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

by Linda Beale

More on Romney’s Privileged Roots
The New York Times ran a story on Rmoney on Sunday but with quite a different take than the Journal’s interview by Paul Gigot that I reported on yesterday.  See, At Harvard, A Master’s in Problem Solving, New York Times, Dec. 25, 2011, at A1.  The story extols Romney’s steady, hardworking, pragmatic, data-driven, parent-in-school approach to a concurrent Harvard business and law school education. 
There were a few paragraphs that grabbed my attention for the additional perspective they provide on Romney’s Harvard time and on the way class connections facilitate success in America today.
1.  It’s who you know that counts
Unlike George W. Bush, who was a year behind [Romney] in business school and was immortalized in the yearbook blowing a huge bubble of gum, Mr. Romney had limited interest in socializing.  (The two barely met, but if Mr. Romney had known where Mr. Bush ‘was gonna go, I would have been on him like white on rice,’ he later told The Atlantic.)  Id. (emphasis added).
As I noted in yesterday’s posting, those who are well-off enjoy a ready-made network of connections that will serve them well all through their lives, from family friends and business partners to influential schoolmates at the most prestigious schools to which they are admitted as much through “legacy” practices as through their own merit.  The quote from The Atlantic demonstrates Romney’s keen awareness that a big part of being at Harvard Law or Harvard Business is getting to know the people that you will be glad you got to know later.  Sally Smith at Podunk Community College isn’t likely to have that opportunity…..

2.  Making distinguished connections while avoiding disagreements, even in a purportedly intellectually stimulating environment, can facilitate your ability to succeed
Mr. Romney was not someone who fundamentally questioned how the world worked or talked much about social or policy topics. Though the campus pulsed with emotionally charged political issues, none more urgent than the Vietnam War, Mr. Romney somehow managed to avoid them. …
Nearly all business school students formed study groups to help them digest the constant flow of cases, but Mr. Romney recruited a murderers’ row of some of the most distinguished students in the class.  “He and I said, hey, let’s handpick some superstars,” said Howard Serkin. …
Romney’s all-male group of “distinguished” “superstars” allowed him to build on his own abilities to succeed while at the same time further achieving the ancillary goal of building contacts in the upper class that would stand him well in his corporate and political career.

originally published at ataxingmatter

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New Year’s Tax Wishes: If I Was Dictator of America

Based on the notions of economic efficiency that I laid out here, if I could do whatever I wanted I would make the following changes over a ten-year period. (Some faster, some slower, some phased in, some implemented instantly on a given date.) The appropriate amounts in each case require a better calculator than I have access to.

Tax All Corporate Profits Like S-Corps, and Eradicate Taxes on Corporations, Dividends, and Capital Gains. Credit for the idea goes to Milton Friedman (Capitalism and Freedom, page 174 in my edition). Shareholders pay taxes on the year’s corporate profits (at normal earned-income rates or higher), whether or not they’re distributed. No more double taxation, but no more preferencing over earned and interest income, or indefinite/eternal deferral.

Eradicate Tax Deductions for Interest Payments — Personal and Corporate. Mortgage- and corporate-interest deductions are terribly distortionary; they encourage borrowing — debt financing — over equity- and self-financing. And they’re regressive.

Eradicate Business Deductions for Employee Health Care/Insurance. Destroy the distortionary historical artifact of employer-based health care coverage. Stop discouraging self-employment and personal choice of health-insurance options. (Having been self-employed for decades, I take this very personally. It’s cost me many tens of thousands of dollars.)

Scrap the Cap on Social Security Taxes. Include all earned income. This only makes a terribly regressive tax somewhat less regressive, and it expands the tax slice from that still-regressive tax — a tax that discourages working for a living because it only taxes earned income. But it makes Social Security cash-flow solvent beyond the foreseeable horizon (revenues support outlays). Other propositions here should be scaled to compensate for its regressiveness and work disincentive.

Change All Local Property Taxes to Land-Value-Only Taxes. Land value taxes are the least distortionary taxes around. This would remove the disincentive to improve land. Since it’s non-distortionary, it would also be good to increase its total share of the tax take.

