This chart from the Treasury Department says it all:
Actually, the chart says very little. It has six data points with two dates superimposed, to give the impression that a single event in 2003 can be considered the cause of the revenue number in 2005. A more instructive chart might include a second set of data points for expenditures, which would then (inconveniently) yield the record deficits racked up under President Bush. For those interested in something a little more sophisticated than bumper sticker economics, try the site Economist's View, which today features a critique of what is referred to as "dynamic scoring," in which revenue projections are goosed upwards to include the magical restorative effects of tax cuts:
Tax cuts do not pay for themselves. Economists of all stripes have consistently found that tax cuts do not generate enough growth to fully pay for themselves. In fact, cost estimates that incorporate macroeconomic feedback from tax cuts are reasonably close to conventional cost estimates that ignore such feedback. ... The Administration’s own estimates published in the Mid-Session Review indicate that, even with favorable assumptions, dynamic feedback would pay for less than 10 percent of the cost of making the tax cuts permanent.
The original supply-siders suggested that some tax cuts, under very special circumstances, might actually raise federal revenues. For example, cutting the capital gains tax rate might induce an unlocking effect that would cause more gains to be realized, thus causing more taxes to be paid on such gains even at a lower rate. But today it is common to hear tax cutters claim, implausibly, that all tax cuts raise revenue. Last year, President Bush said, “You cut taxes and the tax revenues increase.” Senator John McCain told National Review magazine last month that “tax cuts, starting with Kennedy, as we all know, increase revenues.” Last week, Steve Forbes endorsed Rudolph Giuliani for the White House, saying, “He’s seen the results of supply-side economics firsthand — higher revenues from lower taxes.” This is a simplification of what supply-side economics was all about, and it threatens to undermine the enormous gains that have been made in economic theory and policy over the last 30 years. Perhaps the best way of preventing that from happening is to kill the phrase “supply-side economics” and give it a decent burial.
Economics may be the dismal science, but it is still a science, with measurable results. But the most zealous supply siders take its pronouncements as articles of faith. Mark Thoma at Economist's View offers a useful commentary:
The question, of course, is how much additional growth comes from a cut in taxes and here I agree to some extent with Bruce Bartlett. It depends upon the type of tax cuts that are enacted, some are more productive than others and hence some types of tax cuts generate more tax revenue than others. Whether the tax cut is permanent or temporary is also important. We'd disagree over the magnitude however. While some types of tax cuts can affect growth, the effect is nowhere near large enough to generate a 33% tax revenue recovery rate, not even close, and, in any case, all the low-hanging fruit has already been plucked, something that is often overlooked.
Readers are free to agree or disagree with Bartlett or Thoma, but please spare me the bumper sticker aphorisms like "Tax cuts work," a statement so vague that it defies rational discussion.
Life is busy enough these days without taking time to pay much attention to the economic nonsense coming from Republicans these days. But I found I just couldn't ignore this tidbit from Dave Burris at DelawarePolitics:
Can't decide whether I should go with "It's Just the Beginning" or "Who Didn't See This Coming?" Wholesale inflation takes biggest jump in 6 months
WASHINGTON (AP) -- Inflation at the wholesale level surged unexpectedly in January, reflecting sharply higher prices for gasoline and other energy products.
The biggest jump had to do with energy prices:
The acceleration was led by a 3.7 percent surge in energy prices with gasoline prices jumping by 15 percent, the biggest gain in 14 months.
I infer from the brief post that Burris imagines that the January numbers are in some way the result of the policies of President Obama. Let's think about that one for a moment. The report is for the month of January. Barack Obama took office on January 20. The stimulus package was passed last Friday, and signed into law on Tuesday, February 17. Even though the bill is intended to get money flowing as quickly as possible, I am not aware that any money has actually been spent yet. Am I missing something? Have the laws of economics (or physics for that matter) been altered to allow for later events to affect prior measurements? Are we stuck in some weird time/space vortex? Dave, whose pronouncements on economics tend to toward the bumper sticker variety, neglected to identify an economic mechanism that could possibly attribute the January inflation results to the actions of our new president. I imagine Republicans like Burris will continue to criticize Obama’s economic policies over the next 47 months. That’s what opposition parties do. But perhaps he could try a little harder to give his arguments the ring of plausibility. Update: Dave Burris comments that he had the Federal Reserve in mind, not President Obama in his post. As for my inference, I went back to November, and couldn't find a post at Delaware Politics criticizing the Fed, though I found plenty of posts criticizing Obama's economic policies.
