Taxes and the Private Sector, Part 2 Would You Like Some Lags with That?
by cactus
Taxes and the Private Sector, Part 2: Would You Like Some Lags with That?
This post follows up last week’s look at how taxes on the private sector affect growth in the private sector. In that post, the data simply refused to cough up anything that could be construed as an excuse for someone to say “Lower taxes produce faster growth.” (Go figure. This must be the 319th time I’ve looked at the topic, each time with different data, and I still can’t figure out how to justify the free lunch story without some serious sleight of hand.)
In last week’s post, I focused on the “private sector” GDP – that is, GDP subtracting off the government’s contribution to GDP. There are several reasons to do this. Only the private sector pays taxes, so it makes more sense to look at taxes paid as a share of the private sector GDP than it does to look at taxes paid as a share of GDP as a whole. Also, an unscrupulous government can pull a Reagan – that is, it can boost GDP by running up the public debt and spending that money. After all, government spending is a component of GDP, so anything borrowed and spent provides a one-for-one increase in GDP. Focusing on the private sector GDP mitigates this problem.
Thus, last week’s post compared the annual percentage change in taxes paid by the private sector as a share of the private sector’s GDP over the length of each administration (i.e., from the year before it took office to its last year in office) to the annualized growth rate in the private sector GDP over the same period of time, producing this graph:
(Note – links to the data as well as a detailed description of the steps taken are provided in last week’s post. This google spreadsheet also contains links to the data sources, plus the data used in the analysis, all in one place.)
This week, I’m going to account for the possibility of lags. Unfortunately, some of the administrations are pretty short (two of them lasted less than three years) so I took the liberty of doing some merging; I put JFK & LBJ together, and Nixon & Ford together. For the most part, LBJ followed the same policies as JFK and Ford continued the policies of Nixon. (Not entirely true – JFK increased the percentage of private sector income collected in taxes each year of his administration, and LBJ cut it dramatically in his first year in office, but he would follow JFK’s lead on taxes for the rest of his administration.)
The graph below shows the change in the tax rate over the first half of each administration on one axis, and the growth rate in the real private sector GDP on the other axis.
Once again, this isn’t exactly screaming “lower taxes leads to faster economic growth.” In fact, it’s not even whispering.
Another interesting thing we can do – we can look how the real private sector GDP growth compares to the change in taxes in the second half of the previous administration:
The data still refuses to cooperate. Is a nice Austrian story too much to ask? Apparently so.
I’m in a hurry, so let me skip the otherwise obligatory insults to those who would simply make $%& up, and jump straight to a few odds and ends that come out of looking at these last two graphs separately:
1. Based on the second graph, it seems that, evidence or not, the right wing meme of lower taxes produce faster growth has won out in the public mind, even among lefty politicians. Clinton raised the percentage of private sector income it collected in taxes in the first half of his term. Bush Sr. essentially kept it the same. The rest of the administrations all lowered them. (Granted, as stated earlier, JFK raised taxes, but LBJ’s one big reduction means that from 1960 to 1964, tax rates actually fell.) That includes some prominent lefties as Jimmeh Carter. It also includes Obama – hence CEA head Christina Romer, who believes in lower taxes as a cure to who knows what.
2. In the third graph we see that administrations are more likely to raise taxes in the second half of their administration after cutting them in the first half. Call it reality setting in. Everyone walks into the Oval Office believing the magic beans are going to take care of everything, but after a few years they realize the line of bs they fed themselves and the voters ain’t gonna cut it. Think of Reagan – in 1985, he figured out he better do a U-turn on taxes. (Yes, he may have continued cutting marginal rates, but 1985 is when he started increasing the share of people’s incomes that was actually collected. For the millionth time, I’d like to point out that nobody pays the marginal rates, and that in this post, as in most of my other posts, I’m focusing on the actual share of income that goes to taxes.)
3. Ike, Nixon/Ford, and Carter all had much, much faster private sector economic growth in the first half of their terms than in the second. The two Bushes did slightly less dismally in the first half of their terms than in the second half. Growth was about the same in each half of the JFK/LBJ administration. Reagan and Clinton both had faster growth rates in the second half of their terms than in the first half. How any of this squares with the notion of cutting taxes to produce growth, I don’t know.
Well, that’s it for me. Until next week, may your food bowl remain full of kibble, and may your rawhide chew thingie have a meaty center.
—
Reminder: the spreadsheet with info for graph 1 is here.
The spreadsheet with info for graphs 2 and 3 is here.
Data sources..
Current Tax Receipts: NIPA Table 3.1
GDP and the Gov’t piece of GDP: NIPA Table 1.1.6
CPI – U: BLS Table
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by cactus
3. Ike, Nixon/Ford, and Carter all had much, much faster private sector economic growth in the first half of their terms than in the second. The two Bushes did slightly less dismally in the first half of their terms than in the second half. Growth was about the same in each half of the JFK/LBJ administration. Reagan and Clinton both had faster growth rates in the second half of their terms than in the first half. How any of this squares with the notion of cutting taxes to produce growth, I don’t know.