Greatly Expand and Simplify the Earned Income Tax Credit, and Deliver it on Weekly Paychecks. Beyond its manifest benefits to tens of millions, and turbocharger effect on the economy, it could allow for some reduction or eradication of other (economically inefficient) means-tested payments.

Tax Carbon. Since people/businesses aren’t paying for their negative externalities, it’s distortionary not to tax carbon. All hail Arthur Pigou. This is a non-progressive tax, so other taxes would need adjustment to compensate.

Reduce Income Taxes and Make Them More Progressive. As possible and needed, given the other changes, to achieve:

Overall Results:

1. Make the whole tax system — local, state, and federal combined — actually progressive. All the way from the bottom to the top.

2. Increase the total tax take by a few percentage points of GDP. Because Americans (notably, Tea Partierswant the amount of government we’ve got. So they need to cover the costs. True conservatives pay their bills.

Cross-posted at Asymptosis.

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Romney’s Wall St. J. Interview with Gigot–Protecting the Rich

Romney’s Wall St. J. Interview with Gigot–Protecting the Rich

[edited to rephrase and correct typos 12/26/11 5 pm]
Joseph Rago and Paul Gigot interviewed Mitt Romney on his ‘vision’ for America–“On Taxes, ‘Modeling’, and the Vision Thing”, Wall St. J. Dec. 23-24, 2011, at A13.  In it, Romney reveals the way patrician wealth has affected his values, casting President Obama as a “European social democrat” and suggesting that contrasts with his own belief in a “merit-based opportunity society–where people earn their rewards based upon their education, their work, their willingness to take risks and their dreams.”  
Now everybody likes the idea of people being able to advance based on merit, rather than on crony capitalism, improper influence or whatever.   The problem with suggesting that America is a ‘merit-based opportunity society’ is that it isn’t much of one anymore: America in this second Gilded Age is primarily a wealth-and-status-based opportunity society. 
  • Education:  Even Romney admitted (obviously unintentionally) that wealth makes a real difference, since he noted that rewards depend in part on education.  People with wealth receive the finest educations from pre-K through post-graduate, getting preferences at the best children’s academies in Manhattan and at the highest ranked universities like Harvard and Yale.  People without wealth lose out from the very beginning, with inferior schools that are no longer fully supported by the public, as charter and for-profit schools take over offering inferior educations that no patrician family would ever accept.  The poor and middle class take on enormous loans and work loads to finance even their public university educations, since state support has slipped down to a mere 20-30% of the cost of that education.  That makes study and grades and success much more difficult for them. 
  • Working hard (with Contacts/Influence/lobbyists):  The wealthy are introduced early to the most important people of influence in society, like the Vanderbilts and the Astors of old, the private equity fund managers and the Wall Street bankers that can smooth their way through all the trials and tribulations of their ‘work’ careers–i.e., becoming owners of major league baseball team when you have no relevant experience (George W. Bush, with the aid of his papa and his papa’s influential and rich partners) or setting up a venture capital fund (like Romney’s Bain Capital). These connections ultimately permit the wealthy to mingle in a monied society that offers the right contact for every venture to succeed–including lobbyists to help a wealthy entrepreneur get his business going and ability to ‘invest’ in politicians who are willing to risk alienating the middle class to support preferential taxation of the rich. 
    • By the way, lots of the not-rich work quite hard, often at thankless jobs that provide no cushion to deal with life’s difficult blows or at a job that, at minimum wage, still leaves their family below the poverty line.  Without the contacts and influence that smooth the way of the rich, there chances of moving up are much more limited.  If they persevere, have an entrepreneurial idea, and catch a break, they may be able to move beyond where they are, but they have to do a lot more than just ‘work hard.’  