“You and I know that in the history of mankind and womankind, government—federal, state or local—has never created one job,” he said. “It’s destroyed a lot of them.”
In Delaware, this plan will deliver immediate, tangible impacts, including: • Creating or saving 11,300 jobs over the next two years. Jobs created will be in a range of industries from clean energy to health care, with over 90% in the private sector. [Source: White House Estimate based on Romer and Bernstein, “The Job Impact of the American Recovery and Reinvestment Plan.” January 9, 2009.] • Providing a making work pay tax cut of up to $1,000 for 330,000 workers and their families. The plan will make a down payment on the President’s Making Work Pay tax cut for 95% of workers and their families, designed to pay out immediately into workers’ paychecks. [Source: White House Estimate based on IRS Statistics of Income] • Making 8,000 families eligible for a new American Opportunity Tax Credit to make college affordable. By creating a new $2,500 partially refundable tax credit for four years of college, this plan will give 3.8 million families nationwide – and 8,000 families in Delaware – new assistance to put college within their reach. [Source: Center on Budget and Policy Priorities analysis of U.S. Census data] • Offering an additional $100 per month in unemployment insurance benefits to 54,000 workers in Delaware who have lost their jobs in this recession, and providing extended unemployment benefits to an additional 9,000 laid-off workers. [Source: National Employment Law Project] • Providing funding sufficient to modernize at least 28 schools in Delaware so our children have the labs, classrooms and libraries they need to compete in the 21st century economy. [Source: White House Estimate]
Those 11,000 jobs would be good news to the 27,665 Delawareans who were unemployed in December. Governor Jack Markell is reporting that 16,500 residents lost their jobs last year. 11,300 new jobs would knock 1.9 percentage points off Delaware's unemployment rate, and reverse two-thirds of last year's job losses.
As noted before, some Republicans seem to think that they did something clever when they coupled a hike in the minimum wage with a reduction in the estate tax in H.R. 5970, which came to the House floor late Friday night. Congressman Zach Wamp (R-Tennessee) cackled, "You've seen us really outfox you." Apart from the legislative manuevering, how do we compare the economic value of these two very different proposals? The question is not very interesting on the bumper sticker level. Democrats cry that Republicans care only about rich folks. Republicans accuse Democrats of class warfare. The two proposals represent opposite visions of what good economic policy should be. In its starkest terms, the argument of opponents of the minimum wage and the estate tax is:
1. There should be no floor on wages. 2. There should be no limits on wealth.
In this new series, we will more fully explore the economics and politics of these issues. Stay tuned.
In our continuing series, we look at the U.S. Treasury Department's report titled "A Dynamic Analysis of Permanent Extension of the President’s Tax Relief," which may not make for dynamic reading. But the analysis (available here) is instructive. First, as Dave at First State Politics points out, the report doesn't cater to political fashion:
You can't cut taxes and increase spending and expect the deficit to remain steady solely on the back of the requisite growth in the economy. This is contrary to the opinion of many Republican lawmakers that they can continue to spend, spend, spend and that we will continue to have 4% growth to pay for the spending. It's simply not the case. At some point, you have to make the hard decisions.
What I find interesting about the analysis is what it doesn't cover:
The analysis reveals that the long-run effects of these policies depend crucially on whether they are financed by lower spending or higher taxes in the future and are sensitive to assumptions on underlying parameters.
Left out of the analysis are the economic consequences of continuing on the current course of borrow and spend.
Bumper Sticker Economics: Can We Balance the Budget?
In Part 5 of our series, we start with the aphorism that the first step to changing is to admit there is a problem. We previously looked at federal revenues and expenditures. What is the result of the recent federal budget deficits? Deficit spending is sending the national debt, as a percentage of GDP, back to the heights (or depths) of the Reagan/Bush era. And with no end in sight to deficit spending, the national debt will continue to grow. As I said, changing course requires an admission that there is a problem. Instead we hear various expressions of denial. The first is to maintain the fiction that tax cuts will lead to higher revenues and erase the deficits. This form of denial can take the form of dynamic scoring, supply-side economics and the Laffer curve (fondly embraced by Dave of First State Politics). The common thread of these beliefs, that tax cuts pay for themselves, has been refuted by the Congressional Budget Office in this report analyzing the effects of a 10 percent income tax cut:
CBO finds that such a cut in taxes might increase output by amounts roughly in the range of zero to 1 percent on average over the first 10 years, among other economic effects. Under various assumptions, those macro-economic effects are estimated to offset between 1 percent and 22 percent of the revenue loss from the tax cut over the first five years and add as much as 5 percent to that loss or offset as much as 32 percent of it over the second five years.
