The Kimel Curve and the Kitchen Sink, Part 2: The Reagan Era to the Presen
by Mike Kimel
The Kimel Curve and the Kitchen Sink, Part 2: The Reagan Era to the Present
I often post about the relationship between the top marginal tax rate and economic growth, which I’ve noted can be described this way:
% change in real GDP from t to t+1 =
+ c* Top Marginal Tax Rate squared at time t
(I’ve modestly described that relationship as the “Kimel curve.”)
I’ve done this many times, and have added all sorts of things to the curve, but in every case, the results are more or less the same: the top marginal tax rate that maximizes growth is somewhere in the neighborhood of about 64%, give or take about 5%.
Its usually my practice to use all data available when I’m estimating that relationship. That means going back to 1929, the first year for which the BEA keeps data on real GDP. In part that’s because I get accused of cherrypicking if I don’t use all the data available. But lately I’ve started getting accused of somehow trying to bias results by using all the data available.
So I’m going to run a version of the model similar to the one I ran last week, but I’m going to start with data from 1981, which is when Reaganomics set in.
(More after the jump!)
The specific model I’m going to estimate is this
% change in real GDP from t to t+1 =
+ c* Top Marginal Tax Rate squared at time t
+ d* % of pop 35 – 44 at time t
+ e* % of pop 45 – 54 at time t
+ f* President is a Republican (Y/N) at time t
Here are the results:
Figure 1
A few things to note: the percentage of the population 35 to 44 is not significant, though it was significant when data going back to 1929 was used. Conversely, the percentage of the population 45 to 54 was not significant with data going back to 1929, but is significant here. What that tells me is that for much of the period from 1929 to the present, the percentage of the population 35 to 44 was one of the more important demographics for driving growth. However, more recently, the population 45 to 54 has become more important reflecting the reduced importance of manual labor.
The Republican dummy wasn’t significant when using data going back to 1929… and it isn’t significant in the more recent period either.
But what really matters, in my opinion at least, is this: the coefficients on the top marginal tax rate and the top marginal tax rate squared are both significant. The former is positive and the latter is negative. That means the Kimel curve applies to the period since 1981 to the present as well.
The growth maximizing tax rate obtained when using data for the period from 1981 on is 44%, about 20 percentage points below the top marginal rate obtained when using data going back to 1929. So, why the difference? I don’t know, but I have some ideas:
1. The period from 1981 on includes one observation where the tax rate was above 50% (i.e., 1981, when the economy was in a recession), several at 50%, and the rest below. The model simply hasn’t “observed” higher tax rates and the growth rates associated with those higher tax rates.
2. Prior to Reagan, the public was more accepting of the idea that tax rates should be higher. Reagan changed the zeitgeist. The government became the problem, not the solution, and taxes, well taxes came to be viewed as theft.
My guess is that its a combination of both factors. But even if you lean primarily toward the second reason, and assume the optimal tax rate has shifted down over time… its still well above where tax rates are now.
In fact, tax rates have been below 40% since 1987. The annualized growth rate in real GDP during the 23 years from 1987 to 2010 was 2.6%. The last time real GDP grew that slowly during a 23 year period was… well, who knows – it never happened before then in the time since the BEA has been keeping data. If you decide to, well, cherry pick and leave out the Great Recession… the annualized growth rates in real GDP from 1987 to 2007 was a hair over 3% a year. Previous to that, the last time annualized growth rates were that low for the same number of years occurred at the end of World War 2. Put another way… the period from 1987 on may have been a success in terms of keeping tax rates low, but it has been a failure in terms of economic growth, as the only time the economy has done worse was when it switched out of a command economy and went immediately into a recession. (I can’t help but notice that the only time when the economy did worse happened to come during what David R. Henderson refers to as the Post War Economic Miracle.) Better policy would get us faster economic growth and that would be good for everyone, even those paying the highest marginal rates.
Housekeeping… GDP data came from the BEA and tax rates came from the IRS.
A few other comments… the correlation between residuals at time t and time t+1 in the model estimated is about 16.5%. One could do other checks, but it seems very, very unlikely that autocorrelation is a problem here. Of course, we’re also missing some important variables… the fit could be a lot higher. I’ll start incorporating some of the suggestions I received from readers after the last post.
As always, if you want my spreadsheet, drop me a line. I’m at my first name (mike) period my last name (kimel – note only one m) at gmail.com.
“I’ve done this many times, and have added all sorts of things to the curve, but in every case, the results are more or less the same: the top marginal tax rate that maximizes growth is somewhere in the neighborhood of about 64%, give or take about 5%.”
