The Return of Voodoo Economics

Readers old enough to remember will recall that 'voodoo economics' was the label applied to Ronald Reagan's economic policies by George H.W. Bush in 1980. The policies were based on the aptly named "Laffer curve," which purported to show that high tax rates reduce tax revenue by lowering the incentive to produce. (The model also predicts that tax rates below an optimal level for a given economy will reduce tax revenue; today's Republicans conveniently ignore this provision.)

Despite being embraced by mainstream commentators like David Brooks, who called it a "moment of truth," Rep. Paul Ryan's (R-WI) budget proposal is a return to 'voodoo economics.'

"Ludicrous and Cruel" says Paul Krugman in his recent NY Times column.

... [T]he G.O.P. plan turns out not to be serious at all. Instead, it’s simultaneously ridiculous and heartless.

How ridiculous is it? Let me count the ways — or rather a few of the ways, because there are more howlers in the plan than I can cover in one column.

First, Republicans have once again gone all in for voodoo economics — the claim, refuted by experience, that tax cuts pay for themselves.

Specifically, the Ryan proposal trumpets the results of an economic projection from the Heritage Foundation, which claims that the plan’s tax cuts would set off a gigantic boom. Indeed, the foundation initially predicted that the G.O.P. plan would bring the unemployment rate down to 2.8 percent — a number we haven’t achieved since the Korean War. After widespread jeering, the unemployment projection vanished from the Heritage Foundation’s Web site, but voodoo still permeates the rest of the analysis.

In particular, the original voodoo proposition — the claim that lower taxes mean higher revenue — is still very much there. The Heritage Foundation projection has large tax cuts actually increasing revenue by almost $600 billion over the next 10 years.

A more sober assessment from the nonpartisan Congressional Budget Office tells a different story. It finds that a large part of the supposed savings from spending cuts would go, not to reduce the deficit, but to pay for tax cuts. In fact, the budget office finds that over the next decade the plan would lead to bigger deficits and more debt than current law.

In her recent article in Democracy Journal the Brookings Institution's Isabel Sawhill is unequivocal: The Ryan Budget: Voodoo Economics Redux.

Here’s what the progressive rebuttal should be in a nutshell: 1) point out that voodoo economics is back in full gear; 2) start talking about tax reform and its potential to produce a fairer, simpler, and more pro-growth system that has the added advantage of plugging a big hole in the budget; 3) instead of worrying about protections for the elderly, many of whom are quite affluent, remind people that, whether young or old, wealthy Americans have made out like bandits in recent decades and that it’s time to do something for working families of modest means; 4) rethink America’s defense posture and whether we can continue to be the world’s policeman, and 5) be open to some reforms to Medicare and Medicaid but only if they’re combined with additional revenues and a more streamlined military.

Sawhill concludes:

... Unfortunately any hope that Ryan would rise above party politics and seek compromise with Democrats or even the moderates in his own party has been dashed by this proposal. At bottom, his plan is an ideological platform for the 2012 campaign—a Tea Party manifesto clothed in some nice rhetoric and sprinkled with a few good ideas.