I hate arguments like this:
When castigating Democrats for attacking Bush’s jobs record, Robert Samuelson seems to have conveniently forgotten that Bush has been predicting job growth specifically tied to his economic policies for the past three years, and Democrats are reacting to his promises.
One would think that you could remember that the President promised job creation based his policies when complaining about Democrats attacking the President’s policies for not creating jobs.
I think it is fair to make a criticism of Bush’s policies in regards to them not living up to the lofty predictions this administration made regarding rising employment. But that is not what Jesse and the Democrats are doing. Instead, they are essentially engaging in a dishonest argument that can not be disproven.
Because we do not know what the employment rate (and, conversely, the unemployment rate) would be if Bush’s tax cuts HAD NOT BEEN PASSED, there is simply no way to refute the argument the Democrats are advancing. No one with half a brain would argue that the employment rate would be lower if the tax cuts had NOT BEEN PASSED, and Jesse, as one of the smarter people out there, knows this.
As it is inarguable that the recession started prior to Bush’s policies took place, there is no way to avoid the fact that the economy itself and the impact of 9/11 caused the job losses. However, the Democrats are not content to state that Bush has not done enough to help job creation, and instead they rely on arguments such as the previous one which state either that Bush has done nothing or, when they are feeling really pluckish, to state that Bush’s policies have caused or added to the job loss.
Either way, it is a lie.
*** Update ***
Steve Verdon has a great post in response (in addition?) to this post, and it is based on research rather than the rhetorical devices and election-year sloganeering that Jesse and others seem to rely on with recurring frequency.
jesse
Just so I get this straight – there’s no way of knowing what the unemployment rate would have been if the tax cuts hadn’t been passed (even though the criticism in the main is that Bush’s tax cuts and overall economic plan haven’t encouraged the job growth he promised)…but we do know that the unemployment rate wouldn’t have been any lower, so we *do* know what the unemployment rate would have been, according to you. The arguments contradict each other.
And you also presume that the argument is either Bush’s specific tax cuts…or nothing. That’s a disingenous argument, and you know it.
John Cole
Jesse- Sure there is- it is the rebound in employment that coincided with the taxcuts. As Bush’s tax cuts DID OCCUR, we havea before and after with which to measure. Quit trying to engage in sematic foolishness.
The argument the Republicans are making is that though the employment numbers could be better, the tax cuts have helped- which is light years more honest than the thesis you are proposing.
I have no problem if you want to argue that diffeent tax cuts might have done more- but you can’t prove it, and likewise, you simply cannot argue that Bush’s tax cuts have hurt or done nothing.
Ara Rubyan
I can’t decide if you’re being a Post-modernist or just engaging in idle deconstructionism.
Makes no difference either way; you’ve dumbed-down the entire discussion of economic policy to the point where nothing means anything anymore and no one (especially those in charge) is responsible for any of it.
Rick DeMent
First of all the “recovery” in terms of job growth is 7% weaker then the average of the last 6 recessions at 25 months out from the trough, and 3% lower then the last recession. Meaning that Bush
Slartibartfast
“First of all the “recovery” in terms of job growth is 7% weaker then the average of the last 6 recessions at 25 months out from the trough, and 3% lower then the last recession.”
Wow. A WHOLE 7%? And…why just the last six recessions? Does the seventh skew your statistics in a way that fails to make your point? Seven percent below mean is not necessarily statistically meaningful, and is in fact meaningless unless accompanied by a variance. And, in any case, if the growth rate is now, let’s pick a number, 5%, then the mean it would be compared with is something like (roughly) 5.4%. Hardly a startling difference.
“Meaning that Bush
Ricky
Dement makes a good point about the deficit spending, although comparing past recessions to something that was compounded by a tragedy that almost decimated the airline and travel industries is off target.
As far as tax cuts & the economy, there is little doubt that increasing the buying power of the consumer increases economic activity. Drop the price on a product and you’ll likely sell more of it. I’ve got 13+ years experience in the manufacturing industry and I can attest that when the price drops on something (I’ve personally costed more than 500 products) the demand rises (nothing is universal, but this is darn close).
The only question is when the point of diminishing returns is nigh…..we’re not there by a long shot.
The tax cuts stimulated the economy, thus jobs were added. That’s pretty much a given, backed up by most experts. How much the out-of-control spending adds is iffy.
Kimmitt
There are two arguments to this, one more intellectual and one more visceral.
Intellectually:
Economic theory predicts that the kinds of tax cuts Bush promulgated would stimulate investment and do little for demand. Since this is a recession due to a decrease in consumer demand (caused by the normal fluctuations of the business cycle and the increased uncertainty of living in a post-9/11 post-Iraq world), theory implies that Bush’s cuts would do little to help the current situation. He chose to press forward with them anyway, and he bet a lot of his credibility on the outcome. The job growth his theory predicted did not materialize, and therefore he must either abandon the theory or be taken away from the controls of the economy.