I seem to remember the oil price getting to play a big part in all of this. During the late 1960s we started losing control of most overseas production and prices increase through the early 1970s culminatng in the price spike following the 1973 Arab/Israeli war. This was during Nixon’s second term. It spiked again in the late 1970s dooming Carter and driving up inflation that Reagan had to deal with early in his administration. Following lost market share the Saudis opened the spigot which caused prices to crash in 1986 which was like another tax cut and partially explains growth in Reagan’s second term. For Bush 41 what was going to be a weak 1990/1991 turned into recession with the oil price spike following Iraq’s invasion of Kuwait. And this recession like with Carter doomed his hopes for a second term. The spectacular economic growth in the late 1990s also coincided as with Reagan with a oil price collapse making a gallon of gasoline the same cost a a pint of bottled water. This was like a tax cut that helped to offset Clinton’s earlier tax hikes. Anyway the low gas prices probably kept Clinton in office even after being impeached. Bush #43 did cut taxes but he was mostly going into the headwind of rising oil prices which the housing bubble mitigated until it all fell apart after oil spiked at around $150 a barrel with gasoline over $4 in the summer of 2008.
The economy under Nixon, Carter, Reagan, Clinton, and both Poppy and Dubya was greatly affected by price changes in the oil markets. In the summer of 2008 this was like a tax hike of 3-4 thousand dollars on the average middle class compared with prices during the Clinton boom years. The point is that if you don’t understand economic history then you’re really not a person that the rest of us should be taking advise from.
Cantab,
“ The point is that if you don’t understand economic history then you’re really not a person that the rest of us should be taking advise from. “
1. By all means, ignore the nonexistent advice in the post. Since I didn’t provide any, I won’t be upset if you don’t follow it.
2. Sure, oil prices make a difference. So does monetary policy, which I’ve covered in a lot of other posts, though not in this one. Now, you may indicate that I don’t understand economic history because I never mentioned oil, but it seems to me that you are suffering from the same problem, ignoring monetary policy. After all, every single President in the sample was greatly affected by the Fed’s behavior. (http://angrybear.blogspot.com/2007/02/god-punishes-us-when-we-collectively_19.html) Should I make a statement that implies that your failure to mention monetary policy somehow indicates that you don’t understand economic history?
Now, if you want to comment with respect, I’ll reciprocate. But if you want to get all high and mighty, I can be pretty condescending too.
Children, children, play nice!
Cactus,
Monetary policy in the 1970s was largely Arthur Burns and George Miller trying to keep the economy going in the face of the two major oil shocks that decade. And back their action was causing inflation that was not beaten until Volker with Reagan’s support got it under control in the early 1990s. Afterwards inflation pretty much trended downward with some minor bumbs and the falling inlation has allowed the Fed to keep rates low (along with china).
I would also look at labor issues and their effect on economic growth in the 50s and 60s.
High taxes and regulation don’t produce economic growth. I don’t know why you need me to tell you this. If you find data that makes you think otherwise then you need to do more work on this topic. Good luck with your book. I heard Palin may be done with her bus in a few months so it will be available for your book tour.
CoRev,
Children, children, play nice!
Daddy, he’s stealing my myths, I want them back.
Cantab,
“Monetary policy in the 1970s was largely Arthur Burns and George Miller trying to keep the economy going in the face of the two major oil shocks that decade. And back their action was causing inflation that was not beaten until Volker with Reagan’s support got it under control in the early 1990s. “
I assume you meant early 80s. As to the rest of this, you clearly come with some preconceived notions based on what you read and believe makes sense. Fine. But the post I linked to in my comment indicated strong differences in monetary policy over and above the needs of dealing with inflation.
And there is the difference. Some of us believe we know the answer ahead of time, and some of us actually check the data. And the folks who know the answer seem quite happy to lecture those who check the data that they don’t know history.
“High taxes and regulation don’t produce economic growth. “
Find the spot in the post where I said they do. The post indicates that low taxes don’t produce growth. You interpret that as high taxes produce economic growth. As I’ve pointed out for years, there seems to be some evidence there’s a happy medium which allows the gov’t to pay for roads and the military, but not so high as to choke off growth.
Cantab,
Keep your $%#ing myths. I prefer to believe what the data tells me.
Cactus,
You’re analysis is almost nonexistent. Nixon for instance even as a republican used a Keynesian stimulus to help himself get reelected in 1972 (should have stopped with it too). And far from being a market guy he was more a left leaning “control the economy” guy than either Carter or Clinton. Nixon imposed wage and price controls accross the economy with one of the fallouts being the long gas lines and Rationing.
Also, if rising and falling oil prices act correspondingly as a tax hike and tax cut to the middle class it seems this also belongs in any valid analysis of the past 40-50 years. For example, with respect to comparing oil prices in the summer of 2008 versus the late 1990s the impact on the middle class was equivalent to something like a 8-10 percent tax hike (on their average tax rate). And the effect from rising oil price is worse then a tax hike because even with a multiplier less than 1 and the government buying things you don’t value at least it adds someting to our GDP rather then improving social wellfare in countries such as Saudi Arabia and Norway.
OK, one of the things that one comes to expect, and which makes one shake one’s head, is the dismal level of understanding of how science works among the tut-tut crowd. “Guest” seems to have in mind that “valid” necessarily means the final, all-encompassing view of things that rightly comes at the end of the long, bit by bit effort to understand (or alternatively, whatever “Guest” wants “valid” to mean). This is a common rhetorical trick – insisting on examining whatever aspect of some complex problem the other guy has not addressed, in an effort to suggest that the other guy has missed the only important point.
In this case, of course, that cannot be true. When the claim is that tax cuts are powerful juju for growth, but an examination of results over time finds little link between taxes and growth, it is nonsensical to claim that the observation is not important to the argument. If what we can learn from observing results over time is that oil prices matter a great deal, and that taxes matter very little, in the broadest terms, and at rates common in the US, then we have learned something about the interaction of taxes and growth, as well as about oil prices and growth.
