An Empirical Look at the US Economy From the Perspective of Economic Schools of Thought
by Mike Kimel
Cross posted at the Presimetrics blog.
In Response to Bryan Caplan et. al., Part 1 – An Empirical Look at the US Economy From the Perspective of Economic Schools of Thought
One charge that often comes up from libertarian and conservative economists is that there is no data to support the positions typically adopted by those can be said to subscribe, at least in broad strokes, to the general outline of the economy as described by Keynes. As an example, Bryan Caplan wrote this
Keynesians have been a smug bunch from their earliest days. Here’s how Keynes once replied to Hayek:
Thus those who are sufficiently steeped in the old point of view simply cannot bring themselves to believe that I am asking them to step into a new pair of trousers, and will insist on regarding it as nothing but an embroidered version of the old pair which they have been wearing for years.
But what is the source of Keynesians’ self-confidence? Every Keynesian I’ve ever known has a stock answer:
The empirics are on our side. But when probed, they rarely deliver any details about these empirics. It’s been three decades since Keynesians could merely point at the Phillips Curve and say, “See? See?!” And in terms of merely “fitting the data points,” Prescott infamously showed that a simple RBC model works rather well.
At risk of getting sidetracked, a couple notes about the Phillips Curve and the RBC model. The Phillips Curve, purportedly showing a trade-off between the inflation rate (of wages, at least) and unemployment was an erroneous idea glommed onto by many Keynesians because it provided an easy-to-explain way for government actions to improve the economy (i.e., when unemployment rose too much, the government could spend some money to push it down, but not too much less it spur inflation).
While its been a long time since I read Keynes, I don’t think he mentioned anything of this sort, being familiar with the German post-World War I experience and all that. To say that the Phillips curve was is integral to Keynesian views because some prominent Keynesians used it as an excuse is to say that invading Iraq and cutting taxes are a part of the Southern Baptist theology. As to the RBC model working rather well – it may be adequate for spotting things in the rearview mirror as they go by, but if it isn’t too deus ex machina to actually serve some purpose (say, anticipating events), someone please tell me what that might be.
Given so many people, many of them thoroughly incompetent, built (to use the term loosely, in many instances) on the work that Keynes did, criticizing Keynes for the opinions of some of his lesser disciples makes as much sense as criticizing Hayek because of something that Glenn Beck said in last night’s broadcast.
The basic Keynesian insight, and about the only thing that all the various flavors of Keynesian “thought” agree on, is that when the economy is in a recession, government spending can be tremendously helpful. (By contrast, most libertarians and conservative economists are against most government spending, even during periods of economic weakness.) Now, if you look at every recession since 1929, the first year for which there’s data from the National Income and Product Accounts tables, there aren’t many instances where the government cut spending during or just after a recession, but those instances have led to shorter, slower expansions, which can be summarized in this graph:
Notice that when it comes to overall growth during an economic expansion (i.e., length of expansion * speed of expansion), cutting spending produced worse outcomes than small increases in government spending, and large increases in government spending produced better results still. (More info and a link to data sources here.) That fits very well with Keynesian theory of all stripes. On the other hand, it doesn’t fit with libertarian, Austrian, or conservative economic theory.
Another thing about Figure 1… had you shown that graph to Keynes in the early 30s, he’d have had no trouble believing it. Had you showed it to Hayek, be it in the Road to Serfdom era, or decades later, he wouldn’t have. My bet is that most folks on Caplan’s side of the fence don’t that’s what happened, and have been happily theorizing based on a reality a 180 degrees different from what Figure 1 shows for a long, long time.
Now, let’s flip things a bit, and look at the most basic tenet of libertarian/conservative economic thought, namely that because of the profit motive, the private sector is relatively efficient compared to the public sector. Note that a number of people who call themselves Keynesians believe this as well, at least under certain circumstances that have been observed in the not unrecent past. An implication of this belief is that, all else being equal, jurisdictions that tax less will produce faster economic growth over a relatively long period of time.
I tested that not long ago, using data on the growth of real per capita income and the tax burden (from libertarian favorite, the Tax Foundation) for the fifty states plus the District of Columbia. At times, some states are raising tax burdens, and others are lowering them – conservatives/libertarians would expect the former states to grow slower than the latter. At other times, almost all states are lowering tax burdens, and in this case, conservatives/libertarians would expect the states that lowered tax burdens the most to produce the fastest growth rates. Finally, in those periods where most states are raising the tax burdens on their citizens, conservatives/libertarians would expect the most from those states that raised their tax burdens by the least.
