Faith-based economics

Kevin Hassett, economics advisor to John McCain, is quoted today as saying:

What really happens is that the economy grows more vigorously when you lower tax rates. It is beyond the reach of economic science to explain precisely why that happens, but it does.

Now you can be excused for thinking that the first of these statements is true, if you have an economically sound reason for it. But if you don't, you shouldn't. 

Let's call it no longer supply-side economics. It is faith-based economics.

Comments

[robertdfeinman]

When such "faith based" ideas continue to persist in the face of evidence one has to ask why.

In this case the reason these ideas don't fade away is because there is a coordinated effort to keep them before the public. This is accomplished through a series of think tanks and academic departments which receive funding by those who benefit from low tax policies - namely the super wealthy.

Henry George had interesting ideas, but nobody reads him any more because the one organization devoted to promoting his work runs on a shoestring.

Compare this with the funding behind Heritage, Hoover, Cato, George Mason U, and a score of others. If you dig deep enough you will find the same core group of people funding all these propaganda factories: Coors, Scaife, Mars, Waltons, Koch, Olin, etc.

Liberals think that the "truth" will come out if there is an open debate of ideas. The plutocrats prefer to fund their version of the truth to guarantee that their viewpoint becomes widespread. They have been remarkably successful over the past 40 years.

Why publications like the NY Times participate in this effort remains a puzzle. (Perhaps the controlling families feel a class solidarity with the list above.)

[jlr]

Aren't reflexive appeals to "the invisible hand" faith-based, too? I don't think this is anything new.

[Tomas]

Dani, as an economist you should know the effects of fierce competition.

Here, for instance, is a great example of fierce competition for the "stupidest man alive" award amongst hack-economists. As the election draws closer, I am sure we will see many more hacks vying for that prize.

[Mr. Noah]

Are there actually any mainstream economic models that predict a relationship between growth and taxes in the steady-state? I've looked through my books and I can't find one.

Now, most models predict that if you lower capital taxes, the economy will grow faster for a bit as it reaches its new steady state. But the effect would presumably be small and short-lived.

So where are the "supply-siders" getting this idea?

[Mr. Noah]

Are there actually any mainstream economic models that predict a relationship between growth and taxes in the steady-state? I've looked through my books and I can't find one.

Now, most models predict that if you lower capital taxes, the economy will grow faster for a bit as it reaches its new steady state. But the effect would presumably be small and short-lived.

So where are the "supply-siders" getting this idea?

[Chandan]

"faith-based economics"...haha...thats why McCain's is so poor in economic arguments...it seems that he is arguing for permanent tax cuts not because he knows what this actually means and how it impacts the economy, but because he feels obligated to follow his Republican forefathers, who were bogged down on lower taxes , partly due to pressure from their funding sources and special interest groups!

[Chris]

One can only imagine what the NYT cut out of the middle of this quote around "..."

[Jacob]

Er Dani im not sure its fair to take one quotation of a man who opposes taxes and label supply side economics faith based.

Robert Feinman, it is of course true that many successful people fund free market organizations. That does not necessarily say anything about their academic integrity. You can never disprove their arguments by resorting to an ad hominem attack that their "propoganda" is part of a conspiracy by the largest capitalists opressors. The George Mason economics department seems to be pretty well regarded. If you disagree with them, engage with their aguments; I'm sure you will find alot of people who will disagree with you, and you will both have alot to talk about.

I would not say that academic departments are the most welcoming for ideas outside of the norm; a few of Dani's posts in the past show seem to show at least that.

[robertdfeinman]

Jacob:
I don't want to get into an extended debate over the "vast right wing conspiracy", but I've found having discussed this many times, that there are three classes of people who disagree with the characterization.

First, are those who owe their livelihood to these corporate backers. They feel highly insulted that anyone would doubt their intellectual independence. Self delusion or playing their assigned part? Who is to say. There is a famous quote from Galbraith about people in this situation.

Second, are the unaffiliated libertarian or "free market" ideologues. These are the "faith based" people implied above. Like all ideological followers their need for a coherent picture of the world governs their belief system. It's a psychological thing.

Then there are the liberals who think that since their environment is a meritocracy and a bit anarchic that this must be true of their opponents as well. They tend to doubt that that can actually be a quasi-secret cabal behind the entire movement. It seems so un-American and unlikely.

If you fall into the third type I suggest doing a bit of research. SourceWatch and Media Transparency have lots of documentation on exactly who is funding what and on their efforts to make as much of this support as hidden as possible.

[bill]

To me, the problem with supply-side economics is pretty clear.

Assume an economy with a $10 trillion GDP. Let's say that current taxes give 30% of that ($3 trillion), to the federal government.

Supply-siders come along and cut tax rates. The net effect of the cuts is that the federal government receives only 25% of GDP, or $2.5 trillion.

To even EQUAL the previous tax revenues (let alone exceed them, as the argument often goes), growth alone will have to supply $500 billion of tax revenues.

So, at the new 25% rate, we need a GDP of $12 trillion to bring in the pre-cut amount of tax revenue: $3 trillion.

In other words, we need to achieve growth of *almost 20%* to equal those revenues.

That seems ludicrously far-fetched to me, and even entertaining the notion of supply-side economics seems like a waste of time.

[Anonim]

Does "Dow 36,000" ring a bell?

Faith-based economics has a longstanding tradition.

[Jacob]

First off, I would like to say that McCain's economics does indeed seem to be 'faith based'; whether you disagree with what he says or not, it is probably not based on any semblance of reason.

