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Not Scarcity, But Surplus is the Problem

Not Scarcity, But Surplus is the Problem (Just as Dismal, though)

by Noni Mausa, lifted from comments at Economist’s View

They were discussing scarcity last week at Economist’s View. But to my mind scarcity isn’t our core problem. I wrote (and then edited a bit for this post):

=======

Yes, scarcity of resources is fundamental to econ theory, and it’s a real concern, not just an abstract factor for calculations.

But less often mentioned is the truism that human beings, working in concert, produce surplus. Generally this is very great surplus. In any society beyond the most desperately poor, this surplus is sufficient at least to support the 1/3 to 1/2 of the population who cannot support themselves– children, and the elderly and disabled…

This surplus … inevitably leads to the specialized class we would call the wealthy. This clan has existed as far back as we have written records. They may be more useful, or less useful, to their host societies, but they can only exist when those societies produce large surplus.

Economics talks about managing scarcity, but … our real problem is managing the surplus.

Sandwichman takes a stab at Ecological Headstand with Tenacity of Textbook Truism.

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Kash Returns, Discovers one of Mark Thoma’s Cohorts is an Idiot

CBS Marketwatch Devalues their Brand. Kash views the carnage:

Despite all the rhetoric and posturing we see in the media and in Washington D.C., it is safe to say categorically that the U.S. Treasury will not default on its debt after August 2nd, even if the debt ceiling is not raised. Not only will the Treasury be able to pay interest on U.S. debt obligations, but there is money for other essential programs as well. However, there will be some serious cutting that has to happen because spending clearly exceeds revenues.

Yes, quite. In fact, some specific numbers are provided in this column: federal spending would instantly have to be reduced by about $100bn per month. By the end of 2011 federal spending would be about $500 bn lower for the year than it would have been otherwise.

I’ve made this point before, but for numbers that large, anyone who wants to pretend to have some understanding about the economy has to think about macroeconomic effects. In particular, spending cuts of that size would reduce the US’s 2011 GDP by multiple percentage points. The Q3 and Q4 GDP growth rates wold probably be on the order of between -5% and -10%. Recall that during the recession of 2008-09, GDP only fell by about 4% in total. The unemployment rate would be likely to rise by several percentage points from its current level of 9.2%, to perhaps 15% or more of the US population. Recall that at its worst, the unemployment rate during the Great Recession only reached 10%.

So when you read someone blithely writing that the federal government will not default in the absence of a debt ceiling deal, and instead will merely have to trim excess spending, remember that what they’re really advocating is a new and deliberately caused Great Depression. And not just in economists like me.

Can it really be that bad? Well, yes. This is what Marketwatch allows to be given their imprimatur, as one Kurt Brouwer presents “in a Q&A format…what I believe you need to know at a basic level”:

If we do not raise the debt ceiling by August 2nd, we will not default on Treasury obligations. Nor, will we have trouble making Social Security payments. However, there would be a big drop — roughly 44% — in government spending because that percentage represents the difference between government revenues which would be about $200 billion for the full month of August and [sic] $172 billion for August if we start counting after the first week when the deadline hits. Spending is slated to be over $300 billion that month.

Kash is right; that’s about $100B a month. So how does Brouwer solve that $100B+ shortfall?

The [Bipartisan Policy Center] study projects there will be $172 billion in federal revenues in August and $307 billion in authorized expenditures. That means there’s enough money to pay for, say, interest on the debt ($29 billion), Social Security ($49.2 billion), Medicare and Medicaid ($50 billion), active duty troop pay ($2.9 billion), veterans affairs programs ($2.9 billion).

That leaves you with about $39 billion to fund (or not fund) the following:

  • Defense vendors ($31.7 billion)
  • IRS refunds ($3.9 billion)
  • Food stamps and welfare ($9.3 billion)
  • Unemployment insurance benefits ($12.8 billion)
  • Department of Education ($20.2 billion)
  • Housing and Urban Development ($6.7 billion)
  • Other spending, such as Departments of Justice, Labor, Commerce, EPA, HHS ($73.6 billion) [formatted for style]
  • Oh, he doesn’t.

