Grading the President in Macro
What grade should President Bush earn in macroeconomics?
As a short-run employment- and demand-generating program, an objective grade would be a D if not an F. It was about cutting the taxes of the rich, improving incentives to save and rationalizing the taxation of capital income, and boosting the values of people’s 401ks.
Orthodox Keynesian policy in a recession would be to cut taxes. The Bush Administration has done that. Orthodox policy would be to increase government spending over what had been planned. The Bush Administration has done that, too. When a student hands in an exam that repeats almost exactly what the professor was saying in class, but the student still gets a low grade, then one can only conclude that the professor has something personal against the student.
It is true that labor utilization has declined in spite of the tax cuts. It is true that the tax cuts were the “wrong” tax cuts from the perspective of liberal economists. However, to my knowledge, no one has been able to connect those two events. How much lower would the unemployment rate be if the tax cuts had favored people with lower incomes? I doubt that you could find a macroeconomic model that would generate a difference of as much as two-tenths of one percent on the unemployment rate.
DeLong the economist knows that the erosion of Okun’s Law, not the nature of the Bush tax cuts, is the cause of high unemployment. It is DeLong’s politics that leads him to give the tax cuts a low grade.
For Discussion. I would be interested in a comparative statics exercise that tries to analyze the difference that a Democratic alternative policy would have made to the unemployment rate. Has anyone seen such an analysis?