Now, before we go tossing terms around like we know what they mean, a valid argument (to quote Wikipedia, but don’t get all huffy unless you want to embarass yourself, because this is the standard definition) is one “where the conclusion follows from the premises.” So claiming that cactus’ argument isn’t “valid” is a simple misuse of the term, suggesting “Guest” doesn’t really understand the concept. Because when growth doesn’t correlate well with taxes, and cactus concludes that the data don’t show a correlation between growth and taxes, well,…ok, you get the point.
So, for those new to the game, or for those who want to go through the whole dishonest effort that we all had to go through while cactus was building the argument for the first book, here is how it works. You look at relationships in their simplest form first, to see what can be learned. If oil, monetary policy and tax policy are all thought to be important influences on growth, looking at them all at the same time in the first examination does nothing more than we could do in a crude regression analysis. We have all seen the results of such crude regressions (haven’t we?) and can all do our own (can’t we?), but have learned that they are usually terribly flawed, and that doing the analysis the hard way – a step at a time – is best.
So, when a commenter claims that some preliminary look is “not valid” because the commenter already know the answer to the whole puzzle, without showing how the pieces fit, feel free to chuckle at, scorn or deride them – whatever suits you best.
I fail to see how oil impacts the question of taxes. Are Republicans unlucky with oil…is that what Cantab is saying??
No one said high taxes promote growth. Invalidates the whole counter.
Guest,
If you fail to see how oil affects the question of taxes, when you have point to the effect of oil and growth yourself, then I am at a loss. I cannot see how I can make something clear to you which you seem at one writing to understand, then not to understand in the next.
Cantab won’t understand anything he doesn’t want to understand, and he doesn’t want to understand that the tax cut dogma we have lived with for several decades is wrong. But that is not a critique of cactus’ analysis. Cactus is doing the analysis a step at a time. First effort was a look at growth as it relates to taxes on a coincident basis. Next is on a lagged basis. You have written “if rising and falling oil prices act correspondingly as a tax hike and tax cut to the middle class it seems this also belongs in any valid analysis of the past 40-50 years.”
That is simply not the case. “Valid” is not the same as “final”. What is underway here, unless it runs off the track, is a perfectly valid way of trying to understand the interaction between taxes and growth. We can also look at the interaction between oil supply and oil prices and growth. (Supply, as seperate from price, seems to have a stronger impact. That is hardly a surprise, but not adjusting for supply interruptions can lead to the impression that price has a stronger impact than is probably the case.)
Just to be clear, I don’t care which side of the argument you are on. I want it done right. Insisting that we fold oil into the analysis and claiming that any other approach is not valid, is wrong. Go and review the earlier work stored on this site to see the process. It’s one step at a time, and the result is that confusion over lags, interactions between Congress and President, war and peace and the like all get sorted out over time. Those interactions cannot be sorted out in one swell foop.
Cantab won’t understand anything he doesn’t want to understand, and he doesn’t want to understand that the tax cut dogma we have lived with for several decades is wrong.
Wrong? If tax hikes were good for economic growth you would think that Obama and the democrats would be adding them now over republican opposition. They’re not because they know i’m right, you’re wrong, and cactus’s analysis is ridiculous.
You also might want to read Krugman today. I don’t agree with everything he’s saying but at least he’s talking like an economist rather then barking and sneering at us. I don’t generally believe in short term stimulous programs since I think its better to create a positive business environment with low taxes and minimal regulation. Krugman is talking about tax credits to business as a way to stimulate job creation. I differ from him in that I don’t want to just temporarily flip the switch to low taxes only having to flip it back at some latter date. I think the 1970s showed this on again off again policy causes more harm then good.
So I’m talking about making permanent long term positive changes to the business climate that involve tax cuts, Krugman is saying we should have short term tax cuts (along with government projects that may or may not produce useful things). We might disagree on the actual implementation, no doubt looking forward to how much government we want in the economy in the future, but nobody with an economic education would take Cactus’s analysis seriously.
Guest,
I fail to see how oil impacts the question of taxes. Are Republicans unlucky with oil…is that what Cantab is saying?
I not saying this since I mentioned that Reagan was lucky with the oil price collapse in the first months of 1986 which went a long way to replace the money from higher payroll taxes.
Given the lack of data points, why not combine the two graphs and compare each four year period with the tax rates of the previous four years?
The argument gets played out in whack a mole fashion and only resembles an argument on the surface. If Cantab can separate out oil’s impact and actually provide data about his claims of its role, rather than simply stating without data it has such and such a role in quantities we can discuss, it becomes off topic instead of an additional factor.
I agree with cactus it must be dealt with piece by piece, as assertions are simply re-cycled a little later in the process but declared to be valid that day, with no regard for past debate. This is not at all just cantab by the way. But I do object to the decalration oil trumps all without any supporting data, and the off topic declaration of correctness.
Maybe this chart will help. I just happen to know its general shape without having to look up the numbers.
http://www.eia.doe.gov/emeu/steo/pub/fsheets/real_prices.html
Oy. Clearly this is going to take a post. If time permits, I’ll write it over the next weekend. There’s no way I can get to it before that.
But let’s see what I can do, seat of the pants-wise, in the few minutes I have now. And I’ll throw in some numbers.
1. You’re confusing marginal costs with total costs. You did it in last week’s post, and you’re doing it again here. If you want to talk about oil costs as being the equivalent of a tax, fine. But in that case, the price of gasoline or a barrel of oil or whatnot is not the equivalent of the tax. The equivalent of the tax that was paid by the private sector is the price paid times the amount consumed.