    Now, does Brouwer prioritize payments by “bang for the buck” (multiplier effect)? No. Paying interest on debt supersedes even the Social Services. If you’re looking to do as little damage as possible to your domestic economy (this is our government, not China’s), you don’t prioritize paying the interest on the debt (multiplier well 1; those people are liquidity-constrained in a way that coupon-clippers never will be).

    And if you want to be a viable long-term investment, you don’t cut your current investment in long-term human capital (DoE, EPA).*

    So what do you do, pay bond interest, or pay for parts and repairs on that military equipment that keeps active-duty military active? If you’re sane, you put troops on the line in priority over investors whose interest payment won’t be the source of their next meal or the protection from that next IED.

    What does Brouwer say about these choices?

    No doubt picking and choosing who gets paid and who doesn’t would be chaotic. And, lots of programs would not get their funding and that would lead to plenty of screaming. Nonetheless, it should be clear from this exactly how much we are spending in excess of government revenues. And, that could and should lead to a sober assessment of what government can and cannot do.

    Ayup. Government can, if they ignore Brouwer’s advice, keep Brad DeLong calling this “The Little Depression,” keep people employed, and set up future growth with trained workforces and people who are not starved into unhealthiness.

    Or it can do what Brouwer wants, and pay bond market investors who don’t need the cash while soldiers die and people starve.

    Mark Thoma should be ashamed to share pageviews with this guy.

    *As Beverly’s post notes, Texas notes that “beginning 25 years ago, the state began significantly increasing its education funding and therefore the quality of its workforce.” Conservatives used to see the value of human capital development in creating an environment for jobs, and I still hold to that one.**

    **Rick Perry has, of course, reversed this, so anyone looking to start a business in the mid-2030s might do well to avoid the Lone Star State. Unless, of course, everyone else follows suit.

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    Small Business=Fraud, Countercyclical Planning, MMT, and Other Economics Catch-up

    Note:This was going to be short pieces about things I missed during a week of illness. It turned into a Very Long Piece riffing on two posts from Capital Gains and Games. And that’s without even mentioning the bravura work Stan Collender is doing there: see, for instance, this note that a deficit reduction bill with tax increases is very possible if you just ignore John Boehner.

    1. Small Businesses exist in the United States solely as a vehicle for people to commit tax fraud more easily.

      I don’t see any other realistic conclusion from this piece by Pete Davis. He tries to hide it, putting an idiotic suggestion with an Order of Magnitude’s less value fist, and mostly got people in comments to talk about COLAs, because economists are stupid that way. But the big number—$2,900,000,000,000—remains the big number.

      The only proper conclusion from the entries after the first two would be that Pete Davis can’t do mathis very fond of negative-NPV solutions. You could conclude from this that Pete is really stupid, but we know better. Besides, Len Berman of Forbes already went there, concluding, “Pete, you know better, and you’re just enabling them.” The integrity of posters at CG&G doesn’t usually get questioned so directly in the mainstream.

    2. And there’s good reason for that. Andrew Samwick has argued for years that stealing from the Greenspan Commission’s “making Social Security solvent for future generations” fund, and I expect him to continue to do so, just as I will continue to argue that everything in the Greenspan Commission documents says that was not the idea. But Andrew has me worried—possibly in a good way—about his idea of how to combine economics and family:

      Actually, the government should budget the way families should. It’s just not clear that families actually do what they should. Both families and the government should budget countercyclically — their savings rates should be higher during periods of growth than during periods of economic decline, so that their consumption can remain steady across booms and busts. The problem that both the government and families are having today is that neither one saved enough during the most recent boom, and so both are having to cut back more than would be ideal during this protracted downturn.

      Now Andrew—who is younger and cuter than I—is starting to sound like the old man telling us to get off his lawn. Either that or he has just discovered that Lifecycle Theory of Economics doesn’t work so smoothly in reality as in the standard models. Or both. So it’s probably safest if I use that paragraph as a springboard to talk about Countercyclical Policy, Rational Expectations, and MMT (below the fold).