Now, for every two year increment between 1977 and 2002, states were broken up into three equal sized-groups: relatively high tax burden states, relatively low tax burden states, and medium burden states. Growth rates were measured for each state for the subsequent six years, thus creating a series of rolling 8 year windows made up of a tax decision in years 1 and 2 and a growth rate in years 3 through 8. (The eight year window was selected because most successful governors seem to serve two four year terms.) Here is what the data shows:
As I noted at the time:
The table is interpreted as follows: the smallest tax cutters (i.e., those who cut taxes the least or raised them the most in any given year) produced the fastest economic growth about 42% of the time, second about 29% of the time, and third 29% of the time. By contrast, the middle group came in first in one third of all occasions. The “tax cuttingest” group came in first place a mere quarter of the time; in half of all years, it came in last place.
Many conclusions are reasonable from this. However, concluding that states that cut taxes have produced the fastest growth rate in per capita income is not one of them.
(The full post, including links to the data sources here.)
We find something similar at the Federal level. The following graph shows the growth rate in real GDP per capita for each President from 1929 (again, the first year for which data is available from the NIPA tables) to the present, color coded according to whether they increased or decreased tax burdens.
Clearly this is not the truth that you’ll hear from many on the conservative/libertarian side of the aisle. Note that FDR is only shown until 1938 to sidestep the usual arguments from folks on the right who seem to believe that he did nothing right until World War 2; 1938 is sufficiently ahead of WW2 (i.e., even before lend-lease) that his performance cannot be influenced by WW2.
(More info on that graph, plus data sources here. Note that I also have an entire book reaching similar conclusions. More info and a free download of chapter one here.)
Now, I’m just warming up, but this post is getting long, so I’ll save my best material for Part 2. But this is enough to say, for now, that the basic assumption that underlies Keynesian thought is supported by the available data. The basic assumption that underlies both conservative and libertarian economics is completely contradicted by simple graphs of the data.
The Phillips Curve was not a theoretical construct, but rather an empirical observation. It did show a relationship between inflation and unemployment – nothing erroneous or purported about it. The problem was not that the relationship did not exist in the data, but that it proved not to be stable. It fell apart when policy makers tried to take advantage of the relationship. As it turned out, people notice when central bankers intentionally generating inflation, and once people notice, the Phillips Curve relationship breaks down. Rather like monetarist prescriptions which relied on a stable velocity of money. Once velocity became volatile, targeting steady growth in some monetary aggregate no longer served the intended purpose.
The insight that is most (accurately) associated with Keynes is that when monetary policy becomes ineffective, fiscal policy can be used to boost demand. The rate of inflation is not central to that argument, though inflation is certainly a factor in making below-trend economic activity persistent, and in creating the conditions which make monetary policy ineffective. The Great Depression convinced policy makers and politicians that economic activism could work. Keynes had already argued that it could. One of the tools that activist policy makers tried was manipulating the inflation rate to support employment. Keynesian fiscal policy efforts and Phillips Curve monetary policy efforts were both part of a new economic activism, but as Mike points out, Keynes didn’t advertise for Phillips.
Hey Mike, great post.
Just to add that in addition to state comparisons, cross-country comparisons come to similar conclusions.
The mass of econometric literature is conclusive: in large prosperous countries since WWII, tax burden and government spending level have no discernible correlation to growth. (If anything it’s positive.) This even though tax burdens and government spending levels in those countries have ranged from 25-50% of GDP. A massively wide range.
Here are some simple correlations:
http://www.asymptosis.com/government-ba-2.html
http://www.asymptosis.com/government-bad-—-part-4-higher-taxes-more-prosperity.html
Here’s Mankiw:
http://www.jstor.org/pss/2534576
Small government is *not* on his list of things that contributes to the Growth of Nations.
o A low initial level of income is associated with a high subsequent growth rate when other variables are held constant. This is the finding of conditional convergence, discussed earlier.
o The share of output allocated to investment is positively associated with growth.
o Various measures of human capital, such as enrollment rates in primary and secondary schools, are positively associated with growth.
o Population growth (or fertility) is negatively associated with growth in income per person.
Political instability, as measured by the frequency of revolutions, coups, or wars, is negatively associated with growth.
o Countries with more distorted markets, as measured by the black market premium on foreign exchange or other impediments to trade, tend to have lower growth rates.
o Countries with better developed financial markets, as measured, for instance, by the size of liquid assets relative to income, tend to have higher growth rates.