That is still vague. On what percentage of income earners? On what percentage of income? Don’t those factors matter?
The government found it necessary implement a parallel tax system on the rich in the late 60s (the alternative minimum tax), because the wealthy paid so little under the tax structure. Yet the author says that the tax system before the AMT was responsible for higher GDP growth.
Should the U.S. go back to when 50 percent of capital gains were excluded from taxes (*benefits the wealthy*), when there was a dividend-receive credit (*benefits the wealthy*), and repeal the AMT (*benefits the wealthy* and middle class) since these policies were also in effect during the 40s, 50s, and 60s? Or is this a cafeteria take on tax history?
Kevin,
Yes, I referred to results from 1929 to the present to lay some context. But the results shown in the post are for data from 1981 to the present. I don’t know how to put it other than this: tax policies of 40s, 50s and 60s aren’t an explanation for outcomes seen from 1981 to the present, even if you don’t like those outcomes.
Now… now I did provide a bit of a comparison. I noted that the period since tax rates went the way you want to see ’em is one of really crummy growth. I think this explanation fits the data much better than throwing up one’s hands and saying there’s some sort of a stagnation in creativity and technology a la Tyler Cowen.
Min,
“That is still vague. On what percentage of income earners? On what percentage of income? Don’t those factors matter?”
Sure they matter. But this is a model. The point of a model is to explain as much useful information as possible while being as parsimonious as possible with the data. The only perfect model of the real world is the real world. This model leaves out a heck of a lot, but it explains a number of things we’ve seen in economic history better than the orthodox models do. What you find in an econ textbook will tell you, for example, why growth was poor in the New Deal and great under Reagan, when in reality growth in the New Deal was so much faster than growth under Reagan.
“The annualized growth rate in real GDP during the 23 years from 1987 to 2010 was 2.6%….If you decide to, well, cherry pick and leave out the Great Recession… the annualized growth rates in real GDP from 1987 to 2007 was a hair over 3% a year.”
The ideal real-GDP growth rate for a developed country is 2-3.5% (the exception is when a nation is coming out of a recession). Faster growth brings crushing inflation, which the nation experienced in the 70s.
“Now… now I did provide a bit of a comparison.”
There was a comparison, but key aspects of the past tax code(s) were left out of the discussion.
“one of really crummy growth”
You describe what most investors/economists view as ideal growth as “crummy growth”? How long do you think the U.S. real GDP could grow at 7% without bringing on consequences? Maybe I’m missing something, but maybe you could describe the scenario of say 2013-2023 with a top tax rate of 64%.
Kevin,
“You describe what most investors/economists view as ideal growth as “crummy growth”? “
I’m sorry. I mentioned that was the worst 23 year period since data has been kept in terms of growth. That’s ideal growth?
“How long do you think the U.S. real GDP could grow at 7% without bringing on consequences?”
You tell me. Annualized growth from 1932 to 1940 was higher than that… and the economy was accelerating rapidly from that level before the US entered the War.
“There was a comparison, but key aspects of the past tax code(s) were left out of the discussion. “
Fine. Feel free to ignore the comparison. The analysis in the post is the period from 1981 to the present.
Kevin,
“Faster growth brings crushing inflation, which the nation experienced in the 70s.”
Really? This is the official CPI & inflation figures: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
Check the New Deal era, when real growth rates were more than twice your 3.5% figure. I don’t see a crushing inflation rate.
As to the 1970s…. why exactly did the crushing inflation wait until the Oil Embargo when real growth rates went negative to show itself? It seems very odd.
“I mentioned that was the worst 23 year period since data has been kept in terms of growth. That’s ideal growth? “
And it didn’t end in a decade of stagflation, the way the other system went down in flames. The 70s made Keynesians re-think and redefine themselves.
“Annualized growth from 1932 to 1940 was higher than that… and the economy was accelerating rapidly from that level before the US entered the War.”
Yet from 1929 to 1941, the U.S. GDP had a negative return. Your stat is only used by someone who wanted to ignore the fact that it took the economy until 1941 to get back to 1929’s GDP level (GDP recovery has NEVER taken that long since).
“Fine. Feel free to ignore the comparison.“
Many of us already have. Finance ministers of other nations are adopting Reagan’s economic model and not the U.S. pre-1980 model. They know the devastation of 1970’s stagflation and don’t want to recreate it.
Kevin,
“And it didn’t end in a decade of stagflation, the way the other system went down in flames. The 70s made Keynesians re-think and redefine themselves. “
No. Its ended in the Great Recession. What a joy.