2. If you’re going to focus on it as a tax, presumably you want to focus on the imported component.
3. This part I’m doing freehand right now, literally on the back of an envelope. (Like I said, I’m on the run, with no time. Hopefully over the weekend I’ll do it more thoroughly, and I hope I’m not making any mistakes now.)
4. Take total petroleum imports from the AER’s table 5.3 (http://www.eia.doe.gov/emeu/aer/txt/stb0503.xls), multiply by the price per barrel from the AER’s table 5.18 (http://www.eia.doe.gov/emeu/aer/txt/stb0518.xls), and compare that to the GDP figures (links in the main post) less the gov’t portion of the GDP (also linked to in the main post).
Now, you have a figure comparable to the ones I used in the post, and you can add them to those (feel free to go straight to the google spreadsheet I provided) to get a “tax imposed by the government on the private sector plus tax imposed by imported oil on the private sector.” (I’m simplifying a bit – I know, the gov’t also uses a lot of oil, but these figures aren’t broken out.)
I’m doing this on the fly, so assuming no stupid adding mistakes, from where I sit, what I’m seeing is that the “oil plus gov’t tax” was cut by the most under Reagan, with Nixon/Ford in second. Now, Reagan did not produce the fastest economic growth by any measure, and Nixon/Ford did not come in second.
The biggest increase came under Clinton. (This is kinda squirrely, since the bulk of the increase in the “oil tax” came in his last year… but it did rise even without that last year, and as you may recall, the “government taxes” did too.) JFK/LBJ had the second biggest increase. And yet, those two were the two fastest growing admins in our sample.
So once again, I made a mistake with arithmetic, cutting taxes (even including expenditures on imported oil as a tax) is just not giving the result you seem determined to assure us have to be true.
“Nixon for instance even as a republican used a Keynesian stimulus to help himself get reelected in 1972 (should have stopped with it too). And far from being a market guy he was more a left leaning “control the economy” guy than either Carter or Clinton. Nixon imposed wage and price controls accross the economy with one of the fallouts being the long gas lines and Rationing. “
Boy, I feel stupid, having stated plainly in the post that “Nixon for instance as a republican never used a Keynesian stimulus to help himself get reelected in 1972. And he was a raging free market guy who never imposed wage and price controls accross the economy with one of the fallouts being the long gas lines and Rationing.
Oh wait. That’s not in the post at all. So wtf is this in response to? Listen, if you want to debate with your own hallucinations, do it on your own time.
As to the oil, see my response downthread.
David C,
My assumption was that presidential administrations matter.
Cactus,
I have a masters degree in economics. I don’t confuse marginal costs with total costs.
You’re analysis or lack of it as expected really does not hold up. Nixon was a Keynesian who imposed wage and price restrictions and primed the pump with government spending. He was more in lock step with today’s democrats then with free market republicans. So he’s on your side. Economic volatility increased in the 1970s largely due to oi prices rising. This contributed to inflation which led the FED to increase interest rates causing a recession around 1974/75, the republican had to eat it. Under Carter inflation got totally out of hand but the fed sat back and did nothing until they jacked up the rates under Reagan, so again a republican had to be the adult and do the right thing.
You’re myopically looking at what president was in office and it seems that you intentionally omit the fact that in the 70s and 80s while two republican presidents were in office the FED induced economic recessions to fight inflation. Now add to this Clinton inheriting a recovering economy and Bush 43 one ready to go into recession and you pretty much have explained the numbers. Good luck with your book.
“I have a masters degree in economics. I don’t confuse marginal costs with total costs. “
If you want to play that game, I have a Ph.D. in econ and taught Master’s students for five years. I’ve seen people with master’s degrees or on their way confuse marginal costs with total costs and try to bullshit their way out before. You are confusing marginal costs with total costs when you put claim oil expenses function as a tax and then as an example put up links to graphs that show the price of gasoline rather than the amount spent on gasoline (or oil). Either that or you haven’t thought through what you were writing, or you were deliberately obfuscating. There are only those three options.
“You’re analysis or lack of it as expected really does not hold up. Nixon was a Keynesian who imposed wage and price restrictions and primed the pump with government spending. He was more in lock step with today’s democrats then with free market republicans. So he’s on your side.”
I asked above, but what does Nixon being a Keynesian have to do with any of this? I pointed out that that higher taxes (with or without the burden of the costs of oil) do not seem to have caused a drag on the economy. That’s it.
Also, what do you mean by “your side.” Are you under the impression that because I think Reps have a policy that is stupider than the idiocy the Dems promulgate, I am somehow a partisan Democrat?
“Economic volatility increased in the 1970s largely due to oi prices rising. “
Yes. And I ran the numbers to take into account oil prices. Again… I did it quickly, but if I didn’t make a mistake, it isn’t helping your argument at all. Repeating it again and again isn’t helping either – nothing is gained by my putting up the numbers with oil again in response to your repeating the same comment over and over. If you have any doubts, I provided links to the numbers.
“This contributed to inflation which led the FED to increase interest rates causing a recession around 1974/75, the republican had to eat it. Under Carter inflation got totally out of hand but the fed sat back and did nothing until they jacked up the rates under Reagan, so again a republican had to be the adult and do the right thing.”
That’s an interesting interpretation of events. I think its dumb to focus on nominal rates, but since that’s where you’re going, fine. I’ll play. November 80, the month in which Carter was running for re-election, the Fed Funds rate was 15.85%. It had been 17.61% earlier in the year. Under Reagan it got to 19.1%. Now that’s the difference between sitting back and doing nothing and a Republican being the adult.
