Relevant and even prescient commentary on news, politics and the economy.

Another look at Spending and Revenues

This is more or less relevant to Beverly’s post from earlier today.

How many times have you heard Boehner, McConnell, Ryan or one of the legion of right-wing talking heads say, “We don’t have a revenue problem, we have a spending problem?”  I refuted that lie repeatedly in this AB post and at the included links.   But this is one of those zombie ideas that simply will not stay in the grave.  

Therefore, some prominent voices have found it necessary to sing out again against the lie. I will add my humble quavery baritone to the chorus.

Here in Graph 1 is Kevin Drum demonstrating how Real Government Expenditures per Capita have changed under the last three presidents.

What we have isn’t a spending problem. That’s under control. What we have is a problem with Republicans not wanting to pay the bills they themselves were largely responsible for running up.

 Graph 1, Real Government Expenditures per Capita

By using real [inflation adjusted] and per capita numbers, Drum has introduced a couple of denominators.  Real expenses per cap is a rational way to display the data, but not the only way. So lest someone cry out about that ol’ devil denominator, let’s have a different look.

Via Paul Krugman we get Graph 2 and Graph 3, from FRED, showing total Government expenditures and Federal Government expenditures, respectively, on log scales.

Graph 2. Government Total Expenditures
Graph 3, Federal Government Total Expenditures

Yes, you can argue that spending was growing too fast under Bush, although it’s funny how few deficit scolds saw fit to mention that at the time. Or you can say that you just want less spending, although as always people who say this tend to be short on specifics. But the narrative that says that spending has surged under Obama is just wrong – what we’ve actually seen is a slowdown at exactly the time when, for macroeconomic reasons, we should have been spending more.

Remember, a log scale represents constant growth as a straight line, and zero growth as a horizontal line.  So, in pure dollar numbers, spending hasn’t quite declined, but it has stagnated to almost zero growth.  Hence Drum’s decline in inflation adjusted, per capita terms.

In Graph 4, we get one more longer range look, using Krugman’s data series, this time on a linear scale.  Also presented is the difference between the two, which is the amount of spending by state and local governments.

 Graph 4, Government Spending at Different Levels

 The red line is total spending at all levels of governemnt, the blue line is federal only, and the green line is the difference, state and local spending.  Note that the green line flattens early in the recession

To bring things full circle, Graph 5 shows Federal Government current receipts.  Look at this and tell me we don’t have a revenue problem.

Graph 5, Federal Government Current Receipts

To drive this point home, Graph 6 shows Federal Receipts as a fraction of GDP.  The purpose of the ratio is to provide context, using GDP as a proxy for the size of the economy.

Graph 6, Federal Receipts as a fraction of GDP

As you can see, revenues/GDP are in a historically low range.

Conclusions:
– Federal spending is flat in nominal dollar terms.
– Federal spending is declining when adjusted for inflation and population growth.
– Federal revenues are far below trend lines based on any historical reference you chose.
– Federal revenues as a fraction of GDP are historically low.
– The Republican claim that we have a spending problem not a revenue problem is simply a lie, on both counts.
– Disproportional spending growth has only occurred under two presidents: Republicans Ronald Reagan and George W. Bush. 

The simple fact is we have a revenue problem, not a spending problem.

Why do Republicans lie?

The truth is hostile to their agenda.  PK Explains.

Cross posted at Retirement Blues

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Hagel for Defense Secretary

I’m actually agnostic on this choice.  The always excellent Charles Pierce makes a good case for Hagel, but why should Obama go for any Republican?  This just continues to promote the canard that Republicans are somehow stronger or more capable on defense issues than Democrats.

The irony here is that the greatest opposition is coming from Republicans, some of whom have gone so far as to call him an anti-Semite*  because he has spoken openly and honestly about the excessive influence the pro-Israel lobby has on American foreign policy.   When we consider the pros and cons of any individual for any position, we ought to do it on the basis of real qualifications and real disqualifications, not make-believe nonsense put forward by neocons and the cadre of rabid right-wingers whose policies have done such great and possibly irreparable damage to the world in this century.
 
