Republican State of Disunion: Taxes Edition
The Republican response to the President’s State of the Union message was delivered by Washington State Rep. Cathy McMorris Rodgers. It was personal, platitude-ridden, overtly religious, twee, and devoid of policy content or anything else of relevant substance – other than a naked assertion that BHO’s policies are making life harder in myriad unspecified ways. In other words, it was the most you could expect from an intellectually bankrupt party whose only agenda item is to make the President fail.
To be fair, she did offer one concrete recommendation: to lower taxes. The concept that lowering taxes would be beneficial at this point is one of those zombie ideas that not only won’t die, but continues to eat peoples’ brains. For example, in a recent AB comment stream, this idea was put forth: “Substantial tax cuts worked under Kennedy, Reagan, and Bush. Given the much higher level of household debt, a bold tax cut was needed more than ever.”
As I’ve demonstrated before, and shortly will again with actual facts and data, there is no reason to believe that lowering taxes improves the economy. But first, let’s remember two important details. First, over 45% of Americans don’t pay any federal income tax. The Wall Street Journal calls them “Lucky Duckies.” Imagine the great good fortune of making so little money that you don’t qualify to be taxed on your earnings. Second, as Bruce Bartlett pointed out 4 years ago, “tax filers with adjusted gross incomes between $40,000 and $50,000 have an average federal income tax burden of just 1.7%. Those with adjusted gross incomes between $50,000 and $75,000 have an average burden of 4.2%.”
So the opportunity to have tax cuts do much to promote real economic growth is somewhere between slim and nonexistent.
Let’s look at the actual information we have on tax rates and Real GDP growth.* Graph 1 shows the top marginal rate in blue and the capital gains rate in green from 1950 through 2011. Also included in brown [right scale] is the YoY percent change in RGDP [annual data] and a linear RGDP growth trend line. The major trend in each of these phenomena slants down over time.
Graph 1 – Tax Rates and GDP Growth since 1950
Graph 2 is a scatterplot of RGDP growth vs top marginal tax rate, same annual data as in graph 1.
Graph 2 – Scatterplot of RGDP Growth vs. Top Marginal Tax Rate
The points are color-coded Red for Republican administrations, and blue for Democratic administrations. Again, a trend line is included, showing a positive slope. I find it interesting that the space below the trend line is dominated by red dots. You might not. The data arranges itself in columns because the tax rates tend to remain constant for several years at a time. There is a great deal of scatter since many things besides the tax rate influence the economy. The simultaneous general abandonment of a Keynesian approach over the period is notable in this regard.
It might be a bit simplistic to think that a current tax rate influences GDP growth in the immediate year, so I took some long averages and redid the scatterplot. Graph 3 is a plot of the 8-year averages of both top marginal tax rate and RGDP growth. This has the additional advantage knocking down the data columns.
Graph 3 – Scatterplot of RGDP Growth vs. Top Rate, 8-Yr Avgs.
The 8th year of each administration that lasted that long is indicated with a red dot for Republican and a bright blue dot for Democrat. Make of it what you will. The general trend over time is from the top right to the lower left of the graph, and the highlighted dots appear in strict right to left chronological order, from Ike at the right though Kennedy-Johnson, Nixon-Ford, Reagan and Clinton to G. W. Bush at the left. A similar graph of 13-year averages tells the same story, but with all of the the dots landing closer to the trend line.
It does appear from graph 3 that lowering the top rate from 91% to 70% might have been associated with higher RGDP growth. But, note from graph 2 that the spread of RGDP values at 91% is far greater, and that the highest individual RGDP values are at the higher tax rates. The 50’s, when most of the 91% values occurred, were characterized by a series of economic shocks and recessions as the U.S. returned to peace time conditions and absorbed several million WW II veterans into the work force.
Graph 4 is a close-up view of the 8-Yr average graph starting with the Reagan administration.
Graph 4 – RGDP Growth vs. Top Rate, 8-Yr Avgs.from Reagan on
The eight years of the Reagan administration are indicated with red dots, GHW Bush in orange, Clinton in bright blue, and GW Bush in purple. The later is most notable for making the 8 year average of RGDP growth dive off a cliff. And before you get too excited about the transient RGDP increase in the late Reagan years, remember he also ran deficits that dwarfed anything seen up to that time.