  • Taking Risks (and Getting Subsidies and Preferential Tax Provisions):  The poor take a risk every time they get up in the morning–will their health hold out so they can keep working? will they be able to make it to their job in that car that needs a new starter? can they manage to arrange for someone to take care of their kids while they work or will they have to be “latch-key kids” yet another day?  But they don’t usually have the kind of capital nest-egg to take a risk with in the way that Romney means it–the excitement of opening a new business demands from the poor and near-poor Herculean efforts to pull together family, friends, and workers to support their business ideas.  Those with money, on the other hand, have a head start on all of this.  Bill Gates’ parents offered him an educated life of relative ease; he could ‘play’ in the garage on that dream of his rather than running heavy machinery or working behind a counter at a McDonalds.  And those with contacts and money are able (and willing) to hire the best lobbyists to ensure that they get all the tax-advantaged benefits and subsidies that they can finnangle (or buy) from local, state and federal legislators for their activities.  That includes favorable tax provisions that allow them to keep a significant percentage of their wealth (and to fight for even more favorable provisions), such as the carried interest provision that gave Romney a preferential rate on almost all of his compensation income, the preferential capital gains rate that gives all the wealthy a low tax rate on their income from trading stocks and bonds with each other, and the various ways that the tax code subsidizes the kinds of personal deductions that provide the most benefit to those with money–from the charitable contribution deduction (including the ability to give away stock and claim a deduction for its value rather than for your actual basis) and the mortgage interest deduction (for interest on home loans up to a million plus $100,000) to all of those provisions that allow the wealthy to retire well–pension plans, exclusion of life insurance benefits, etc.  Then there are the many subsidies they get various governments to provide for their businesses, presumably by using those long-term family/status connections to wine, dine and influence.  They include low-cost loans such as those enjoyed by Romney’s Bain Capital for various businesses that Bain Capital was ‘turning around’.  (Handily, they can make low-taxed profits for themselves even when their turnarounds fail, with all those subsidies, so that the taxpayer sometimes ends up paying  for their losses along with the fired workers.)  See the links provided in the posting yesterday on Romney’s reluctance to release his tax returns, which discuss some of the subsidies and other benefits to Romney’s business. 
That’s not a merit-based opportunity society:  it’s an influence-based society, where the poor and even most of the middle class are working against long odds to make headway. 
And there’s not much evidence that Romney recognizes this fundamental difference in existence of the well-off and the not-so-well-off here in America.  Take the Gigot story’s discussion of tax policy and what kinds of “reforms” Romney supports.  The Journal apparently thinks Romney is too timid on ‘risk-taking’ because he didn’t espouse the kind of tax agenda that the Journal supports–moving to a consumption tax–like the national sales tax– that shifts most of the tax burden to ordinary folks (since they will pay tax on most or all of their  income since they spend most of it on food, shelter, clothing and other necessities) and leaves a zero percent tax rate on the capital gains, dividends, and other income from capital that makes up most of the income of the wealthy and little of the income of everybody else.  Why, the Journal notes, Romney’s plan merely calls for extending the Bush tax cuts, cutting the statutory corporate tax rate from 35% to 25%, and eliminating capital gains and dividends taxes only for those who make $200,000 or less.  Romney won’t even say he supports a consumption tax til he’s studied it more, though he likes the purported “simplicity” of a flat tax.    Romney also says he likes “removing the distortion in our tax code for certain classes of investment”.  This means that Romney does not understand the real economics of the consumption tax and the so-called ‘flat tax’, both of which result in taxation of 100% of the income of the poor and near poor and most of the middle class while leaving the rich with a minimal tax burden.  Any system for alleviating that burden (such as a low-level exemption at the bottom of the income scale) would thrust a truly burdensome recordkeeping requirement on those least able to cope with it.  Especially for versions that merely zero out the tax rate on income from capital, distortions would be magnified: the categorization of income into different types is one of the primary distortions in our system, and any plan to eliminate taxes on one type of income while retaining them on another increases distortions rather than removing them!