“You’re myopically looking at what president was in office and it seems that you intentionally omit the fact that in the 70s and 80s while two republican presidents were in office the FED induced economic recessions to fight inflation.”
Yes, and you just pointed out that nothing was done while Carter was in office. Which was wrong. (BTW – Carter appointed Volcker, knowing full well what Volcker intended to do.) And since you’re glomming onto interest rates as a way to fight inflation (you really shouldn’t, but even if you haven’t noticed, others may have realized I’m taking what you say and working with it) – interest rates hit 12.92% in the 74 – that was the high point prior to Carter taking office. Recall, they hit 17.6% under Carter.
BTW – all data from this comment from
Cactus,
I busted your nonesense. Now you’re wasting my time. Enjoy the book tour.
“I busted your nonesense. Now you’re wasting my time.”
I see… you indicated that including oil changes matters. I threw in oil. It didn’t change anything. Then you said something about interest rates. I checked the numbers for that too, and once again, you were wrong.
And with all that, you’ve busted my nonsense. Monty Python did it better in the 70s. (http://www.youtube.com/watch?v=dhRUe-gz690)
As to the book tour, that will be a while. The book is coming out in August.
You did not say anything significant about the oil markets and you failed to acknowledge their impact.
Another one of your failures is your aligning presidents with tax regimes. Both Nixon and Ford were high taxing high regulation presidents. So don’t they belong on your side. President Clinton on the other hand told us the “The era of big government is over”, and he’s your champion? What’s that all about. You even choose your time series to conflate revenue earned from marginal tax rates and those from capital gain. To focus in on Clinton it was the tech/stock bubble which was not a Clinton federal economic program that drove up the economy which provided tax revenue, especially notable with huge increases in capital gains. Moreover, in other times such as 1973 and 1981 inflation from rising oil prices induced the FED to put the economy into recessions. So you have 2 fed induced recession that happened during the periods when republicans were in control. And Clinton’s numbers are above average because he inherited an economy on the rebound and then got the benefit of crashing oil prices which was like a major tax cut in his second term (it also kept him in office). Bush on the other hand inherited recession and had to deal with rising oil prices that acted to offset the benefits derived from his tax cut.
If you say your charts and analysis mean nothing then we are in agreement. If you say they show that high tax rates are good or irrelevant to economic growth then your analysis suffers from basically two fatal flaws. The first are acts of ommission since you don’t include the impact from rising prices in the oil markets and the FED response they induced. The second is you get the direction of causality backwards and fix your time series to take advantage of it. The main example is during the Clinton years when economic growth generated high income taxes and sky rocketing capital gainst tax. You say look we can have economic growth with high taxes even though it really was economic growth that generated the taxes. And even under Clinton taxes were much lower then what’s hiding behind the democrats veil.
More on cactus getting causality backwards:
Its hard to have great numbers when you’re running into a headwind and its hard to have bad ones when the winds at your back. High growth generates above average tax revenue while low or negative growth errodes it. All you can do as politicians is to create a postive business climate with low tax rates and liberal regulation. After that you can’t control oil price spikes or expect a technological perfect storm to lift the economy. These things happen but you don’t plan for them or control the.
The bottom line is that economic growth generates tax revenue and cactus has it backwards when he suggests that tax revenue causes economic growth. And when he puts out his graphs that’s exactly what he is communicating to the uncareful reader. And it’s not the reader’s fault since they were not the ones intentionally trying to deceive.
http://www.nber.org/cycles/cyclesmain.html
Peak………………………..Trough……………………President……Party
July 1953(II)………………May 1954 (II)…………..Eisenhower….Republican
August 1957(III)…………April 1958 (II)…………..Eisenhower….Republican
April 1960(II)……………..February 1961 (I)………Eisenhower….Republican
December 1969(IV)………November 1970 (IV)…..Nixon………..Republican
November 1973(IV)………March 1975 (I)………….Nixon/Ford…Republican
January 1980(I)…………..July 1980 (III)………….Carter……….Democrat
July 1981(III)……………..November 1982 (IV)…..Reagan……..Republican
July 1990(III)……………..March 1991(I)…………..Bush #41…..Republican
March 2001(I)…………….November 2001 (IV)……Bush #43…..Republican
Business cycles have been dealt with in another post. I see no data on oil and quantified impact if your claim is that oil made the difference.
Rdan,
What do you think about the fact that most of the recessions in the last 60 year happened while republicans were in office. These recessions tend to put the hit on tax revenue so i’m saying Catcus has it backwards since economic growth or the lack of it are the main driver for his results he’s picking up in the charts.
Business cycles have been dealt with in another post
That must been one hell of a post.
I see no data on oil and quantified impact if your claim is that oil made the difference.
Do you doubt that the fed raised rates to beat inflation directly following the oil price increase of 1973 and again belatedly in 81/82 to beat inflation carried over from the late 1970s? Some economic literacy and or the ability to google are really an implicit requirement for those wishing to follow the arguments here.
You need to ease up Cantab. Ad homs and rhetoric do not cut it.
Great stuff as always Cactus. I do wonder about one bit “It also includes Obama – hence CEA head Christina Romer, who believes in lower taxes as a cure to who knows what. ” Did I miss something ? I was not aware that Romer had that view in general. I’m sure she thinks cutting taxes during a recession and liquidity trap is better than doing nothing (although not as good as raising spending).