Here’s Robert Barro, who does good econometrics but draws specious conclusions. He likes to argue that small government spurs growth even though his evidence for prosperous countries (which he buries) contradicts that belief. He finds a positive correlation.
http://www.asymptosis.com/an-open-letter-to-robert-barro.html
You’ll also find therein a link to Nijkamp and Poot’s metanalysis, which analyzes the full body of econometric literature on the question, and bears out the assertion in spades.
None of this looks at government spending specifically in recessions, which is what Keynes recommended. I’ll try to dig up cross-country numbers on that. I don’t think Reinhart and Rogoff do that analysis in This Time Is Different.
The incompetents who ignored Keynes’s very clear warnings and added a Phillips curve to the IS-LM model were named Robert Solow and Paul Samuelson. Not technically Keynes but a very long way from Glenn Beck.
Also great post. I might add that no one has found a cross country correlation of low tax burdens and fast growth in a recession which included lagged per capita GDP (for convergance).
Looking at your graphs I am always struck by the huge influence of the tiny exception to the rule that there was a bit more growth under Reagan than Carter.
> cross country correlation of low tax burdens and fast growth in a recession which included lagged per capita GDP (for convergance).
Even better solution: hold starting GDP (only) constant in your regression. This is what Lane Kenworthy does consistently, makes his analyses very convincing.
Caplan is an interesting case. If you read Caplan on Caplan http://econfaculty.gmu.edu/bcaplan/autobio.htm
you find something very intriguing, Caplan credits himself with the ability to ascertain capital T ‘Truth’ and doesn’t appeal to empirics at all. Take the following paragraph:
“As I digested the stock of libertarian insight, I noticed a phenomenon central to my mature research: Most people violently rejected even my most truistic arguments. Yes, I was a shrill teen-ager, but it seems like anyone should have recognized the potential downside of drug regulation once I pointed it out. Instead, they yelled louder about Thalidomide babies. True, it was not a complete surprise – I had already experienced the futility of trying to convert my family and friends to atheism during the prior year. But I was frustrated to find that human beings were almost as dogmatic about politics and economics as they were about religion and philosophy.”
Note there is no apparent attempt to demonstrate that rushing drugs to market prior to FDA approval actually saves net lives/dollars, instead it just seems ‘truistic’ (itself an interesting word choice). And the atheism aspect is equally revealing as Caplan ‘explains’ his deconversion:
“I rejected Christianity because I determined that it was, to be blunt, idiotic.”
Gosh and you wonder why his friends and family did not have their own Road to Damascus Unmoment on hearing that. As you go through the rest of the autobiography you come to the startling revelation that Caplan, like many other libertarian/austrian influenced types simply defines ‘Rationality’ as ‘Immediately agreeing with the truistic insights of Prof Bryan Caplan’ to the point that he wrote a whole book advocating cancellation of the right to vote for people who disagree with his views on minimum wage. There seems to be no self-realization at all here, no understanding the if you turn ‘Dogma’ inside out you just have ‘Revealed Truth’, or better perhaps they are just the opposite sides of the same coin. Which is why I don’t find it surprising that this most dogmatic, apparently unempirical man feels free to throw those labels at other. Some famous guy once said something about ‘Mote, Beam, Eye’, which I guess was one of those ‘idiotic’ things that caused Caplan to reject Christianity.
And finally in two passages likely to make Mike tear his hair out with both hands:
“The Objectivists were right to insist that reality is objective, human reason able to grasp it, and skepticism without merit.”
“What about the deep truths of the Austrians? Perhaps the most valuable, to my mind, was their view – perhaps only implicit – that economists should focus on big questions, not the picayune minutiae that fill most academic journals. I always roll my eyes when someone alludes Keynes’ hope that economists make themselves “as useful as dentists.” The Austrians were right to emphasize elementary economic theory and introspection, and downplay mathematics and econometrics.”
Yep, screw data points and skepticism, all you need is to do is to apply pure reason introspectively into objective reality and deep truths emerge. What can you do with an opponent who starts and stops from this stance?
Bruce: I actually like a lot of Bryan’s thinking even though he never challenges the fundaments of his core beliefs. As for his “objectivism,”
http://www.asymptosis.com/to-claim-objectivism-at-20-is-predictable-to-claim-objectivism-at-60-is-plain-idiocy.html
Hmmmm. I see no graph of peak debt. http://market-ticker.org/akcs-www?get_gallerynr=13
Funny how Keynesians always ignore the economy’s capacity for carrying additional debt. Nice misleading cherry picked graphs as well. Coincidence does not equal causality as they say.
kharris,
Bad phrasing on my part. Sure, its an empirical construct, but the question should have been – is there any reason for it and will it last? Again, as mentioned in the post, the existence of the post WWI Germany was known to economists in the 1930s… the amazing thing is that it was forgotten by the 1960s.