Viscerally:
Bush promised us that the enormous debts racked up by his tax cuts would engender the creation of millions of jobs. This did not happen. He borrowed $2,000 per man, woman, and child in the United States this year alone. We were supposed to get something for that, something he promised.
We didn’t.
Andrew J. Lazarus
Kimmitt nails it. President Bush made many promises about job growth (including recently, long after 9/11), and they ALL failed to materialize. Isn’t this a strong indication that Bush either has no clue on economics, or that he does, but is willing to dissemble in order to deliver tax cuts to millionaires? Kimmitt correctly notes that the more concentrated the cuts, the LESS they stimulate demand. Bush gambled that making the richest Americans richer would generate enough economic growth for political gain; he appears to have lost.
Your attitude towards counterfactuals, John, seems reserved for this issue only. I’ve never seen “It’s impossible to speculate what Al Gore would have done after 9/11, so the subject is off limits.”
John Cole
I am not sure what you are talking about, Andrew. I can hypothesize all I want about what would have happened were Al Gore President post 9/11, and that would be all that it is- hypothesizing.
Asfar as the argument regarding Bush, you are simply misguided or misunderstanding this post. Jesse and Kimmitt are stating that the Bush tax cuts caused no increase in employment and no growth in the economy. Not only is that not true, as employment is increasing, albeit slower than we would desire, and the economy is growing, at a rather brisk pace lately, but it is simply impossible to state we would have been better off had there been no tax cuts.
Not only does that defy common sense, but there is no way to objectively judge it, as the tax cuts did happen.
Now, if you want to argue that different tax cuts, or more specific tax cuts aimed at different tax cuts might have done more, that is a whole different ball game. However, that is not whatis being stated here.
Meanwhile, while the Democrats are busy with their doomsday projections regarding the unemployment rate, I would suggest you go check out the unempoyment rate was in 1996. I don’t remember similar hysterics coming from certain sectors.
JayR
we do not know what the employment rate (and, conversely, the unemployment rate) would be if Bush’s tax cuts HAD NOT BEEN PASSED,
This is true. However, your line of reasoning is a gross oversimplification that glosses over the real points:
1. Bush advocated this tax cut as a way to stimulate the economy and create jobs. Its success must therefore be evaluated in light of his justification for it. Did it work? No. It didn’t help at all. It merely proved (again) that trickle down economics is a load of hooey. But, and much more important…
2. The tax cut wasn’t made in a vacuum. As Kimmitt points out a couple of comments above, it was made at the cost of borrowing heavily against our future. The question, then, is whether we got a good present day return on our investment and the answer, in my mind, is no. You may disagree with me but then it is incumbent on you to show me where all the prosperity I was promised in return for shoveling a trillion dollars worth of debt onto my kids is.
Dean
“Borrowing heavily against our future”? Hmmm. Have to remember that line when the Kerry or Edwards Administration starts proposing new spending and higher deficits.
It’s not simply a choice between “Bush’s specific tax cuts…or nothing.” Er, isn’t that how the argument about Iraq is usually framed? I mean, it was about more than JUST WMD, but that seems to be the “lie” that gets the Left all into a dither.
More to the point here, though, one has to wonder: What if the tax cuts DID improve things? What if, w/o the tax cuts, there’d have been a DEEPER, or LONGER, recession? Ah, but that’s a counterfactual, w/o evidence. True enough—which makes it juast as valid as your argument.
Now, you might viscerally believe that somehow you’re owed something for the tax cuts. Mebbe. Mebbe I figger I’m owed something by all the welfare spending of the past forty years. Just b/c I don’t happen to see it, however, doesn’t mean that it ain’t there.
Steve
Jesse is clearly not up on the latest from those die hard right wing nuts Erica Groshen and Simon Potter.
Groshen and Potter have looked at employment data and noticed something happening in the data. In the last two recessions (and the most recent recession in particular) the changes in unemployment have been structural for the most part as opposed to cyclical.
Cyclical changes in unemployment means that as the business cycle changes so does employment. The business cycle goes down, then employment follows. The cycle turns and a bit latter employment goes up.
With this gone all that is left is the structural change. A structural change is the moving of jobs from one sector to another in the economy. Groshen and Potter note that with the current recession the change in employment is 79% structural and 21% cyclical. Compared to the 70’s and 80’s where it was roughly 50-50, this is indeed a big change in how the labor markets respond to changes in the business cycle.
What are some possible explanations? Groshen and Potter note three possible explanations:
1. The “pay back”. With this explanation industries that have over invested in capital and labor now have to cut back.
2. Better fiscal and monetary policy. Bush got lucky in a sense that his tax cuts came shortly after the start of the recession. Add in that Greenspan has sharply cut interest rates, and you have very strong counter cyclical policies. Could they have dampened the cyclical element of unemployment? One place to look is the housing market which is quite sensitive to cyclical movements and this time there was little chagne in jobs in the housing market.
3. Changes in management strategy to try and take advantage of recessions vs. riding them out. The evidence for this could be outsourcing, both domestically and abroad. Also the increase in temp workers.
All there stories are NOT mutually exclusive.