I rarely agree with Mish on anything political, and to find myself agreeing in principle with him when he’s agreeing in principle with Patrick Buchanan has my stomach turning and my head spinning. 

Vertigo, nausea and angular momentum aside, this appointment is the president’s decision, and I want to see the debate procede along substantive rather than ideological, illogical or untruthful  lines.   And I most particularly don’t want to see him get Riced.

Now, where do I pick up my pony?

__________________________

* On 1/07 I heard Eliot Abrams do exactly that in an NPR interview.  Abrams was an Iran-Contra cohort of Paul Wolfowitz and Oliver North.

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An Editorial on Robert Bork and his Legacy

On Wednesday, December 19, 2012 Robert Heron Bork died at age 85I did not mourn.

Bork first became infamous in 1973 for his role in the “Saturday night massacre” when as Solicitor General, the number three position in the Justice Department, he carried out, under President Nixon’s orders, the firing of Watergate Special Prosecutor Archibald Cox.  Bork inherited this task when both Attorney General Elliot Richardson and Deputy Attorney General William Ruckelshaus resigned in protest.  This much is well known.  What sometimes gets left out of the discussion, though, is that due to the manner in which Cox’s position was created and defined, he could not be removed except for cause.  Doing a good job of tracking down evidence relevant to the case he was pursuing does not qualify as cause.  This was a defining moment in Bork’s career, in which he conveniently chose power over principle.

Most recently he was the senior judicial adviser to Mitt Romney’s unsuccessful presidential campaign, but he is best known for being rejected as a Supreme Court justice when nominated for that position in 1987 by Ronald Reagan.  After his nomination was defeated by a 58-42 vote in the Senate, his name was verberized into a neologism that was [and occasionally still is] used almost exclusively in the passive voice.

To be “borked,” as his supporters would have it, is to be subjected to unfair criticisms based on distortions of your words, actions, and beliefs.  But his radically reactionary views on equal protection and sex discrimination were typical of his extreme and perverse positions. The mere fact that he was able to speak out in favor of a poll tax speaks volumes.  In reality, the borking of Bork consisted of subjecting him to valid criticism based on the precise meanings of his words, actions and beliefs.  Jeffrey Toobin explains.

Bork was “borked” simply by being confronted with his own views—which would have undone many of the great constitutional landmarks in recent American history. As Senator Edward Kennedy put it in a famous speech on the Senate floor, “Robert Bork’s America is a land in which women would be forced into back-alley abortions, blacks would sit at segregated lunch counters, rogue police could break down citizens’ doors in midnight raids, schoolchildren could not be taught about evolution, [and] writers and artists would be censored at the whim of government.”

Was Kennedy too harsh? He was not—as Bork himself demonstrated in the series of intemperate books he wrote after losing the Supreme Court fight and quitting the bench, in 1987. The titles alone were revealing: ”The Tempting of America,” “Slouching Towards Gomorrah: Modern Liberalism and American Decline,” and “Coercing Virtue: The Worldwide Rule of Judges.” One of his last books may have summed up his views best. Thanks in part to decisions of the Supreme Court—decisions that, for the most part, Bork abhorred—the United States became a more tolerant and inclusive place, with greater freedom of expression and freedom from discrimination than any society in history. Bork called the book, accurately, “A Country I Do Not Recognize.”

Indeed, Bork’s words and actions were consistently anti-gay, anti-female, anti-minority, always favoring government intrusion over citizen’s rights, businesses over people, big business over small, and corporations over government.  His supporters would argue that these conclusions are based on principled positions, and that the outcomes, however repugnant to idealists, are therefore legitimate.  I argue instead that policies that consistently result in the contraction rather than the expansion of basic human rights, and that continually disadvantage definable target groups are corrupt at their core, and that the negative results are inherent and predictable.

