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March 26, 2008

Voodoo Economics
Posted by Michael Cohen

I think it seems pretty clear that John McCain's understanding of economics is, how shall we say, thin. But according to the New York Times today, his advises aren't much better. Check out this quote from Kevin Hassett, a key McCain adviser and the director for economic policy studies at the American Enterprise Institute.

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.

Beyond the reach of economic science? Isn't the notion that lower taxes or higher government spending will grow the economy the very basis of Keynesian economics? Isn't this sort of fundamental to the understanding of macroeconomics?

Maybe this is Kevin Hassett's way of saying we need more tax cuts - we don't know why they taste to good, but boy are they delicious, so let's have some more and not get all worried about the "why!" Or maybe it's his way of dismissing those reams of economic data, which disprove supply side economic by showing that tax cuts don't increase tax revenues - you see economic science can't really tell us anything definitively so why don't we just cut more taxes and hope everything works out for the best.

Either way, my confidence in John McCain's economic acumen just took another pretty big hit. But then, after what he said here in January, it didn't have to much further to fall.


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While your basic point is correct (McCain is a fool), some of what you wrote could be corrected a bit by a real economist. Lane Kenworthy (via Mark Thoma) is quite good, and can explain why the "Laffer Curve" (the idea that lowering taxes will cause more growth and thus increase government revenue above where it was before taxes were lowered) isn't true, see here:

The Keynesian idea about lower taxes and/or higher spending can be summarized that if the economy is experiencing a demand shock (lower demand for goods and services than normal, all else held constant) then the appropriate response is for the government to "make up for" the missing demand by running a deficit. Some ways are better than others to turn the public funds into economic demand, and lowering taxes on the rich is one of the least effective ways to do this while increased spending (particularly on the poor) is one of the most effective means.

These two ideas are very separate, for one thing, Keynes was talking about fixing an economic shock, and Laffer was talking about permanently causing more growth. Also, the two theories have two very different bases: Keynes is based on real economic logic (hard to call it a science, but that's another discussion), while Laffer's idea lie in the logic that giving tax breaks to rich folks will reward Republican supporters (no actual economic ideas really play into it).

It's long been obvious that John McCain is weak on economic policy. Any national leader who relies exclusively on fiscal policy (tax cuts) for stimulating economic growth without bothering to have informed positions on budgetary policy ("big government"), trade policy and monetary policy (the peso dollar) can't really be taken seriously. Someone needs to check the record on what McCain's views of Larry Lindsey's predictions of the economic costs of this war would be back in 2003. Take away McCain's asserted strength in national security and foreign policy, and he's a doomed candidate.

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