Tuesday, July 24, 2012

Newt Gingrich's To Save America 6: Economic Rules?

In my latest reading of To Save America: Stopping Obama's Secular Socialist Machine, Newt Gingrich argues that tax cuts stimulate the economy, encourage economic mobility, and increase revenue.  Newt looks at the Kennedy, Reagan, and Bush II tax cuts, and he also talks about how an increase in revenue from the capital gains tax corresponded with the capital gains tax cut, and how a decrease in the corporate tax rate has helped Europe economically.

Here are some of my reactions to this and other points in my latest reading of this book.

1.  I wrote in my post on Reagan's centennial that it's hard to know which narrative on the 80's is right, since both the Left and the Right present statistics to support their positions.  I'd say that the same is true regarding the Kennedy tax cuts: Whereas Newt argues that the Kennedy tax cuts increased revenue, economist Bruce Bartlett contends in his book Impostor that they did not exactly do that.  Granted, Bartlett says that the Kennedy tax cuts generated economic growth that made up for a lot of the lost revenue that they initially caused, but he does not think that they actually increased revenue----in terms of the government getting more money than it was getting before the Kennedy tax cuts.  (That's my recollection of Bartlett's argument, according to my understanding.)

So who's right?  You'd think that different sides would agree at least on what the data are.  Maybe it would be a good project sometime to compare the statistics that different sides present on a particular issue----such as "Did income increase during the 1980's, or did wages stagnate?"----and look at where the statistics are coming from.

2.  How easy is it to identify cause and effect in the economy?  Newt says that corporate tax cuts are helping the European economy, but (elsewhere) he argues that socialism inhibits Europe's economy.  Newt says that Bush II's tax cuts (which he deems good, yet inadequate) helped the economy, yet he also contends that regulations during Bush II's administration hindered the creation of jobs and led to the collapse of the housing bubble.  So there are economies that are good and bad, I guess.  How can one attribute what's good in the economy to tax cuts, and what's bad in the economy to government intervention?  Maybe the opposite is true!  Is there a way to tell?

3.  I have a hard time wrapping my head around certain economic rules.  For example, if you want to decrease inflation, then the standard wisdom is that the Federal Reserve can do so by increasing interest rates.  Why?   I think it's because less money is in circulation when interest rates are high, since people are reluctant to borrow money from the bank.  So inflation goes down when there is less money in circulation.  If that's the case, though, wouldn't tax cuts be inflationary, too, since that puts more money into the private sector?  Well, maybe not, if the rich just sit on their money!  But I thought the whole idea behind tax cuts was that the rich would not just sit on their money but would invest it, spend it, use it for job creation, etc.

Newt says that increasing government spending is inflationary.  I'm not entirely sure why this is so, but I have heard this claim from conservatives.  Why, then, was inflation low under Reagan, who increased government spending on defense?

As I said, the conventional wisdom is that you reduce inflation by increasing interest rates.  But, as Newt notes, the Carter years were a time when both interest rates and also inflation were high!  Newt says that Reagan bringing down inflation set the stage for interest rates to come down later, though, so perhaps low interest rates and low inflation can coincide somehow.

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