After his defeat, Robert Bork gradually faded away from the public consciousness.  I can tell you, in the intervening 25 years, I gave him virtually no thought at all.

But Bork had enormous, possibly even dominant influence on the modern interpretation of anti-trust law, perhaps single-handedly redefining the scope and purpose of anti-trust legislation.  Basically, Bork was pro-efficiency and anti-anti-trust.  He had swallowed whole the bait-bucket of Chicago-economic-school ideas of market efficiency, and built the entire framework of his pro-trust belief system on that invalid foundation.

It seems fair to say that it is in some part because of Bork’s influence that we now have trans-national mega-corporations with huge oligopolies and near-monopolies.  These corporations have no inherent loyalty to anyone nor anything.  In my view, the oligarchs that run them do not even have a general sense of loyalty to stock-holders, let alone the broader universe of stake-holders, who mainly exist to be exploited.

Efficiency, in and of itself is a good thing.  But it cannot be achieved in a vacuum – frequently there are externalities that are largely negative.  For one thing, the efficiencies are mainly internalized and do not necessarily represent a more broadly efficient society.  Second, as a market gets concentrated, competition decreases and the pressure to improve, or even maintain status-quo efficiency slowly erodes.  This ultimately leads to a situation where big, lumbering and inefficient but extremely powerful entities control the economic and political landscape.  Yes, Big Oil, Big Pharma, Big Insurance, Big Finance, I am looking at you.

Perhaps worse, though, is the power asymmetry that results from size and influence.  Suppliers, customers, and the public at large are overwhelmed by the sheer might of these institutions, leading to even greater concentrations of power and wealth.

The end game is some version of economic collapse.  It happened in the 1930’s, and – due largely to neoclassical Chicago-style economic thinking that has over the last 40 years willfully unlearned the lessons of that time – it happened again in 2008.

Most of the time, evil doesn’t manifest as some cackling cartoon villain, mad-man on a murderous rampage, or even an unjust war waged on false pretenses.  It results instead, in a far more banal but far-reaching way, from the highly refined ideas of men like Robert Bork who value abstract concepts such as efficiency over the effects the programs they institute have on the lives of real human beings.

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One Nation, Divisible

We are a country not just divided, but fragmented along axes of race, age, religion, economic status and geography.  There are now 15 States where citizens have filed petitions to secede from the Union.  “These include Louisiana (which led the charge), the Republic of Texas, Kentucky, Colorado, New Jersey, Montana, North Dakota, Indiana, Mississippi, North Carolina, Alabama, Florida, Georgia and Oregon.”  I don’t know which is number 15, but I’m gong to guess Oklahoma. 

I’m not going to get flip about it.  While these petitions have virtually no chance of achieving anything, it’s important to remember two things:

1)  You never hear anything like this when Republicans win.
2)  All but 4 of these states represent the (since 1965) solid Republican South.

Another geographic dimension is urban vs rural.  When I do get flip, I say Obama won everywhere that people outnumber cattle, deer, goats or alligators.  This comes distressingly close to being the truth.  Look at the electoral map of just about any State.  I like to consider Ohio, since it is my home State and in many ways represents the U.S. in miniature.  But pick a State at random [or Texas in particular] and you’ll probably see the same scenario.   The Ohio electoral map shows that Obama carried 16 of Ohio’s 88 counties.  Half of these are strung along the Lake Erie shore, four more are contiguous in the densely populated north-east corner, and the other four contain Columbus, Dayton, Cincinnati and Athens.

I’m not ambitious enough to undertake the study, but I’ll hypothesize that Obama’s vote percentage in each county is directly proportional to the total population – and this in a State where the counties don’t vary much in physical size.  Consider that Lucas Co. [essentially my home town, Toledo] with 198,000 votes cast went for Obama by 64 to 34%, while Mercer Co. along the IN border with 21,000 votes cast went for Romney by 77 to 22%.  You can find these kinds of results all over the country.

