Saturday, November 18, 2017

John Hinderaker Renews His "Tax Cuts Pay For Themselves With Growth" Nonsense

It's been awhile since John "Everything I wrote about economics for an entire year was wrong" Hinderaker has written about economics.  The respite has been glorious.  But now that Republicans in the House have passed a tax bill, ol' John has to tell us that they will lead to glorious growth.

I have one word for him: KANSAS.  Sam Brownback tried this over the last 5 years in his state and it failed.  Miserably.  For more on this, please see Menzie Chen's writing over at Econbrowser.

But more to the point, the whole "tax cuts made the 80s the most amazing economic growth miracle since the beginning of time pure trope.  Let's look at the overall pace of growth:

Above is a chart from the FRED database (which John still can't seem to locate) that shows the Y/Y percentage change in real GDP.  On the really funny side, notice that the pace of growth under Carter was higher on a Y/Y pace than Reagan.  John never seems to mention that.  And yes, growth in the 1980s was good.  But after the initial acceleration (which is more a function of statistics than actual numbers) growth occurred at/near/around its historical trend.

So, was this a function of tax cuts?  The Kansas experiment tells us that, no, it probably wasn't.  Clinton raised taxes in the 1990s and the economy still grew.  Bush II cut taxes and growth declined.  Taxes were over 90% during the 1950s and 70% in the 1960s, yet we still had solid growth.  So, between the pure experiment of Kansas and the historical record, we can say that tax rates don't seem to have the impact we thought.

So, what caused growth?  Let's start with this chart:

Notice that when the Federal Reserve raises rates (usually to slow inflation), the economy slows.  Imagine that.  Its' almost like there's a relationship there or something.

And as for Saint Ronnie Reagan, remember that he loved to spend government money just like a real Keynesean.  However, he liked to spend it on the military:

Ron primed the pump with a massive increase in defense spending.  So, Uncle Ronnie loved to spend money just like the tax and spend liberals.

So, what really caused growth?

I present you with the labor force participation rate, a statistic that Republicans magically found during Obama's presidency.   Econ 101: potential GDP = population growth+productivity growth.  More people + an increasing ability to produce more stuff equals how much we're going to grow.  During the 1980s and 1990s two demographic trends hit: the baby boomers began their prime earnings years and women increased their economic participation.  The combination was powerful.  It's also why we're now slowing: women are leaving the labor force and the baby boomers are retiring.

None of this matters to John.  He's been economically illiterate since the beginning of time and still continues to write about the subject.  But for others, this data might be important.