I almost think you are talking about the Romer and Romer paper on the short term effects of facultative tax cuts. That paper puts them out on the right fringe with Keynes. It has little to do with your work on medium term effects. I mean I don’t think you disagree with the Romers at all.
That paper is missinterpreted by Republicans (who dreadful as it seems might be honestly confused about what the Romers said). The current situtation is extraordinary. I don’t know of any evidence that Romer supports tax cuts in normal times.
As I said, maybe I missed something.
cantab,
This is gonna hurt, so I suggest you reach for the Bengay now. Mind you, this isn’t personal, but here at AB we have an unofficial motto of responding to most of the sorta plausible at first glance sounding inanities so that casual readers don’t simply read a few comments and assume that a good point was made.
To minimize the damage (not to mention the wasting of my limited time) I’m going to avoid responding to the stuff I’ve already responded to – repeating an error that has been pointed out over and over isn’t the kind of thing to fool the casual reader. Grab ahold of something, ’cause here goes…
“The second is you get the direction of causality backwards and fix your time series to take advantage of it.”
The second graph in the post looks at changes in the rate of private GDP paid in taxes in the first half of each administration and compares them to changes in the real private GDP growth rate in the second half of the administration. If I have causality backwards, then the growth rate from 1996 to 2000 is causing the tax collections to increase from 1992 to 1996, and the growth rate from 1984 to 1988 caused changes in the tax collections from 1980 to 1984. That sort of low budget wanna-be jedi mind trick might work on Jonah Goldberg, but I have to assume you simply are not showing the rest of us the respect of actually paying a fraction of the attention to what we wrote that we are paying to to what you wrote. Notice I am giving you the respect of assuming that you are not stupid enough to believe that events in the year 2000 can influence events in 1993 despite what you wrote. And by the way – the third graph makes your comment even more egregious.
OK. That’s inanity #1. Inanity number two is actually a bit worse because its boring. Its come up many, many times before here at Angry Bear, and interestingly enough, does indicate something about getting causality backwards.
“What do you think about the fact that most of the recessions in the last 60 year happened while republicans were in office.”
Let me start by agreeing with you that most of the recessions in the last 60 years happened while Republicans were in office. More recessions started while Republicans were in office, and Republicans spent more of their terms in recession than Dems.
And to make your argument stronger, let me note that just about all of the major economic disasters in the US of the last hundred years plus – the ones that got the government to intervene in a big way, tended to start after many years in which Republicans held the Oval Office.
The Panic of ’07 (started six years into Roosevelt’s term, following another Rep, McKinley)
The Crash of 29 and the Great Depression (at the start of Rep Hoover’s Presidency, Hoover in turn following Reps Coolidge and before that, Harding)
The 1973 collapse of Bretton Woods (started four years after Nixon took office)
The S&L Fiasco (about four years after Reagan took office)
The Current Mess (GW)
(And no, the stock market bubble collapse in 2000 did not cause enough of a problem for the government to be intervening in the economy, particularly not on the scale of these other problems.)
Now, others might look at this list and conclude – well, maybe something isn’t right with the economic policies these guys are following. You on the other hand, seem to be concluding that God gets pissed off at America when Republicans become President, and that divine displeasure is some sort of valid excuse for underperformance.
Anyway, I appreciate the comedic relief after a long day at the office, but if you aren’t trying to be a parody of yourself, I would suggest you lay off the […]
Robert,
Thanks for the complement. I am thinking of Romer and Romer. Leaving aside issues with the paper itself (in particular, the “narrative history” paper that manufactures the data on which it is based), even if one could prove (again, without having to manufacture a “narrative history” that contains oddball items like, and I’m working from memory here, but as I recall it had a tax hike around 2005, and it completely ignores the effect of transfer pricing rules) that lower taxes can be a good short term fix to a recession, there’s still the political aspect. Indicate that you believe that taxes work to fix a recession, and in a Fox News World in which we live, from then on you’re explaining why we have taxes at all ever.)
On the other hand, you can simply have the government spend the money if its a one time thing, and you have a bit of a chance of killing off that spending later when its unecessary.
It’s hard to debate when the moderator deletes your posts.
Nope…no deletions.
I made a short one to you with regards to your warning and one to close out with cactus. They both vanished. I don’t see how I could have screwed up two in a row.
OK, pretending to know what the Obama administration would do and why it would do it is a REALLY interesting claim of special knowledge. You work at the White House? Also, the claim that the Obama administration would do the thing that is technically optimal over the objections of Congressional Republicans seems pretty amazing at this point. Obama has been accommodating the GOP over the objections of his advisors from the very beginning.
So, what we have is Cantab claiming special knowledge of the Obama administrations thinking, special knowledge of the influence of oil on the economy, special knowledge on the impact of tax policy on growth. Wow, Cantab must have gone to one of those special schools where every effort is made to support all the special peoples special self-esteem.
No, Cantab, we don’t believe unsupported, recycled claims for a set of policies that has been tried. We don’t accept your spinning any comment that comes along as somehow extreme or stupid while only you are level-headed and right. We’ve all see that nonsense paraded through here before. It’s textbook “big lie” stuff that has been around longer than any of us have been alive.
You see, that’s one of the reasons people with otherwise busy lives will spend long periods either writing step-by-step evaluations of the various inputs to economic performance, or reading those evaluations – to sort out evidence from propoganda.
Shorter Cantab –
cactus agreed to consider everything I said, but didn’t end up agreeing with everything I said, so he must be stupid so I win and I quit before he can do any more data stuff but then he did more word stuff so I didn’t stay quit but I still win because I say so because everybody else is stupd. So there.
