"There is no better way to help our economy than to leave more money in the hands of the men and women who earned it."
For George W. Bush, this is all anyone needs to know about economics. It provides a bedrock economic principle, an all-purpose solution to every problem -- and is the source of other notions that have come from the administration, such as budget deficits don't matter, and trade deficits are a sign of strength.
But the idea that lowering taxes necessarily leads to stronger economic growth is pure economic baloney. It is a political mantra that substitutes for critical thinking and truth telling.
Let's start with the obvious observation that economies don't thrive when taxes and government spending are cut to zero. Without schools, roads, basic scientific research, defense, public health programs, police and other public safety measures, economies do not thrive. In fact, According to Robert Solow, who won a Nobel Prize for his study of economic growth, there are many cases where government spending has a higher payoff than private investment. That's not to say there aren't times when taxes get so high they discourage people from working or investing, or prompt high earners to leave the country, with deleterious effects on economic growth. And there are certainly many instances where government spending accomplishes so little that the economy would have been better off had it been left in private hands.
But as Joel Slemrod, a tax expert at the University of Michigan, has concluded, there is simply no easy connection to be found between taxes, the size of government and economic growth. It's not the level of taxes or government spending that affects economic growth so much as the way taxes are raised and spent.
Equally sloppy is the administration's line on the budget deficit, which the Congressional Budget Office warned last week would hit $338 billion in 2004 and remain above $100 billion at least through 2013. Although administration officials talk about finding spending cuts to reduce these numbers, so far it's been just talk -- all hat, no cattle.
Last week, Treasury Secretary John Snow was telling friendly business groups that cutting taxes on incomes and dividends will usher in a new golden era for the economy. How? By expanding the pool of investment capital in the economy.
But up on Capitol Hill, Snow was telling lawmakers not to worry about the budget deficits created by those cuts, even though they reduce national savings and, with it, the available pool of investment capital.
The fact is that running up big budget deficits to cut taxes is at best a wash in terms of economic growth -- and in all likelihood worse than that. And it's not just liberals and Democrats who say so. Just ask William Niskanen, a top economic adviser in the Reagan White House and now chairman of the Cato Institute.
Niskanen is no cheerleader for taxes; these days he's finishing up a book arguing that the optimal size of government would be about half what it is today. But he is clear on another point: Deficits do matter. Cutting government has to mean cutting taxes and spending. Doing one without the other, he warns, would be "nothing short of folly."
Niskanen is the sort of Washington policy wonk people have come to trust in these matters. Over the years, he has refused to sacrifice professional credibility to further his career or favor political allies. He's careful to separate what is known from what isn't. When policies he favors involve difficult trade-offs, he acknowledges the costs as well as the benefits.
That's why economists from across the political spectrum will gather this afternoon at the Cato Institute to fete Bill. They'll be celebrating not only his 70th birthday, but a kind of intellectual honesty that's in short supply in George W. Bush's Washington.
Steven Pearlstein will host an online discussion today at 11 a.m. at www.washingtonpost.com. His e-mail address is firstname.lastname@example.org.