So yeah, Bush might be a victim of his own success. Not that I expect this to carry any weight at all with somebody like Jesse.
I’ll further note that by historical standards unemployment is actually not high. It is only high when you look at the final years of the Clinton Administratin…years that were dominated by a bubble in the tech industry. That level of unemployment is unsustainable. Using that as the standard sets the bar too high as Brad DeLong has noted.
Steve
Let me also point out that strucutral changes in employment take longer.
With cyclical unemployment, workers who are laid off are called back. Hence re-hiring is pretty quick and the result is rapid drop in unemployment.
With structural change there are problems such as job searches. You have to find the right worker for the job. Also, there is uncertainty. Instead of bringing back and employee who was laid off to fill his old job, you are filling a brand new job that may or maynot lead to a payoff for the company.
So this could indeed be an important part of why the labor market has not responded to “traditional stimulus”.
So John’s point about unemployment not being lower without the tax cuts is probably true. Further, his overall argument is not contradictory. Bush’s tax cuts may have worked, but instead of adding jobs, what it did was prevent additional job loss. The research by Groshen and Potter offer some support for this idea.
"Edwafd"
Mr. DeMent,
How many of the “last six recessions” experienced a 9/11 type event? Seven percent off of the mean sounds pretty good to me considering the trillion dollar hit to the economy and the concomittant uncertainty from September 11th.
Kimmitt
Since Bush did his level best to increase that uncertainty, I feel comfortable leaving that at his door as well.
russ
I say that there is jobs to be had but people either to incompetent or incompatible in this country to fill them…
These are the same people who’ve lost their jobs and are still awaiting their buggy whip factory to reopen…
Also there has been a very large upsurge over the last two or three years of self-employment…
Lex
w/o respect to the merits of the original argument, I’d just like to say that the airline industry cannot take the blame here. Yes, it lost an estimated $7B due to 9/11 … and got $7.5B from the government thereafter.
Slartibartfast
“Since Bush did his level best to increase that uncertainty, I feel comfortable leaving that at his door as well.”
I can think of a better way to increase uncertainty that takes zero effort. It’s just slightly different than what Clinton did; it doesn’t involve cruise missiles, but it does involve sitting on our collective hands and waiting for the next attack.
So, Kimmitt, if that’s the best you think Bush could have done to increase uncertainty, your thinking is lacks effort.
Andrew J. Lazarus
russ, this may shock you, but economists have good ways of measuring self-employment.
One of the things that worries people about the current job market is that before, as manufacturing jobs were lost, at least some of the replacement jobs were in places like high-tech, where with more training you could actually do better financially. Maybe like making buggy whips and becoming an auto mechanic 90 years ago.
If the high-tech jobs are going the way of the buggy whips and the dinosaurs: what type of jobs are replacing them? Self-employed manicurists? Contracted-out Walmart janitors? Sometimes I’ve thought Bush’s economic policy was all about restoring cheap, educated servants to the upper class. It looks like the replacement jobs are LESS attractive financially. Bad bargain.
rkb
kimmit argues that Bush should have stimulated consumer demand more.
In point of fact, consumer demand was grossly overheated compared to productivity and investment. Consumers were going deeper and deeper into debt without using that debt money to improve housing, invest in small businesses, send kids to school etc. – it was mainly consumption that continued from the dot com bubble days of conspicuous sudden wealth.
Shifting the focus to investment was precisely the right thing to do. It will take time for those investments to generate jobs here, but when they do they will tend to be quality jobs – at least, those in technology-driven industries will.
Re: technology jobs disappearing, there seems to be a huge confusion on the part of many – including young techies – about what value many of the “high tech” jobs of the late 90s through 2001 or so actually were producing. Many of those jobs were things like network administrators. In other words, they were middleman jobs that got paid higher than their sustainable value for a short time while corporations ramped up IT infrastructure. It was inevitable that a fair number of those jobs would melt away once the infrastructure was in place … the reason some of these are migrating to lower wage countries is that expert software replaces them easily.
Network admin primarily depends on knowing the details of configuring this year’s version of things. Jobs like senior software engineers, on the other hand, add true value that is harder to replace.
As someone who used to hire techies, and was a techie myself (with a few well-selling books published in the field) it was obvious to me that many self-taught admin people and programmers were going to quickly reach the limit of their cost-effectiveness for companies.
What *will* be created over the next few years in the software market will be jobs that deploy open source software, jobs that take advantage of new technologies like genetic algorithms and jobs that link multiple areas of expertise, such as systems that store and analyze molecular information aiding drug and gene therapies. But to fill those jobs, people will actually need to study at real schools, not just buy a few books and sell themselves based on being self-taught “experts”.
Andrew J. Lazarus
The estate tax and the top tax bracket for PERSONAL income tax have realtively little to do with new investment. For one thing, the cost of capital has probably never been lower, so we didn’t need a larger savings pool. At least you admit that Bush skewed his economic plan away from current job production. But it doesn’t do anything for future job production either, not with the LONG-term impliications of trillion-$ deficits.