I’m looking at the chart on “Annual Average % Change in Tax rate v. Annualized Growth Rate of Real “Private” GDP.
I think the title of this chart should change since the term “tax rate” is generally associated with the rates from the tax code and not tax revenue as a proportion of GDP.
Also, when you sit back an look at the chart and treat the axis as going from bad to good those data points in the bad sector are either associated with periods that coincided with recessions or other supply shocks such as oil prices. And those in the good sector are associated with periods that inherited the bounce from an economic recovery and/or had positive supply periods with falling oil prices.
The take away from the chart really is that economic growth creates tax revenue, and that that for a president if you have a recession during your term its going to be hard for you to have top shelf numbers. President Obama inherited a monster recession that whacked growth on his watch. But none of it was his *fault. So basically, even if Obama were to turn out to be a water walker there is no way that he’s going to have good numbers. Thus his future according to this rating criteria was set even before he entered office or any of the legislation he wanted to enact was passed. He can’t do well in the chart even if he does well in practice. And this is the major defect of the analysis.
I wrestled with the title of the chart. Tax burden is a better title but I’ve used that before in other posts to deal for something similar but not identical.
I assume good to bad means with respect to growth. Collecting more or less taxes only matters if it makes us better off. But by definition, administrations that managed to minimize recessions also had faster growth.
“nd those in the good sector are associated with periods that inherited the bounce from an economic recovery and/or had positive supply periods with falling oil prices. “
Yes and no. Excellent performances have been turned in by administrations that actually inherited a mess. You may not believe me, but FDR had faster real growth than any other president in the time since Simon Kuznets developed GDP. Even if you don’t like the measure I use (real private GDP) – go to NIPA table 7.1 and compute the growth rate in real GDP per capita. And it isn’t the war – leave out 1940 to 1945, and he still outperforms everyone. And he inherited the worst mess out of the bunch of ’em. Similarly, the one administration to actually inherit a recession through no possible fault of their own (i.e., the recession was ongoing even during the election) was the JFK/LBJ admin. Granted, it was close to over, but it followed a decade of crappy growth. Simply put, there was no reason to expect the recovery would be any different than the short lasted recoveries of the previous decade.
“he take away from the chart really is that economic growth creates tax revenue”
No. The graph looks at tax revenue as a percentage of private GDP. Not total tax revenue. Put another way…. its the amount the government is actually collecting as a share of the total pie. That depends in part on marginal rates, but much more on enforcement.
“President Obama inherited a monster recession that whacked growth on his watch. But none of it was his *fault. So basically, even if Obama were to turn out to be a water walker there is no way that he’s going to have good numbers…. And this is the major defect of the analysis.”
Once again, see FDR. I realize you were probably told all sorts of things about FDR, so I urge you to go to NIPA table 7.1, and calculate growth rates of real GDP per capita yourself. And frankly, if Obama faces tougher conditions than every Pres since FDR (and I don’t think that’s true, though he seems to be going out of his way to make them harder with some of the policies he’s followed – topics of previous posts), well, Obama campaigned for the job. There’s no reason to feel sorry for him. And he wasn’t anointed by God. He owes us just like every other resident of the Oval Office before him owed us.
Catcus,
I think FDR is another case that proves my point. The NBER shows two downturns that are generally associated as the period of the depression. The dates are as follows:
August 1929(III)-March 1933 (I)
May 1937(II)-June 1938 (II)
The major part of the great depression ended in March 1933 and FDR took office on March 5, 1933. FDR rode the rebound and that’s why he shows decent numbers. Yet it took until near the end of his second term until the economy recovered. That’s not very good. Once the industrial arts figures how to harness technology the knowledge is in the bank and there is no need to reinvent it. So it really took quite a long time for FDR to get the economy back to the same point that it was at mid 1929.
Poor Obama, unlike FDR he took over an economy falling off a Cliff so he’s really going to have a hard time getting decent overall growth numbers for his first term.
1. You’re implying Presidents are bystanders to the economy and 2. you are misunderstanding how the NBER marks the begining and end of cycles.
On item 1, FDR started acting immediately upon taking office (“first 100 days”), and in fact, had been talking since long before he took office. BTW – other examples of this effect – JFK and GW. GW walked into office promising to reverse policies that had produced the best growth in the memory of most Americans. You don’t think that had an effect? I was at a job in Brazil when he was inaugurated, and I remember talking to Brazilians who were asking – “what does he think is going to happen when he reverses Clinton’s policies?”
On item 2, there are always slight upticks and downticks in the economy. If you take office during a weak period, but proceed to make immediate changes that have an immediate, positive effect on the economy, a year later the NBER says – well, that was the end of the recession right there. The converse is also true. The difference between Obama and say, FDR, JFK, and GW is that he didn’t create an immediate change in the economy. He spent the months before he was inaugurated explaining how he would continue GW’s policies for dealing with the mess (which nobody thought was working), and then he did just that once he was inaugurated. You may see him as a victim, I see him as having dealt with the economy incompetently thus far.
BTW – as to FDR’s second recession…. nobody said the guy was always right. He made some serious mistakes there, trying to cut back on the government’s piece of the economy too early. The economy was still too weak, evnen if growing rapidly.
Guest was me. Sorry.
BTW… you can’t argue coming out of an economic mess is good and coming out of an economic mess is bad. By your argument, maybe GW should have done lousy during the recession, but he should have posted excellent numbers for the rest of his term. Or at lest few years. But there were no years during the GW administration that even qualified as very good. There were two that were average in terms of real GDP per capita growth rate compared to the sample period. That’s it.