“Yet from 1929 to 1941, the U.S. GDP had a negative return.”
I’m not even sure what this means. But if you’re trying to say that GDP, whether real or nominal, shrunk between 1929 and 1941, I think you have to take that up with the BEA. They might demand some evidence from you before they change their figures, though.
“Finance ministers of other nations are adopting Reagan’s economic model and not the U.S. pre-1980 model.”
Yeah. I’ve noticed that every few years there’s a new “success” story to tout as a country that has taken up the Chicago school approach to governance. In my adult lifetime, I can, off the top of my head name Argentina in the late 1980s and early 1990s, Russia, Hungary, Poland, Slovakia and the Baltic States in the late 1990s, Ireland a few years later, and more recently Iceland, Portugal and Spain.
As I noted upthread, avoiding the stagflation of the 1970s has more to do with avoiding another oil embargo than avoiding rapid economic growth.
“As to the 1970s…. why exactly did the crushing inflation wait until the Oil Embargo when real growth rates went negative to show itself? It seems very odd. “
January 1970 – 6.18
February 1970 – 6.15
March 1970 – 5.82
April 1970 – 6.06
May 1970 – 6.04
June 1970 – 6.01
July 1970 – 5.98
August 1970 – 5.41
September 1970 – 5.66
October 1970 – 5.63
November 1970 – 5.60
December 1970 – 5.57
January 1971 – 5.29
February 1971 – 5.29
Find a 10 month, 12 month, or 14 month period after Reaganomics helped correct the stagflation economy (let’s say after 1983) that comes close to that experienced in 1970, three years before the oil embargo of 1973. Should we manifest some Great Oil Embargo of 1970 to support the story, akin to the Great Oil Embargo of 1979 that the Arab nations weren’t aware? Inflation was such a concern in 1970, that the cover of Time magazine came up with this at the end of the year: http://www.time.com/time/covers/0,16641,19701214,00.html
Time, a general publication late to almost all trends would go with that cover? Seems odd.
“Check the New Deal era, when real growth rates were more than twice your 3.5% figure. I don’t see a crushing inflation rate.”
That “fantastic growth” just retraced what had been lost. For all this talk about the great GDP growth from 1932 on, the actual growth for the ten years ending in 1939 was negative 11% (it went from 103.6 billion to 92.2 billion GDP in 10 years). Wow.
“No. Its ended in the Great Recession. What a joy.”
Ended? I guess you’ve turned prophet on us now. I don’t hear of a SINGLE bill requesting the top rate be raised to 64%, much less hiking it over 50%. What was the demarcation for this era’s end?
“I’m not even sure what this means.”
The GDP in 1929 was 103.6 billion. In 1940, it was 101.4 billion. That’s growth to you? Seems that 1940 is short 2.2 billion to just stay even with 1929.
“I’ve noticed that every few years there’s a new “success” story to tout as a country that has taken up the Chicago school approach to governance.”
Yea, those nations really took up supply side economics. I can’t recall Reagan implementing a VAT tax, but whatever demarcation you want to create for policies that corrected the decade of stagflation is up to you. Hiking the top rate to 50% has done wonders to the U.K. GDP growth. How many nations have concluded that a top rate in the 64% range works well?
Ended in the Great Recession means we ended up with the Great Recession. So far.
“The GDP in 1929 was 103.6 billion. In 1940, it was 101.4 billion. That’s growth to you? Seems that 1940 is short 2.2 billion to just stay even with 1929.”
Now I see why you were so adamant that any growth above 3.5% a year real leads to inflation in contradiction of the CPI data. We both know there was deflation from 1929 to 1940. We both know that real GDP grew between 1929 and 1940. Save your sleight of hand for the rubes please.
“ Hiking the top rate to 50% has done wonders to the U.K. GDP growth. How many nations have concluded that a top rate in the 64% range works well?”
I don’t know enough about how tax rates have evolved in the UK to discuss it, and I would be embarassed if someone kept finding errors in what I wrote, so I simply can’t respond to this point.
Kevin, Are those GDP number real or nominal? Was deflation a factor? What were interest rates nomial v. real in the same time frame?
You showed one year changes in inflation rates on a monthly basis that were 5% and 6% and above. Not exactly crushing inflation. But let’s say it is. Why don’t you show what the growth rates were that year? (Real, not nominal… don’t play the games you played upthread, please.) Because your point was that high growth creates high inflation… and the “high” inflation you point to, as we both know, didn’t accompany high growth.