What about Romney’s saying he won’t propose cuts in individual tax rates for those making more than $200,000?  The Journal seems to think that is rather cowardly, since such a proposal accepts President Obama’s linedrawing on where rate cuts might be reasonable.  Now, aside from the failure to consider dropping the entire bunch of Bush tax cuts and letting all the rates go back to the level that they were when Bush took office (which might well be the best tax reform the Congress could do at this point), Romney should be commended for at least recognizing that the wealthy have gotten a fistful of tax gifts from the Bush individual tax cuts (and, indirectly, from the various corporate tax provisions that have allowed companies to pay less and less into the federal fisc) and for not wanting to proffer even more. 
But here’s the rub.  Romney doesn’t recognize the damage from the wealthier among us continuing to get even wealthier while the vast majority suffers stagnation and decline:  as the concentration of income increases at the top and inequality becomes the defining characteristic of this society, opportunity for all is threatened as is democracy itself.  Tax policies that could serve as a deterrent to that wealth buildup at the top–e.g., a stiffer, progressive estate tax, a financial transactions tax to discourage trading and capture a tiny amount in connection with those secondary market trades amongst the wealthy, and bracket expansions that would create a more progressive set of tax rates for the highest income that would distinguish between those who have $400,000 a year and those who have $2 million a year–aren’t even on Romney’s radar screen.  He’s content with the current system’s distribution, one that is highly favorable to the wealthy.  As a recent FED Finance and Economics Discussion Series article made clear, inequality has made permanent inroads and tax policies haven’t done much to dampen them.  See Jason DeBacker et al, Rising Inequality, Transitory or Permanent? New Evidence from a U.S. Panel of Household Income 1987-2006.
Romeny’s made it clear that he isn’t about to challenge the status quo of an easy tax life for the wealthy.  Here’s what he said to the Journal on the question of making sure that the wealthy never see any kind of a tax increase.
“My intent is to simplify our tax code and create growth, and so I will also look to see whether the top one-half of 1% or one-thousandth of 1% or top 1% are still paying roughly the same share of the total tax burden that they have today.  I’m not looking to lower the share paid for by the top.”  Wall St. J., Dec. 24-25, 2011, at A13 (quoting Romney).
So after a decade of cutting taxes on the wealthy and passing more and more provisions that benefit the wealthy in particular either directly or indirectly, Romney declares today’s status quo as the perfect state for things to be in–the current low taxes on the wealthy, in perpetuity, are his goal.  And while we may applaud him for not intending to lower taxeds further on the wealthy, it is hard to see how continuing current tax policy towards the wealthy makes sense for the fisc or for democracy.   Carried interest–won’t be taxed under Romney as the ordinary compensation that it is.  Mortgage interest deduction on million-dollar loans–won’t be pulled back to a more reasonable amount such as the interest on a loan that is 80% of the value of the median-priced US home.  Charitable contribution deduction for value rather than basis in stocks contributed–won’t get rid of that one.  Establishment of new brackets to recognize the drastic expansion of incomes at the top so that those with progressively more income are paying progressively more in taxes–won’t happen under Romney.  Why?  Because he is going to make sure that the top 1%, the top 1/2%, the top 1/1000% don’t pay less, but also don’t pay a bit more in taxes than they are paying now, this perfect state where the GOP wants to cut people off Medicaid to save money, turn Medicare into a ‘premium support’ system that will shift more and more of the burden of health care in one’s old age to the vulnerable elderly with a pension they can’t count on and a Social Security system that the GOP is trying to ensure that they can’t count on.
Most tax “simplification” promoted by lobbyists won’t create growth–it is much more likely to result in tax loopholes that the wealthy can drive a truck through.  Refusing ever to increase taxes, even on the ultra-rich who can clearly afford to pay more (without really noticing the difference in spending power) won’t create growth–it most likely will result in a stagnant economy where the burdened middle class gradually falls into the ranks of the New Poor. 