Free market economics in general though, is a different story.
Robert, it is pretty disheartening to see free market and libertarian thought dismissed as "faith based" and "ideologues" (who are you, Napolean?), as well as the language of "belief system", and then go to "psychological" reasons for their beliefs. Milton Friedman and Fredreich Hayek are two celebrated economists of the "free market" variety and have made important contributions to economics. Many people would probably bristle at any talk of "ideologues" when discussing their ideas.

I do not think academic departments are at all receptive to ideas outside of the norm or are neccesarily as "meritocratic" as you believe. Because of his views, Fredreich Hayek was banned from the economics department of the University of Chicago and had to have his salary paid by an outside foundation (the Volker fund- perhaps started by a capitalist who wanted to provide justification for his evils). Von Mises could barely get a position at a US university, even though he was very well regarded in Europe at the time- once again his salary had to be provided by an outside source. It is true that their are not too many great libertarian thinkers out there right now, but then again most students are not introduced to their thought in college or high school. It is difficult to get an academic position if all of your work has little in common with the incumbents.

[Eric H]

Good catch, Dani. Welcome to the election year, where the most believable punditry will come from The Onion.

Jacob, you should understand that Robert's ideology-free ideology consists almost entirely of ad hominem arguments. As he frequently reminds us, if only we would study the issues (like he does), we would certainly come to the same conclusions.

Can we all agree that Keynes was the midwife to the faith in the ability of policy to work miracles? Is the difference between spending more while cutting taxes on one hand, and filling old bottles with banknotes and burying them in abandoned mines on the other, a difference in degree or in kind?

[robertdfeinman]

Ideologues never see themselves as such. That their fringe ideas are not accepted by the vast majority of the rest of the world is just further evidence to them that there is a conspiracy to prevent the "truth" from emerging.

Sorry, if you don't want to think there is a psychological component to inflexible belief systems, but there is over 60 years of research data on this.

The latest comes from psychologist Robert Altemeyer. He has a free, online book out on the subject at theAuthoritarians.com.

His research has found that the most ideological won't even go so far as to read the studies, so I cite this for the benefit of others who may be interested in studying those who ideas of the world are "faith based".

[Rob]

Mr.Noah---

While most models are set at levels, those levels really represent growth rates. So a higher steady state implies a higher rate of growth of GDP not just a higher level of GDP.

That said supply-side still has many, many holes.

[Eric H]

Ideologues never see themselves as such.

Exactly. That's why I'm skeptical of people claiming to be "ideology-free". Another term for it is "unbounded rationality", something which makes for less-than-satisfactory theoretical conclusions.

It's not difficult to understand why such people choose to identify anyone who doesn't accept their conclusions as either evil, insane, or stupid. Or, if you prefer less judgmental terms: morally corrupt, mentally unhealthy, or ignorant. They can't bring themselves to believe that other people, in the face of uncertainty, could choose to weight the available evidence differently. They believe in the existence of a single true answer, which they themselves know, whose rightness is obvious to anyone with similar knowledge and experience, and doubt of which is evidence of moral or biological failure.

[Some Random Economist]

What kind of economics is it that leads Obama to support comparable worth?

[Jacob]

Robert,
Your main problem is in confusing people who believe ideas with the ideas themselves. I don’t really care too much of somewhere out there a free market thinker believes there is a conspiracy by liberals to keep free market ideas out of universities; that has no effect on my theories. There may be people, ‘liberals’ as well as ‘conservatives’ who are inflexible and do not listen to reason. That has no effect on their ideas. Case in point is the website link you gave; the website doesn’t prove anything about “free market” ideas- it talks about authoritarians, many of whom are ‘republicans’, operating under the guise of “conservatism”. The very introduction states that the government has nothing to do with “conservatism”, and that they have in fact betrayed it (conservatism and free market are of course very different).

You seem to be an expert psychologist; but not only a psychologist of people, but incredibly a psychologist of ideas and indeed of logic. “Ideologues” can never recognize themselves as ‘Ideologues’; just as Marx stated, the ‘Bourgoise’ can never recognize their faulty logic. It is so convenient to reduce every argument with an ad hoc hypothesys of a psychological tendency.

Does anyone else find RobertFeinman's use of the word ideologue hilarious? It was of course Napolean who made the word popular and used it as his favorite expression of contempt towards those who opposed him (the Ideologues were the names of a group of teachers at the 'Ecole de Medecine). The word "ideology" origionaly referred to the analysis of human ideas and human action; but Napolean corrupted the word; instead of debating his opposition he would label them 'ideologues'. One of the 'ideologues' hated by Napolean was coincidentaly a now famous economist, Jean Baptiste Say, whose second edition of a book was banned by Napolean.

[Nathan Smith]

So it's not permissible to cite an empirical fact if there's still some dispute about the theoretical explanation? I guess the weak microfoundations of Keynesianism make that school of thought faith-based, too. Where do you draw the line?

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[Faith and Facts]

The last time I looked, tax revenue has stayed very steady at about 19% of GDP. One may question which comes first in the matter of tax cuts and GDP, but you don't need a new economic model to know that growing GDP is the best way to increase Federal revenue

Take a look at a funny illustration of our tax system - http://www.faithandfacts.com/2008/11/07/bar-stool-economics/

[Supra Skytop Magenta Black]

Here, for instance, is a great example of fierce competition for the "stupidest man alive" award amongst hack-economists. As the election draws closer, I am sure we will see many more hacks vying for that prize

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