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Voo-doo econ

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Conservatives love to frame their policies as based on something other than ideological preference. We are to believe that they're inspired by immutable laws of economics, and there's always an economist around who will back up whatever their ideological preference is that day with a smart-sounding theorem.

Which is why this piece from yesterday's New York Times needs to be promoted:

Early last month, without much fanfare, the Congressional Budget Office released a paper called "Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates." At a modest seven pages, it didn't elicit the same sort of interest as the budget office's budgetary and economic outlooks. Yet it may be one of the most important government publications in years.

As Douglas J. Holtz-Eakin, the budget office's director, writes in a brief summary at the beginning of the paper, most predictions of the effects of tax-rate changes "do not include the budgetary impact of any possible macroeconomic effects of tax policies." In other words, the predictions don't take into account how tax cuts could affect the overall size of the economy. It is this omission - one often cited by proponents of tax cuts, especially in the White House - that the paper tries to correct.

The author of the analysis, Ben Page, estimates how an across-the-board cut in income tax rates could generate higher levels of economic activity, potentially replacing lost tax revenue. The theory behind these feedback effects is well worn: putting money back into taxpayers' pockets will let them spend more and save more, raising demand for goods and services and helping companies to invest for the future.

Mr. Page assumes that government spending will continue as planned for a decade after the tax cuts. He also creates different possibilities based on various assumptions about people's foresight, the mobility of capital and the ways in which the federal government might make up for the lost revenue when the decade is up - either by cutting spending or by raising taxes again. Finally, he compares the budget office's figures to those of two private forecasting firms, Global Insight and Macroeconomic Advisers.

Like many predictions in economics, Mr. Page's vary widely depending on his assumptions - this stuff is more like weather forecasting than Newtonian physics. But even within their range, the results answer the fundamental question posed by the Laffer Curve.

Joshua Holland is a staff writer at Alternet and a regular contributor to The Gadflyer .