Another divide is along education level.  Among the 15 States with the best public school systems, Obama carried 13, while among the 15 States with the worst public school systems, Romney carried 12.  I see this as a big component in the recent Republican war on education.  One thing you develop as a result of good education is a set of critical thinking skills, which then give you the ability to see through nonsense peddlers like Rush, Trump, and the whole Fox roster.

All of this tends to make me pessimistic about our nations future.  But I see rays of hope amidst the great divide.  Even in Georgia, which went 53 to 45% for Romney, you find Obama winning by huge margins in Atlanta, Macon, Augusta, Columbus, Savannah, and Albany.

Plus, another thing is happening that you have to see a country-wide county level electoral map to notice.

There is a blue streak that starts along the Mississippi river valley where Arkansas, Louisiana and Mississippi converge and runs almost continuously through Alabama, Georgia and the Carolinas to join with the blue States along the coast.

I call it the band of sanity running through the South, and it might just represent an opportunity for progressives to build on going forward.

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Fowl and Fishy Inflation

It has been suggested that the rapid increase in the prices of fish, fowl, meat and eggs for about two years following October, 2009 was the result of QE causing inflation in these items.  From this Calculated Risk graph, we can get the QE date line.  QE was announced on Nov 25, 2008, and expanded in April 2009.  It ended in May, 2010.  QE II was hinted at in Sept, 2010, announced in Nov 2010, and ended in August 2011.

The timing correspondence is less than stellar, since the YoY increase in prices for those food items dropped like a rock from October, ’08 though Oct. ’09.  It then shot up to a 7 1/2 year high in May of 2011.

This can be seen in the red line of Graph 1, which also shows the CPI for all items except food and energy (CPILFESL) in blue.

 Graph 1 YoY Price increases for Selected Food Stuffs and All Items Less Food and Energy

To assume a cause and effect relationship, you have to account for a time lag of a year from the announcement and 6 months from the expansion of QE to the turn around in those price increases from the Oct ’09 bottom.  Remember, through the first 11 months of QE, the YoY change in those prices dropped dramatically.  Between May and November, 2010, while no QE program was in effect, these prices had the steepest part of their rise.  After QE II ended in August, 2011, the YoY price increase remained high for those items until the end of the year, and then fell rapidly.

A longer view reveals that the increase in those food prices oscillates continuously around the All Items Less Food and Energy line.  The trough to trough period is irregular, averaging 3.52 years with a standard deviation of 0.45 year (5 measurements).   The trough to trough time from May, ’06 to Oct., ’09 was a very typical 3.4 years.  It is very hard to look at that graph and see anything unusual about the 2008-2012 region, other than the depth of the trough shortly after the Great Recession.

It appeared to me that the blue line of Graph 1 might be a crude approximation of a long average of the red line.  This turns out not quite to be the case, since the two lines are measuring different baskets of goods.  What we have is the YoY increase for these food items oscillating around its own mean. That sounds like a tautology, but let’s look a little deeper.

Graph 2 shows the same data, along with some long averages of the food stuffs YoY price increase line.   These are the 5 Yr (light blue), 8 Yr (yellow), and 13 Yr (purple) moving averages, and the average for the whole data set, 2.9 (bright green).  I’ve also included an envelope one standard deviation (3.06) above (5.96) and below (-0.17) the mean in dark green.

Graph 2 YoY Price increases for Selected Food Stuffs with Avgs and All Items Less Food and Energy

This (sort of) resembles a control chart.  The +/- Std. Dev. envelope isn’t a hard barrier, but does tend to turn the data path back toward the mean, unless something strange happens.  Frex, the big rise from late ’02 to early ’04 followed the Iraq invasion and resulting disruption in petroleum pricing.  The ’09 trough was the result of the Great Recession.  These are explainable variations.

