29 Nov 2012

Romer vs. Romers?

Economics 5 Comments

Earlier this year, Obama’s former head of the Council of Economic Advisors, Christina Romer, weighed in on the tax debate:

AT least since Calvin Coolidge, politicians have trumpeted the supply-side benefits of cutting marginal income tax rates. Lower rates will unleash economic growth and the cuts will largely pay for themselves — or so it’s often said. Yet careful studies find little evidence of such effects. Perhaps it’s time to reform tax policy based on facts, not worn-out assumptions.

History shows that marginal federal income tax rates have varied widely….

If you can find a consistent relationship between these fluctuations [in tax rates] and sustained economic performance, you’re more creative than I am. Growth was indeed slower in the 1970s than in the ’60s, and tax rates were higher in the ’70s. But growth was stronger in the 1990s than in the 2000s, despite noticeably higher rates in the ’90s.

Where does this leave us? I can’t say marginal rates don’t matter at all. They have some impact on reported income, and it’s possible they have other effects through subtle channels not captured in the studies I’ve described. But the strong conclusion from available evidence is that their effects are small.

Given the strong evidence that the incentive effects of marginal rates are small, opponents of such a move will need a new argument. Invoking the myth of terrible supply-side consequences just won’t cut it.

—–Christina Romer, NYT op ed, March 17, 2012

I wonder if she forgot about this paper? It was published in a respected journal:

“Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent. Our many robustness checks for the most part point to a slightly smaller decline, but one that is still over two percent….Third, investment falls sharply in response to exogenous tax increases. Indeed, the strong response of investment helps to explain why the output consequences of tax changes are so large. Fourth, the output effects of tax changes are highly persistent.”
——Christina Romer and David Romer, “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks,” American Economic Review (March 2007 draft).

I agree that the above two quotes aren’t a literal contradiction like “I am fair to my opponents” and “I am not fair to my opponents” would be. But after reading Romer’s initial description of the literature, isn’t the follow-up quotation a bit surprising?

5 Responses to “Romer vs. Romers?”

  1. Tom E. Snyder says:

    “But after reading Romer’s initial description of the literature, isn’t the follow-up quotation a bit surprising?”

    Not really. She has become a political shill like Krugman.

  2. Matt Tanous says:

    I have a new argument for lower taxes. Raising taxes “one percent of GDP lowers real GDP by roughly three percent.” Also, “investment falls sharply in response to exogenous tax increases.” Romer’s a shill. And I realize why the NYT doesn’t have comment sections for its editorials – someone might show these guys their old statements that contradict their positions.

    • Keshav Srinivasan says:

      They do have comment sections for their columns, it’s just that they close it after some period of time.

    • xgsmmy says:

      Matt, I skimmed the paper and they divide tax changes into several categories.

      The effects you’re talking about are apparently only true for a narrow class of tax increases called “exogenous” not including taxes raised to close a budget deficit. (Although, I only skimmed it, and am not an economist, so perhaps I misunderstood.)

  3. Jeff says:

    She’s pretty obviously talking about wildly different phenomena. The first quote deals with long-run supply-side effects and the second one with short-run demand-side effects and to a lesser degree short-run supply side effects. So you’re that that they’re far from a literal contradiction — they’re not a contradiction at all. The second one is nothing more than the generic claim that tax hikes are contractionary in the short run, which is entirely compatible with the claim that tax cuts are not self-financing over the long run.

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