Cactus,
Guest was me. Sorry.
Don’t worry, I knew it was you so there was no misunderstanding on my part.
Are you throwing president Obama under the bus now just because he’s not helping your analysis. Real analysis is something more then post hoc rationalization. This is why I complain about data mining and I’m pointing out that because of its lack of robustness it has little or no predictive power.
On FDR took he took over an economy with a huge upside potential that never really lived up to its potential. The recession in the late 30s really is the proof that FDRs approach did not work well. Even economists like Paul Krugman say the real cure to the depression was the second world war. And the build up started before we entered the war with massive new ship building programs.
“Are you throwing president Obama under the bus now just because he’s not helping your analysis. Real analysis is something more then post hoc rationalization.”
No. For three years, I had posts here about how Presidents did. I was asked by people on the right whether I would be as derisive to the next President if it was a Democrat and he/she didn’t performed as I had been to the previous non-performers. As I said time and again in response, I don’t give a $#&^ what party these people come from. They work for me, and they owe me performance.
I’m throwing him under a bus, as you put it, because, as I wrote (in several posts last year) that if he didn’t work hard to find a way to kill the silly Bush administration bail-out plans we’d be worse off because the money would simply go to the banks and the banks wouldn’t lend, and there is nothing anywhere in that does anything for the economy. It was predictable. Not an accident.
“little or no predictive power”
See my previous point about explaining what Fed/admin’s actions were going to result in. Bear in mind, I called the recession in March of 08 (http://angrybear.blogspot.com/2008/03/how-is-this-recession-not-like-other.html) and somewhere in the comments to a post I mentioned a recession was likely in 08, though at that time I expected to be much more mild.
“On FDR took he took over an economy with a huge upside potential that never really lived up to its potential. The recession in the late 30s really is the proof that FDRs approach did not work well. Even economists like Paul Krugman say the real cure to the depression was the second world war.”
Clearly I’m a crackpot, because I seem to believe something that everyone else has told you is not true. I even claim I ran the numbers and the numbers somehow make FDR look good in comparison to other Presidents, which is clearly completely nutso. But for whatever reason, you seem perfectly content to argue with this particular crackpot.
So go ahead, run the numbers (NIPA Table 7.1, line 10 has real GDP per capita in 2005 dollars) and show me the results. Prove me wrong. You kow you’re right, and its quick and easy to do.
And if you’re convinced it was the build-up to the war that fixed it, fine, then don’t run through 1940. Stop at ’38, in the middle of the recession. The advantage to doing it yourself is greater than just humoring a crackpot. Call it an exercise – it will keep your skills fresh. Five minutes is all it will take you – less time than it takes to craft an answer to this comment.
Cactus,
Please stop with all this crackpot stuff. On FDR and line 10 of table 7.1 of the NIPA tables i’m not sure what you want me to do. I looked at the table and for the years 1929-1933 year over year the numbers are negative then as the economy rebounds they are positive. That’s what I would expect and think we have witnessed in every post war recession.
Here’s what I’m saying – you want to compare the growth rate over the length of FDR’s administration (or some acceptable subset of his administration that does not include factors you deem unacceptable) to those of other Presidents to see exactly poorly FDR did. Your statements above were that a) Presidents who inherited a mess cannot do well, b) everyone knows the economy was a basketcase under FDR, and c)the economy only started to move under FDR because of the war or preparation for the war. I am asserting that all three of these statements are untrue.
Now, the typical way to compare the growth rate in the economy is to annualize some variable that takes into account inflation and population growth, and which is widely accepted. Real GDP per capita is typically it. (I personally think its easy to construct more appropriate variables, and have had many posts on that (and its covered at length in my book) but there’s no point in having that discussion here/now. Real GDP per capita is acceptable.)
The way to annualize real GDP per capita (or anything else) is this:
{[Final Value / Initial Value] ^ (1/years)} -1
(You’ll find that formula in econ books and finance books, and I’ve come across it in biology and physics textbooks. This is standard stuff.)
I’ll pick as the initial value – what real GDP per capita was before FDR took office as being the 1932 value: 5,809 (in 2005 dollars). (BTW – if you locate any of my old posts, that number would be different – the BEA only started using 2005 as the base year a few months ago, so all my previous posts on this subject are using the BEA’s figures with a 2000 base year.) Again, its fairly standard, but if you want to play with it later and pick his first year in office, feel free.
And since we want to avoid not just the war years, but also any possible build-up to the war, let’s pick 1938 as the end year. That was in the middle of a recession – the real GDP in 1938 was well below what it had been in 1937, and equal to what it had been in 1936. The recession was a major screw up for FDR (I think everyone would agree) so we’re not trying to make FDR look good here.
Anyway, real GDP per capita in 1938 was 7,638.
So… the annualized growth rate in real GDP per capita, measured from 1932 (in the middle of an awful recession) to 1938 (in the middle of another awful recession) was:
(7,638 / 5,809) raised to the power (1/6) (because there are six years of growth here), and then we subtract one from that quantity.
It comes to 4.7%. Now, an annualized growth rate of 4.7% over a six year period can be described by one word, and one word only: “scorching.” The fastest annualized growth rate in real GDP per capita put up for any six year period in recent decades was 3.9%, which covers the years 1961 to 1967. And we’ve essentially cherry-picked dates that make FDR look as bad as possible. Its also easily the slowest six year period in FDR’s entire term of office – leaving out the periods which cover the Hoover administration.