This presentation debunks several prominent conservative economic myths using facts from the CBO and other highly credible sources.

1. Debunking
Conservative Economic
Mythology
David Doney CPA
June 2017
1

2. Conservative Economic Mythology
1. Do income tax cuts pay for themselves?
2. Was government housing policy a primary cause of the 2008 crisis?
3. Does fiscal stimulus work?
2

3. Do Income Tax Cuts Pay for Themselves?
Conservative claim
 Income tax cuts pay for themselves, by driving enough economic growth to offset lower tax rates
What the facts say: Tax cuts do not pay for themselves. They reduce revenue, increasing deficits and debt relative to a
baseline without the cuts.
1CBO: Changes in Baseline Projections Since January 2001 (June 2012)
2CBO: Budget and Economic Outlook 2009-2019 (January 2009)
Congressional Budget Office (CBO)
 The CBO estimated in June 2012 that the Bush tax cuts of 2001 (EGTRRA) and 2003 (JGTRRA) reduced revenues by approximately $1.5 trillion total over
the 2002-2011 decade, excluding interest, relative to a baseline without those tax cuts.1
 The CBO estimated in January 2009 that the Bush tax cuts would add approximately $3.0 trillion to the debt over the 2010-2019 decade if fully extended
at all income levels, including interest.2
 The CBO estimated in January 2009 that extending the Bush tax cuts at all income levels over the 2011-2019 period would increase the annual deficit by
an average of 1.7% GDP, reaching 2.0% GDP in 2018 and 2019.2
3
$1,186
328
$1,514

4. Do Income Tax Cuts Pay for Themselves?
3IGM Forum: Tax Reforms (May 2017)
http://www.igmchicago.org/surveys/tax-reforms
IGM Forum / University of Chicago Survey
 84% of the prominent economists polled by the University of
Chicago in May 2017 either disagreed or strongly disagreed
with the conservative claim, in this case regarding the
proposed Trump tax cuts.3
 Economist David Autor: “Not a shred of evidence that U.S. tax
cuts pay for themselves.”3
 Economist Anil Kashyap: “Maybe when marginal rates are
90%+ you can cut them and have them self-fund, but not true
in the more recent era.”3
4
Further evidence against the claim:

5. Do Income Tax Cuts Pay for Themselves?
5
https://twitter.com/LHSummers/status/857764470193606656
Summers: "If I had been asked by the White House to assert a proposition as
demonstrably false as the claim that this [Trump tax cut] plan would produce revenue, I
would have resigned rather than put the credibility of the department behind a proposition
that no one with real experience would believe was true.“ (CNBC, April 2017)
Treasury Secretary Steven Mnuchin
“The [tax cut] plan will pay for itself with growth”4
Former Treasury Secretary Lawrence Summers
4Washington Post: Trump’s treasury secretary: The tax cut ‘will
pay for itself’ (April 20, 2017)
Conservatives / Republicans keep making the claim… …despite the consensus to the contrary

6. Origins of the Claim
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4Heritage Foundation Arthur Laffer: The Laffer Curve: Past,
Present and Future. (June 1, 2004)
 At 100% tax rate, the government collects zero.
 As the rate falls initially from 100%, the government
collects more.
 After a certain point, the government collects less.
 The Laffer Curve was based on a thought experiment,
not empirical study.
 Changes in tax rates have two effects: an arithmetic
effect and an economic effect.
 The arithmetic effect is to increase revenue from a tax
rate increase and reduce it from a tax rate decrease
 The economic effect acts counter to the arithmetic
effect; a tax rate cut provides incentives to increase
work, output and employment, while a tax increase
provides a dis-incentive.

