That is why I believe assumptions must be clearly stated up front, and justifiable by hard data
Justified in terms of "that makes sense", and "according to this theory, this data would indicate", or perhaps even "in a similar situation when we did X, Y was the result". But in terms of having real hard data that can let you solidly predict the results, not so much, to the extent you can predict its more art, and theory, than hard data. People have their own agenda, any model of complex interactions among many people is going to even more of an oversimplification of reality than is usual with models of complex systems.
econometrics firm that was instructed to specifically include 'Laffer Curve' effects from Bush's lowering of tax rates
Not including such a curve at all is just silly. The key though is what specific assumptions you plug in about the curve, not its existence.
2) Rising debt levels = 'Bad for growth rates'.
Its a little more complex than that. I'm not much of a Keynesian, but there can be some stimulus effect. Alternatively it can be pretty neutral. OTOH crowding out can occur. Beyond that fear of the future results on the fiscal stability of the government can make it more negative. And of course a full blow major fiscal implosion can have an enormous short and medium term impact, possibly with a continuing but smaller long term negative result (unless the crisis forces positive changes, which would still leave you with a big short term negative, but might make the medium term impact lower, and the long term impact possibly even positive if only indirectly)
But in general terms I'd say rising debt is bad for growth rates.
I'd even simplify it, instead of two points, I'd make it just one. Rising government spending is bad for growth rates (except some times in the short term, or from very low levels). You can finance it from taxes, or you can finance it with debt, but either way its a burden on the private sector.
For relatively modest deficits I would say that the tax cuts positive effect on growth might be positive even after adding higher debt. Sure the borrowing is negative, probably (absent tons of easy money coming in from outside the country which can have its own negative in terms of causing bubbles) as negative in direct terms as the tax increase is positive. Both pull the same amount of money out of the economy, spending is spending however you finance it. But except perhaps when you have low simple taxes to start with, or for the most perverse types of tax cuts, lowering taxes decreases the distortive effects of taxes. The "pulling the money out of the private sector" part balances out, but the reduction in distortion is positive. Bush didn't get nearly as much of that positive affect as he could have with real tax reform, but broadly lowering rates by itself (unlike highly targeted credits and deductions, or very narrow rate cuts) does reduce distortion. Also cutting taxes by x% doesn't result in x% lost revenue, but much less.
OTOH for really serious deficits (like what we have now) inject enough fear about the situation to increase the negative effect, esp. when you have long term hard to change factors, like entitlements driving spending up.
And if the fiscal situation gets worse and nothing is done to pull out, then you can eliminate confidence, and destabilize the whole economy.
Still to the extent we face the possibility of such a situation, we have to look at the real problems causing it, which is the massive increase in spending, harmful both by itself, and for the debt it causes. |
