Should-Read: Paul Krugman: Tax Cuts, Growth, and Leprechauns

Should-Read: It is now almost forty years since Tennessee Senator Howard Baker characterized Republican fiscal policy as a “riverboat gamble”—where if you lose, you don’t pay up but instead abandon ship, jump overboard, and swim to shore. It is more than 35 years ago since Reagan OMB Director David Stockman said, of the Republican members of congress’s understanding of fiscal policy: “nobody understands these numbers”. I say it reminds me of fratboys who haven’t done the reading winging it in a budget simulation course.

And I do find myself resenting former Bush CEA Chairs Eddie Lazear’s and Glenn Hubbard’s endorsements of this “unworkable mess”, in the words of their colleague Greg Mankiw. They owe the country better:

Paul Krugman: Tax Cuts, Growth, and Leprechauns: “The Tax Policy Center released its macroeconomic analysis of the House tax cut bill…

…TPC is not impressed: their model says that GDP would be only 0.3 percent higher than baseline in 2027, and that revenue effects of this growth would make only a tiny dent in the deficit. But… focusing on GDP is itself misleading, because we’re a financially open economy with a lot of foreign ownership already, and a large part of the alleged benefit of corporate tax cuts is that they will supposedly draw in lots of foreign investment…. I’ve been trying a back-of-the-envelope estimate of the difference leprechaun economics (so named because Ireland is the ultimate example of a country where national income is much less than GDP, because of foreign corporations) makes to the analysis…. For 2027 I get $60 billion in reduced GNI relative to GDP… 0.2% of GDP.

Remember, TPC estimates the extra growth in GDP at 0.3%. So according to the back of my envelope, leprechaun economics—extra payments to foreigners—basically wipe out all of that growth. And let me say that I am not entirely clear, given this result, why there should be any dynamic revenue gains. Given how scrupulous TPC normally is, they probably have an answer. But as far as I can see there’s no obvious reason to believe that dynamic scoring helps the tax cut case at all, not even a little bit. I’m sure that people can improve on my back-of-the-envelope here. But for now, it looks to me as if, properly counted, these tax cuts would do nothing for growth.