As far as productivity, it continues extremely high, which is indeed one of the reasons job growth is so anemic. Our (I mean my company’s) analysis is that the only thing that held the economy together was the fact real estate stayed strong, allowing the middle class to refi their houses, basically like ATMs.
Incidentally, RKB, the tech crush managed to clip Senior SWEs too. That was my former title. (My current job has more responsibilities, but it was a long involuntary vacation.) Are you still working in the field? Or are you, delicious irony, one of the many headhunters for whom business was so bad, they folded!
rkb
The low cost of capital is not something that just happened … it is tied to public policies. Future job creation will depend on the generation and regeneration of industries, which will be indirectly helped by the tax cuts.
I’m not a fan of some parts of Bush’s tax cuts. But the claims that he “caused job loss” and that someone like Kerry could fix that is …. nonsense.
Yes, senior s/w engineers got clipped when the dot com employment bubble burst. But by and large the jobs status in technology-based sectors is a structural adjustment that would NOT be fixed by “jobs creation programs”.
Headhunter?? Not on your life. I moved from techie to technology executive to consultant, now teach computer science and systems engineering/decision analysis at a well known school. Have remade my own career multiple times, paying my way each time, doing two grad degrees at my own expense while working and raising my daughter and am about to start a PhD program, on my own currently-earned nickle, at age 52. I’m no more immune to market realities than you are. I just don’t wait around for others to fix it for me.
Steve
Real estate is very much pro-cyclical. Why didn’t it tank during the recession? Tax cuts, then interest rate cuts? Could it have been fiscal and monetary policy…could Bush have done something right? Can you bring yourself to admit at least the possibility here?
As for consumer spending, I got news for everybody here (well save maybe Slartibarfast who also reads my blog, and rkb) that in formation is avialable on the web quite easily. The Bureau of Economic Analysis’ website should be etched into the forehead of everybody here who thinks that consumer spending wasn’t high enough. During the recession that area was suprisingly strong. The area to take the biggest hit was investment. Go look at at the Goddamned data for crying out loud. And look at the research by the people who get paid to look at the data. Sheesh.
Kimmitt
Steve claimed that the US was somewhere near the peak of the Laffer Curve and that we would possibly see a decrease in Federal revenues if we repealed Bush’s tax cuts.
He therefore has no credibility whatsoever on economic matters and should simply be ignored. He’s either lost in ideological fervor or actively attempting to manipulate you. Either one makes his statements worse than useless for someone trying to understand the issues.
John Cole
Kimmitt- That is nothing more than a drive-by argument ad hominem. Why are his comments wrong here, presuming you are correct in your first criticism.
Andrew J. Lazarus
I’m now one of them, sort of.
The real estate boom had, of course, started long before the Bush Administration. It continued after much of the rest of the economy soured mostly because of low interest rates. Most Americans don’t have that much more money in their pockets from the tax cuts. Actually, some have less: my mortgage went down three times through refis, and my salary went down even more.
You are absolutely right about consumer spending being higher than one would expect during the recession. I suggest we look at the psychologists’ recency effect: the boom had been so much fun that at first people didn’t realize how much they wouldhave to tighten their belts. You’re also right about investment, but isn’t that the opposite of where we started?
[Aside to rkb: we seem to be trying the same careers in reverse order; I started as a teacher with Ph.D., moved to techie, then consultant, and am on the verge of executive….]
Kimmitt
It’s a lot easier to make it clear that you shouldn’t listen to someone who’s trying to manipulate you with tools of the art than it is to pick apart the manipulations for laypersons. I’ll give it a try, though:
Steve is making a reference to the Laffer Curve, which is a nice theoretical ideal that states that as taxes continue to depress economic activity (and they do; the question is whether or not we get more out of the programs that come from the taxes than from the depression of activity), one can eventually tax an economy so heavily that increases in the tax rate actually lead to decreases in revenue, as the economy shrinks faster than the increase in tax rates.
It is theorized that Sweden and Finland might be at the peak of the Laffer Curve and that it would be an interesting experiment to see the two of them cut taxes and try to figure out if it did increase revenue.
Sweden and Finland’s governments make up about 55% of their GDP. They borrow, but not an insane amount, so that’s a good number for the amount of tax money they collect. The US’s governments (Federal, State, and Local) make up about 30% of GDP, but we borrow a lot, so we’re only taxing at about 28%.
That is, we would have to double our current tax rate for the Laffer Curve to possibly kick in, and nobody’s talking about that. Using the Laffer Curve to discuss US tax policy is inherently manipulative, since it implies that it is relevant.
Steve
Distortion and irrelevant. I never said that we are at or near the peak. Second, the post was about raising taxes to eliminate the long term deficit we face right now. As such bringing in the Bush tax cuts is not really relevant as the long term budget problems are a function of future government spending.
This might carry some weight if you weren’t a lying jackass. The Laffer curve is real, any economist will tell you that. Even Lord Keynes noted the ralationship (although he didn’t call it the Laffer curve).
Nice try, but you really need to work on how the Laffer curve works.