FWIW, having spent my formative years in South America in the 70s and 80s, I was shocked to learn about this Phillips Curve thing in grad school at UCLA. I couldn’t believe anyone would be talking about something like this, especially in a program with so many Latin American professors and students.
Steve Roth,
I keep forgetting to link to your stuff on these posts. In fairness, I had a sentence in the first pass that said something about “I myself have done work on this in the last few months” but that fell out in my revision.
Should the ultimate conclusion be that tax hikes result in money that would have been extracted from the economy as income instead being invested in expanding the productive capacity of the economy?
Should taxes be viewed not as a “taking” by the state but as a “nudging” by the state to direct the flow of capital away from hoarding and speculation and into real investment?
Robert,
I doubt I’m debating Caplan. He won’t notice my post. But what he says is said a lot in the Caplan to McArdle continuum so every once in a while its worth pointing out that they’re absolutely positively dead wrong.
BTW… I learned from debating Summers (I believe JzB mentioned that in a recent post of his, which he linked to in comments to one of yours) that any debate of that sort ends up going at cross purposes. There really isn’t a debate possible with a movement that 15 years ago was pumping Argentina as an economic lesson, and now are insisting that the Argentine government has much of an ability to assert its will in Argentina, much less more ability to do so than the Singaporean gov’t has over Singapore.
Far be it from me to criticize a few giants of the field, but I’m too stupid to know better. Samuelson was a smart guy, and technically very good. For my dissertation I had to do a bit of work with population ecology models, and it seems Samuelson had been there before. A math professor of mine once told me Samuelson had great skills and could have been a fine mathematician – for him that was the highest praise possible. But sometimes Samuelson got the intuition very wrong.
As to Solow – I’m not sure I have given enough thought to his work since leaving school to have much of an opinion either.
That, and FDR always surprise me.
Ah, but only those who reach the right conclusions truly reason well. And it takes excellent reasoning skills to understand that the data is always wrong, and thus to reason that what one wants the data to be is what you can conclude the data actually is.
Ben,
I wrote that post years ago. Many times. Here’s one example:
http://www.angrybearblog.com/2007/12/republican-party-and-national-debt.html
Tell me about cherry picking again.
Kimel writes;
Notice that when it comes to overall growth during an economic expansion (i.e., length of expansion * speed of expansion), cutting spending produced worse outcomes than small increases in government spending
Actually there are only three observations of declining spending — and they all occur in the immediate post WWII. Why is that? It is because real GDP per capita was slow in the late 1940’s and 1950’s because the denominator (capita) was growing at an unprecendented pace due to the baby Boom. Real GDP per capita was slow in the baby-Boom era regardless of the change in gov’t spending.
Kimel’s chart displaying Real GDP Per Capita shows that both Truman and Ike had substandard per capita growth during their presidencies — not because of real GDP but because of demographics. The rate of gov’t spending looks to be largely irrelevant.
Also, Kimel overstates the case for a relationship between increased government spending and real per capita growth by omitting the Hoover years. Hoover increased real gov’t expenditures enough to qualify alonside the 1933-37, 1938-45 and 1975-1980 datapoints (the black bars on the graph). If the Hoover years are added into the mix the numbers change rather drastically.
Kimel, however, does not bother to omit the Hoover years when drawing a relationship between real GDP/capita and federal receipts (what he refers to as the tax burden). Perhaps because in one instance, the Hoover years support Kimel’s thesis but detract from the validity of his other related assertion.
color coded according to whether they increased or decreased tax burdens.
A decline in tax receipts is not the same thing as a decline in the tax burden. Tax receipts decline in a recession because business profits morph into losses, households earn less and unrealized capital gains dissapear as the stock market declines. Likewise, when the economy is booming and throwing off additional tax revenue this is hardly the definition of an increase in the tax burden.
The government does not announce that it will collect ‘x’ percent of GDP in revenue — the government sets tax rates, regulatory and monetary policy and then collects revenue in accordance with how economic participants respond to the policies set in place. Total tax receipts are accumulated over the course of the economic calendar year — there is no such thing as a tax burden which citizens are aware of or pay upfront.
