International Trade
Joe Klein Does Karl Rove's Dirty Work

Greg Mankiw's Abstract Is Misleading...

Greg Mankiw writes:

Greg Mankiw's Blog: Dynamic Scoring: In today's Washington Post, columnist Sebastian Mallaby gives my recent work with Matthew Weinzierl on dynamic scoring some free publicity, while using it to beat up my former boss [i.e., George W. Bush]. Here is the abstract of the Mankiw-Weinzierl paper:

This paper uses the neoclassical growth model to examine the extent to which a tax cut pays for itself through higher economic growth. The model yields simple expressions for the steady-state feedback effect of a tax cut. The feedback is surprisingly large: for standard parameter values, half of a capital tax cut is self-financing. The paper considers various generalizations of the basic model, including elastic labor supply, general production technologies, departures from infinite horizons, and non-neoclassical production settings. It also examines how the steady-state results are modified when one considers the transition path to the steady state.

The article is forthcoming in the Journal of Public Economics. A nontechnical summary is available here.

The abstract is misleading. It should read, "The feedback is surprisingly large: in the long run, provided spending is cut to keep the government budget in balance, for standard parameter values, half of a capital tax cut is self-financing."

In Mankiw-Weinzerl's model, you have to cut spending by almost all of the static revenue loss in the short run, and by half of the static revenue loss in the long run. That's not Bush tax policy. Bush tax policy is to cut taxes and boost spending. "[H]alf of a capital tax cut is self-financing" implies that Mankiw-Weinzerl's results are relevant to the capital tax cut bill moving through the system right now. They aren't.

See also:

"Dynamic Scoring: Alternative Financing Schemes": Eric M. Leeper, Shu-Chun Susan Yang NBER Working Paper No. 12103 Issued in March 2006

Abstract: Neoclassical growth models predict positive growth effects over the entire transition path following a reduction in capital or labor tax rates when lump-sum taxes (or transfers) are used to balance the government budget. This paper considers the consequences of bond-financed tax reductions that bring forth adjustments in expected future government consumption, capital tax rates, or labor tax rates. Through the resulting intertemporal distortions, current tax cuts can lower growth. The paper shows that the stronger the response of distorting fiscal policies to debt, the more favorable the growth effects of a tax cut.