First, the tax revenues rise. While taxes do depress economic activity initially they don’t depress it enough to lower revenue. Past a certain point the tax revenue will eventually decline as the taxes place an overly large burden on society.
The only problem with the above is that it is not at all clear that what would be the peak of the Laffer curve in one country will necessarily have to be the peak in another country. Kimmit is making a logical fallacy here in assuming that all countries (actually the people in these countries) are the same. They aren’t, so the conclusion is dubious.
Yeah, if we were Sweden, and if Sweden is near the peak of its Laffer curve. Aside from the problem I noted above, the Laffer curve is also unobservable. Even changing the tax rate from one year to the next to see what happens to revenue would not give you a clear picture. You’d have what in econometrics circles is called and identification problem.
Kimmit is not only ignorant of economics, but is a liar on top of it. My post he links to, is not about a one time tax increase, but about the need to be increasing taxes in the not so distant future fairly regularly. The current demographic shift and the obligations made by the federal government are going to pretty much demand tax increases over the years (unless there is a dramatic shift in policy). So the idea that could eventually hit the peak of the Laffer curve and go right past it is indeed a real possibility, one that we should be aware of.
Finally, both of Kimmit’s posts about my post utilizing the Laffer curve is a red herring. It in no way reflects on my post about the structural change in the labor markets, nor Erica Groshen and Simon Potter’s reserch. Instead of attacking their research for possible weaknesses Kimmit has to drag in something completely irrelevant.
Andrew,
Which indicates there is some veracity to the counter-cyclical aspects of recent monetary policy. Could it have also helped minimize cyclical job loss too?
As for the tax cuts, one reason why alot of people don’t have much money in their pockets because of the tax cuts is that many people don’t pay that much in federal taxes. If you are in the bottom 50% of the income distribution you pay hardly any federal taxes at all (although sales taxes, payroll taxes, and other such taxes take a big bite they are not within the scope of cutting federal taxes).
This doesn’t mean that Bush’s claims about job creation are valid or are reasonable. Plainly they are not. What the tax cuts and monetary policy MIGHT have done is prevented the unemployment rate from going really high like double digits. This would have been more in line with past recessions.
Ricky
Kimmitt, Steve’s a pro on statistics. I like you so I’ll just say: Choose your battles wisely.
And I don’t mean that in a snarky manner, either. :)
Andrew J. Lazarus
Steve, would you object to “President Bush’s tax cuts probably ameliorated job losses in the recession compared to doing nothing, but other policies might have done even better and/or resulted in a more vigorous recovery of jobs.”? (I notice that new jobless claims were up, and up more than ‘expected’, today.)
Kimmitt
“First, the tax revenues rise. While taxes do depress economic activity initially they don’t depress it enough to lower revenue. Past a certain point the tax revenue will eventually decline as the taxes place an overly large burden on society.”
I did some hunting around over on Jstor, but I didn’t find any articles discussing a delayed-result Laffer curve. Can you give me some references, please?
“Kimmit is not only ignorant of economics, but is a liar on top of it.”
Actually, I am a second-year graduate student in economics.
“My post he links to, is not about a one time tax increase, but about the need to be increasing taxes in the not so distant future fairly regularly.”
This is a distinction without meaning.
“The current demographic shift and the obligations made by the federal government are going to pretty much demand tax increases over the years (unless there is a dramatic shift in policy).”
Finally, a correct statement. Of course, it implies that the current batch of cuts is absolutely irresponsible.
“So the idea that could eventually hit the peak of the Laffer curve and go right past it is indeed a real possibility, one that we should be aware of.”
It’s certainly a physical possibility, but somehow I doubt that the Fed is going to move from pulling in 20% of GDP to 40% of GDP anytime soon.
Ricky
Dude, that has a huge distinction with plenty of meaning.
rkb
we seem to be trying the same careers in reverse order
Could be. Depends a bit on your PhD area, I suppose. [smile]
I went from software engineer to project management to VP Engineering to general manager of a small business unit and then briefly to COO during a post-IPO transition; MBA from a top 10 program with an emphasis in finance and operations; helped turn around a small cap company and take it public, consulted to several other venture funded companies that IPOd or merged successfully.
So, to Kimmitt and others, I want to say that looking at structural changes in technology-based markets is more than an intellectual exercise for me – it’s how I’ve steered my career and business decisions.
My current research (and future PhD) area is the intersection of intelligent software with decision analysis. Specifically, associating measures of utility, quality and importance to data, especially data collected by software from 3rd party sources, and designing software to use those value models when drawing inferences from data.
For the last 3 years I’ve taught computer science, and now decision analysis & other systems engineering topics, to undergraduates at West Point (the US Military Academy).
FWIW lol.
Steve
Andrew,
Sure that’s possible, but the problem is we wont really ever know. Samuelson’s point is a good one. Presidents have damn little control over the economy. Think about it, Bush’s father was beaten because unemployment was still fairly high by the time the election rolled around. Bush isn’t stupid (and even if he isn’t the birghtest bulb in the lot, his advisors aren’t dim), so if he could exercise control over the economy like many seem to imply why not push that unemployment down to 4% right now and hold it there till the election. Who ever runs against him would be toast.