In other words, the best-case scenario is that a tax cut will result in a loss of 78 percent of revenue in the first five year and a loss of 68 percent of revenue in the second five years. The second form denial takes is to emulate Dick Cheney and simply state that deficits don't matter--end of discussion. Robert Rubin, who knows a thing or two about global capital markets, clearly lays out the reasons why we should pay attention to the federal deficit:
Virtually all mainstream economists agree that, over time, sustained deficits crowd out private investment, increase interest rates, and reduce productivity and economic growth. But, far more dangerously, if markets here and abroad begin to fear long-term fiscal disarray and our related trade imbalances, those markets could then demand sharply higher interest rates for providing long-term debt capital and could put abrupt and sharp downward pressure on the dollar.
The good news is that we know that the federal deficit can be brought under control--because it was done not so very long ago. But "Rubinomics" has been a pejorative in the West Wing since the current regime took over.
Bumper Sticker Economics: Are Budget Deficits Sustainable?
In Part 4 of our series, prompted by Dave at First State Politics, we look at the question of how long we can continue the current deficit spending. One interpretation of Dick Cheney's comment that deficits don't matter is that cutting taxes can provide a short term benefit and that the long term consequences can take years to be felt. Put another way, real men cut taxes and leave the job of cleaning up the fiscal mess to the next guy, providing he's a fiscally responsible wimp like Bill Clinton or the first President Bush. My macroeconomics textbook was authored by Gregory Mankiw of Harvard, who also served in the younger Bush's White House. Let's see what Professor Mankiw had to say about Reagan's fiscal policy, from page 64 of Macroeconomics (Fourth Edition):
One of the most dramatic economic events in recent history was the large change in U.S. fiscal policy in 1981. In 1980 Ronald Reagan was elected president on a platform that promised increases in military spending and reduced taxes. The result of this combination of policies was, not surprisingly, a large imbalance between government spending and revenue. The federal budget deficit skyrocketed in the 1980s and the government borrowed at a rate unprecedented in peacetime. As our model predicts, this change in fiscal policy led to higher interest rates and lower national savings. The real interest rate (as measured by the yield on government bonds minus the inflation rate) rose from 0.4 percent in the 1970s to 5.7 percent in the 1980s. Gross national savings as a percentage of GDP fell from 16.7 percent in the 1970s to 14.1 percent in the 1980s.
The real interest rate (using May's CPI of 4.2 percent and Friday's 13 week t-bill) is 0.7 percent. While not an alarming figure, keep in mind that the national debt has climbed from $5.6 trillion in 2000 to $7.9 trillion last week. As for the national savings rate, we are getting numb to news stories about our negative national savings. One reader mentioned the work of Boston University economist Laurence J. Kotlikoff, who sounded the alarm in the July 2 issue of Time magazine:
Let's face it--Uncle Sam is broke. The gap between the U.S. government's future expenses and tax receipts is $63.3 trillion.
The piece is more about the need forpersonal savings rather than fiscal policy. This projected gap, which makes forgreat headlines, can vay greatly depending on the methods used to calculate future expenditures and revenues. For instance, if future revenue and obligations are calculated in perpetuity, the numbers become very large indeed. In a more practical sense, the U.S. government is not bankrupt in that it has the cash to meet current obligations and can easily borrow money at reasonable rates. The problem is that borrowing money will eventually become more expensive as the national debt grows. Tomorrow: How did we balance the federal budget in the 1990s, and can we do it again?
In Part 3 of our series, we look at the budget deficit, which was declared irrelevant by Dick Cheney, as quoted on page 297 of Ron Susskind's The Price of Loyalty:
"Reagan proved deficits don't matter."