“ Inflation was such a concern in 1970, that the cover of Time magazine came up with this at the end of the year”
Paying down the debt too quickly was a concern of a lot of folks in 2000-2001. A concern in the media is not a sign that something is happening.
“That “fantastic growth” just retraced what had been lost. For all this talk about the great GDP growth from 1932 on, the actual growth for the ten years ending in 1939 was negative 11% (it went from 103.6 billion to 92.2 billion GDP in 10 years). “
The New Deal produced very rapid growth. If you feel that its just a bounceback, then you have to explain why we didn’t see a rapid bounceback in other big recessions… such as the current one. Sure, it was a smaller recession, but why didn’t have a proportionately rapid come back? Or in the 1970s? Or in other recessions?
Second, are you really going to keep trying to obfuscate the difference between real and nominal? Is that really where you want to hang your hat?
“We both know there was deflation from 1929 to 1940. We both know that real GDP grew between 1929 and 1940. Save your sleight of hand for the rubes please.”
Spoken like someone who only looks at numbers without thinking things through. The unemployment rate in 1934 was 21.7% and in 1938, it was 19%, more than double than the current unemployment rate. If you’re trying to convince us that someone’s 0.00 dollar check went further in 1938 than it did in 1929, and that the unemployed and poor were better off because of deflation, then get your nose out of the book and look around at real life. You really can’t think the economy grew when it went from 4% unemployment to 19% unemployment, with periods in between of more than 20% unemployment… or do you really believe that?
Plus, the fact that you posted “…but if you’re trying to say that GDP, whether real or nominal, shrunk between 1929 and 1941, I think you have to take that up…” shows that you didn’t know the facts about nominal GDP growth for the period until I proved it to you and that you knew I was referring to GDP not adjusted for deflation, (deflation doesn’t help the poor and unemployed, demographics that best represent that time period. And since you don’t seem to understand the theory behind it, shrinking money supply doesn’t do much for the average person).
Just to be clear, since your posts suggests this bizarre insight… you don’t think economies can grow themselves through deflation, do you?
1. Yes, of course economies can growth even when there’s deflation.
2. I don’t mean to alarm you, but its been years since the Lebergott figures on unemployment for the Great Depression were considered the best estimates. I think the final straw there was when people realized that Lebergott considered any of the millions of people working for the WPA and the CCC and similar agencies building dams and roads and whatnot to be unemployed. I posted on that here: http://www.angrybearblog.com/2010/06/unemployment-during-new-deal.html
Nominal. Adjusting for deflation returns misleading results. Like all statistics, one needs to be aware with what they are conveying or else a person is blindly using numbers, a cheap form of plug-n-chug, and arguing about a past situation that never existed.
Example (I’m a classic truck aficionado and I restore them): In 1928, a new Chevrolet half-ton pickup (the first 6 cylinders) cost $400 (real 1928 dollars). In 1939, the same truck restyled went for $572 (in real 1939 dollars) http://www.pickuptrucks.com/html/history/chev_segment3.html. Yet, if one adjusts for deflation, the production of that pickup grew the economy by 75%. The company produced essentially the same product in the same number (1 truck), yet Kimel contends that the economy grew 75% over what was produced in 1928. We get the same results with bread, milk, sugar, and some meats (only eggs and some fruits do not produce the same contorted results).
We know better. Producing the same goods in the same number is not growing an economy. And we know that when 20% of the labor force is idle, a national economy does not grow unless there is some fantastic gain in productivity (such productivity gains were not realized in the 30s). That’s the rub with adjusting for deflation.
I wonder if your curve here exists, peaking at about 44 percent, because we had an intentionally induced recession in the early 1980s to fight inflation. We can’t rewrite history, but the expected gdp growth rate under a 50 percent rate might be understated in the data because of the Volcker-Reagan decision. Combined with having few data points at that top rate.
If understated, the effect would bend your curve because you have no years with rates higher than 50 percent. When you use all historical data, anomolous data points at the 50 percent rate have less impact on the overall model. IMHO, your model that incorporates all data probably is more accurate, and your partial, post-1980 model has an artificial bend at 44 percent.
“Yes, of course economies can growth even when there’s deflation.”
Right… when adjusting for deflation. Nations, finance ministers, and central banks all shoot for a small (less than 2%) rate of inflation. I wonder why they continue to ignore your take on economic matters? Seems odd, no?
“I don’t mean to alarm you, but its been years since the Lebergott figures on unemployment for the Great Depression were considered the best estimates.”
I’m aware of the revisionist “controversy”. You might want to bring up your take that Lebergott stats are not worthy of consideration with serious economic journals. Lebergott followed the same practices the census used. Lower rates are only produced when (a) excluding uemployed persons not searching for work and (b) counting people with recurrent spells of unemployment (the rotating underemployed in WPA and CCC relief work), as “fully employed”.