Thus it is also dumb to “take responsibility” for things like job growth. It wasn’t the President who did it all by himself, but all those people at varius businesses who make hiring decisions. To be sure on input are some of the policies that the President can put in place, but they aren’t the only inputs into that decision making process.
Frankly, I’m not sure what policies could have been put into place to deal with structural unemployment.
Don’t get me wrong, on domestic policy Bush doesn’t pass the smell test with me. His decision on stem cell research, gay marriage, and the deficit are all things I am not happy with.
Kimmit,
What are you talking about? There is no lag to the Laffer curve. The point is that at low levels while taxes depress economic activity the drag they put on the economy isn’t that large, so tax revenues increase. Eventually, the drag gets larger and revenues peak then decline (although there is the possibility of multiple peaks I suppose). No lag.
Then you should know how the Laffer curve works. You should know its real, but the problem is that it is unobservable. Hence basing specific policy on it can be problematic at best. Still, it is something one should keep in mind when talking about tax increases.
Second, you should also be aware of the fact that there can be cultural differences as well as national differences in people. Assuming that there is one single Laffer curve carved into stone is dumb. Very dumb. Hence saying the peak on the Laffer curve for the U.S. is the same as in Sweden is dubious.
No, it isn’t. If you increase the tax rates from 0% by 5% every few years eventually you’ll wind up at 100% taxation. That part of the Laffer curve we all know. The tax revenue is zero. Try popping a 100% tax rate into your standard neoclassical labor-leisure model and see how much labor is supplied (don’t use a cobb-doublass utility function as it doesn’t allow for corner solutions).
Fed? Federal Researve or Federal Government. If it is the former I don’t know what you mean. If you are talking about the latter check out the CBO and their long term projections. The Federal governments share of GDP is projected to be anwhere from 6% yo 53%. My guess is more towards the latter number since government spending historically doesn’t tend to decrease for very long. But who knows, maybe there will be a sudden shift towards libertarianism and the economy will soar to new economic heights and we’ll hit that 6%.
Now…you gonna address the research of Groshen and Potter?
Kimmitt
Okay, now that we’ve stopped talking past each other quite so much:
I posted a slightly simplified version of the Laffer curve for the layperson. You apparently took issue with the simplification; we appear to now agree that the Laffer curve refers to short-term revenues rather than affecting long-term growth.
Your terms:
You appear to have defined a one-time tax increase as a single tax increase which is permanent.
You differentiate this from the concept of a series of tax increases, all of which are permanent.
All of this is in service of attempting to argue that we may at some point be so mind-bogglingly stupid that we will cross over the tip of the Laffer curve, not notice, and continue to raise taxes and depress revenue without ever happening to figure out what’s going on.
Since Reagan and Clinton demonstrated pretty convincingly that we are nowhere near the tip of the curve for the US (that is, Reagan’s tax cuts produced dramatic revenue losses and Clinton’s tax increases produced dramatic revenue increases), I find any discussion of the Laffer curve to be alarmist at best. We are currently four full percentage points of GDP below the point of greatest postwar Federal taxation of our economy. Taxes as a proportion of GDP are currently below Reagan levels, and expenditures are similarly low. Put simply, there is a lot of give.
That said — it is probably true that structural change is behind the current jobless recovery. What is not clear is how long this will last; are we looking at three months to full employment or three years? If it’s the former, a strategy of riding out the storm makes a certain amount of sense. If it’s the latter, the business cycle may kick in again and really magnify the employment shock. If that’s so, it will be sensible policy to start looking at make-work programs to help us against deflationary pressures, liquidity traps, and the social costs of long-term unemployment. All of these are demand-side stimuli, not supply-side stimuli, and Bush’s tax cuts are precisely the wrong way to go about things.
Steve
Robert Barro disagree with you (I trust you are familiar with him). In his Macroeconomics text book for undergrads (which is a bit old) he points out the following.
1. Sweden’s top tax rate (i.e. the marginal tax rate that maximizes revenue) was 70% in the 1970’s. The estimation was by by Charles Stuart, 1981, “Swedish Tax Rates, Labor Supply and Tax Revenues”, JPE 89, pp 1020-1038.
2. In 1987 The average marginal tax rate along with the SS tax was 34% according to Barro.
3. He notes that if you use average tax rates, the 70% marginal rate in Sweden would be about a 50% average rate here in the U.S. Considering the tax rate at the time was 32% we weren’t close.
But there are caveats,
1. There are other taxes in the U.S. that aren’t part of the above calculations.
2. Second, the estimates are just that estimates and estimating a Laffer curve isn’t easy.
3. There is no reason to assume the U.S. and Sweden have the same Laffer curve.
Fruther, Barro notes that while the Laffer curve was not true in general there is some evidence that it may have been true for those in the top brackets.