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Joseph Stiglitz on the economy

Joseph Stiglitz in an op-ed in Vanity Fair tells us about a more basic set of problems we face than actually discussed in public media. It is very long.

The fact is the economy in the years before the current crisis was fundamentally weak, with the bubble, and the unsustainable consumption to which it gave rise, acting as life support. Without these, unemployment would have been high. It was absurd to think that fixing the banking system could by itself restore the economy to health. Bringing the economy back to “where it was” does nothing to address the underlying problems.

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Casey Mulligan Wonders Why People Use Unemployment Insurance

Casey Mulligan is curious: what could have caused the big uptick in the uptake on unemployment insurance in recent years?

It’s a mystery.

Or, maybe not:

Sorry, the JOLTS data only goes back to 2001.

Which directly addresses Mulligan’s basic assertion: People are lazy. They don’t like to work.

Well yeah. (People especially don’t like working at unpleasant jobs — those at the low end of the spectrum.)

But how lazy are they?

Rob Valletta and Katherine Kuang of the Federal Reserve Bank of San Francisco do a lot to answer that question. Returning here to an earlier post, on Valletta and Kuang’s study of unemployment insurance and unemployment. This graphic stands out:

People who quit their jobs or are just entering the job market aren’t eligible for unemployment compensation. People who lose their jobs are. The money quote:

The differential increase of 1.6 weeks for job losers is the presumed impact of extended UI benefits on unemployment duration. It is straightforward to translate this increase in unemployment duration into an effect on the unemployment rate, based on their proportional relationship and adjusted for the share of job losers in overall unemployment, which was about 67% in December 2009. The implied increase in the unemployment rate is quite small, slightly less than 0.4 percentage point, indicating that without UI extensions, the measured unemployment rate would have been 9.6% in December 2009 rather than the observed 10.0%.

Job losers (eligible for UIC)  take an extra week and a half to get jobs.

So the “obvious” is true: if you pay people not to work, they will work less, in aggregate. Some people will opt for “funemployment” insurance and take the summer off. But that simplistic truism hides the truly important reality:

The effect is very small — even when you throw five UI extensions into the mix.

Simplistic arithmetic based on this study suggests that any given moment, because of UIC there are about 600,000 people not working, who would be working without it. (.004 times the U.S. work force of 150 million.) That sounds like a lot, and it’s certainly enough to inflame many people’s hot-wired “cheater resentment” genes.

But I say: Get Over It. They’re a tiny percentage, and in the big picture the effects are trivial. The shortage-of-job-openings effect utterly dwarfs the “laziness” effect.

Maybe my resentment genes are pathologically inoperative, but these numbers do a hell of a lot more to light up my compassion genes — compassion for the 14.4 million hard workers who are protected from personal economic meltdown, resulting from an economic catastrophe that was none of their doing. (I won’t even start on how the whole economy is better off as a result of their spending.)

If 600,000 people at a time get a week and a half of extra leisure along the way — the kind of extended leisure time that I, lucky soul, have been blessed with throughout my life — I say more power to ’em.

Cross-posted at Aysmptosis.

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The Only Modern Xmas Story

Dr. Black has already embedded one of the few worthwhile modern Xmas songs.* And I usually leave re-posting this story to Brad DeLong, but he appears to have gone all-in for Latin and skipped it this year. So, without further ado, Mark Evanier:

I arrived, headed for my favorite barbecue stand and, en route, noticed that Mel Torme was seated at one of the tables.

Mel Torme. My favorite singer. Just sitting there, sipping a cup of coffee, munching on an English Muffin, reading The New York Times. Mel Torme.

I had never met Mel Torme. Alas, I still haven’t and now I never will. He looked like he was engrossed in the paper that day so I didn’t stop and say, “Excuse me, I just wanted to tell you how much I’ve enjoyed all your records.” I wish I had….

I waved the leader of the chorale over and directed his attention to Mr. Torme, seated about twenty yards from me.

“That’s Mel Torme down there. Do you know who he is?”

The singer was about 25 so it didn’t horrify me that he said, “No.”

I asked, “Do you know ‘The Christmas Song?'”

Again, a “No.”

I said, “That’s the one that starts, ‘Chestnuts roasting on an open fire…'”

“Oh, yes,” the caroler chirped. “Is that what it’s called? ‘The Christmas Song?'”