The record of the Clinton years not withstanding, I’m not going to get into a post-hoc discussion of higher taxes causing higher growth – though the data up to at least the 70% level is consistent with that assertion. Correlation is not causation. On the other hand, the absence of correlation absolutely refutes causation. What one may say with absolute certainty is that in the post WW II United States, tax cuts have never led to a sustainable increase in RGDP growth. The lone possible exception is the cut in the 60’s from 91% to 70%. It’s plausible that cutting from an extremely high tax rate might be beneficial, but, due to the extreme volatility of the early post WW II period, the effect in that case is not at all clear.
So if anyone tries to tell you that cutting taxes in the current set of conditions will stimulate growth, feel free to show them this post.
_________________________________________
* Top marginal tax rates from Citizens for Tax Justice.
Capital Gains Tax rates from the Tax Policy Center.
RGDP data from FRED
Good stuff , Jazz.
Regarding the final chart , it pays to keep in mind that the economic performance during the Reagan and Dubya periods benefited from strongly rising leverage (i.e. credit booms ) , which , if accounted for , would make for a stronger correlation of high marginal tax rates with better economic growth.
http://research.stlouisfed.org/fred2/graph/?g=9gr
Your simple charts are full of missing variable biases, which I cited some before, and you obviously completely ignored.
“So the opportunity to have tax cuts do much to promote real economic growth is somewhere between slim and nonexistent.”
The EITC is similar to a negative income tax, so the implication that tax cuts stop at 0% is not entirely based in truth.
PT –
Yes, I am explicitly looking at one variable. If i were claiming cause and effect, you would have a valid criticism. But – also explicitly – I am not doing so. My point is to show non-correlation, rather than build a model of GDP growth.
Marko has indicated another variable, which makes my case even stronger.
Sorry I missed your other variables. Please cite them again, and I’ll give them some thought..
M.jed –
In that sense, I guess a tax cut would be equivalent to an increase in the EITC.
The point is that placing more money – by whatever means – in the hands of those who will spend it is going to boost consumption, which is about 70% of GDP.
Cutting the top tax rate is very unlikely to do that. Cutting low to middle class rates could, in the abstract, but doesn’t provide much leverage since the effective rates are already so low.
Increasing the EITC should be highly effective -for those who have earned income. UI and welfare also boost consumption for those who don’t. But those ideas go nowhere with a Republican led house.
Cheers!
JzB
You need to take into account other factors, e.g. population growth, or per capita real GDP growth, whether inflation was overstated or understated (for example, there’s substantial evidence inflation was understated in the 1970s and overstated in the early 1990s and beyond), trade deficits subtract from GDP (which increased from zero of GDP in 1980 to 6% of GDP in 2006, and remains relatively high, continuing to subtract from GDP growth – China has been to a large extent a U.S. factory, not counted in U.S. GDP), smaller economies tend to grow faster than larger economies, whether the top tax rate was raised too high and reduced total tax revenue (income could’ve been sheltered), etc..
If you believe in Keynesian economics, expansionary fiscal policy includes tax cuts. When the economy is in recession, cutting taxes generates growth and raising taxes slows the expansion to a sustainable rate, like in the 1980s.
“You need to take into account other factors, e.g. population growth, or per capita real GDP growth, whether inflation was overstated or understated (for example, there’s substantial evidence inflation was understated in the 1970s and overstated in the early 1990s and beyond), trade deficits subtract from GDP (which increased from zero of GDP in 1980 to 6% of GDP in 2006, and remains relatively high, continuing to subtract from GDP growth – China has been to a large extent a U.S. factory, not counted in U.S. GDP), smaller economies tend to grow faster than larger economies, whether the top tax rate was raised too high and reduced total tax revenue (income could’ve been sheltered), etc……”
Jeebus!
Jazz,
Please find out what results Peak Trader would prefer to see , then modify your post so as to generate those results.
Trust me , if you do this , it’ll be easier on all of us.
PT –
It doesn’t matter if you look at real or nominal GDP, per capita or not. The song remains the same.
http://jazzbumpa.blogspot.com/2010/05/real-gdp-per-capita-since-1950.html
But basically, to Marko’s point, you’re saying, “why don’t I write the post that you want me to write?” Ain’t gonna happen. But feel free to do it yourself, if you’re so inclined.
