Submitted on Sat, 2004-09-25 06:00
(...) I opened it and started reading chapter one. It starts off with a bunch of hand waving then proceeds into fallacy after fallacy leading to compounding errors, and I'm only talking about the first 8 pages! At this rate the idea of a couple of quick blog posts pointing out what I believe to be the errors between basic "mainstream" economics and reality will become a re-write of the entire book. So be it. (...) The second fallacy he gives is the failure to hold other things constant, which in his example he commits another fallacy by attacking a straw man. His example is the supply-side theory. Supply-siders point to J. Kennedy's cutting of tax rates and the subsequent increase in tax revenue as proof that cutting tax rates can increase tax revenues. Samuelson suggest that the supply-siders failed to hold growth constant while evaluating the effects of rates on revenue. Now I'm no fan of supply-side theory, but isn't the Laffer curve all about economic growth? That is, cutting taxes can increase tax receipts, because the economy will grow more? There are plenty of examples available to show the fallacy, he does not need to mis-represent ideas. (...)
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A paragraph mentioned in the above post reads as follows:
Failure to hold other things constant. A second pitfall is failure to hold other things constant when thinking about an issue. For example, we might want to know whether raising tax rates will raise or lower tax revenues. Some people have put forth the seductive argument that we can eat our fiscal cake and have it too. They argue that cutting tax rates will at the same time raise government revenues and lower the budget deficit. They point to the Kennedy-Johnson tax cuts of 1964, which lowered tax rates sharply and were followed by an increase in government revenues in 1965. Hence, they argue, lower tax rates produce higher revenues.
And it continues in its 19th edition as following:
What is this reasoning fallacious? The argument assumes that other things were constantㅡin particular, it overlooked the growth in the overall economy from 1964 to 1965. Because people’s incomes grew during that period, total tax revenues grew, even though tax rates were lower. Careful econometric studies indicate that total tax revenues would have been even higher in 1965 if tax rates had been held at the same level as in 1964. Hence, this analysis fails to hold other things constant in making the calculations.
“Assumes” in the 2nd sentence must be the misprint of “does not assume.” By the way, the former paragraph continues in its 18th edition as following:
What is wrong with this reasoning? This argument overlooks the fact that the economy grew from 1964 to 1965. Because people’s incomes grew during that period, government revenues also grew, even though tax rates were lower. Careful studies indicate that revenues would have been even higher in 1965 had tax rates not been lowered in 1964. Hence, this analysis fails to hold other things (namely, total incomes) constant.
CF. Economics, its 19th edn., by Samuelson and Nordhaus, Chapter 1, p. 6.
CF. Basic Concepts in its 18th edn., by the same authors, Chapter 1, p. 6.