Hoover tried raising income tax rates and excise taxes and ended up with a weaker economy and less revenue. The JFK across-the-board tax cuts improved the fluidity of the economy and resulted in higher revenues per unit of GDP. These two examples are paradoxical with respect to your definition of the tax burden.
Your data needs updating. 2007 represented peak debt which is why the housing bubble could not be inflated any longer and why GDP only appears to be positive due to massive government borrowing.
I’d like to see your data updated to show the current situation. Keynesian policy only appears to be successful as long the economy can carry more debt just as the Joneses can appear to live the high life unti the credit card is maxed out or they can no longer make payments. I’ts pure ponzi finance at its finest.
Steve Roth,
The charts you link to seem to make the case that bigger government (higher tax/gdp) does not improve economic performance.
The U.S. grows faster than virtually every country on the list and does so from a HIGHER starting point. Do you kinow what happens when a large number and a smaller number growth at the same percentage rate? The absolute gap between the two numbers grows ever wider!
If high tax nations grow merely at or near the rate at which the U.S. grows, guess what happens? Eventually the U.S. ends up with more tax revenue per capita than the poorer, high-tax regime. Growth means more wealth and more redistribution at the same time!
In fact, according to this blog, the OECD finds that per capita tax revenue in the U.S. is already equal to Western Europe;
http://super-economy.blogspot.com/2010/08/us-and-european-tax-policy.html
This means that the various layers of gov’t in the U.S. have just as much money to distribute as they see fit as the typical European gov’t has. Despite the lower tax/GDP!
TheNumeraire,
“does not bother to omit the Hoover years when drawing a relationship between real GDP/capita and federal receipts (what he refers to as the tax burden). Perhaps because in one instance, the Hoover years support Kimel’s thesis but detract from the validity of his other related assertion.”
If you’re asking why Hoover years appear in Graph 3 but not Graph 2 – as was made clear in the post, the data only goes back to 1929, and Graph 2 is a graph of economic expansions. I can’t indicate the length or strength of an expansion that began before 1929 for lack of data. However, if you care to point to an economic expansion that began in 1929 and continued through the rest of Hoover’s term, let me know and I’ll happily amend the graphs.
As to the rest… feel free to recompute real GDP per working age person. Show me how much that changes.
TheNumeraire,
I don’t doubt that your paragraph 1 has some relevance, but I think its smaller than you think. Think of it this way… growth was faster under Reagan than under Carter, but the tax burden fell under Reagan and rose under Carter. Similarly, FDR raised the tax burden in his first few years in office – into the teeth of the Great Depression.
My experience dealing with tax issues tells me that how much the government collects generally has more to do with what rules and regulations the IRS writes and enforces.
The Numeraire,
“The U.S. grows faster than virtually every country on the list and does so from a HIGHER starting point. Do you kinow what happens when a large number and a smaller number growth at the same percentage rate? The absolute gap between the two numbers grows ever wider! “
A week or two I noted that an apples to apples comparison of unemployment rates across countries doesn’t give the standard “we have the lowest unemployment rates around” story.
One of these days I am going to write about the difference in the way GDP is computed across countries and what that does to growth comparisons.
TheNumeraire: “The charts you link to seem to make the case that bigger government (higher tax/gdp) does not improve economic performance.”
This is true. And of course you don’t hear people screaming at the top of their lungs, for decades on end, that it does.
>The U.S. grows faster than virtually every country on the list
That’s just incorrect. The US and the EU have been growing at the same rate for decades.
http://www.asymptosis.com/europe-vs-us-who’s-winning.html
Let me give your best argument: Europe started catching up fast after WWII, but that pretty much ended around 1980 (though they did hit 90% of US GDP/capita in the late 90s, I think). But they’ve never really caught up. Why?
I can think of many possible reasons (American entrepreneurial spirit, the lack of constraints in a largely empty continent, etc.), but based on all the growth-economics literature, small government is *not* the reason.
But hey: thanks for the arithmetic lesson.
If you want to see the data updated, Ben, do it yourself. It’s all out there, just takes some time in Excel…
To repeat the most important part of the arithmetic lesson; growing at the same rate still guarantees a widening gdp per capita gap and a greater amount of absolute taxation than our poorer European brethren.
America doesn’t have small government, it’s the same size as that of Western Europe, America just has the larger economic pie. It’s all relative.
A week or two I noted that an apples to apples comparison of unemployment rates across countries doesn’t give the standard “we have the lowest unemployment rates around” story.
Low unemployment is no panacea in of itself. Ideally, prosperity and high living standards are to be found in some mix of high employment and high productivity.