Look, this is a blog post, not a peer reviewed journal article. It has one simple, direct point – and I made it. The first graph does that, quite emphatically, all by itself.
You, on the other hand, made the opposite claim, with no evidence at all. And if you try, you won’t come up with any, because it does not exist.
You don’t like it, but that’s reality.
Lowering taxes does not correlate with increasing GDP growth.
No correlation no causation.
That’s it. QED.
Other factors are of marginal relevance, at best. I’m not trying to develop the economic equivalent of unified field theory.
Marko –
Nobody ever said it would be easy.
Cheers!
JzB
Jazz:
Love the graphs! 🙂
“No correlation no causation.”
This is a point that should be repeated over and over. There is a correlation between increasing top marginal tax rate (from the current rate) and increasing GDP growth. That means that increasing the tax rate MAY increase in GDP growth.
There is no correlation between decreasing the current top marginal tax rate and increasing GDP growth. Therefore decreasing the tax rate WILL NOT increase GDP growth.
There must be correlation if there is to be causation.
It’s been proven, mathematically and empirically, reducing taxes generates growth and raising taxes slows growth, ceteris paribus, like easing the money supply generates growth and tightening the money supply slows growth, ceteris paribus. It’s a major reason why the business cycle has been smoother.
Also, for example, if tax rates, or tax revenue, are too low, a tax cut will have less of an effect (e.g. in the 1930s) to generate growth. Similarly, if tax rates, or tax revenue, are too high, a tax cut will have more of an effect to generate growth (e.g. the 2001 recession, when per capita real GDP didn’t fall that year – of course low oil and commodity prices, the “peace dividend,” and demographics, i.e.. the peak of the 35 to 54 age group, which is the most productive group, contributed to the strong disinflationary boom from 1995-00).
However, reducing the top tax rate, or reducing taxes for the top 20%, for example, will have less of an effect to generate growth, because their marginal propensity to consume is relatively low and their marginal propensity to save is relatively high, which is less effective to generate a consumption-employment cycle.
Peak,
I know I should not do this, but is there a chance you could link to the “mathematically and empirically” proven truth you talk about?
Yes, PT, cites please.
But I warn you in advance, if they’re from the Heritage Foundation, all I will do is laugh.
However, reducing the top tax rate, or reducing taxes for the top 20%, for example, will have less of an effect to generate growth, because their marginal propensity to consume is relatively low and their marginal propensity to save is relatively high, which is less effective to generate a consumption-employment cycle.
This is more or less correct, and more or less the point of this post. Replace “less of an” with “essentially zero” and you’ll have it right.
JzB
Messed up the first link. s/b
http://jazzbumpa.blogspot.com/2011/06/another-lie-from-lying-liars-at-heritsg.html
JzB
JzB, apparently the Republican argument is that the top 1% taxpayers are the “job creators” and thus we must decrease their taxes if we want jobs. Which, as you point out, is completely contradicted by the evidence. Heck, I don’t need a fancy graph, even. I just need a single data point to compare to last year’s data point. 1968. 75% top marginal tax. 3.6% unemployment rate. Real per capita GDP increase of 2.12%.
Reality, of course, is that businesses are in business to make a profit, not as social welfare organizations, and hire only the number of workers needed to meet demand, and not a single worker more, because each additional worker means less profit. So the only way to increase employment is to increase demand. Which cutting taxes on the 1% won’t do because they’re just 1% of the population and cannot physically consume anything near their proportion of real income — and don’t. Adding yet more unconsumed income will not change employment one whit unless there is a shortage of investment capital — which 0% effective rates on Treasuries says isn’t happening (if there were worthwhile investment vehicles to stick that cash into, it’d go there, so clearly there’s more cash than investment possibilities). So in other words, you and I both know that the right wing tax cut mantra is BS, and we both know it for the same reason — we looked at the actual data. But who needs data when you have ideology? They’re like Soviet Communists, clinging to a failed ideology long after it’s proven wrong, and refusing to listen to any data that suggests their ideology might be flawed. And we all know how successful the Soviet Communists were in the end….
“It’s been proven, mathematically and empirically, reducing taxes generates growth and raising taxes slows growth…”
If the above statement is true and not just opinion, there should be a preponderance of real world data to support it. Until I see the data, I consider the statement an opinion, not fact.
