100 Economics Question of the Day: An Intermittent Blog: Menzie Chinn Saves the Best for Last

Thursday, July 27, 2006

Menzie Chinn Saves the Best for Last

Via Mark Thoma comes Menzie Chinn's fine argument against "Dynamic Analysis."

UPDATE: Thoma has more, including Jason Furman's updated analysis (PDF).

I'm not certain Chinn intended the post that way (though I suspect in the affirmative), but the collateral damage he does to the concept is impressive:
The 0.7 percent deviation from baseline cited in the 2007 MSR is in the top right hand corner element, under "Financed by Decreasing Future Government Spending" (recent history has not been too supportive of this possibility, though)....

Of course, the astute reader will note that if taxes are raised in the future to finance the tax cut, then GNP will eventually be 0.9 percent lower than steady state baseline....

(By the way, the "Division on Dynamic Analysis" is in the President's budget proposal for FY2007.)

One might believe he greets this as positively as P.Z. Myers take[down] on the National Center for Complementary and Alternative Medicine.

Chinn is also clear on what "Dynamic Analysis" is not:
It is important to understand that there is no welfare calculation undertaken, despite the fact that under certain conditions, GNP is higher than under baseline. That is because undertaking a welfare analysis would require taking a stand on the utility associated with government spending on goods and services. So even if one were to take the Treasury's high end estimate for the long run steady state effect, the answer to the question of whether tax cuts are desirable depends upon the utility associated with spending on civil servant wages, bridges, and body armor. [emphases mine]

So, in summary, tax cuts might be a positive force if (1) they are offset by spending cuts, (2) they don't have such an effect as that they need to be balanced by increases later, and (3) you don't consider the value that revenue may have produced.

(Originally posted at Marginal Utility)

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