One of these days I am going to write about the difference in the way GDP is computed across countries and what that does to growth comparisons.
I can’t see how differing methodologies is going to eliminate the large gap between U.S. and European per capita GDP by any significant amount.
Actually when the tax burden (federal receipts/GDP) rose rapidly between 1979 and 1982 (mostly because of bracket creep stemming from high nominal income growth and a progressive tax system), there was virtually no growth in real GDP and per capita GDP was nil between 1978 and 1982. The growth in the Carter years took place from 1976-1979, when receipts/GDP were relatively stable.
My experience dealing with tax issues tells me that how much the government collects generally has more to do with what rules and regulations the IRS writes and enforces.
Why don’t you go into greater detail and provide examples of IRS rules and enforcement that captured greater tax revenues? Do so for each era in which you believe the tax burden rose because of tax law enforcement. Otherwise, there is nothing to measure or analyze to support your expert intuition.
The Numeraire,
“Low unemployment is no panacea in of itself. Ideally, prosperity and high living standards are to be found in some mix of high employment and high productivity. “
Che Guevara!!! My point was that the standard story of unemployment (i.e., we do better than other industrialized countries) was incorrect when unemployment was computed the same way across countries, and that there was a similar problem with the way GDP is computed differently which also produces a bias toward making US growth look faster. Take that into account, and the fact that as Steve R showed, the growth rates aren’t better to start with even using the biased data, and your statement about US growth rates starts having the same relationship to data as much of Caplan’s stuff.
The Numeraire,
Go back and do a search. As I recall, OldVet (who had spent much of his career working for the IRS) had a few posts discussing what you think you’re after.
As to your 1978 to 1982 period… you are correct that Carter’s last year was unimpressive. But its interesting that you blame Carter for 1978 to 1982.
See, growth real GDP grew 2.9% from 1978 to 1980 – which frankly is unimpressive, but only 0.5% from 1980 to 1982. (Data here: http://www.bea.gov/national/xls/gdplev.xls) I do seem to remember Carter leaving office in January of 1981 and thus having no ability to influence events after that. (You’ll notice that in my posts I don’t absolve Obama for anything that happened after January of 2009 either.)
Mike,
I think that when the evidence against the classical model became overwhelming, in a sort of Kuhnsian way, it widened prospects for economic researchers, allowing them to make plenty of mistakes. Phillips’ interest was in UK economic behavior, and the data he examined were from the UK (1861-1957). His observation was that a relationship existed in the UK, in the period he examined. He was right enough. As noted, Solow and Samuelson made stronger assertions, having found similar relationships in other economies, prior to 1960.
I don’t know whether they posited a universal law. They may implicitly have had in mind only western, developed economies. There has been a strong tendency to think as those economies as operating under their own rules, with the rules operating elsewhere somehow degraded. “Development economics” is full of efforts to figure out why performance is different and how “they” can become more like “us”.
As it turns out, taking the Phillips curve as law (within the context of virtuous western-developed economies), rather than empirical observation made western, developed economies more like “them”.
Cultural blinders are powerful, powerful things.
See, growth real GDP grew 2.9% from 1978 to 1980
Per capita growth was only 0.3%, which is statisitically insignificant. But you go right ahead and switch between absolute and per capita figures whenever you see fit.
As to your 1978 to 1982 period… you are correct that Carter’s last year was unimpressive. But its interesting that you blame Carter for 1978 to 1982.
I don’t blame Carter, my exact words were;
…when the tax burden (federal receipts/GDP) rose rapidly between 1979 and 1982
I merely looked at the years in which the abnormally high receipts/GDP persisted and compared those figures with the lousy GDP figures from the same period, regardless of who was president. In 1983, receipts/GDP returned to its post-WWII trend and per capita GDP grew rapidly. This period in history is a mark against your broad assertion that taxation does not influence per capita growth. However, because you measure the periods by presedential term rather than by the level of taxation, the result are smoothed in favor of your thesis. The low-tax Carter years mask the weakness of the high-tax Carter years and the high-tax Reagan years erode the overall performance of the Reagan years (even though 1981-1989 still ends up lookng pretty good on a real per capita basis).
Numeraire:
It’s very easy to cherry-pick periods that demonstrate one point or another. (Mike, I don’t know why you even bother responding to them any more.)
That’s why I put this together:
http://www.asymptosis.com/europe-vs-us-who’s-winning.html
And pointed it out to you. Pick a period. Any period.