And an opinion is nothing more than an opinion!
I’ve already shown mathematically when income = GDP = output rises through a tax cut, i.e. disposible income rises, both consumption + saving = income rise. Moreover, the marginal propensity to consume + the marginal propensity to save = unity.
And, it’s supported by overwhelming empirical evidence that expansionary fiscal policy generates growth and contractionary fiscal policy slows growth, ceteris paribus.
I guess, some people here believe when you cut taxes for workers in the top 20%, for example, they’ll save all of it, i.e. has zero effect on consumption, or maybe they believe if you cut their taxes $1, they’ll save $1.10. In reality, they’ll spend some of it and save some of it. Some will spend all of it and some will save all of it. Some may donate to the poor, and the poor will spend all of it.
You can also make the same false assumption with monetary policy and say when the Fed eases the money supply, growth slows, and when the Fed tightens the money supply, growth speeds-up. However, that’s not true.
For example, the Fed began an easing cycle in Sep 2007 and the economy peaked in Dec 2007 and fell into recession. Also, well before growth accelerates, the Fed will tighten the money supply, because of lags in the adjustment process, since the Fed works in the future economy.
P.T.: Again: 1968.
You waving your hand about “the math” does not make 1968 go away.
“…when income = GDP…”
When you make up your own equalities, you can mathematically prove anything.
Either don’t call it GDP or try using the actual definition of GDP.
“Measuring GDP
Gross domestic product, GDP…Measures both output and income, which are equal.”
http://en.wikipedia.org/wiki/Measuring_GDP
PT,
Using the income approach to GDP from your reference, where does a change in tax rate enter? The only thing in terms of individual income that I see is “employee compensation” which is a gross number, not an after tax number. It is the same no matter what the tax rate.
“I’ve already shown mathematically when income = GDP = output rises through a tax cut”
You’re really confused about this , or pretending to be.
What happens when you pay taxes ? Does the gov’t bury the money in the back yard ? No , they cut checks and send them out , which results in income for whoever gets a check.
The reason you can’t see a growth response from the Republican tax cuts is that they were structured to redistribute income upward. Given that the rich save most of their marginal income , and that the economy of the U.S. is generally demand-constrained unless the credit spigots are wide open , the result was that the tax cuts were non-events.
Jerry, there are many ways to account for GDP without an explicit tax rate variable.
And, you’re making assumptions, on employee compensation and tax rates, that aren’t based on anything.
I’ve shown, cutting taxes increases consumption and therefore income rises.
Again: 1968.
You have a correlation and claim it is causation. All I need to do is present one data point to show that your correlation is unrelated to causation. I did that, PK. 1968. Explain 1968, please. Thank you.
Marko, when you owe $5,000 in high interest credit card debt, a $5,000 check from the government won’t help you. However, government spending $5,000 to hire and overpay five people to screw a lightbulb will help you, particularly if you’re on the other side of the country 🙂
Of course, you could default and have banks pick-up the check.
PT, you assume that government is hiring people to screw in light bulbs. Given the enormous amount of infrastructure repair needs this country has, the government is more likely to be hiring people to repave highways and repave bridges. And yes it helps me even if the highway being repaved is all the way across the country, because the company that got the contract buys computers, and I design computers, and if the company that got the contract now has the money to buy new computers, that’s money in my pocket even though I’m all the way across the country.
This isn’t brain surgery. This is economics 101. Our economy is no longer local, and hasn’t been for over half a century. Money injected in one section of the country doesn’t stay there, and hasn’t stayed there for over half a century.
From the viewpoint of the economy, $5000 paying down debt is basically mattress money, creating no economic activity. It went to a bank, and the banks right now are mostly just stashing it in the Federal Reserve rather than lending it, effectively shredding it (a ledger entry at the Fed is not circulating money fostering economic activity).. $5000 spent paying people to pave roads, on the other hand, creates significant economic activity because there’s strings attached to the money — the paving company can’t just pay down debt with it, they have to buy asphalt, pay workers, etc.. So which should government concentrate on in order to increase economic activity? Well, that’s one of those “duh!” things, duh!
