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Larry Kudlow on forecasting, taxes and deficits

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08/01/2004

In a June 17 column Larry Kudlow predicted second quarter growth of 6%. It now appears to have been more like 3%. Of course, no one can predict the future so one should perhaps not be too hard on him , but this miss is particularly interesting since he in a column last November derided those who believed that the strong third quarter number last year was a one-shot event from tax cuts, increased government spending and record-low (negative) interest rates. Later in his June 17 column he argues that "The incentive power of lower marginal tax rates on economic growth is one of the most underrated facets of mainstream economic thought.".

Now I of course agree that lowering marginal tax rates will boost economic growth, but what he and other supply-siders neglect is the negative effect of deficits. Not only will it create the income effect falsely attributed to lowering the burden of government, but more importantly it will divert savings from real investments to government spending. Tax cuts combined with increased government spending can therefore hardly be expected to provide more than a short-term boost.

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