Friday, December 23, 2005

Paul Krugman calls Robert Lucas a hokum-swallowing yokel.

From Paul Krugman's most recent...

Since the 1970's, conservatives have used two theories to justify cutting taxes. One theory, supply-side economics, has always been hokum for the yokels...
With one yokel, Nobelist Robert Lucas, going so far as to dedicate his 2003 Presidential Address (.pdf) of the American Economics Association to the importance of supply-side hokum...
Taking U.S. performance over the past 50 years as a benchmark, the potential for welfare gains from better long-run supply side policies exceeds by far the potential from further improvements in short-run demand management.... [emphasis in original]

The potential gains from improved stabilization policies are on the order of hundredths of a percent of consumption, perhaps two orders of magnitude smaller than the potential benefits of available "supply-side" fiscal reforms.
Lucas on tax policy...
When I left graduate school, in 1963, I believed that the single most desirable change in the U.S. tax structure would be the taxation of capital gains as ordinary income. I now believe that neither capital gains nor any of the income from capital should be taxed at all.

Supply side economics [is] a term associated in the United States with extravagant claims about the effects of changes in the tax structure on capital accumulation.

The analysis I have reviewed supports these claims: Under what I view as conservative assumptions, I estimated that eliminating capital income taxation would increase the capital stock by about 35 percent.

The supply side economists have delivered the largest genuinely free lunch that I have seen in 25 years in this business, and I believe that we would have a better society if we followed their advice.
-- In Supply Side Economics: An Analytical Review, Oxford Economic Papers, 42:293.
Is Krugman still a member of the AEA? After his career change and all, one could understand if he decided to save the dues.