Grasping Reality on TypePad, by Brad DeLong

Like Jared Bernstein--like nearly every other economist I know--I had assumed that Greg Mankiw as chair of the Council of Economic Advisers in 2003-2005 was playing the "inside game": arguing to Bush, Cheney, and company that tax cuts were good policy only if they were matched by spending cuts. If they weren't matched by spending cuts, I thought he was arguing inside the administration's councils, tax cuts were destructive and counterproductive--and so real spending cuts had to be a sine qua non for tax cuts. 2003--the year the Bush administration committed us to Medicare Part D and to the extraordinarily expensive misadventure in Iraq without a single sign of spending restraint--was certainly not a year for spending cuts. Hence not a year in which I would have believed that Greg Mankiw was sitting in the administration's councils advocating tax cuts not matched by equal additional spending cuts.

In his post, Greg Mankiw blathers on about the long-run supply-side benefits of the 2003 Bush tax cuts made in some alternate universe by some alternate Bush who was serious about spending restraint. He is oblivious to the reality in which we live--a reality in which the 2003 Bush "tax cuts" were not tax cuts at all, but only destructive tax shifts.

Alex Tabarrok explains the point:

What Tax Cut?: Newsroom: The Independent Institute: I favor a much smaller government but I do not favor the Bush tax cut. Or, to be more precise, I would support a tax cut if one had been proposed. But so far President Bush has neither proposed nor implemented a tax cut—-only a tax shift.

To grasp the difference between a tax cut and a tax shift, we must first understand that what ultimately drives taxes is spending. If spending increases, as it has under the current administration, then sooner or later taxes must increase (or inflation, a type of tax, will go up).... If spending isn’t cut, then less taxes today means more taxes tomorrow. Thus, the Bush tax cut plan is really a plan for future tax increases.... Bush is shifting taxes to precisely a time when future taxes will be increasing for other reasons. Sound tax policy aims to smooth taxes over time, not to concentrate them so that we take our hits in one staggering blow.

Against these considerable negatives are some small positives... a small short-term stimulative effect, but the key word is "small."... [A]lthough Bush’s tax proposal does shift taxes away from capital (which, other things equal, would promote long-run economic growth), the mismatch between the tax cuts and spending increases means a rise in government borrowing to make up the difference. Some of this borrowing will... [drain] private investment. Thus, on net, I don’t expect significant gains in long-run economic growth from these tax cuts.

Some conservatives... have a secret Machiavellian argument held in reserve. The Bush deficits, they believe, will force future administrations—-presumably of a more liberal bent—-to cut spending. Conservatives used to argue that the public didn’t want big government but was fooled by deficit financing and other hidden taxes into thinking that it costs less than it actually does. Today, conservatives seem to believe that the public does want big government and that the only way to curb government growth it is to fool the public with lower taxes today so that the costs of government will be so high tomorrow that no one will accept the offer. How cynical.

Will deficits in fact force future administrations to cut spending?... I am fearful.... Today it is evident that we have two political parties: the Tax and Spenders and the No-Tax and Spenders. Neither party is fiscally conservative. Is there no room at the inn for an honest conservative? A conservative who makes the case for smaller government on its merits and not just as the fallback option when fiscal bankruptcy threatens?

Alex Tabarrok makes sense: listen to him.

As for Greg Mankiw, I'm incredulous.