    The glory of Accounting Identities is that they must be true; the truth of them, though, is that there are many ways to get there. (“What do you want it to be?” is not just a joke; see Point One above.) So let’s start from an Accounting Identity:

    Y = C + I + G + NX

    Now, Andrew might have argued—and I might have agree conceptually—that transfer payments such as Unemployment Insurance, Social Security, Disability Insurance payments, and Medicare/caid Prescription Drug Coverage should be counted as C, not G. But since Andrew insists that Social Security benefits can be cut without Social Security payments being reduced, he’s clearly treating those payments as part of G, not C.* So I will too.

    Now, MMT people—as I think of them, the ones who make certain that only Kevin McHale can “spike” the punchbowl**—argue for Nominal GDP targeting. This would keep the overall risk-free rate (r) relatively stable*** since the components of r combined— π + ie —pretty much has to equal “5” at all times.

    Given that, the expectation should that the nominal Yt+1 should equal about 1.05Yt on an annual basis.

    Several of you are looking up and saying, “Nu?” So let’s go back, then, to Andrew’s “all should budget countercyclically” claim and see what happens in a stable-NGDP, possibly-MMT, world.****

    Let’s make one more assumption (not necessary, just easier for maths): at stable equilibrium,***** π and ie are both equal to 2.5: that is, 2.5% growth, 2.5% inflation. So, all else equal, half of the return on savings is going to be taken by inflation and half of the cost of debt is inflation. In an environment with no tax distortions and in which all lending is done sensibly and prudently (I’d like a pony, too), this is pure realisation of Modigliani-Miller: businesses should be indifferent between raising capital and borrowing, either of which is an Investment (I).

    So assume that the growth rate for the economy—as a reminder, that’s the π portion—is expected to be three percent this year (it’s a good year). MMT would tell us that, to stay stable, we have to reduce inflation expectations to 2%. This means draining money from the system to reduce Isl (supply of loans) in the financial system.

    (As noted above, at equilibrium, there is just enough loan money to go around. Since this is above equilibrium, profits will be reduced and businesses will have to raise I through capital, not loans.

    Andrew would tell us that people in good times want to save more. This means that C should go down, relatively, which means that Isc (supply of capital) goes up.

    Since—again, an identity—Is = Isc + Isl, MMT demands that personal savings rise to cover the tighter monetary policy. Just as Andrew wants. And just as is more possible in growth times than tight times.*******

    So, ideally, I remains constant, if dIs = dIc. Not my favorite assumption, but a working one.

    So far, in the boon environment, C is down and I is, at best, neutral. What about G?

    Well, in Andrew-world, government is “saving for a rainy day.” Which means on balance that it’s trying to make more and spend less, just like the family. Which means there are two forces at work—(1) monetary policy, as the interest rate is tightened to control demand and/or reduce inflation, and either (2a) tax rates or (2b) spending cuts in some manner—that are working in the market.

    I doubt 2a (tax increases) is the desired method of slowing growth (if you’re MMT-inclined) or stabilizing to equilibrium (which I assume to be Andrew’s goal). So let’s assume spending cuts.

    Here those transfer payments come in. As the economy grows, UI costs are reduced. Let’s assume similar, smaller gains in other areas and stipulate that G declines in an above-equilibrium state due to a reduced need for spending—not “spending cuts” per se, but rather people being employed as growth comes.********* Best case scenario, fewer UI payments are made, debt is repurchased with those funds, future liabilities is reduced, and more revenue comes in as business expands—which is used to pay down debt so borrowing can be done more easily (read: at a relatively lower rate) during a downturn.

    G declines. As Andrew would want, for good and proper reasons.

    Which leaves NX. An expectation of 3% real growth is higher than the market had expected. Currency appreciates; exports become more expensive to buyers, who buy fewer. Imports become less expensive, relatively. dNX is negative (dX=0).

    So with moderately higher growth, C, G, and NX all decline, while I either (a) increases slightly (in the absence of the need for and use of monetary policy, and not greater than C declines) or (b) declines (if monetary policy is used to reduce loan demand, since that pesky C0 rather ensures that dIsc |).

    If you don’t use monetary policy to drain funds from the system, in which case (C + I) remains relatively stable or rises slightly, NX is more ambiguous (effectively=0), and G still realizes those spending cuts (paying down debt—more tax revenues at the same rate as business expands—which cet. par. increases the spread between r and equity investment and means some of that Is becomes Ic, but that’s a side discussion).

