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Friday June 24th 2011

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Preaching to the Choir

Paul Krugman says there was no Reagan revenue-growth miracle.

Actually, I tend to agree with Paul on this one.  I am also skeptical that across-the-board tax cuts increase tax revenue (although, unlike Paul, I think that tax cuts do generate significant dynamic effects and therefore are not as costly as static estimates suggest).

What strikes me about Paul’s blog post, however, is how completely unconvincing it is.  He uses a chart that starts the Reagan era in 1979, arguing we need to correct for the business cycle.  But would or should this persuade anyone?

The null hypothesis being tested is that Reagan policies had a significant effect on revenue growth.  But would any believer in that null hypothesis include the last couple years of the Carter administration as part of the Reagan era?  Weren’t the policies of those years precisely what Reagan was trying to reverse?  Maybe Paul’s chart might appeal to someone who already agrees with him, but I thought economists turned to data to try to persuade those who are truly undecided. It is hard to see how this presentation of the data would move someone who is yet to make up his mind.

One more thing: What Paul calls “the Clinton miracle” might also be called “the Internet bubble.”

This article was originally posted on Greg Mankiw’s Blog