But if you actually want to figure out how things have played out over the long term, look at lots of periods — especially long ones.
I’ve added a graph to that post, BTW, to make the point more immediately apprehensible.
But those illustrative tables and graphs aside, the point is that the only way one can overcome the cherry-picking problem is to look at as much data as you can, over the longest possible representative period(s), sliced as many different ways as possible, to try and suss out overarching trends and patterns.
That’s what Mike’s done, and quibbling over one particular data point in one particular period does little to invalidate trends that appear in many different data sets and analyses.
The plural of anecdote is data.
The Numeraire,
“But you go right ahead and switch between absolute and per capita figures whenever you see fit. “
Ummm… weren’t you the one who brought it up by mentioning this:
“virtually no growth in real GDP and per capita GDP”
I had that file up, so when you brought it up, I merely computed that. Why is it a surprise that if you mention a variable, I might actually look at it?
“when the tax burden (federal receipts/GDP) rose rapidly between 1979 and 1982 “
1978: 18.5%
1979: 19.0%
1980: 19.1%
1981: 19.8%
1982: 19.0%
Now, maybe that constitutes really rapid increases, but if so, compared to what?
Second, the reason one doesn’t look at a single instance but rather at as much as possible is because there are outliers.
Mike,
We are at 26% (Receipts/GDP). I thought Democrats who over spend were good for the economy?
Or is it all Democrats except for Obama?
“We hold these Truths to be Truistic…”
Jimi,
It’s impossible to evaluate the assertion imbedded in your first question because no data are available in the class you specify. There are no Democrats who over-spend.
Now, if you have a hard time understanding why the economy is in trouble right now, and insist that every period is like every other period, people are going to start to suspect you aren’t really a legitimate participant in the discussion. You remember…that biggest recession in most of our lifetimes that got underway during the Shrub administration?
This is the argument I’ve heard most frequently in the recent past.
Jimi,
Didn’t get as far graph # 3?
The Numeraire,
I’ve been thinking about our little exchange, and forget the details, what’s the big picture here? Say you can show that 1978 – 1982 doesn’t behave like the rest of the sample. Does that mean the period from 1929 to 1977 and from 1983 to 2009 is an outlier and we should make policy based on the 1978 to 1982 period (and ignore the evidence from the states, to boot)? What exactly is the best case scenario for you here?
If we were to dig through the EU 15 average I’m sure we would find a wide range of per capita growth rates that smooth out the averages. Much like what happens when Mike Kimel takes the average of a 4-8 yr. presidential term.
For instance, the UK is part of the EU 15 and it has grown at a faster rate than the U.S. In 1980, UK real GDP per capita was 69% of the level of the same US figure, by 2008 the UK had reached 77% (i.e. the UK grew more than 10 percent faster). Over that same 1980-2008 period the likes of Italy, Germany, Sweden and France grew slower than the U.S.
In other words, UK economic growth raised the EU 15 average — but not through expanding or maintaining gov’t tax and redistribution, but rather by pursuing the same degree of marginal tax rate reduction and market-friendly reforms that the US did.
Even without regard to specifics the main point to be mainained is that the smaller, poorer EU does not grow faster than the U.S. and therefore cannot shrink the gap in per capita GDP. Now, what did that Greg Mankiw paper you cited say about a smaller level of initial income;
o A low initial level of income is associated with a high subsequent growth rate when other variables are held constant. This is the finding of conditional convergence, discussed earlier.
Mike, go back and read what you wrote earlier. It was you that used the Carter-Reagan comparison as an example, I responded by making the claim that the average of the aggregates as you present them masks or conceals what happened when. During that period an abnormally high federal tax burden coincides with a stagnant economy, in the immediate years before and after this high tax period, real growth is easily observable.
I see it as though there is one underlying problem with your work and it pertains to how you define the tax burden.
By claiming a rise in receipts/GDP as being a genuine rise in the tax burden is to deny that fluidity or friction within the economy can cause tax receipts to rise or fall. In 1979-80 receipts rose due to a negative event; bracket creep resulting from high inflation and a progressive tax system. On the other end of the spectrum, receipts rose rapidly from 1998-2000 as a strong labor market and internet boom provided a large income windfall for individuals through items like stock options and hiring bonuses.
There is also the example of LBJ’s war surtax, which raised the level of tax receipts to an abnormally high level but coincided with a cessation in per capita growth. Yet, the 30 percent across-the board JFK cuts produced a robust recovery and essentially no change in receipts/GDP. And, of course, the Hoover tax hikes, which were signed into law fully retrocative to Jan 1 1932 and coincided with a plunge in the economy and a disappearance of high incomes, ultimately causing the tax receipts to shrink.