Note also that the moving average lines tended to run below the CPILFESL line prior to late 2002, and have tended to run above it since.  This is to be expected since these items are basically the top of the food chain and have several layers of fuel dependent contributors in their cost structure.  Recall that until 2002, fuel prices were low, and since then (except for the Great Recession) have increased steadily.

I’m quite sympathetic to the idea that QE has done very little to help ease the economic doldrums following the GR.  But I see no reason at all to believe that it has contributed to the pain and suffering of ordinary citizens at either the grocery store or the gas pump.

Maybe there have been real downsides to QE.  Any thoughts on what they might be and how to quantify them?

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GDP Growth Caused By Tax Cuts Has Never Happened

Mike’s post here got me thinking.  I’ll telegraph my conclusion.  He dramatically understated his case.

You can see the long range view of nominal and inflation adjusted GPD growth in Graph 1 of FRED quarterly YoY percent change data.

Graph 1 YoY growth Nominal and Inflation Adjusted GDP

Nominal GDP Growth was in a secular up-trend from 1960 through 1980.  However, inflation adjusted GDP growth quickly peaked after the Kennedy-Johnson tax cut, reaching a maximum value of 8.5% in Q4 of ’65 and Q1 of  ’66.  It then dropped dramatically for the next four years.  This peak value has been matched only once since: in 1984, during a sharp rebound from the double dip recession of 1980-82.

Since then, in the wake of numerous tax cuts, the rate of GDP growth has been anemic. To get a look at the rate of growth, I took an 8 year average of the annual percent change data presented above, and then plotted a 5 year rate of change for that data.  This is essentially the 2nd derivative of GDP, or GDP acceleration, as shown in Graph 2.

 Graph 2  GDP Acceleration

 Inflation Adjusted GDP acceleration peaked in Q3, 1966.   Fueled by the inflation of the 70’s, NGDP acceleration stayed high until Q1, 1980, then plummeted for 9 years.  It has been relentlessly negative since.

Inflation adjusted GDP acceleration has not done quite as badly in this disinflationary era, but has been below zero more than half the time since 1970.  This is a little bit worse than coasting.

This all might seem a bit abstract, but the message is clear.  If tax cuts were good for the economy, then GDP growth would be increasing.  In other words, acceleration would be positive and most especially so after a tax cut.  The data is not consistent with this notion.

Clinton’s famous tax increase preceded increased GDP growth by either measure, and an upturn in acceleration.  The Bush tax cuts preceded decreasing GDP growth.

I’m not going to get into a correlation vs causation discussion.  I’ll simply say that tax cuts over 5+ decades have been an utter failure at stimulating real economic growth in any inflationary environment.  Since the real world data correlation is counter to the received conservative wisdom, it might be worth trying an anti-conservative approach.

It might also give the NGDP targeting enthusiasts something to ponder.

Cross posted at Retirement Blues.

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Debt and Growth

Art at The New Arthurian Economics and I are looking at the relationship between debt and economic growth.  Art started with an observation of two FRED series, total credit market debt owed (TCMDO) and Gross Domestic Product (GDP,  nominal or GDPC1, inflation adjusted – take your pick.)

Graph 1, from FRED, shows these data series.  I’ve chosen nominal GDP and, for reference, also included the total Federal Debt.

 Graph 1 TCMDO, GDP and Total Federal Debt

In 1950, TCMDO was about 1.3 times GDP, but growing a bit more quickly.  By 1980, the ratio was 1.6, and by 1987 it was greater than 2.  Now that ratio is approaching 4.  Note that TCMDO is also close to 4 times greater than total public debt.  This is why Art and I agree that private, not public debt is the problem that needs to be addressed, but is largely ignored.

Linked here are Art’s posts with graphs of YoY growth in both factors, pre 1980 and post-1980.  Pre 1980, their moves are similar in magnitude, and pretty well coordinated. Post 1980 there is still some occasional similarity of motion, but the coordination breaks down and debt growth is generally quite a bit higher than GDP growth.  The 80’s in particular stand out as being starkly different from the previous period.