    The implications here, and for a downturn example and the full cycle model, are left to the next post.

    *This should make it clear that this point was not opened with an ad hominem attack, so anyone who suggests so in comments—even on the basis of “well, I didn’t read below the fold”—will see that comment deleted. Assuming, of course, that I read the comments on a regular basis, so you’re probably safe, if warned.

    **Glee, not old NBA, reference.

    ***Still some uncertainty and timing issues, but a relatively flat but upward sloping yield curve would be a perpetual result.

    ***The coolest thing about working with everything in Nominal terms is that we can basically eschew calculus and natural logs. The worst thing about working with everything in Nominal terms is…

    *****You’re driving down a dessert highway in a two-seater. By the side of the road, miles from the nearest water source, you see A Gorgeous Blond(e), Santa Claus, and an old, tired-looking Stable Equilibrium. Which one do you offer a ride?

    A: The Gorgeous Blond(e). The other two are figments of your imagination.******

    ******Yes, think joke works better with “a brilliant violist.” But this is an economics blog, so live with it.

    *******I would quibble Andrew’s statement that people borrowed too much for two reasons: one is that market transactions where the borrower is the one most subject to getting a poorer deal due to issues of asymmetric information hardly call to mind the borrower’s irrationality. Second is that many of those transactions were people “trading up” without clearly taking on a greater burden. (That is, $200K in equity on a NYC 1BR became a $200K down payment toward a home whose costs would be similar or lower, cet. par. The household balance sheet was not necessarily expanded on purchases. (That those purchases were at a higher direct cost than the available OERs is a separate, significant issue.) Similarly, HELOC borrowings that were invested into the property—all those effing marble kitchens for people who don’t know how to cook—are only negative to the balance sheet to the extent that they don’t have a reasonable ROI in the first place. That is, the deadweight loss is probably 30% or less on any portions of HELOCs that were used for Home Improvement projects.

    Collaterally, if the HELOC was used in place of savings or 401(k) borrowings or other assets (for those who have same)—or even a higher-interest rate “bank” loan—as the method of buying a new car or other necessity, the fault lies not with the borrower, who made the rational (ex ante) choice to stay invested in “the market” and/or maintain Investments (savings).

    In short, since all mortgages and HELOCs have been getting tarred with the same brush, we cannot be certain the extent to which “bad borrowing” was actually bad borrowing, or whether it was just borrowing based on the expectation that jobs and income would remain fairly stable—not drop the f*ck off the cliff and be reduced in even nominal terms for the survivors—concurrent with “investment” values dropping into an abyss.

    Anyway, since C0 is still essentially constant (“sticky”) even as income first declines, it is intuitive that saving is easier (consider the effect on S = Income – [C0 + Cchoice] as Income approaches C0) in more prosperous times, on balance, for most of society, distributional effects being constant (or changing incrementally).

    *********In such an environment, monetary policy may not be used so proactively. This should be fine for all, given that 5% NGDP is the target, not the absolute. Over time, it will smooth. I guess.

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    Health Care Thoughts: Draft Exchange Rules Published

    Health Care Thoughts: Draft Exchange Rules Published

    The Obama administration has published draft rules for the formation and operation of Affordable Insurance Exchanges, a key element in the PPACA (Obamacare) plan to increase insurance coverage.

    There is a 75 day comment and then more time to digest the comments before final rules are issued. Implementation is due by January 1, 2014.

    See the rules here, 244 pages (link fixed)

    Tom aka Rusty Rustbelt

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    Texas, the jobs engine? Or Texas, the jobs-laundering engine?

    by Beverly Mann

    Update: Business journalist Merrill Goozner has a terrific in-depth deconstruction of the so-called Texas Miracle at TheFiscalTimes, at Perry’s Texas Miracle less than meets the eye, published last Friday.

    Texas, the jobs engine? Or Texas, the jobs-laundering engine?

