New Year's Day is a time for making resolutions, so I am going
to make one today. I resolve to do more in the future to correct the
economic misinformation that appears in the news pages of major newspapers.
This is hard work because there is so much of it.
In defense of the media, I should say that the worst
misinformation is so deeply embedded that it is really just conventional
wisdom. Everybody has heard it so many times before that it is just assumed
to be true by reporters, editors and readers alike.
A good example of this is the myth that the budget deficits of
the 1980s resulted from a trick -- some would even call it a lie -- played
by Ronald Reagan and a group of supply-side economists. Supposedly, they
sold Congress and the American people a bill of goods by saying that the
1981 tax cut would lose no revenue. Based on something called the "Laffer
Curve," they are said to have asserted -- on the basis of no logical or
empirical evidence -- that there would be such an outpouring of work,
investment and economic growth that higher revenues would be collected at
lower tax rates.
This whole story is, of course, complete nonsense. No one in a
position of authority ever said any such thing. And even if they had, how
can one possibly believe that a skeptical Congress and a liberal news media
would allow anyone to get away with it?
The truth is that every official estimate made by the Reagan
Administration, published in the budget and elsewhere, showed large revenue
losses associated with the 1981 tax cut. Furthermore, these estimates were
comparable to those made by independent agencies such as the Congressional
Budget Office (CBO).
For example, if one goes to a CBO report entitled "Economic
Policy and the Outlook for the Economy," issued in March 1981 (page 47), one
will see that the CBO predicted federal revenues of $769 billion in 1984,
after the tax cut, and the Reagan Administration predicted $771 billion. It
turned out that both were wrong, but the point is that the Reagan
Administration used standard revenue-estimating methods in making its
As economist Bill Niskanen wrote in his book, "Reaganomics"
(Oxford University Press, 1988): "Supply-side economics ... does not
conclude that a general reduction in tax rates would increase tax revenues,
nor did any government economist or budget projection by the Reagan
Administration ever make that claim."
In addition, I have looked carefully at statements made on the
record by economists affiliated with the supply-side school. In every case,
they forecast large revenue losses for many years after the tax cut.
Ironically, it was liberal economists who actually said that the tax cut
might raise revenue.
For example, testifying before Congress's Joint Economic
Committee in February 1981, Professor Richard Musgrave of Harvard said that
supply-side effects of the Reagan tax cut might recoup 30 to 35 percent of
the lost revenue, with demand-side effects bringing in another 18 percent.
In a 1987 study, the Congressional Budget Office concluded that
the economic effects of the tax cut probably had reduced the net revenue
loss of the 1981 tax cut by about 25 percent. So where did the deficits come
from? The main reason is that inflation came down much more quickly than any
economist in 1981 thought possible. It fell from 12.5 percent in 1980 to
just 1.1 percent by 1986. This lowered expected revenues by reducing
bracket-creep, where taxpayers are pushed into higher tax brackets by
inflation. Secondarily, spending was much higher than expected.
One can fault the Reagan Administration for not doing more to
hold the line on spending. But to claim that deficits resulted primarily
from a mystical belief in the power of tax cuts to raise revenue has no
basis in truth.
Interestingly, today it is Democrats who are more likely to say
that tax cuts may raise revenue. It was House Minority Leader Dick Gephardt,
Democrat of Missouri, who said this on "Meet the Press" (1-27-02): "The
purpose of tax cuts is ... to get the economy to grow. If you can get the
economy to grow, you will start having more money coming into the
Although I resolve to address this issue again, when it
inevitably turns up in the press, I am not optimistic of prevailing. I am
reminded of H.L. Mencken's experience. In 1917, he wrote a tongue-in-cheek
article claiming that Millard Fillmore had installed the first White House
bathtub. Later, Mencken was horrified to see this cited as fact. Although he
wrote other articles saying that he made the whole thing up, and despite the
lack of any historical documentation, one still sees President Fillmore
credited for the first White House bathtub to this day.