Graph 2 shows the entire data set, since 1952.

Graph 2 YoY % Growth in TCMDO and GDP

These observations led Art to the reasonable hypothesis that, “Output growth slowed when debt became excessive.”  This, in fact, might explain the great stagnation.

I suggested, and Art accepted two corollaries to his hypothesis.

1) There is a non-excessive amount of debt. Let’s call it “just right.”
2) Below the “just right” amount, there might also be “not enough.”

Actually, there is a lower level hypothesis, to which Art’s is corollary: That there is a functional relationship between debt and growth, in which growth is the dependent variable.

This is what I will explore in this post.

Graph 3 is a scatter plot of GDP vs TCMDO YoY % change for each, FRED quarterly data from Q4, 1952 through Q2, 2012, with a best fit straight line included.

Graph 3 GDP vs TCMDO, YoY % Change

The relationship is quite clearly positive.  The R^2 value at .39 is rather low, but not terrible.  There is quite a bit of scatter in the data.  Note the circle of data points around the left end of the line.  More on that later.

Next, I divided the data by decades, frex, 1961-1970.  This admittedly simplistic data parsing reveals that the slope and R^2 values are strongly variable over time.  Graph 4 shows the scatter plot along with the slope and R^2 values for each decade.  These data values are arranged in the chart in chronological order and color matched with the corresponding data points.

 Graph 4 GDP vs TCMDO, YoY % Change by Decade

I’ve added a brown line connecting the dots for the first decade of this century.  The chronology proceeds from a cluster near the center of the graph into a clockwise circular spiral.

Graph 5 shows how the slope and R^2 vary over time.

 Graph 5 Slope and R^2 Over Time for GDP vs TCMDO

After the 60’s, the slope plummets, and by the 80’s R^2 is a laughable 0.035.  Though the slope has remained low, R^2 has since recovered to 0.38, which is near the whole data set value of 0.39, and only slightly less than the 0.40 to 0.44 of the first three decades.

The slope changes can be interpreted as generally less GDP bang for the TCMDO buck, as the TCMDO/GDP ratio increases.  This is totally consistent with Art’s hypothesis.

I have more to say about the GDP -TCMDO relationship, but this post is getting long, so I’ll save it for a follow-up.

For now, I’ll close with a few questions.

1) Do you think we’re on to something?
2) What do you think of the methodology?
3) “Excessive debt” is suggestive, but non-specific.  How should this concept be quantized?
4) How should I go at exploring corollaries 1 and 2 mentioned after Graph 2?
5) Any thoughts on what was there about the 80’s that blew up the prior debt – GDP relationship?
6) Is there such a thing as productive vs non-productive debt, and how would they be characterized?

I look forward to your constructive comments.

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Strategic Lying as Political Art

If you listen to Randi Rhodes, you know she is still livid over Romney being declared the “winner” in last week’s – we’ll call it a “debate” for the nonce.

Alas, though, the reason he won is that poll numbers have moved in his favor.  Whether that bounce is robust remains to be seen.  But it did gain Romney some sort of advantage, at least in the near term.

Randi’s objection is that Romney lied, repeatedly, and about almost everything.  In the process, he flatly repudiated some of the major planks in his platform – the destruction of Medicare as we know it, the $5 Trillion dollar tax cut, the reduction of tax share paid by high income people, and an insurance plan not covering pre-existing conditions stand out in that regard.   And these are but a few of the 27  debate lies that can easily be recognized and refuted.