As you can see, I’m making the claim that there are a lot more of what you refer to as outliers present in the disaggregated data. Averaging data over a measured period can often conceal what happened when and why a figure is relatively large or small in comparison.
Numeraire,
Our understanding of past events is clearly different. Examples of the way I see it:
1. There was a bit of a dip in real gdp per cap growth in 1967 (1.4%), but it was back up to 3.8% the next year. When your worst year is 1.4%, and you jump back the next year, I have a hard time seeing that as a cessation of per capita growth.
2. The so called Kennedy tax cuts were pushed through by LBJ using JFK’s name in 1964. Kennedy died in 1963. The robust recovery under JFK began in 1961.
3. Hoover tax hikes in 1932… yes, 1932 was a bad year, and was worse than 1930 and 1931. But its hard to characterize an economy that was shrinking rapidly in 1930 and 1931 as having a plunge in 1932 -that implies it wasn’t already plunging.
As to your general point… if every observation is a special case, then its not possible to reach any conclusions about anything. At some point one has to make a decision – is it possible to learn something about the economy or it all unknowable?
Finally… as to the bracket creep, etc. Yes, its a factor. But nevertheless, even when times are good, the burden falls under every Republican President. Clearly at some point policy is having an effect.
The Johnson surtax was implemented in the second half of 1968 and kept in place in reduced form under Nixon until 1970. Real per capita growth in 1968 was very high in the first two quarters and much slower through to the end of 1970. The surge in receipts/GDP during FY 1969 and 1970 coincides with recession and stagnanting per capita GDP. Real per capita GDP resumes growth in 1971 alongside a decline in receipts/GDP.
Annual real GDP per capita grew much faster in the years following the JFK tax cuts (1964-68) than during the 1961-1964 period.
The worst year of decline during the Depression was 1932, which is remarkable considering how much the economy had shrunk the previous two years. It is far more standard for most of the negative figures to occur in the earliest phase of an economic contraction, unless of course the economy is bombarded with additional negative stimuli a la Hoover.
Too many people are stuck in the royalist model. The GDP is a measure of the king’s wealth. It says nothing about us peasants. For most of us, it makes sense to measure life expectancy, unemployment and the median wage. The GDP may have been a useful metric back in the 1930s or 1960s, but with our outsized financial sector capable of generating huge numbers without providing additional goods or services, it is probably time to abandon it for something more useful. The nation isn’t doing well if the king has a golden palace, but the peasants are don’t have health care.
Also, the most obvious empirical argument for high taxes and high government spending is the red state – blue state paradox in which states that are consistently anti-business are economically better off than states with pro-business policies. While wealthy individuals may vote red, wealthy states vote blue. Stick that in your Road to Serfdom and smoke it.
To be fair to the Europeans, they are still running under the Articles of Confederation, something the US abandoned in the 18th century.
Also, despite a lower GDP, the Europeans feel richer than Americans. For example, here is no serious argument in the EU that universal healthcare is unaffordable as there is in the US. Ditto that for longer vacations, shorter hours, childcare allowances, soldiers’ pay, maternity leave, veteran care, old age pensions and so on. If you’ve always wanted to trade in your bicycle for a car, and now that you have worked for years and built your career or business, and still don’t feel you can afford one, maybe you aren’t doing as well as you thought.
Is truistic like Colbert’s truthy?
The Numeraire,
Sorry about the delayed response… the internet was out here for a day.
We simply continue to disagree about past events.
“It is far more standard for most of the negative figures to occur in the earliest phase of an economic contraction, unless of course the economy is bombarded with additional negative stimuli a la Hoover.”
The way you’ve written the sentence, the Depression applies – most of the negative drops occurred before 1932. I think you meant to write that the biggest drops occur early in the recession, and even that is wrong.
Consider the post WW2 recessions.
Feb 45 – Oct 45 – the biggest drop came in 46. Score one against.
Nov 48 – Oct 49 – biggest drop came in Q1 of 49. Score one for.
July 53 – May 54 – biggest drop came in Q4 of 53. Score two against.
Aug 57 – April 58 – biggest drop came in Q1 of 68. Score three against.
April 60 – Feb 61 – Q4 of 60. Score four against.
Anyway, I can go on, but my reading of events is that only the Nov 48, July 90 and March 01 recessions had their biggest drops in the early part of the recession. And if