Finally, I have not said that we are currently near the top of the Laffer curve, but we do have a looming problem with SS/Medicare. The amount of the budget that they are going to start sucking up is going to grow astonishingly. Add in the prescription drug plan (and subsequent expansions of said program) and it is not, IMO, unreasonable to see some periodic permanent tax increases.
The potential problem is that this could act as a sufficiently stronge enough drag to actually reduce tax revenues.
Add in that expansions have been decreasing for that last 20 or more years, that the most skilled workers will be leaving the workforce and you have a recipe for a pretty bleak picture.
Another economist who holds such a view is Laurence Kotlikoff at Boston University. Remember that $41 trillion dollar brouhaha a while ago, his sometimes co-authors Smetters and Gokhale wrote the paper on that.
Do we have to be mind boggling stupid to get there? Given posts by Kevin and the acceptance they get from most of his readers, no, not mind boggling, simply ignorance will suffice, IMO. Mention the Laffer curve to Kevin and I’m sure you get a could laugh out of him (you can’t thank me latter for avoiding the horrendous pun here).
A fair question, but let me also suggest we might already be at full employment. The low unemployment during the Clinton Administration was unusual historically speaking (Clinton and his team are to be commended for helping to maintain the expansion for so long).
I’m leary of make-work programs because they are just that. Programs that make work nobody wants to pay for. Dig a ditch here…okay now fill it in. Here is your $50 for the day.
Also, I’m not sure that you can have make work programs with the current deficit and even raising taxes isn’t going to help all that much in that you’ll still have new outlays.
If the previus recession is any guide we should hopefully see some improvements in the next few months (i.e., up to 6 would be my wild ass guess).
Kimmitt
One thing this recovery has made clear is that previous recessions are not good guides.
At any rate, do we seem to agree that repealing Bush’s tax cuts would be good policy? That is, it makes more sense to me to retire some debt while the Laffer curve is known to not be a factor than to risk maxing out Federal revenues and still be unable to meet obligations.
But then, I’m not trying to starve the beast.
Slartibartfast
Sure, there are probably more effective policies. But I’ve yet to see anyone propose one that’s got any clear advantage. It’s much easier to just sit back and snipe, than to actually use head.
rkb
Re: structural changes and full employment
Kimmit, to understand and judge this you need a broader historical perspective.
I belong to the “baby boom” generation, the largest generational cohort in history. To our size, add the unprecedented entry and persistence of women as well as men in the work force during our generations, and in particular our huge move into white collar jobs.
I think it’s a measure of the effectiveness of our economic system that this incredible cohort of workers has been able, by and large, not only to find employment but in many cases to better their parents’ standard of living. Inevitably, that increased standard of living depended on two incomes, however, as the huge supply of workers placed some limits on pay.
Information technologies made much of this employment possible. Computers and software are so integrated into our economy that most people no longer realize just how explosively new this is: robotic manufacturing, databases that allow customer support from centralized call centers, fibre optic communications networks managed by computerized switches based on software protocol standards etc etc.
What happened in the 90s is that 3 decades of research and development in a variety of computer and communications technologies converged as mature capabilities ready for full scale deployment. The protocols that underly the Internet were developed in the 60s, mostly for Defense purposes, and deployed in prototype form in the 70s in university and R&D settings. It took until the early 90s for them to be spun off to form the publicly-available Internet. Once the Internet was available, the software standards that make up the World Wide Web got developed quickly — and by the way, the basic ones (HTML, HTTP) are outgrowths of earlier Defense Dept. R&D (SGML and the TCP/IP communications protocols created by DARPA in the late 60s – early 70s).
The deployment of those technologies also benefitted from a generation of workers who tended to have a decent grounding in math and science.
Today we’ve ridden the wavefront of deploying those technologies and to some degree that wave is dying down to a more sustainable level. So what comes next?
Bad news: we have underinvested in basic R&D and in math / science education in this country for 20 years or so.
Good news: there are some interesting technologies approaching commericalization potential (nanotech, some interesting software techniques and some interesting bioengineering). Also good news – the size of the generational cohorts behind the boomers is smaller.
Short to mid-term problem – the decade or so during which boomers are still in the workforce in large quantities and then migrate into retirement, with all that implies about medical care etc.
I really do not see any responsible alternative, given this situation, other than to focus first and foremost on stimulating investment. Our consumer demand already outpaces responsible finances in many households – the last thing we really need is greater and greater personal debt. OTOH, since we HAVE been relying on consumer demand to keep the economy going, we can’t afford just to shut that off.
Hence my general support for the Bush tax cuts and for, if not starving the federal govt, then at least putting it on a serious diet.
The one area where I believe we have gained major payoff for federal involvement is basic R&D. However, such research is usually not efficient unless there are challenging and time-critical problems to solve. Whether we like it or not, I suspect that defending against terror and geopolitical chaos, while attempting to preserve some degree of personal freedom, poses just such problems. On a longer time scale, so does manned space exploration.
Expect to see commercial information mining software, biometric security for homes and companies and a host of similar industries emerge in the next year or so. Also expect employment growth in companies that make unmanned aerial and ground vehicles for security surveillance, air and water-based chem/bio detection devices and perhaps in a few years out, customized immunications.