7. Empirical Studies on the Laffer Curve
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1Don Fullerton The New Palgrave Dictionary of Economics (2008)
2IGM Forum: Tax Reforms (May 2017)
http://www.igmchicago.org/surveys/tax-reforms
 Studies place the inflection point for maximizing tax
revenue at different places
 Some studies place the inflection point in the 70% range1
 There is consensus among economists that marginal
income tax rates around present levels (35%) are to the
left of the inflection point, meaning tax increases would
raise revenue and tax cuts would reduce it.2

8. Conservative Economic Mythology
1. Do income tax cuts pay for themselves?
2. Was government housing policy a primary cause of the 2008 crisis?
3. Does fiscal stimulus work?
8

9. Government Housing Policy and the Crisis of 2008
Conservative claim
 Government housing policies (e.g., GSE’s Fannie & Freddie, affordable housing goals, and Community Reinvestment
Act/CRA) were a primary cause of the 2008 financial crisis.
 These policies forced banks to make risky loans, making the system vulnerable.
What the facts say: Government housing policy was NOT a primary cause. The crisis was mainly a private sector phenomenon,
with failure to regulate the risk taking of non-depository (shadow) banks globally a primary cause. In other words, it was
government inaction, not action, that caused the crisis. A massive credit bubble inflated in multiple asset classes (not just
housing) and in many countries, further indications that U.S. housing policies were not the primary factor.
1Financial Crisis Inquiry Commission (FCIC) Report Conclusions
https://fcic.law.stanford.edu/report/conclusions
Financial Crisis Inquiry Commission (FCIC) Majority Report Conclusions (6 Democrats)1
 Page 12: “We concluded that [Fannie & Freddie, the GSE’s] contributed to the crisis, but were not a primary cause. Importantly, GSE
mortgage securities essentially maintained their value throughout the crisis and did not contribute to the significant financial firm
losses that were central to the financial crisis.”
 Page 12: “By the end of 2008, GSE mortgages were far less likely to be seriously delinquent than were non-GSE securitized mortgages:
6.2% vs. 28.3%.”
 Page 13: “[Affordable housing] goals only contributed marginally to Fannie & Freddie’s participation in [risky] mortgages.”
 Page 14: “…CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject to CRA.
Research indicates only 6% of [risky or subprime loans] had any connection to the law.”
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10. Government Housing Policy and the Crisis of 2008
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 Subprime lending expanded dramatically 2004-2006,
although U.S. housing policies and CRA (in-place for decades)
were not materially changed around that time.
 Expansion of home ownership had been pursued by several
administrations, both Democrat and Republican, including
the G.W. Bush administration.
 Housing bubbles also appeared across Europe, indicating a
more global phenomenon was at work (i.e., not U.S.
centric policies).
 Bubbles also appeared in non-housing markets, such as
commercial real estate.
Sources: FCIC Graphics
https://fcic.law.stanford.edu/resource/graphics

11. Government Housing Policy and the Crisis of 2008
Further evidence:
FCIC Dissenting Statement (3 of 4 Republicans)
 An important hypothesis in the dissent was that a rapid growth of savings from Asia and the Middle East created bubbles in a variety of
asset classes as investors pursued higher yield. When these bubbles burst, the financial system and then the wider economy suffered.
 Page 416: “These facts tell us that our explanation for the credit bubble should focus on factors common to both the United States and
Europe, that the credit bubble is likely an essential cause of the U.S. housing bubble, and that U.S. housing policy is by itself an
insufficient explanation of the crisis. Furthermore, any explanation that relies too heavily on a unique element of the U.S. regulatory or
supervisory system is likely to be insufficient to explain why the same thing happened in parts of Europe. This moves inadequate
international capital and liquidity standards up our list of causes, and it moves the differences between the regulation of U.S. commercial
and investment banks down that list.”
 Page 415: “…problems with U.S. housing policy or markets do not by themselves explain the U.S. housing bubble.”
 Page 415: “Large financial firms failed in [several countries]. Not all of these firms bet solely on U.S. housing assets, and they operated in
different regulatory and supervisory regimes than U.S. commercial and investment banks.”
 Page 422: “U.S. monetary policy [Federal Reserve actions] may have contributed to the credit bubble but did not cause it.”
 Page 437: “Fannie Mae and Freddie Mac did not by themselves cause the crisis, but they contributed significantly in a number of ways.”
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Washington Post - Barry Ritholz “What caused the financial crisis? The big lie goes viral” (Nov 5, 2011)
 “Wall Street has its own version: Its Big Lie is that banks and investment houses are merely victims of the crash. [The Big lie is] the
entire boom and bust was caused by misguided government policies. It was not irresponsible lending or derivative or excess leverage
or misguided compensation packages, but rather long-standing housing policies that were at fault. ”
 “Congress did radically deregulate the financial sector, doing away with many of the protections that had worked for decades.
Congress allowed Wall Street to self-regulate, and the Fed the turned a blind eye to bank abuses. The previous Big Lie — the
discredited belief that free markets require no adult supervision — is the reason people have created a new false narrative.”

