Naked Economics: Undressing the Dismal Science pdfdrive com

part because it’s significantly more attractive than paying less and getting less.
When the Trump Administration proposed its large tax cuts in 2017, Treasury
Secretary Steve Mnuchin said confidently, “Not only will this tax plan pay for
itself, but it will pay down debt.”
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Never mind that the Congressional Budget
Office, the nonpartisan agency that does the authoritative economic analysis on
these kinds of things, estimated that the tax cuts would result in $1 trillion in lost
revenue over ten years, even when additional growth is taken into account. The
Booth School of Business at the University of Chicago periodically polls an
ideologically diverse panel of economists on issues of the day, such as tax cuts.
When the panel was polled on the Trump tax plan as it made its way through
Congress, 100 percent of the economists answered that it would add to the debt
—not 86 percent, or 91 percent, but every single one of them.
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Hence one news
headline: “Trump’s team says the tax bill will pay for itself. It won’t.”
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Less than a year later, the White House reported that “the deficit was
growing faster than it had expected” and that the federal debt would grow by $1
trillion in the coming decade because of the Trump tax cuts. This is like being
surprised that a marble dropped from a bridge goes down rather than up. It is
what every single economist polled by the Booth School said would happen.
Think about a simple numerical example. Suppose the tax rate is 50 percent
and the tax base is $100 million. Tax revenues would be $50 million. Now

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and the tax base is $100 million. Tax revenues would be $50 million. Now
suppose that the tax rate is cut to 40 percent. Some people work extra hours now
that they get to keep more of their earnings; a few spouses take second jobs.
Assume that the tax base grows to $110 million. Government revenue is now 40
percent of that bigger economy, or $44 million. Government has lost revenue by
taking a smaller percentage of preexisting economic activity, but some of that
loss is offset by taking a percentage of the new economic activity. If there had
been no economic response to the tax cut, the 10 percentage point cut in the tax
rate would have cost the government $10 million in lost revenue; instead, only
$6 million is forgone. (In the case of a tax increase, the same phenomenon is
likely in reverse: The increase in new revenues will be offset in part by some
shrinking of the economic pie.) Tax experts typically take these behavioral
responses into account when projecting the effects of a tax cut or a tax increase.
In all but the most extraordinary of circumstances, there is no free lunch.
Lower tax rates mean less total government revenue—and therefore fewer
resources to fight wars, balance the budget, catch terrorists, educate children, or
do anything else governments typically do. That’s the tradeoff. The
bastardization of supply-side economics has taken an important intellectual
debate—whether we should pay more in taxes to get more in government
services, or pay less and get less—and transformed it into an intellectually
dishonest premise: that we can pay less and get more. I wish that were true, just
as I wish that I could get rich by working less or lose weight by eating more. So
far, it hasn’t happened.
Having said all that, the proponents of smaller government have a point.
Lower taxes can lead to more investment, which causes a faster long-term rate of
economic growth. It is facile to dismiss this as a bad idea or a policy that strictly
favors the rich. A growing pie is important—perhaps even most important—for
those with the smallest slices. When the economy grows slowly or sinks into
recession, it is steelworkers and busboys who are laid off, not brain surgeons and
university professors. In 2009, in the midst of the recession induced by the
financial crisis, the American poverty rate was more than 13 percent—the
highest rate in more than a decade.
Conversely, the 1990s were pretty good for those at the bottom of the
economic ladder. Rebecca Blank, a University of Michigan economist and
member of the Council of Economic Advisers in the Clinton administration,
looked back on the remarkable economic expansion of the 1990s and noted:
I believe that the first and most important lesson for anti-poverty warriors
from the 1990s is that sustained economic growth is a wonderful thing.

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To the extent that policies can help maintain strong employment growth,
low unemployment, and expanding wages among workers, these policies
may matter as much or more than the dollars spent on targeted programs
for the poor. If there are no job opportunities, or if wages are falling, it is
much more expensive—both in terms of dollars spent and political
capital—for government programs alone to lift people out of poverty.
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So, for two chapters now I have danced around the obvious “Goldilocks”
question: Is the role that government plays in the United States economy too big,
too small, or just about right? I can finally offer a simple, straightforward, and
unequivocal answer: It depends on whom you ask. There are smart and
thoughtful economists who would like to see a larger, more activist government;
there are smart and thoughtful economists who would prefer a smaller
government; and there is a continuum of thinkers in between.
In some cases, the experts disagree over factual questions, just as eminent
surgeons may disagree over the appropriate remedy for opening a clogged artery.
For example, there is an ongoing dispute over the effects of raising the minimum
wage. Theory suggests that there must be a tradeoff: A higher minimum wage
obviously helps those workers whose wages are raised; at the same time, it hurts
some low-wage workers who lose their jobs (or never get hired in the first place)
because firms cut back on the number of workers they employ at the new higher
wage. Economists disagree (and present competing research) over how many
jobs are lost when the minimum wage goes up. This is a crucial piece of
information if one is to make an informed decision on whether or not raising the
minimum wage is a good policy for helping low-wage workers. Over time, it is a
question that can be answered with good data and solid research. (As one policy
analyst once pointed out to me, it may be easy to lie with statistics, but it’s a lot
easier to lie without them.)
More often, economics can merely frame issues that require judgments based
on morals, philosophy, and politics—somewhat as a doctor lays out the options
to a patient. The physician can outline the medical issues related to treating an
advanced cancer with chemotherapy. The treatment decision ultimately resides
with the patient, who will interject his or her own views on quality of life versus
longevity, willingness to experience discomfort, family circumstances, etc.—all
perfectly legitimate considerations that have nothing to do with medicine or
science. Yet making that decision still requires excellent medical advice.
In that vein of thought, we can present a framework for thinking about the
role of the government in the economy.

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