Was he right? Let's look at the numbers, taken from the Office of Management and Budget: The chart shows federal revenues and expenditures as a percentage of GDP. The Reagan/Bush era generated deficits so enormous that the first President Bush decided to break his "Read my lips. No new taxes." pledge. (James Carville called it "the most famous broken promise" in political history.) The Clinton era gave us four consecutive budget surpluses and the prospect of budget surpluses "as far as the eye can see." But that was too good to last. George Bush came into office and started cutting taxes. Revenues plummeted while expenditures climbed. The OMB projections show a drop in the deficit in the next several years, based on sharply lower federal spending--which hardly seems realistic to me. So do deficits matter? Last year, I quoted former Treasury Secretary Robert Rubin on the question:
Virtually all mainstream economists agree that, over time, sustained deficits crowd out private investment, increase interest rates, and reduce productivity and economic growth. But, far more dangerously, if markets here and abroad begin to fear long-term fiscal disarray and our related trade imbalances, those markets could then demand sharply higher interest rates for providing long-term debt capital and could put abrupt and sharp downward pressure on the dollar.
When Cheney made his infamous declaration in the days following the 2002 midterm elections, he wasn't taking the long view. Instead, Susskind reports, he saw it as a matter of raw politics:
My previous post has drawn comments ranging from wonky to snarky and back again. I seem to have hit a nerve. There's enough material in your comments for a week's worth of posts, which means I've got to get busy. To help us get started, here's a bit of fun titled "Left Behind Economics" from Paul Krugman, via Economist's View, which helpfully posts the Shrill One's columns in a free (if obscure) forum:
I’d like to say that there’s a real dialogue taking place about the state of the U.S. economy, but the discussion leaves a lot to be desired. In general, the conversation sounds like this: Bush supporter: “Why doesn’t President Bush get credit for a great economy? I blame liberal media bias.” Informed economist: “But it’s not a great economy for most Americans. Many families are actually losing ground, and only a very few affluent people are doing really well.” Bush supporter: “Why doesn’t President Bush get credit for a great economy? I blame liberal media bias.” ...
In the coming week, we'll do out part to further the national dialogue on the economy. Stay tuned.
O'Reilly and Coulter: Lefty Websites Fomenting Violence
Sometimes a blogger doesn't have the time and attention for complex policy analysis. For those times there's Bill O'Reilly. Yes, Bill makes it easy to look smart with a minimum of effort. Take his rant about being intimidated from his show last night with Ann Coulter as guest, transcribed by Media Matters for America:
O'REILLY: Yeah, but on a policy basis, what they're trying to do on these far-left smear sites is intimidate people with whom they disagree, and then choke off their ability to get their message out. I mean, freedom of speech means nothing to these people. They really want to just bludgeon anybody with whom they disagree, or am I wrong?
What I find remarkable is ease with which O'Reilly and Coulter assume the role of victim. We've had five years of conservative Republican rule in Washington. These two media stars command big speaking fees and publish books that regularly appear on the bestseller lists, but there is nothing they enjoy so much as crying in their beer. Here's more from last night:
COULTER: If you go speak at a college campus, I promise you, if you don't have a security detail, they will physically attack you, because they are the party of ideas, and they're so intellectual their ideas just can't fit on a bumper sticker. You know, everything else they're always saying about themselves. But when it actually comes time to formulate a counterargument, all they can do is throw food. O'REILLY: All right. But it gets to be frightening. And I -- look, in my own case, I have to have security, and obviously -- COULTER: Any conservative does. O'REILLY: Yeah, but I think liberals, some -- well, I don't know. Look, there's no question -- COULTER: No liberal has to have security. Though I'd like to change that. O'REILLY: Well, there's no -- let me just ask you this. Do you believe that these smear sites on the Internet are encouraging violence against you and others? COULTER: They may be intended to. I think what mostly encourages violence is their incapacity to formulate an argument.
Cheap laughs? Easy pickings? Perhaps. Next week, we'll get back to the typically trenchant tommywonk treatment of the news you all have come to know and love. After all, we have to do our part to raise the level of political discourse in this country.
Actually, the chart says very little. It has six data points with two dates superimposed, to give the impression that a single event in 2003 can be considered the cause of the revenue number in 2005.
Actually, the chart says very little. It has six data points with two dates superimposed, to give the impression that a single event in 2003 can be considered the cause of the revenue number in 2005.
