FREDERICA FREYBERG:

AT HIS CAMPAIGN STOPS, PLURAL, COMEDIAN JIMMY FALLON POINTS OUT SCOTT WALKER’S LOVE FOR WISCONSIN-BASED KOHLS DEPARTMENT STORES.

SCOTT WALKER:

I WENT TO KOHL’S DEPARTMENT STORES NEAR OUR HOUSE, AND I BOUGHT SOMETHING AT THE PRICE IT WAS MARKED AT. SO NOW I KNOW, OVER THE YEARS, IF I’M GOING TO GO BUY A SHIRT AND IT WAS $29.99, I GO TO THE RACK THAT SAYS NOW $19.99. I REMEMBER TO GET THE FLYER OUT THAT WE GOT MAILED AT OUR HOUSE WHERE YOU GET 15 OR 20 OR – IF YOU’RE REALLY LUCKY – 30% OFF. TONETTE USUALLY IS WITH AND SHE’LL REACH INTO HER PURSE AND PULL OUT SOME OF THAT KOHLS CASH, AND NEXT THING YOU KNOW, THEY’RE PAYING ME TO BUY THE SHIRT.

FREDERICA FREYBERG:

BUT WALKER IS NOT JUST TALKING ABOUT CHEAP SHIRTS. HE’S ALSO TALKING ABOUT TAXES. HE SAYS KOHLS MAKES MONEY OFF VOLUME. HE SAYS BY LOWERING PRICES AND BROADENING THE BASE TO MAKE MORE MONEY.

SCOTT WALKER:

THAT’S WHAT I THINK ABOUT YOUR MONEY, THE TAXPAYERS’ MONEY. THE GOVERNMENT CAN CHARGE YOU A HIGHER RATE AND SOME OF US COULD AFFORD IT, BUT IF IT YOU LOWER THE RATE, BROADEN THE BASE, WE EXPAND THE VOLUME OF PEOPLE WHO CAN PARTICIPATE IN THE ECONOMY. [APPLAUSE] YEARS AGO, WE USED TO CALL THAT – A SIMILAR PLAN WAS SUCCESSFUL UNDER PRESIDENT RONALD REAGAN AND BACK THEN WE USED TO CALL IT THE LAFFER CURVE. TODAY I CALL IT THE KOHL’S CURVE BECAUSE I BELIEVE YOU CAN SPEND YOUR MONEY FAR BETTER THAN THE FEDERAL GOVERNMENT, AND WHEN WE DO, THE ECONOMY WILL GET A WHOLE LOT BETTER. [APPLAUSE]

FREDERICA FREYBERG:

SO WE PUT SCOTT WALKER’S FUN KOHLS CURVE ECONOMIC PLAN TO AN ACTUAL ECONOMIST. UW-MADISON PROFESSOR OF ECONOMICS STEVEN DURLAUF JOINS US NOW. THANKS VERY MUCH FOR DOING SO.

STEVEN DURLAUF:

THANKS FOR HAVING ME.

FREDERICA FREYBERG:

SO WHAT CAN DO YOU THINK ABOUT THE GOVERNOR’S KOHLS CURVE DESCRIPTION AS A WAY TO GROW THE ECONOMY?

STEVEN DURLAUF:

WELL, THE DESCRIPTION ITSELF WON’T DISTINGUISH HIM FROM OTHER CANDIDATES WHO SAY FOOLISH THINGS, BUT RATHER THAN WORRY ABOUT REASONS WHY IT ISN’T AN APT ANALOGY, THERE’S REALLY TWO ISSUES. THE FIRST IS WHETHER BY LOWERING TAX RATES, THE ECONOMY IS STIMULATED AND THE ANSWER TO THAT QUESTION IS – UNDER THE AVAILABLE EVIDENCE, THE THEORIES WE HAVE – YES, IF. AND YES, IF MEANS THAT YOU DON’T CHANGE OTHER THINGS. SO ONE THING THAT I WOULD SAY ABOUT THE POLICY DISCUSSIONS OF TAXES IS THAT THEY’RE INCOMPLETE. IN OTHER WORDS, IT DOESN’T TALK ABOUT WHAT’S DONE WITH THE TAX REVENUE. THERE’S AN ASSUMPTION WHEN HE SAYS YOU CAN SPEND THE MONEY BETTER THAN THE GOVERNMENT. WELL, IF IT’S BUYING SHIRTS, ABSOLUTELY. BUT ON PROVIDING EDUCATION, COLLEGE EDUCATION FOR PEOPLE, NOT SO CLEAR. PROVIDING INCENTIVES FOR RESEARCH, NOT SO CLEAR. AND SO REDUCING TAXES CAN STIMULATE THE ECONOMY AT TWO LEVELS. ONE, PEOPLE HAVE MORE MONEY TO BUY THINGS AND AT THE LEVEL THAT THEY HAVE INCENTIVES TO ENGAGE IN ENTREPRENEURIAL ACTIVITY, TO WORK LONGER HOURS CAN BE EFFECTED. BUT THAT’S ONE SIDE OF THE EQUATION. THE OTHER SIDE OF THE EQUATION HAS TO DO WITH WHAT THE TAX REVENUES ARE USED FOR. AND IF TAX REVENUES ARE USED TO PROMOTE RESEARCH AND DEVELOPMENT, EDUCATION, INFRASTRUCTURE, THOSE ALL GROW THE ECONOMY TOO.

FREDERICA FREYBERG:

BECAUSE WE’VE SEEN WHAT MIGHT BE DESCRIBED AS THIS EXPERIMENT IN WISCONSIN OF LOWERING THE TAXES TO TRY TO GROW THE ECONOMY. AND THE JURY IS APPARENTLY STILL OUT ON THAT.

STEVEN DURLAUF:

WELL, MY INTERPRETATION OF THE DATA, AND TO BE CLEAR, SOCIAL SCIENCE ISN’T LIKE NATURAL SCIENCE, WHERE THERE IS A DECISIVE EXPERIMENT. THERE ARE JUDGMENTS TO BE MADE, BUT I THINK THE REASONABLE INTERPRETATION IS THAT THE TAX REDUCTIONS THEMSELVES DID STIMULATE THE ECONOMY. THOSE WERE COUNTERED, HOWEVER, BY THE ASSOCIATED REDUCTIONS IN GOVERNMENT EXPENDITURES, BECAUSE OF THE OBLIGATIONS TO KEEP THE BUDGET BALANCED. SO THAT’S WHY I WANT TO BE CLEAR THAT IT’S ONE THING TO SAY TAXES WILL STIMULATE THE ECONOMY. IT’S ANOTHER TO SAY SIMULTANEOUSLY REDUCING TAXES AND GOVERNMENT SPENDING WILL STIMULATE THE ECONOMY, AND THERE, I DON’T THINK THE EVIDENCE HAS SUPPORTED WHAT THE GOVERNOR IS CLAIMING.

FREDERICA FREYBERG:

SO ON THE OTHER PIECE OF WHAT HE’S TALKING ABOUT IS THE ANALOGY TO THE LAFFER CURVE, WHEREBY LOWER TAXES RAISE REVENUE. HOW COULD THAT EVEN BE TRUE?

STEVEN DURLAUF:

WELL THE THEORY WOULD BE THE FOLLOWING, WHICH IS THAT I LOWER THE TAX RATE ON AN ENTREPRENEUR, AND THAT ENTREPRENEUR ENGAGES IN SO MUCH MORE ECONOMIC ACTIVITY THAT THIS LOWER RATE MULTIPLIED BY THE HIGHER LEVEL OF INCOME PRODUCES MORE MONEY THAN WAS ORIGINALLY AVAILABLE. AND SO — AND IT’S CERTAINLY NOT THE CASE THAT IT’S A NONSENSICAL STATEMENT. IT’S AN EMPIRICAL QUESTION. IS THE SENSITIVITY OF INDIVIDUALS TO FIRMS, OTHER ECONOMIC ACTORS TO TAX RATES SUCH THAT AS AN EMPIRICAL MATTER, ONE SEES THIS PHENOMENA. THAT’S WHY THE KOHL’S ANALOGY, TO BE HONEST, WAS A LITTLE SILLY. KOHLS SET ITS PRICES NOT TO MAXIMIZE REVENUE. IT SETS IT TO MAXIMIZE PROFITS. AND ONE REASON THEIR PRICES ARE LOW IS BECAUSE IF THEY RAISED THEM, THEIR COMPETITORS WOULD DRAW AWAY THEIR DEMAND. SO THE U.S. GOVERNMENT IS NOT MAXIMIZING PROFIT, IT’S MAXIMIZING REVENUE, AND ITS ONLY COMPETITOR, WHICH IS NOT A TRIVIAL ONE, IS NON-TAXABLE INCOME, IN OTHER WORDS THERE MIGHT BE SOME SUBSTITUTION AWAY, AND THAT’S WHY HE SHOULDN’T BE BLAMED, EVERY POLITICIAN MAKES STATEMENTS LIKE THIS. BUT THE SUBSEQUENT QUESTION, IS AN EMPIRICAL MATTER, DID REVENUES GROW BECAUSE OF THE TAX CUTS HERE AND THE ANSWER HAS TO BE THAT THE — THE DATA SPEAK FOR THEMSELVES. THE CRISIS OVER THE BUDGET THIS YEAR IS A MANIFESTATION OF THE CUTS LAST YEAR, AND SO WE SEE IN THE SHORT RUN IT DIDN’T HAPPEN. IT DOESN’T MEAN THAT OVER THE NEXT FIVE YEARS, THERE COULDN’T BE ANOTHER EFFECT.

FREDERICA FREYBERG:

IN HIS SOUND CLIP AFTER THE JIMMY FALLON THING, THE GOVERNOR SAID THIS WORKED WELL UNDER PRESIDENT REAGAN. DID IT?

STEVEN DURLAUF:

NO, THAT STATEMENT IS SIMPLY FALSE. THE CONSENSUS OF RESEARCH AND ECONOMICS IS THAT THE RAISING TAX CUTS DID STIMULATE THE ECONOMY, HOWEVER OF, THE CONSENSUS ALSO IS THEY DID NOT GENERATE A NET REVENUE INCREASE.

FREDERICA FREYBERG:

AND YET ALL OF THIS SAID, IT IS PRETTY CATCHY, KIND OF AN EVERY-MAN WAY OF DESCRIBING AN ECONOMIC PLATFORM, DON’T YOU THINK?

STEVEN DURLAUF:

ABSOLUTELY. IF IT HAD BEEN — IF I CAN DIGRESS, IF A DEMOCRAT HAD BEEN SPEAKING, THEY WOULD HAVE TALKED ABOUT THE VIRTUES OF GOVERNMENT SPENDING WITH NO ATTENTION TO THE TAXES NEEDED TO PAY FOR IT, EVENTUALLY, OR TODAY. AND WHAT’S MISSING ON BOTH SIDES OF THESE DEBATES IS WHAT I’M GOING TO CALL THE ECONOMIC ARGUMENT. WHICH IS THAT TAXES AND GOVERNMENT SPENDING, THEY MOVE TOGETHER. THERE ARE BENEFITS AND HARMS TO INDIVIDUALS FROM EACH OF THEM AND THERE’S NO ASSESSMENT OF HOW TO MAKE THOSE TRADEOFFS. NEITHER ONE IS AN UNALLOYED VIRTUE OR AN UNALLOYED EVIL.

FREDERICA FREYBERG:

PROFESSOR, THANK YOU VERY MUCH FOR YOUR HELP ON THIS.

STEVEN DURLAUF:

OKAY, THANK YOU.