Down Is Still Up

Sunday, May 21, 2006

WHEN BEN S. Bernanke left the White House Council of Economic Advisers to become Fed chairman, his place was filled by Edward P. Lazear, an accomplished economist from Stanford University. For all his credentials, Mr. Lazear is not doing well.

In a speech Thursday, Mr. Lazear contended that "low taxes are consistent with rising federal revenues, which helps bring the deficit down." This deliberately implies that low taxes cause a rise in federal revenue, even though they don't. Last year one of Mr. Lazear's predecessors as chairman of President Bush's Council of Economic Advisers, N. Gregory Mankiw of Harvard University, examined whether tax cuts pay for themselves: In other words, do they boost work incentives enough to generate sufficient extra growth that government revenue ends up higher than it would have been without tax cuts? Mr. Mankiw concluded that this "dynamic" effect is way too small to justify Mr. Lazear's message. Tax cuts cause falls in federal revenue, and implying the opposite is irresponsible.

Mr. Lazear also stated that "higher productivity translates directly into higher wages -- even over the relatively short run." But one of his own charts showed how wages of production workers have lagged behind productivity gains for nearly all of the past 50 years and how this gap has grown wider in the past five years. In a recent paper titled "Where did the Productivity Growth Go?" Robert J. Gordon of Northwestern University reports that between 1966 and 2001, everyone in the bottom 90 percent of the income distribution saw wages grow more slowly than productivity and that fully half the gains from extra productivity went to the richest tenth. Mr. Lazear did not address this issue.

In a Wall Street Journal op-ed recently, Mr. Lazear stated that the Bush tax cuts have narrowed gaps in take-home earnings. This is wrong, as a previous editorial noted; but in Thursday's speech Mr. Lazear returned to the subject of progressivity from the opposite angle. "To further investment in human capital, it is necessary that the progressivity of the tax system not become too pronounced," he said; in other words, inequality usefully boosts the incentive to get an education. To illustrate the dangers of equality, Mr. Lazear cited Eastern Europe circa 1990, when "highly skilled individuals chose to drive taxis for tourists."

It is true that equal wages dampen work incentives, but the invocation of communist Czechoslovakia or Poland is far-fetched. In the late 1980s, the Gini coefficient, a standard measure of inequality, averaged around 24 points in the Soviet bloc; the contemporary United States, with a Gini score of about 40, is far less equal. Does Mr. Lazear honestly believe the United States is anywhere close to a situation in which engineers or doctors forsake their professions to act as tour guides? Or is he scraping around for an argument -- any argument -- to play down justified concerns about rising inequality?

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