“You showed one year changes in inflation rates on a monthly basis that were 5% and 6% and above. Not exactly crushing inflation.”
Inflation rates higher than 4% are not sustainable, because the public notices the price change and alters their behavior. The past is clear evidence of this and it’s why central banks stay on top of inflation concerns. You dismiss inflation because you do not understand it, but it is a huge, huge concern for governments.
“ A concern in the media is not a sign that something is happening.”
The statistics prove that the nation experienced high inflation in 1970 and the media, even Time, was on top of it.
“The New Deal produced very rapid growth.”
You should have been around in the 30s to tell the 20%+ of the population that was unemployed about how well the economy was growing.
“If you feel that its just a bounceback, then you have to explain why we didn’t see a rapid bounceback in other big recessions… such as the current one. Sure, it was a smaller recession, but why didn’t have a proportionately rapid come back? Or in the 1970s? Or in other recessions?”
Bounceback? Who used that term? The ‘growth’ just retraced what was lost. The unemployment rate and the fact you have to adjust for deflation to realize your ‘fantastic growth’ underscore the reality (only time we adjust for deflation. Odd, huh?). We have come back from other recessions. It just doesn’t take us a decade to get back to pre-event GDP levels the way the New Deal did.
“But if you’re trying to say that GDP, whether real or nominal, shrunk between 1929 and 1941, I think you have to take that up with the BEA.”
So, when are you contacting the BEA about the issue you have with their nominal GDP statistics? Geez….
1.. Inflation rates above 4% are not sustainable? 6% is crushing? Where do you get this stuff? And you state it with such assurance. Why not point to something that shows what you state?
2. “You should have been around in the 30s to tell the 20%+ of the population that was unemployed about how well the economy was growing.”
Unemployment started above 25%. If you don’t count people building dams and roads as unemployed, it ended at about 10%. That’s an improvement. If you don’t think so, ask the 15% that got jobs. Besides what would you prefer? No growth? Slow growth? The policies that got the country into the Great Depression? You may have noticed that the tax policy now is identical to the tax policy in 2007. Ditto regulatory policy. Notice the very rapid bounceback? Oh, excuse me, “growth” retracing what was lost? Neither do I. Are you going to argue that’s better than rapid growth?
And yes… I know, we’ve already retraced what was lost since 2007. But slowly, and the growth is slow since. After the New Deal retraced what was lost, growth continued at double digits real. Oh… that’s right. You stated above any growth like that would have to produce rapid inflation… which of course we did not see in the New Deal era. The point is, you have this scenario constructed that simply didn’t happen.
“So, when are you contacting the BEA about the issue you have with their nominal GDP statistics? Geez….”
I make one mistatement (and read it again, its clearly a mistatement) and you get all huffy. You’ve invented a whole lot of “facts” and an alternate history from whole cloth and you keep going. So geez back.
Kevin,
So… in plain English…. adjust for inflation when inflation is positive, but do not adjust for inflation when inflation is negative.
As to the idle labor force… I keep pointing what has been stated over and over about Lebergott’s figures and you keep going back to them. So folks who built roads and dams are idle. Does that work today? And how do you decide which folks are idle? Is it just construction workers? Or does it work for people who fix copy machines too? Maybe sign painters? Where does the line get drawn between people who are working and are “idle” and people who are working who are not “idle?”
PJR,
I agree to a large extent. But I suspect there has been a cultural shift and the current “optimal” tax rate is lower now than it used to be, in the same wya that the optimal tax rate is higher in Scandinavia than in, say, Argentina.
Mike,
I thought there was no accounting for unemployment in certain a certain school of thought? These people are considered “at liesure.” No wonder you can’t get higher levels of productivity with this many people “at liesure.”
“And you state it with such assurance. Why not point to something that shows what you state?”
I encourage you to read through the papers. Since you have a tendency to arrive at inept conclusions, I’ve provided some highlights to assist.
Federal Reserve Bank of Atlanta
http://macroblog.typepad.com/macroblog/2010/02/do-we-need-to-rethink-macroeconomic-policy.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2FRUQt+%28macroblog%29
“…put me down on the petition to not experiment with higher inflation to avoid a problem that was not so clearly a problem.”