    An op-ed piece mentioned by a reader two weekends ago in the LA Times, called Texas, the jobs engine? by Rick Wartzman, executive director of the Drucker Institute at Claremont Graduate University, begins:

    For the last few weeks, I’ve been unable to get a startling statistic out of my head: Since the recession officially ended, Texas has created more than 4 of every 10 new jobs in America.

    That’s right, Texas: the reddest of red states, home to gun lovers and school textbooks that openly question whether the Founding Fathers intended for the separation of church and state. I am no ideologue. Still, whenever I get political, I tend to tilt reflexively to the left, making the jobs figure a bit disconcerting at first.

    But there’s no escaping it. The number is real. Which means that if you care about putting people back to work at a time when nearly 14 million in this country are unemployed, maybe Texas has something to teach us.

    Wartzman goes on to say that according to the Dallas Fed, Texas, which he says accounts for about 8% of the nation’s economy, generated 43% of the net new jobs in the U.S. from June 2009 through May 2011. He then notes that aspects of Texas’s boom cannot be optionally replicated in other states. The booming energy industry and the high export demand for commodities such as beef and cotton.

    He then cites some longstanding government policies—both conservative and liberal ones. Conservative: Low tax rates, the downside of which, he notes, is a smaller safety net, and “right-to-work” laws, resulting in Texas’s tying Mississippi as the states with the biggest percentage of workers paid at or below the minimum wage. Liberal: Strict lending guidelines enacted in the wake of the S&L crisis of the 1980s that require Texas financial institutions “to keep larger capital reserves and take on fewer problem mortgages than were seen elsewhere in the country,” and which spared the state from the real estate boom and bust that hit most of the rest of the country. And beginning 25 years ago, the state began significantly increasing its education funding and therefore the quality of its workforce.

    Then the pay-off paragraph, so to speak:

    At the same time — and this, of course, is the tough part for those on the left to swallow — it is clear that the state’s limits on taxes, regulations and lawsuits are contributing to the job machine. “The most important thing I think that’s happened to us is tort reform,” Fisher, the Dallas Fed president, has said. He added that when John Deere and other companies have decided to hire in Texas, they’ve been largely driven by steps the state has taken to cap non-economic damages in medical malpractice suits and to make it harder to bring product liability and class-action cases.

    Okay. Are these folks claiming that the companies that are hiring in Texas decided to hire because of Texas’s low tax rates and its “tort reform” law? Or are they saying that these companies needed to hire more workers, and chose to expand in Texas rather than in, say, California or Michigan or Ohio, because of Texas’s low taxes and tort reform?

    Setting aside for a moment the fact that Texas’s tort laws have little effect on lawsuits for injuries from their products in other states—injured plaintiffs can sue in the state where they purchased and used the product and were injured by it, and it’s that state’s tort laws that apply—and that physicians apparently aren’t flooding the Texas landscape by moving there from other states, what these people actually are saying is that Texas , as the lowest-common-denominator state for pro-business laws, is attracting businesses from other states and is spurring hiring there that otherwise would occur in another state.

    Fine. But if the issue regarding job losses and job growth is an aggregate one for the country as a whole, rather than which states lost the most jobs to lower-common-denominator states, then why praise Texas as a national jobs creator? It’s not, at least not as a result of its government policies. The claim to the contrary is like saying that South Dakota and North Carolina “created” all those credit-card-company jobs in recent decades, as if those jobs wouldn’t have been created, albeit disbursed more throughout the country, if those two states hadn’t enacted such credit-card-company-friendly laws.

    So when Rick Perry rolls out his presidential primary campaign and starts lauding all those Texas job gains, remember to ask what states those jobs otherwise would be in were it not for Texas’s chamber-of-commerce legislature’s largesse of recent years. I’m sure y’all will.

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    Once more: I WANT MORE SPENDING!

    by: Daniel Becker
    Ok some more information to bolster my position that my flower shop being down this year another 4.5% compared to last year (at least the decline is leveling off) is not the results of government debt or too much taxation or banks not lending or unions… nope, my shop is off because of one thing: Lack of income in the hands of the many and nothing to date has been done to change that.
    As noted here and here, monetary policy is not going to cut it. (Please pray for the Greeks.)
    Or I should say, not cutting it for anyone who earns a penny because someone else had an extra penny to spend beyond their non-discretionary expenditures. That is, they are at the point of autonomous consumption, but not at the point of offsetting income earned from their cognitive or physical labor with that earned from money. That means we’re talking about the bottom 90% of the income earning population. (The top 10% own 82% of the stock.)