Badtux, of course, government should spend and squander that $5,000. How much it costs to repave the road isn’t really important, as long as people are employed. When you bought those $5,000 worth of goods, they were meaningless trinkets. So, why pay for them and have another $5,000 to take the slack out of the economy and generate more growth? You just don’t know how to spend.
I stated in Feb ’09:
1. Obama should change his stimulus plan to a $5,000 tax cut per worker (or $700 billion for the 140 million workers at the time, including through the earned income tax credit), along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets [i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc.]. This plan will have an immediate and powerful effect to stimulate the economy and strengthen the banking system. When excess assets and goods clear the market, production will increase.
2. Shift “toxic” assets into a “bad bank.” The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost “animal spirits,” and inflate toxic assets.
3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.
PT, are you saying we do *not* have trillions of dollars of infrastructure needs? If so, then you need to tell it to every single infrastructure expert in the United States, each of which is absolutely alarmed by the poor conditions of our roads and bridges.
if you’re going to respond to my comments, you should respond to what I actually wrote, instead of responding to imaginary BS that you made up out of the finest straw. Your idiotic strawman arguments are annoying me and just make you look like a dishonest fool and moron. If you wish to engage me, address what I say, not what you imagine I said in some theoretical imaginary universe of pink unicorns and cotton candy trees where the infrastructure does not have trillions in unmet maintenance needs. Until then, good day, sir.
Hmm, PT. On the last post you sound like Ben Bernanke. Imagine that :).
The problem with handouts in a deflationary era is that they disappear under mattresses because the future value of the handout is felt to be higher than its current value. If the future value of an asset is higher than its current value, the only sane and rational thing to do is to hang on to the asset. Every trader knows that. Duh.
Your proposal for the government to simply buy stuff, on the other hand, was virtually identical to what I was pointing out about government spending. I’ll just point out that we have huge amounts of infrastructure that need repairing, so we don’t need to have the government buy cars in order to sink them as reefs in order to stimulate the economy. There is actual real productive use that can be done with that kind of stimulus money to fulfill real needs of the country that cannot otherwise be fulfilled.
So, you want to spend money on roads when the economy is underproducing by $1 trillion a year and there are over 20 million people unemployed or underemployed.
Perhaps, we should’ve jolted the economy into a self-sustaining consumption-employment cycle with $700 billion in tax cuts first, and then the country would be producing $1 trillion a year more in output, at full employment, while government revenue soared and government spending on the unemployed collapsed, resulting in much smaller federal deficits or federal surpluses. Then, the government would have lots of money to spend on paving roads (and state and local governments would also be fiscally strong rather than still on this on-going train wreck).
The problem with your hypothesis, PT, is that it is explicitly contradicted by the Federal Reserve flow of funds data from the first Obama stimulus plan in 2009. That stimulus consisted of $237 billion in tax cuts, and more than $100 billion of those were targeted at lower and middle class households. The flow of funds data showed that the money simply disappeared into banks as payment for debts, rather than being used for consumption — and at that point essentially disappeared under a mattress, since banks simply stashed it at the Federal Reserve.
The reality is that simply handing out money with no strings attached, while intellectually simple, runs into the reality of the zero bounds. Note that the zero bounds is not necessarily zero. All that is necessary is that people view the future value of money as being greater than the current value of money (perhaps because they fear for their jobs and thus view the money as being more valuable to them at some point in the future than it is now) and they’ll stash it under mattresses rather than spend it.
And that, in fact, is what happened to the Obama stimulus tax cuts — they disappeared under mattresses rather than being spent. The result was a lot of lumpy mattresses, but not the increase of consumption that you predict would have happened.
At the zero bounds, the only handouts that work are handouts with strings attached that require the money to be spent in some way that creates employment. Because as long as unemployment is high and people are fearing for their own jobs, they will continue to believe the future value of their money is greater than its present value, and will do what everybody does when they view an asset as having greater future than present value — they’ll hold on to it.
Keynes 101. 🙂
The tax cuts were too slow and too small. They were only enough to place a floor on consumption, or certainly not enough to jolt the economy into a stronger and lasting recovery. I think, it amounted to $17 a week, on average, or some ridiculously low, and slow, amount.
You can argue the benefits of a tax cut all you want but the data does not support your argument.