Indeed, the one rare moment of lucid candor came when he eagerly, gleefully announced that he would send Big Bird to the unemployment line in order to avoid borrowing money from China.  Big NPR whoop!  To put this in perspective, for CY 2012, the Federal Government, via the Corp. for Public Broadcasting, is contributing $26.65 million in support of PBS, or 0.0007% of total Federal expenditures ($3.77 Trillion) for 2012.    In fact, the entire Federal contribution to CPB is $445.2 million, or 0.0118% of total expenditures. That’s sure going to help balance $5 Trillion in tax cuts over ten years. (CPB data from Wikipedia, current expenditure data from the St. Louis Fed.)   Romney isn’t lying about our creditor position with China, but he was certainly misleading.  According to Fox News (!) “China, it turns out, holds less than 8 percent of the money our government has borrowed over the years.”

OK, I get where Randi is coming from – to have a totally unprincipled opportunist in charge of running the world’s greatest super power is not a recipe for any kind of enduring success, either for the U.S.A. specifically, or for the world at large.  There are many historical examples one could cite, but we really needn’t go back any further than the “compassionate conservatism” of unprosecuted war criminal and would-be social security privatizer George W. Bush to make the point.

But what Randi refuses to acknowledge is that what we witnessed last week was not a debate, by any recognizable definition of the term.  Lying will get you disqualified in a real debate – right?  This was political theater – and what is theater but staged fiction? 

And there is nothing unusual here.  I’ve been saying for years that all Republicans do is lie, and then lie about their lies. (I might have gotten that phrase from Randi – the memory is foggy.)  Here is a four-year-old exposé of some of Romney’s shape shifting.  (H/T to Dave Brockington at LGM.)

A more insidious kind of lie is simply denying reality, as characterized by birtherism, New Deal and global warming denialism, and Friday’s epidemic of conspiracy theories surrounding the latest favorable jobs report.   But I digress.

Here is my point.  Brad Delong points us to a 1984 Fay Joyce article in the N. Y. Times uncovered by Michael Moore.  It turns out that lying during a debate is a time honored Republican strategy.  Even 28 years ago, when there was some chance of the main stream media doing actual journalism, they were confident in their lying strategy.

The Republicans are unabashed in their discussion of their ability to use the television medium. “You can say anything you want during a debate and 80 million people hear it,” observed Peter Teeley, press secretary to Vice President Bush. If reporters then document that a candidate spoke untruthfully, ”so what?”

”Maybe 200 people read it or 2,000 or 20,000,” he said.

Now, they have honed it into an art form.  And it’s worth remembering the one reason that always accounts for every person’s lie: their agenda is not compatible with the truth.

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The Effect of Capital Gains Tax on Investment – Appendix

In comments to my previous post, Robert requested the unsmoothed data from Graph 3.  Here it is.   GPDI is plotted against the Capital Gains Tax Rate.

Since the Capital Gains Tax Rate (X-axis) is quantized, the result is columns of data.  Compared to the smoothed version, there is little change in either the slope or intercept of the best fit straight line.  R^2 is, of course, much lower.

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The Effect of Capital Gains Tax on Investment

Matt Yglesias, servitor to our corporate overlords, suggests that the reduced capital gains tax rate paid by rentiers like Willard Romney is really a very, very good thing.  To wit:

The main reason Romney’s effective rate is so low is that the American tax code contains a lot of preferences for investment income over labor income.
. . .
But this is definitely an issue where the conservative position is in line with what most experts think is the right course, and Democrats are outside the mainstream.
.  .  .
That’s the theory, at any rate. It’s a pretty solid theory, it’s in most of the textbooks I’ve seen, and it shapes public policy in basically every country I’m familiar with. Even researchers like Thomas Piketty and Emmanuel Saez (see “A Theory of Optimal Capital Taxation”) who dissent from the standard no taxation of investment income position think capital income should be taxed more lightly than labor income. Empirically, it’s a bit difficult to verify that variations in capital gains tax rates and the like really are making a material difference to investment levels. But then again the data is noisy.

Scott Lemieux at LGM demurs.