IMF
http://www.imf.org/External/Pubs/FT/staffp/2001/01a/pdf/khan.pdf
“The threshold level of inflation above which inflation significantly slows growth is estimated at 1–3 percent for industrial countries…”
If you want more links that argue against targeting a high rate of inflation, let me know. In fairness, can you provide something that advocates an inflation rate higher than 4%? While you’re at it, maybe you can give us some publications that champion how great the 1930s were, how underappreciated the 1970s are, how high inflation isn’t a big deal…. pretty much anything that supports your positions.
“Inflation rates above 4% are not sustainable? 6% is crushing? Where do you get this stuff?”
The Economist, the IMF, the Federal Reserve Board, remembering the lessons from University. Where do you get your stuff?
“Unemployment started above 25%.”
Check again. Unemployment before the Great Depression was much lower. Or maybe you don’t like those stats either?
“Are you going to argue that’s better than rapid growth?”
The U.S. is in much better shape today, 30 years after Reagan took office than it was in the 1970s. I guess you can call performance in the stock market the past 30 days as rapid incease if you ignore what’s happened since July. You can only call what happened in the 1930s as rapid growth if you ignore what happened beforehand.
“You’ve invented a whole lot of “facts” and an alternate history from whole cloth and you keep going.”
Me? You’ve invented the ‘Great Oil Embargo of 1979″, blamed a four month period in the 70s for the entire decade’s stagflation, misread stats from the BEA, miscalculated growth…. I’ve posted my resources. Proove yours.
“I make one mistatement…”
No, you’ve made many “mistatements” and proven that your understanding of inflation/deflation is wholly inadequate.
“So… in plain English…. adjust for inflation when inflation is positive, but do not adjust for inflation when inflation is negative.”
Understand what you’re adjusting for. You should understand that inflation is a tool that central banks and governments use, many times without control. Deflation is not the same thing. If you really think that making the same products in the same number next year “grows” the economy, state it. I made my case about the result of deflation adjustment. Make your case that it’s a rational thing. Otherwise, leave common sense thought to those of us who aren’t advocates for high inflation, stagflation, and who understand the concept of ’cause and effect’.
“Where does the line get drawn between people who are working and are “idle” and people who are working who are not “idle?””
It’s not drawn by Darby. If you want to criticize Lebergott, then you need to criticize FDR’s government, whose standards he used to derive his numbers. And you need to convince a whole lot of other economists and publications as well.
Mike I consider that to be your hypothesis about US culture. Perhaps it is testable with appropriate data about US cultural attitudes towards taxes and the impact of these attitudes on economic behavior. That said, it’s hard for me to see how it could explain the bend in your curve at 44 percent, because the bend is caused by data points at the very start of the time series in this analysis. You would have to hypothesize that we experienced a sudden, dramatic, but long-lasting cultural shift circa 1980 that immediately caused fantastically changed economic behavior. I just don’t think so.
Furthermore, because you focus on the top marginal rate, your hypothesis necessarily focuses on culture/behavior by those who face a top marginal rate, no? That would be the top 1 percent today (more in some other prior years). So I think you really are hypothesizing a sub-cultural shift insofar as it concerns economic behavior.
There may have been a cultural change at the top of our income/wealth hierarchy that would affect their economic behavior–and lower gdp growth rates–IF we raised the top marginal rate back to that of Reagan’s first term (or for that matter to LBJ’s top rate). Unfortunately your historical data cannot answer that question. So it is an unsubstantiated fear that conveniently happens to swallow whole what many in the top 1 percent and their hired guns tell us to believe. We’ve been there, done that.
Oh just as aside and FWIW, I agree with the thrust of your observation that our growth rates have been weak since the 1980 change of course. Out of curiosity, prompted by your comment and another comment elsewhere on AB, I looked for evidence that goes back in time beyond your data. Economic historians have tried to estimate gdp in earlier decades, of course, and I found one attempt to put the data all together. It groups growth rates by decade so ups-and-downs like we had in the 1930s are not captured, but the data are consistent with your observation placed in a longer-term historical context (through 2006–the recent recession is not captured here):
1800s: 3.6
1810s: 3.1
1820s: 4.1
1830s: 4.2
1840s: 5.1
1850s: 6.4
1860s: 3.3
1870s: 5.7
1880s: 5.2
1890s: 2.9
1900s: 2.4
1910s: 3.4
1920s: 4.2
1930s: 2.0
1940s: 5.8
1950s: 3.7
1960s: 5.1
1970s: 3.7
1980s: 3.5
1990s: 3.3
1996-2006: 3.4
1800-2000: 4.1
Kevin,
OK. China went through deflation from 1998 to 2002. It may also have been the fastest growing economy in the world during those years. (I’m too tired right now to look up the official statistics, but this seems to be a credible source: http://www.asianperspective.org/articles/v28n3-a.pdf Here’s another: http://www.hkma.gov.hk/media/eng/publication-and-research/quarterly-bulletin/qb200309/fa3.pdf)
I don’t understand why you keep insisting that rapid growth is impossible in times of deflation given examples like the New Deal and China from 1998-2002, unless the whole point is simply to deny the growth in those periods. Serious, what is the benefit of insisting over and over on things for which there is plenty of data showing the exact opposite of what you are claiming? Its one thing to say you don’t like my analysis or my results, but standing on a street corner yelling “up is down” isn’t helping your cause.
