"Economic Scene"
by Alan B. Krueger

             Chapter 15 summarizes alternative economic theories that have guided public policy.  The conclusion points out that each theory is based on different assumptions and different priorities.  Sorting through the disagreements can be confusing.  So how do you decide where you stand?

             If you are like many Americans, your opinions on economic policy may ultimately rest on your political ideology.  In this "Economic Scene" column, Alan Krueger summarizes the results of a survey he conducted with fellow economist Alan Blinder.  They gave a random sample of Americans  a quiz on basic economic facts and asked their opinions about economic policy.  Unfortunately, most Americans have not taken an economics class lately (if ever) and did not do well on the quiz—especially if they relied primarily upon television as their information source.  But those people in the survey who identified with a particular political perspective (liberal, moderate, or conservative) were more knowledgeable about the economy than those who did not have an ideological leaning.  Further, peoples' ideology influences their opinions about crucial economic policy questions like the Bush tax cut (described on page 370 of your text) and budget deficits.

• According to Krueger's article, are peoples' views on economic policy largely determined by their own economic self-interest?  Why or why not?
• Looking back at the economic theories described in chapter 15, which seem to support a conservative political ideology?  Which seem to support a liberal political ideology?
• Why does a political scientist quoted in the article assert that basing one's opinion on ideology can be rational?  Do you agree or disagree with this statement?
• Try plotting the data at the end of the article on a bar graph using Excel or a similar program.  What patterns do you observe?

"A Bit of Doodling About a Tax-Cut Danger"
by Daniel Altman

Source:  The New York Times, January 1, 2006.
http://select.nytimes.com/search/restricted/article?res=F00710FE3B540C728CDDA80894DE404482

             Is the time ripe for a revival of supply-side economics?  Supply-side economics, described in chapter 15 of your text (see pages 365-367), asserts that tax cuts can actually generate more revenue for the federal government, if tax rates are so high that they are inhibiting economic incentives.  In plain English, if tax rates are too high, people may not work extra hard and businesses may not invest to expand because they feel that much of the payoff for their effort will get snapped up by Uncle Sam.  In this theory, we get to have our cake and eat it too: government cuts tax rates but since we all work harder and make more money, the tax revenue the government collects actually increases.

             The trick to this theory is determining how high taxes have to be to have this disincentive effect.  In this column, Daniel Altman quotes a study from the Congressional Budget Office that concludes that we are NOT at that point.  That is, the study concluded that lowering taxes may be great for those taxpayers who keep the money.  But lowering tax rates will lower the revenue collected by the federal government.  Why is this a problem?  Since we already have a substantial budget deficit, the government will have to borrow more money to fund its activities.  Interest on the federal debt will continue to pile up.  Altman proposes that this continued borrowing also has its limits.  At some point, lenders may not feel confident in the federal government's ability to keep up with its interest payments (like someone who has maxed out their credit cards).

• When Altman describes the "left" and "right" side of the Laffer Curve, he has drawn the graph differently than the way it is shown in your text on page 367.  He is envisioning the axes reversed, with the tax rate on the horizontal axis and the tax revenue on the vertical axis.  Try drawing the Laffer Curve this way.  Mark a point on the right side of the peak and see what happens to tax revenue when you cut the tax rate.  Then mark a point on the left side of the peak and see what happens to tax revenue when you cut the tax rate.
• According to Altman, which point more closely represents the state of the economy when Reagan cut taxes in 1981?  Which point more closely represents the current state of the economy?