Jerry, your statement proves you’re in complete denial, along with being closed-minded and delusional on the subject. The data prove tax cuts promotes growth. There are only disputes, by NeoClassical and NeoKeynesian economists, with the multiplier effect.
A tax cut was needed more than ever before for reasons I stated, which you also seem to completely ignore. However, another major reason for a substantial tax cut is the imbalance caused by international trade.
U.S. consumers increasingly bought foreign goods and foreigners increasingly bought U.S. Treasury bonds. Those dollars should’ve been “refunded” to U.S. consumers in the form of tax cuts to allow the spending to go on. Unfortunately, government kept, spent, and squandered too many of those dollars instead, and now have weak demand.
EMichael
January 31, 2014 9:00 am
Peak,
I know I should not do this, but is there a chance you could link to the “mathematically and empirically” proven truth you talk about?
PT says
“The data prove tax cuts promotes growth.”
1. Show me the data.
2. What kind of tax cuts are you talking about?
3. What are you calling growth.
4. The data show that increases in the top marginal income tax rates increases GDP growth, the opposite of what you are talking about. You have yet to provide anything other than your opinion.
5. Put some real world numbers into your math. Take the equation for GDP based on income and show us what changes and by how much when we cut taxes. Show us how GDP increases and how much more it will increase with a tax cut.
6. Explain the difference in the government buying cars for people and the government buying roads for people.
He’s still in denial about the flow of funds data from 2008 and about the unemployment and economic growth data from 1968 (75% top marginal tax rate) nevermind what JaB’s graphs above show, so expect just more handwaving and techno-babbling about how it’s true because he says it’s true and JzB’s graph above is wrong because he says it’s wrong. Obvious troll is… obvious.
PT –
Jerry, your statement proves you’re in complete denial, along with being closed-minded and delusional on the subject. The data prove tax cuts promotes growth.
My post shows unequivocally that the top marginal tax rate correlates positively with GDP growth. You repeating naked assertions refutes nothing.
If you are going to respond with hand-waving and fact-free dogma while snarking at the other commenters, I’m going to have to ask you to not comment on my posts.
Your last several comments have little or nothing to do with the current subject matter. I don’t appreciate having my post hijacked to serve your agenda.
You are welcome to disagree, but bring real facts, supportable data, and some knowledge of the methods of rational discourse.
Play nice and we’ll all have fun.
Otherwise, I have the ability to delete comments, and will do so if provoked.
JzB
I’ve already cited mathematical proof and empirical evidence lower taxes generates growth and raising taxes slows growth. Look above.
And, Badtux believes tax cuts simply disappear into mattresses or banks.
A $5,000 tax cut for each worker can increase discretionary income, particularly when household debt is high.
For example, if someone owes $5,000 on a car debt and pays $400 a month, a $5,000 tax cut can pay-off the loan and raise discretionary income $400 a month. Moreover, if all workers receive a $5,000 tax cut, it will be much less likely debts will default, because people will make appropriate and rational choices. The sum of those choices will raise output and employment substantially.
EMichael, when there’s excess inventory, no production, and no customers, is the solution to have government produce another good?
PT,
Show me how $400 of individual descretionary spending products more economic growth than $5000 of government spending? Show me the numbers!
JazzBumpa, you can also say Fed easing cycles correlate with slower growth and Fed tightening cycles correlate with faster growth. Then, suggest when the Fed eases, you get slower growth and when the Fed tightens, you get faster growth. Yet, you know, or should know, that’s not true.
Two words: Zero bounds.
Someone who fails to understand the zero bounds and how things behave differently there is not worth my time. The different behavior at the zero bounds has been mathematically modeled and the actual measured reality matches the model. Good day, sir.
“when there’s excess inventory, no production, and no customers, is the solution to have government produce another good?”
Is that really what is being discussed? Does not increasing tax revenue allow the governement to fill in depressed consumption? (Certainly not add to production?)
Badtux, good day to you too sir. Let me know when you figure out how monetary policy works.
” the absence of correlation absolutely refutes causation”
I think this is a step too far. If there is a positive relation between lowering taxes and economic growth, but it has a small contribution, then another factor could everwhelm it. Having multiple factors related to time could make sucha thing happen.
Instead, you could say that supply-siders act as if the relationship is proved, which would require correlation. Lack of correlation refutes any proof of causation.