As to the Lebergott and the Census… yes, he counted unemployment the way the Census did in 1940. But that’s not the way we do it today, so 25% is not apples to apples or even apples to oranges. Imagine if someone counted Black males in Georgia the way the Census did in 1840 today, complete with the 3/5 of a person thing. There’s a reason the BLS does things differently now than the Census did then.
Kevin,
I hate arguing by authority. But if you’re going to do it, do it right.
1. David Altig at Macroblog and the Atlanta Fed is a smart guy and I have never seen him make an argument that isn’t well thought out. He is a very fine economist and I have nothing but respect for him. But it doesn’t mean he’s always right. He has for a long time worked for an organization which sees keeping inflation very low as one of its central mandates, if not its most important one.
2. Since you chose to quote a paper by some folks at the IMF stating that inflation rates above 3% start causing growth problems, I wonder if you read the Altig post you cited. After all, he quotes Olivier Blanchard, the IMF’s director of research (and thus the boss of the folks whose paper you cited). The Blanchard quote Altig provides is this: “Central banks may want to target 4% inflation, rather than the 2% target that most central banks now try to achieve, the IMF paper says”
So even the Director of Research at the IMF doesn’t agree with the IMF staffers. And the IMF, I might add, has been the big cheerleader of the Argentinas of 1991, and Russia and the Baltics of the late 1990s, and Ireland and Iceland more recently.
“The Economist, the IMF, the Federal Reserve Board, remembering the lessons from University. Where do you get your stuff? “
As I noted upthread, the fastest peacetime economic growth in the US since data has been kept. Also, China’s possibly world-beating growth rate from 1998-2002. I can produce other examples. Yes, I know, you found some authorities who don’t remember all the instances where deflation accompanied very rapid growth, but it doesn’t mean they aren’t there.
PJR,
I’ve been thinking about how to test this. The problem is… a shift in the optimal rate can also be (and I bet it is) accompanied by a shift in the maximum possible growth rate. (i.e, the maximum growth rate that can be achieved by Sweden at Sweden’s optimal growth rate is different from the maximum growth rate that can be achieved by Argentina at Argentina’s optimal growth rate.) You end up with an identification problem trying to estimate this. I have to think about how to do this.
But I would like to dispute one thing you noted. The fact that the analysis focuses on the top marginal rate does not mean that’s the only one that matters. In general, when the top marginal moves, so does the next highest rate.
BTW… what’s your data source? Thanks.
Sources of those gdp growth rates were not cited where I found such data brought together: http://www.skyscrapercity.com/archive/index.php/t-500228.html There must be sourced data elsewhere. I’d prefer sourced data if I could find it but I thought what I found might be reasonably close.
You have a good point about earners a little below the top marginal rate but, perhaps oddly, a lower top marginal rate does not necessarily imply a lower rate for these people. For example, a joint return of $38K in 1986 (when we had a 50 percent top marginal rate) faced a marginal rate of 33 percent; inflation-adjusted, this same return 20 years earlier (when LBJ had a 70 percent top marginal rate) was approaching only the 25 percent bracket; and 20 years later (when W had a 35 percent top marginal rate) it was again in in the 25 percent bracket, just like the LBJ years although the top rate was half of LBJ’s. Similarly, if in 1986 you faced a 45 percent marginal rate, close to but not quite the top rate, you made enough (inflation adjusted) to get only to the 36 percent tax bracket in 1966, roughly half the top rate.
Correction… most of the New Deal era was not deflationary… though it did have low inflation. However, yes, the CPI was lower in 1941 than in 1929… but a big part of that is due to the deflation that occurred following the market crash from 1929 to 1933.
Correction… most of the New Deal era was not deflationary… though it did have low inflation. However, yes, the CPI was lower in 1941 than in 1929… but a big part of that is due to the deflation that occurred following the market crash from 1929 to 1933.