Sure, if you 1)accept the premise that reducing or eliminating capital gains taxes will result in productive infrastructure investments rather than worthless accounting tricks, 2)ignore the economic benefits created by consumption, 3)assume that significant numbers of people will forgo money for doing nothing just because the profits will be taxed , and 4)ignore the fact that in most jurisdictions consumption is also “double taxed,” then reducing capital gains taxes looks good.   But since all of these assumptions are (to put it mildly) highly contestable, it’s just question-begging.

My response to Matt is that in my jaundiced opinion, you might as well consult The Necronomicon of Abdul Alhazred as an economics textbook for an issue like this; and that in a world that has on the one hand Krugman, Thoma and Delong, and on the other Fama, Cochran and Cowan, a consensus among experts is about as likely as lions lying down with lambs for some purpose other than a quick snack.

To Scott I say, why assume or ignore anything when that oh-so-noisy data is readily available?

Graph 1 shows the capital gains tax rate and year-over-year growth in gross domestic private investment (GPDI,) each presented as a percent.  If Matt and what he calls “the mainstream” are right, then there should be a negative correlation between the tax rate and investment growth, since higher taxes would be a disincentive to investment.

Graph 1  C G Tax Rate and GPDI, 1954 – 2011

Instead, what we find is that over time, as the capital gains top rate has gone down, so has GPDI.  This is indicated by the downward slope of the best fit straight lines through each data set.  The best fit lines are based on the data through 2008, so the huge 2009 negative in GPDI is not represented.

One way to handle noisy data is to superimpose a moving average.  The dark heavy line that snakes up to a top in 1978 is an 8-Yr moving average.  This top corresponds exactly with the last year of the 40% Cap Gains Tax rate.  The purple horizontal line is the period average of GPDI YoY growth from 1954 through 2011.   Note that until 1986, the 8 Yr line is mostly above the long average line, and since 1986 it is mostly below.

This is not because the bottoms in the GPDI data set are lower since 1986.  A quick look shows that, except for the 2009 plunge, they are not.  It is because the peaks are lower.  The table gives a count of extreme data points for GPDI growth, before and after 1982, the year the Cap Gains rate was reduced to 20%.

Even at a detail level, it appears that a higher tax rate corresponds with a higher rate of investment growth, as both curves peak in 1978.

Graph 2 provides a close-up view of 1985 through 2005.

Graph 2  C G Tax Rate and GPDI, 1985 – 2005

When the Cap Gains tax rate was increased from 20 to 28% in 1987, the rate of investment growth increased from 1.4 to 5.2%, and stayed at about that level until it was derailed by the 1990-91 recession.  Then from 1992 through 2000, 8 of 9 years had GPDI growth above the long average (purple line,) an unprecedented occurrence.  Granted, the last three of these years were at the lower C G Tax rate of 21.19%, instituted in 1998.  But also note that this decrease did absolutely nothing to spur increased investment.

Cutting across the data in a different way, Graph 3 presents a scatter plot of the C G Tax Rate and YoY GPDI growth, each presented as an 8 Yr average.

Graph 3 Scatter Plot of GPDI Growth vs C G Tax Rate, Smoothed

Even with smoothing, there’s a lot of scatter.  No surprise, since many other factors can affect investment: business cycle, commodity price shocks, wars, etc.  I’m tempted to say the obvious relationship is that a higher C G Tax rate leads to higher investment, but I don’t want to get into a correlation-is-not-causation brouhaha.  So I’ll simply say that the idea that lowering C G taxes leads to increased investment – and therefore increased economic growth – is not only unsupported by the data, it is refuted by the data, and therefore contrary to fact.

So, once again, we find a mainstream economic idea that is only valid in some imagined alternate reality.

Capital Gains Rate data can be found here (Returns With Positive Net Capital Gains Table, 1954-2008) and here.  There are a few slight discrepancies between these sources, mostly in transition years.  I have used the maximum tax rate, column farthest to the right in either table.
Gross Domestic Private Investment is FRED series GPDI.

Cross posted at Retirement Blues

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