“That’s the name,” I explained. “And that man wrote it.” The singer thanked me, returned to his group for a brief huddle…and then they strolled down towards Mel Torme. I ditched the rest of my sandwich and followed, a few steps behind. As they reached their quarry, they began singing, “Chestnuts roasting on an open fire…” directly to him.

A big smile formed on Mel Torme’s face — and it wasn’t the only one around. Most of those sitting at nearby tables knew who he was and many seemed aware of the significance of singing that song to him. For those who didn’t, there was a sudden flurry of whispers: “That’s Mel Torme…he wrote that…”

As the choir reached the last chorus or two of the song, Mel got to his feet and made a little gesture that meant, “Let me sing one chorus solo.” The carolers — all still apparently unaware they were in the presence of one of the world’s great singers — looked a bit uncomfortable. I’d bet at least a couple were thinking, “Oh, no…the little fat guy wants to sing.”

But they stopped and the little fat guy started to sing…and, of course, out came this beautiful, melodic, perfectly-on-pitch voice. The look on the face of the singer I’d briefed was amazed at first…then properly impressed.

On Mr. Torme’s signal, they all joined in on the final lines: “Although it’s been said, many times, many ways…Merry Christmas to you…” Big smiles all around.

And not just from them. I looked and at all the tables surrounding the impromptu performance, I saw huge grins of delight…which segued, as the song ended, into a huge burst of applause. The whole tune only lasted about two minutes but I doubt anyone who was there will ever forget it.

Go read the whole thing. The rest of us have to abide with this:

If you liked this, please consider joining me in donations to Oxfam America or Heifer in honor of others. Which will still deliver an e-card in time for the 25 December thingie.

*The other was, of course, sung without the slightest sense of irony at soup kitchen being run at a homeless shelter by the cast of Glee.

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How Unitarians Saved Christmas

Poking a little bit of fun at his own traditions and perhaps a bit also at the ‘war on Christmas’ that is becoming a tradition in our politics, my minister offered this ‘sermonette’ to his congregation last Sunday.  I thought to put it up in a more prose form to remind us also to remember our roots and the founding fathers, invoked so often to lay claim to authority.   (Our church was really popular back then.)   Dan

“How Unitarians Saved Christmas (and why we celebrate the Solstice)” 

by Rev. Nathan Detering

We are going to begin by ask us a few questions. Are we ready? How many of us asked, or heard it asked – Do Unitarian Universalists celebrate Christmas?  How many of us have been or will be here on Christmas Eve where we tell the story of the birth of Jesus, and the nativity, and there is the pageant and the familiar carols?

And, with those two questions in mind, do we ever wonder what happened to the good old days, when ‘the holidays’ were not a euphemism for Christmas and Hanukkah? When the Christmas tree was trimmed with simple homemade ornaments and we would exchange simple gifts and where there wasn’t all this commercialism and shopping, and the true spiritual meaning of these holidays was first and foremost?

If you wonder any of these things, then we’ve got news! This kind of Christmas – the true Christmas that was only about Jesus or only about spiritual matters – never really existed. I hope this is freeing news for us! You don’t have to feel guilty! Because in fact, Christmas over the centuries has always been a hodge-podge of celebration, merriment, giving presents, getting together with family and friends, buying frivolous decorations (anyone seen the giant inflatable Santa’s?), and religious story. And – this is probably not news – many of the Christmas traditions we celebrate have their origins in the celebrations of the winter solstice.

So, a few facts before we get to our solstice-centered story this morning: Long before lights and cell phones and t.v.’s and illuminated our homes, the darkness and cold and retreating sun made many people depressed and even rather scared. So, when the ancient people started to see the sun return – as it will on Friday, after the shortest day of the year – these people celebrated the event with big dinners and singing and even exchanging gifts (sound familiar?) Some of their symbols of revelry are still with us – holly and ivy and wreaths and decking the halls with greens (as we will in a moment). A tradition they also had is one we’ve maybe heard of: kissing under the mistle-toe.

