A TAX CUT PUZZLE

How come President Bush, who has made a massive tax cut his foremost domestic goal, has chosen as his chief economic adviser a leading skeptic about President Reagan’s massive tax cut?

The skeptical economist is N. Gregory Mankiw, a Harvard professor. Mr. Bush has nominated him to head the Council of Economic Advisors. In his 1997 textbook, “Principles of Economics,” Professor Mankiw ridiculed the idea of supply-side economics and the economist who promoted it 30 years ago. Mr. Mankiw (pronounced Man-CUE) called it “fad economics.” He called its advocates “charlatans and cranks.”

His specific target was Arthur Laffer, who met with a group of economists and business writers in 1974 in a Washington restaurant, drew a graph on a cocktail napkin, and persuaded them that tax rates were so high that a cut in the rates would actually increase tax revenues. Conservative economists and the editorial page of The Wall Street Journal promoted the idea, Mr. Reagan bought it, and Congress enacted it, although George H.W. Bush had called it “voodoo economics” as Mr. Reagan’s rival in the 1980 presidential campaign.

As Mr. Mankiw recounted the results, what happened was less tax revenue, not more. “Revenue from personal income taxes (per person, adjusted for inflation) fell by 9 per cent from 1980 to 1984, even though average income (per person, adjusted for inflation) grew by 4 percent over this period.” He went on: “The tax cut helped begin a long period in which the government failed to collect enough tax revenue to pay for all its spending. Throughout Reagan’s two terms in office, and for many years thereafter, the government ran large budget deficits.”

When President Bush nominated Mr. Mankiw in February, The New York Times reported that his comments infuriated some prominent supply-side economists. It quoted Martin Anderson, a senior fellow at the Hoover Institution, who served in the Reagan White House and advised Mr. Bush in the 2000 campaign, as saying, “It’s stupid; it’s simply not what a good economist writes. Anybody who puts that in a textbook for tens of thousands of students to read has a lot of explaining to do.”

The Reagan tax cut, the monstrous increase in the national debt, the 20 percent interest rates and the “stagflation” seem long ago. Republicans almost unanimously favored the huge Bush tax cut. Even Maine’s moderate Republic senators voted for the somewhat reduced version that was enacted. Democratic leaders favored their own, lesser, version of a tax cut and seemed to accept the idea that a properly devised tax cut could bring economic growth without causing unacceptable budget deficits.

And has Professor Mankiw changed his views on the subject? Questioned by e-mail this week, he replied: “My views have not changed, but some people read more into the presentation in the first edition than I had intended, so I revised that part of the book in the second edition. Supply-side economics is discussed in Chapter 8 of the third edition, which came out several months ago. If you want to learn my current views, the most recent edition is the most reliable guide.”

No one knows, of course, whether the Bush tax cut will bring a repeat of the Reagan experience or whether it will, as advertised, rescue the economy from the present doldrums. Advocates acknowledge that it probably will add substantially to the budget deficit, but they predict it will produce jobs. Whatever happens, let’s hope that Professor Mankiw, who writes like a dream and sticks to his beliefs, will help guide the economy into recovery.