12. Conservative Economic Mythology
1. Do income tax cuts pay for themselves?
2. Was government housing policy a primary cause of the 2008 crisis?
3. Does fiscal stimulus work?
12

13. Does Fiscal Stimulus Work in a Downturn?
Conservative claims
 Economic stimulus, such as the 2009 American Recovery and Reinvestment Act (ARRA), is ineffective.
 Stimulus increases the debt without adding significantly to jobs or GDP growth and can “crowd-out” private sector activity.
 Income tax cuts are the most effective type of stimulus, as opposed to spending.
What the facts say: Economic stimulus is effective in creating jobs and economic growth. Its impact is particularly strong in a
downturn. If the private sector is unwilling or unable to spend, then government can borrow more and spend without “crowding
out” private sector economic activity or bidding up interest rates. Spending is more effective stimulus than tax cuts, as the latter
can be saved.
1CBO “Estimated impact of the ARRA” (February 2015)
Congressional Budget Office1
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 The CBO data in the table indicates sizable GDP increases and
unemployment rate decreases due to the 2009 ARRA
 Changing the unemployment rate by 1% represents 1.6 million jobs

14. What Did Most Economists Think About the 2009 Stimulus (ARRA)?
1IGM Forum: “Economic Stimulus”
http://www.igmchicago.org/surveys/economic-stimulus 14
IGM Forum / University of Chicago Survey1
 80% of the prominent economists polled by the University of
Chicago in February 2012 either agreed or strongly agreed
that the Obama stimulus (ARRA) lowered the unemployment
rate.
 46% agreed or strongly agreed the benefits outweighed the
costs, while only 12% disagreed. Many were also uncertain.

15. Does Stimulus Crowd Out Private Sector Activity?
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 In theory, in a healthy economy, if the government increases
its deficits and therefore its bidding for scarce savings,
interest rates will rise, making investments and mortgages
more expensive. This is called “crowding out” meaning a
reduction in private sector activity.
 However, interest rates did not increase, indicating there was
no crowding out of private sector activity due to the stimulus
and other deficit increases to address the 2007-2009
recession.
 The U.S. had a large savings surplus 2009-present, indicating
household savings was much larger than business
investment.
 When savings by households is greater than investment by
businesses, the government can borrow and spend the
money without crowding out the private sector.
 Since the money would otherwise remain in the banking
system unused, government borrowing and spending the
money adds to GDP and employment.

16. What is the Most Effective Type of Stimulus?
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 CBO estimated the multiplier or “bang for the buck”
for various measures included in the 2009 ARRA.1
 Spending is a more productive stimulus measure per
dollar, as tax cuts can be saved.
 Further, those with higher income tend to save more
of the next (marginal) dollar of income they receive,
so measures that help lower-income persons tend to
have more bang for the buck.
1CBO “Estimated impact of the ARRA” (February 2015)

17. What Might Have Happened Without Stimulus?
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Economists Mark Zandi (Moody’s) and Alan Blinder (former Fed Vice-Chair)
Source: CBPP-Blinder and Zandi-The Financial Crisis: Lessons for the Next One (October 2015)
 The “policy responses” refer
to both fiscal and monetary
stimulus.
 Fiscal stimulus refers to
government spending and tax
policies, while monetary
stimulus refers to actions of
the Federal Reserve.

18. Conclusions
1. Tax cuts do not pay for themselves. They increase deficits and debt relative to a
policy baseline without them. CBO estimated the Bush tax cuts would cost the
Treasury as much as 2% GDP per year if extended beyond 2013; budget deficits
have averaged 3% GDP historically.
2. Government not regulating the risk taking of large investment banks was a
primary cause of the 2008 crisis, not U.S. housing policy. The crisis was a failure
of free market fundamentalism, which argued the investment banks would self-
regulate out of their own interests.
3. Fiscal stimulus is effective, particularly in a downturn. Spending is a more
effective form of stimulus than tax cuts, as the latter can be saved. Stimulus
targeted at low-income persons is more effective than for high-income persons.
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