Another fact: The early Christian church did not celebrate Jesus’ birth at all. In other words, there were no Christmas Eve services and no pageants and no ministers trying to make sense of it all! Only over centuries, and only after these solstice feasts turned really wild and really out of control, did Christians seek to offer an alternative, calling it “Christ’s Mass,” or Christmas.

Another fact: nobody was as hard on Christmas as the Puritans, the folks who built the pews you are sitting in, who thought that Christmas wasn’t biblical and Jesus wouldn’t have approved of any birthday celebrations. They ordered shops to stay open on Christmas, banned holiday cakes and candles, and also managed to have the Massachusetts Congress declare Christmas illegal from 1659-1681. Bah-Hum-Bug!

And last, some final facts to make us Unitarians feel good. Christmas as we know it didn’t really get going until the mid-1800’s, and that was largely because of one story – A Christmas Carol – written by Unitarian Charles Dickens.

Another fact: how many of us have Christmas trees at home? Well, for that you can thank Charles Follen, minister of our Unitarian congregation in Lexington, MA, who introduced the idea of the Christmas Tree to New England, a tradition that has German and pagan roots. And, best of all, Unitarian James Pierpont wrote “Jingle Bells.’ Did Unitarians save Christmas? I think so!

So why do we do tell the story of Solstice here in our UU church? Because, I think, it honors the traditions of our forbears, it helps us reclaim the past, it teaches us something about why and how we do things at this time of year. And, best of all, it allows to show how far we’ve come since the Puritan days.

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A Random Observation About the 1970s… and the 1980s

by Mike Kimel

A Random Observation About the 1970s… and the 1980s

People often point to the stagnation of the 1970s, and the Reagan administration that followed, as evidence that cutting taxes leads to faster economic growth. But the same folks rarely look at the flip-side of things, and when they do, they don’t reach consistent conclusions. Here’s an example of what I mean. Real GDP grew 14.5% from the first quarter of 2003 to the last quarter of 2007. That is a 20 quarter period. I started with 2003 because that’s the year that tax rates dropped to 35%, and it was also more than a full year after the 2001 recession. I picked the last quarter of 2007 as the end point because the economy peaked in that quarter.

What followed, of course, was the Great Recession. 2003 Q1 to 2007 Q4 were the years of the Greenspan Put, and the real estate bubble. If it isn’t clear, I am cherry-picking, purposely selecting a period that best showcases the the 35% top marginal income tax rate era.
Now, 14.5% growth over 20 quarters lacks context. So here’s context. Take any consecutive 20 quarters beginning no earlier than Q1 of 1970 and ending in Q4 of 1980. There are 25 such periods. Only seven of them, or 28% of those periods, saw real growth rates below 14.5%. 72% of those periods had real GDP growth rates above 14.5%. (It is worth noting that four of those seven periods began in 1970 or Q1 of 1971 and that Carter didn’t take office until Q1 of 1977.)

Now, the 1970s were the decade of the Oil Embargo, the Iranian Revolution, inflation, stagflation, polyester, the Bee Gees and big sideburns. Big sideburns for crying out loud. They were also an era with top marginal tax rates of 70%. And yet, they compare very favorably to the best years we’ve seen since tax rates fell to 35%.

Now… let us discuss a more recent period. Reagan famously cut taxes – top rates were at 70% when he took office, and by 1986 were down to 50%. In 1987 they were cut to 38.5%, and then to 28% in 1988. They rose slightly to 31% in 1991. Finally, under Clinton, in 1993, top marginal tax rates rose to 39.6%. So we’d expect exceptionally rapid growth from 1987, ending around 1993, right? Well, pick any quarter from 1986 Q1 to 1991 Q4 and consider the growth in real GDP over a twenty quarter period. Every single one comes in with growth in real GDP below 14.5%.

That is, every single one under-performs the period that under-performs the 1970s. (I guess we can say those periods were under-performing squared.) The conclusion is clear, but I’m sure it is different to folks on different ends of the political spectrum.

Data here.

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