Ricky
On-budget (non-social security, to eliminate potential “but he increased payroll taxes” spin) inlays to the federal government, in millions of (actual) dollars and the percentage increase over the previous year.
1981 – 469,097 — 16.1%
1982 – 474,299 — 1.1%
1983 – 453,242 — -4.4%
1984 – 500,411 — 10.4%
1985 – 547,918 — 9.5%
1986 – 568,986 — 3.8%
1987 – 640,951 — 12.6%
1988 – 667,812 — 4.2%
1989 – 727,525 — 8.9%
Sorry, but your credibility on this subject is greatly damaged. If you can’t get the basics right (and please, don’t spin)…
Steve
I think, from purely a deficit reduction stand point, I’d rather see the parts that expire expire. I’m not sure making them permanent and keeping spending this high is good.
Making the kind of cuts to bring the budget back into balance is politically infeasible. So I think the best we can hope for is discipline to keep spending increases moderate or maybe even some cuts, and try to revamp SS. I think a forced savings account is about the only way to go to reduce the impact of the demographic shift.
Bottom line is there is a very serious imbalance in the government’s budget and no candidate really has a plan to deal with it. The problem is dealing with it honestly gives the other side too many opportunities for political sniping. Imagine Bush getting up and saying, “Look Social Security, as is is slated for disaster in about 35-40 years, and will cause serious problems with the deficit in even less time, so we’ll have to change the system dramatically. It’ll hurt, but we really have no choice.”
Remember that little cartoon the Dems ran of Bush pushing the little old lady over the cliff? I do, and I bet Bush’s advisors do as well. The race has tightened considerably and many might be thinking now is not the time rock the boat.
Now while from a short term strategic stand point that makes a lot of sense. But from a long run economic stand point it doesn’t. Having a discussion about this issue now so that the various plans can be evaluated and be part of the voters calculus on selecting a candidate would be better. But we all know no candidate is going to do that.
See, we don’t monumental stupidity…simply the status quo.
Kimmitt
Ricky, Reagan raised taxes in 1983 as a response to the loss of revenue in 1982. His tax cuts lasted a grand total of one year before they had to be partially repealed. And, as one would predict, when he raised taxes in 1983, revenues popped back up.
“Bottom line is there is a very serious imbalance in the government’s budget and no candidate really has a plan to deal with it. ”
I’ve got a great plan. Let’s go back to a variant on the Clinton tax scheme which appears to have been quite successful. Rational tax policy is only politically unfeasible because of Republican demagoguery on the issue.
Ricky
Kimmitt, we were in a deep recession in ’82. You KNEW that and conveniently omitted it.
Ricky
Speaking of recessions, someone forgot what was happening at the end of the Clinton tax cycle.
Rick
Reagan got another round of tax cuts in ’86, remember. In exchange for “permanent” reduction in marginal rates, some loopholes were closed, and assorted breaks moved from the 1040-A, onto Schedule A for itemization.
The 1983 tax hike was the SS payroll tax increase, forwarned by Ricky. What part of that wasn’t clear?
Cordially…
Kimmitt
“Kimmitt, we were in a deep recession in ’82. You KNEW that and conveniently omitted it.”
A valid point, so let’s look at Federal revenues as a percentage of GDP:
Year Pcnt
1980 18.9
1981 19.6
1982 19.1
1983 17.4
1984 17.3
1985 17.7
1986 17.5
…in 1983, there was a major drop in Federal revenues both in real money terms and as a percentage of GDP. After that, we came out of the recession, which is, as you point out, always good for revenue.
The full tables are here. I much prefer to use “percentage of GDP” as a measure of the results of tax policy; it is less subject to the vagaries of the business cycle and takes into account the simple fact that as our population grows, so too does the need for the services of the state. In order for us to break even, real Federal revenues still need to increase at approximately the rate of population growth.
Of especial interest to those on this board should be the expenditure side of the equation. Clinton got expenditures down to historically low levels (it helps to govern during a boom, granted, but hey, it helps when you do your level best to extend it, too). But no one since pre-Vietnam has pushed Federal expenditures below 18.6 percent of GDP. In order to break even, we are simply required to collect that much in taxes, and probably a percentage point or two more.
Steve
It wont address the issues raised by guys like Kotlikoff, Smetters, & Gokhale. The best solution, IMO, is to try and fix SS and not with bandaids such as raising the qualification age a few years, raising taxes, or the cap on the income that is taxed.
A system of forced savings would offer a number of improvements. Such as, since you only get what you’ve got saved there is no way to try an vote yourself a “raise”. As for Medicare, since you can’t count on taxpayers to cover the cots you’ll be more concious of costs, and take other preventative measures as well.
And no, I’m not a big fan of means testing either as that is essentially a penalty levied on responsible behavior. Save alot and you get nailed for it. Be a spendthrift and the goobermint is there to pick up the pieces.
John Cole
I just want to say that this is probably the best comments thread this website has ever had. I know I have learned a lot.
Thanks all.