    Two nice charts from the NY Fed bank

    The first shows just how much of a dive spending has taken. Considering we’re a “consumption economy”, I don’t think this bodes well for us. The second shows how lacking in recovery such spending is compared to prior recession.
    I don’t know about you, but I don’t care how much money we pump into the economy at the top, if it doesn’t get in the hands the bottom 90% of the income earners, there will be no recovery. It does not matter if the Fed’s are pumping it in or the Government is doing it via tax reductions because both methods are not putting the majority of the money in the hands of the many. The Fed article notes that this discretionary spending is “services”. It is 30% of all personal consumption expenditures (PCE). Non-discretionary is 34% of PCE, that leaves 36% somewhere in the middle? They state PCE is 70% of all output. So, 30% of 70% is 21% of all output? Using $14.7trillion means about 3.09 trillion has taken a 7% hit of $216 billion! ( I readily accept any math corrections in comments)
    The author states:  
    Because consumption accounts for about 70 percent of output, this in turn raises some concern about the future strength of the recovery.
    That’s an understatement! He hedges some more: Also, households may remain wary about their employment and income prospects, suggesting that they may have lowered their future income expectations.
    Really? “May” is the word one wants to use here? 
    A Mr. Roche is more direct:
    The real weakness in this recovery is rooted in the fact that consumer balance sheets are so mangled that they’re spending primarily on non-discretionary items and saving the rest of their incomes to pay down debts. This is important to understand because policy must be geared in such a way that it does not further hinder the household balance sheet. And therein lies the problem with a policy such as QE2. Anything that can potentially cause cost push inflation will only further weaken the household sector and detract from any possible recovery. In the case of QE2 I think we saw the increased speculation contribute directly to rising commodity prices which ultimately squeezed consumers further and led to the current soft spot in the economy.
    BINGO!
    Let’s not stop there. From Mr. Weisenthal Under “Scariest Job’s Chart Ever” we get this one on the duration of unemployment.

     
    Which brings me to my posting from 4/2008: The longest Recession Ever
    I noted in this post that it took 20 months from the Bush 2 recession for the peak of what I call Person Weeks Unemployed (a multiple of the number of people out and the number of weeks out). I also noted that Reagan with back to back recessions did not see the peak until 30 months past the first recession. Almost 3 full years! He also double the quotient.
    I ended with: 
    Thus, the peak of a recession is in the eye of the beholder. If you’re a person earning money from labor, a recession these days can last a very long time. This data would suggest that what we are seeing in the Spencer post is not a decreased risk but a lull before the storm. One other thing. It appears the Republicans fail again. As a group they have the longest turn-around to seeing a reduction in lost labor.
    There you have it.  You want to fix the economy?  Don’t follow the conservative ideology.  The Republicans win in delaying recoveries. Yet, here we are with a “Democratic” president using the very language, words, framing of the group that is proven to not know how to create jobs and thus get money in the hands of the many in the shortest amount of time. Some say the Republicans are doing it this time with intention. I doubt that, though it is a meme that would make them seem to be the ultimate chess players.
    Yes, I WANT MORE SPENDING!

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    GDP Gap versus S&P 500 EPS

    Over at Economist’ View he has posted a nice set of charts on the GDP Gap, employment versus the long term trend and other measures of how much excess capacity the economy has that have become very popular among economists over the last couple of years.

    http://economistsview.typepad.com/economistsview/

    But these charts never include profits in their analysis and I would suggest that readers should know how profits look versus their long term trend.

    Over the last 50 years the long run growth rate of S&P 500 earnings per share has been about 7%.

    Moreover, even if you look at the more recent trend of operation earnings the trend growth rate has been almost this high.

    S&P 500 EPS is almost back to its 7% long run trend and the consensus bottom-up earnings forecast has it surpassing the long run trend in either the 4th quarter or the 1st quarter. By way of contrast it will be years before the GDP Gap is closed or the economy reaches full employment.
    This really shows how virtually all the gains in income so far in the recovery has gone to profits
    rather than labor.