So Kevin… your statement about rapid growth bringing about inflation didn’t happen from 1933 – 1941. Quite the opposite, in fact. And your statement about deflation preventing rapid growth is disproven with China from 1998-2002.
This is rich.
“The Blanchard quote Altig provides is this: “Central banks may want to target 4% inflation, rather than the 2% target that most central banks now try to achieve, the IMF paper says””
You are either taking my side of the argument now, forgot what point you are trying to make, or single digit numbers give you great difficulty. When I stated that inflation higher than 4% is not sustainable and that 6% inflation is crushing, you replied “Where do you get this stuff?”. Now as evidence for your argument you provide Blanchard stating that they MAY want to target, at the high end, 4% inflation. Not 5% inflation, not 7% inflation, but 4% inflation which is EXACTLY the top end inflation rate I provided. Amazingly odd, isn’t it? I’d thank you for proving my point, but I’m worried that you would take it the wrong way.
“I hate arguing by authority.”
This is hilarious as well. You first ask “Where do you get this stuff?” and then when provided with the answer, you hate the fact that I provided sources. Real quality arguments on your part.
“As I noted upthread, the fastest peacetime economic growth in the US since data has been kept. Also, China’s possibly world-beating growth rate from 1998-2002. I can produce other examples” followed by “Correction… most of the New Deal era was not deflationary… though it did have low inflation. However, yes, the CPI was lower in 1941 than in 1929… but a big part of that is due to the deflation that occurred following the market crash from 1929 to 1933.”
This may take the cake. To provide an example of growth during deflation, you cite the U.S. during 1929-1933. Then you provide China from 1998-2002, a period when everyone admits it consumed less energy and its freight numbers dropped. You know the amount of work that has been done that questions the GDP numbers provided by China for this period, right?
You should do thought experiments in your head. If an economy produces fewer goods next year than this year, how can its GDP grow and why do we use a deflator/inflator to adjust nominal GDP? Best yet, think of an imaginary economy that produces just one good, say one pound coconuts. Last year, at 90% capacity, they produced a million coconuts when the price was a dollar per coconut. This year, coconuts are 75 cents each. How can they grow its economy grow, year over year?
I actually figured out a situation where I am wrong, a caveat that illustrates a couple of points. This caveat doesn’t apply to the 1930s. The exception proves that some of us are open to new perspectives, to new concepts that challenges conclusions that we previously held. I’ll provide it later since it brings up a couple of other points.
This is rich.
“The Blanchard quote Altig provides is this: “Central banks may want to target 4% inflation, rather than the 2% target that most central banks now try to achieve, the IMF paper says””
You are either taking my side of the argument now, forgot what point you are trying to make, or single digit numbers give you great difficulty. When I stated that inflation higher than 4% is not sustainable and that 6% inflation is crushing, you replied “Where do you get this stuff?”. Now as evidence for your argument you provide Blanchard stating that they MAY want to target, at the high end, 4% inflation. Not 5% inflation, not 7% inflation, but 4% inflation which is EXACTLY the top end inflation rate I provided. Amazingly odd, isn’t it? I’d thank you for proving my point, but I’m worried that you would take it the wrong way.
“I hate arguing by authority.”
This is hilarious as well. You first ask “Where do you get this stuff?” and then when provided with the answer, you hate the fact that I provided sources. Real quality arguments on your part.
“As I noted upthread, the fastest peacetime economic growth in the US since data has been kept. Also, China’s possibly world-beating growth rate from 1998-2002. I can produce other examples” followed by “Correction… most of the New Deal era was not deflationary… though it did have low inflation. However, yes, the CPI was lower in 1941 than in 1929… but a big part of that is due to the deflation that occurred following the market crash from 1929 to 1933.”
This may take the cake. To provide an example of growth during deflation, you cite the U.S. during 1929-1933. Then you provide China from 1998-2002, a period when everyone admits it consumed less energy and its freight numbers dropped. You know the amount of work that has been done that questions the GDP numbers provided by China for this period, right?
You should do thought experiments in your head. If an economy produces fewer goods next year than this year, how can its GDP grow and why do we use a deflator/inflator to adjust nominal GDP? Best yet, think of an imaginary economy that produces just one good, say one pound coconuts. Last year, at 90% capacity, they produced a million coconuts when the price was a dollar per coconut. This year, coconuts are 75 cents each. How can they grow its economy grow, year over year?
I actually figured out a situation where I am wrong, a caveat that illustrates a couple of points. This caveat doesn’t apply to the 1930s. The exception proves that some of us are open to new perspectives, to new concepts that challenges conclusions that we previously held. I’ll provide it later since it brings up a couple of other points.