Clearly, the incentive effects make sense (for the supply-side case), but I have seen hypothoses for why lowering taxes can lower growth that make just as much sense, and could explain why the incentive effect gets overwhelmed.
Jerry, that’s the debate between NeoKeynesian and NeoClassical economists, which has a higher multiplier effect, government spending or tax cuts.
I’m saying when household debt is high, a tax cut has a higher multiplier effect.
Arne, stronger growth will increase tax revenue. The question is what will generate faster growth through federal budget deficits, spending or tax cuts.
Answer: Depends on whether you are at the zero bounds.
Keynes 101. Modeled. Proven. Matches observed reality. Monetary policy results in pushing on a string at the zero bounds.
BTW, I *REALLY* appreciated the insult, PT. You’re an asshole. That is all.
Badtux, my response was appropriate to your following statement (particularly, since I passed the comp exams in Money & Central Banking).: “Someone who fails to understand the zero bounds and how things behave differently there is not worth my time.”
PeakTrader
February 1, 2014 3:23 pm
“EMichael, when there’s excess inventory, no production, and no customers, is the solution to have government produce another good?”
Who builds roads?
BTW,
I have seen no evidence anywhere in any of your posts(you told us to look above). Please copy the post you say shows your evidence, cause I cannot find it.
EMichael, here’s part of it:
I’ve already shown mathematically when income = GDP = output rises through a tax cut, i.e. disposible income rises, both consumption + saving = income rise. Moreover, the marginal propensity to consume + the marginal propensity to save = unity.
And, it’s supported by overwhelming empirical evidence that expansionary fiscal policy generates growth and contractionary fiscal policy slows growth, ceteris paribus.
Moreover, I may add, we saw substantial tax cuts spur the Kennedy, Reagan, and Bush economic booms (the second, third, and fourth longest expansions in U.S. history). Of course, the Bush 41 boom, from 1991-01 was the longest expansion, which also included a “peace dividend,” low oil and commodity prices, and the productive peak of the Baby-Boomers, i.e. reaching “prime-age” from 1995-00. Also, I may add, the Bush 43 boom from 2001-07 followed a very mild recession, where per capita real GDP didn’t fall in the 2001 recession and real GDP growth averaged about 3%, in spite of trade deficits reaching 6% of GDP, which subtract from GDP.
Sorry.
That is bs.
I do not know which is worse, your thought process or your inability to read a calendar.
The Bush booms? I am thinking II cause all of the growth we saw can be attributed to the growth in residential construction caused by the bubble. And that was not real in any way.
Somehow I cannot find the Bush 1 tax cuts, so I am guessing you are going with the theory of decade long lag from the Reagan tax cuts to the growth in the 90s while ignoring the tax increases that happened along the way.
Just silly
I want to clear up one of Badtux’s misconceptions. He stated: “This isn’t brain surgery. This is economics 101. Our economy is no longer local, and hasn’t been for over half a century. Money injected in one section of the country doesn’t stay there, and hasn’t stayed there for over half a century.”
There was a map of the North Dakota fracking boom that showed the multiplier effect was strongest at the center of the oil boom, became increasingly weaker away from the center, and was almost non-existant, perhaps 200 miles from the center.
PeakTrader11:
You are taking on the appearance of a troll. Quite literally you do not know what you are talking about. It is econ 101 and you are abusing the privilege. Please stop.
EMichael, I didn’t state there was a Bush 41 tax cut. I cited some of the other factors that facilitated the boom. Expansions are from trough to peak.
I don’t know which is worse: Your lack of economics, math, or logic.
And one specific industry in North Dakota is representative of exactly what?
And, again, cites, please.
Otherwise, it’s one more naked assertion.
“I’m saying when household debt is high, a tax cut has a higher multiplier effect.”
” The question is what will generate faster growth through federal budget deficits, spending or tax cuts.”
This combination does not make intuitive sense to me. A high multiplier comes from people spending what they receive. But when they have debt, they will pay off the debt before they increase spending.
“Moreover, I may add, we saw substantial tax cuts spur the Kennedy, Reagan, and Bush economic booms (the second, third, and fourth longest expansions in U.S. history). Of course, the Bush 41 boom, from 1991-01 was the longest expansion….”
Peak,
I would suggest you read JBs post again and try not to talk.