    Just to be comprehensive and forestall many questions I’ll also show economic profits vs trend.

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    A Post: Tax Burdens, Presidents, and Subsequent Economic Growth – A Few Pictures, Part

    by Mike Kimel

    A Post: Tax Burdens, Presidents, and Subsequent Economic Growth – A Few Pictures, Part 1

    Last week I had a post looking at the relationship between the change in the tax burden in the first two years of a Presidential administration and the growth of real GDP during the remaining years of the administration. I’ve done variations of this exercise before. It turns out that the more an administration reduced the tax burden in its first two years, the slower the growth the in real GDP over the remainder of its term in office administration. Assuming the result is more than an artifact of the data (and it does seem to correspond with other results I’ve reported here over the years), it requires an explanation. While (I am not happy to report) an increased tax burden might in and of itself stimulate faster economic growth, I suspect a bigger effect is that a) the easiest way to move the tax burden is by increasing or decreasing tax regulation and b) there is a correlation between an administration’s views on tax regulations and its views on other regulations that are intended to prevent externalities. This theory is supported by the fact that the relationship between lower tax burdens and slower growth is strengthened by not including the administrations that served only four rather than eight years makes the relationship stronger.

    As I keep noting, one doesn’t have to like the results. I personally would much prefer a world in which lower tax burdens do lead to faster economic growth. But the data doesn’t seem to show that. Still, every time I put up a post like this, I get a lot of flack. One thing people keep telling me is that the results are, at best, a coincidence. In their honor, in today’s post I’m going to describe a few more coincidences that the data shows in my next few posts. Some of these coincidences I expected to see, and some, to be frank, I did not. Today I’m going to stick with a few coincidences I expected.

    So… let’s go with coincidence number one. The graph below shows the change in the tax burden from Year 0 (i.e., the last full year of the prior administration) to Year 2 on one axis, and the growth rate in the last full year of each administration. (Only eight year administrations are included.) As an example, for Ronald Reagan, we see the change in the tax burden from 1980 to 1982 along one axis and the percentage change from the 1987 real GDP to the 1988 real GDP.


    Figure 1

    Notice that the relationship between the tax burden in the first two years of each administration and the growth rate in its last year is extremely strong. That’s consistent with what I wrote in my last post (and so many times before): most administrations do not change their tax policy very much, but tax policy (and other policies that correlate with tax policy) can take a while to have an effect on the economy.

    Before I go on, a few ground rules for those who want to comment or send me e-mail:
    1. If you really believe that the growth rate in the last year of an administration is “causing” the change in the tax burden in the beginning of the administration, I encourage you to seek psychiatric help. I can’t do anything for you.
    2. US’ participation in World War 2 prior to 1940 is best described as peripheral. Growth in 1940, or 1939, or 1934 for that matter, is not due to World War 2.

    (If you find my constant repetition of these ground rules funny, hazard a guess as to what creeps into my inbox.)

    Now, another coincidence… the next figure shows the the change in the tax burden from Year 0 (i.e., the last full year of the prior administration) to Year 2 on one axis, and the growth rate in the fourth year of each administration.

    Figure 2

    Again… the picture looks an awful like Figure 1. The fit isn’t as good (consistent with the idea that it takes a while for policy to have a a very strong effect. Kind of odd for a coincidence.

    Now… you may be wondering… what about other years. I’ll tell you flat out, the fits in years 1 and 2 are awful… consistent with the idea that it takes a while for policy to have a very strong effect. As to the rest, that will wait for the next post.

    To close, nominal and real GDP come from the Bureau of Economic Analysis. GDP was first computed in 1929, so the first complete administration for which we have data is FDR I. Data on the Federal government’s tax receipts comes from the Bureau of Economic Analysis’ NIPA Table 3.2.

    As always, if you want my spreadsheets, drop me a line at my first name (mike) period my last name (kimel – with one m only) at gmail period com. I should also point out, you can find a lot more of this sort of analysis in Presimetrics, the book I wrote with Michael Kanell.

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