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

Employment and Deficits: A Tale of Two Administrations

Stan Collender notes that, for the first time in four years, the U.S. Treasury reported a surplus in the month of April.  It isn’t just that there was a surplus in April of 2008, though.  If you look back through Aprils (data here), the last time that month showed a deficit is 1983—the April less than six months after the last official “double-dip” of recessions.
Stan offers three reasons that the White House doesn’t want to point out this good news.  I consider the first two somewhat silly—the GOP never hesitates to take about the deficit, except to deny its responsibility, and no politically-alert Democrat will see the April surplus as representative of “the wrong fiscal policy” so much as an indication that employment last year was better than it has been.
It’s his third reason that is most interesting:

While that’s likely to be $200 billion or more less than what was recorded for 2011, the deficit will still be close to $1 trillion and that would be hard to defend.

I’m assuming the phrase “close to $1 trillion” means that Stan assumes the actual FY2012 deficit will be lower than $1T.  The original projection was just under $1.3T. Getting that down to $1T would be 23% better than the original projection, not to mention the psychological gain of being back down below thirteen digits again. Even $1.1T would be just about a 15% improvement over the original projections.  If a 15%+ improvement in the deficit over your projections isn’t worth saluting, then what is?
Stan concludes:

This is a little-understood part of the federal budget debate. Even if the 2012 deficit was half of what it was in 2011, and even if that reduction were applauded by Wall Street and the economic community, it would still be a painfully difficult political issue. In fact, long after the deficit has fallen to the point where most economists are comfortable with it, the political advantage will still be with those who criticize it.

Far be it for me to argue, but…just for the sake of argument, I decided to compare President Obama’s record with that of the last sitting President running for re-election on The Two Issues that Abide, The Deficit and Jobs.

First, Deficit:

dFYFSD Obama v Bush

We don’t, of course, have the data for the deficit at the end of this year yet. (We have data for subsequent years of debt for the Previous Administration, of course, but nothing that would have been public knowledge by the voting in November of 2004.)

The story here is a clear one: the previous incumbent increased the deficit significantly; the current one has reduced it from the baseline he inherited. (If the current year ends up with around a $1T deficit, Year 3 will be around +$400,000.)

So the current Administration has been taking the deficit in the “right direction.”  But, of course, that’s only good if you are in a growing economy (for the Democratic knowledgeable; see Stan’s second point) or because the Previous Administration was “priming the pump” for the Great Growth that would follow. (After all, what the 2001 tax regression didn’t solve, certainly the 2003 Hubbard-Mankiw version would.)

So let’s check how well that Growth Thing worked.  I’ve already pointed out that the post-recession public-sector employment between the current and the previous Administrations was about 600,000 jobs almost nine months ago.  So let’s be as nice as possible and compare Total Employment Gains since their respective Recessions, knowing that we’re spotting the Previous Administration when looking at total Non-Farm Payroll:

payemspostrecession

The Obama Administration got employment back to the end-of-recession level after sixteen (16) months; it took the previous Administration twenty-eight (28) months. Counting from the end of the recession, the Previous Administration produced just under 1.4MM jobs in the thirty-four (34) months to the next election (Dec 2001-Oct 2004).

The Obama Administration has produced more than twice that (2.825MM) in thirty-three (33) months.
In summary, if we compare the current Administration to the previous one, it has (1) produced twice as many new jobs, (2) produced budgets that reduced the annual Federal deficit instead of making it greater, and (3) reduced our troop presence in wars started by the Previous Administration while finding and eliminating Public Enemy #1.

And the only thing it wants to talk about is the third.

As I said chez Collender, If this Administration is afraid to run on its gains because there is less “political advantage” in highlighting the improvements your Administration has produced than in getting bashed for something for which you will perpetually get bashed, then the country is truly lost.

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Newt downsized executive branch staff in the 90’s

I found this link in Sitemeter and am in a quixotic mood. I couldn’t resist chasing it down as I wondered what Free Republic was and how Mike’s material could be used in a debate there.

Lifted from comments at Free Republic website regarding Newt’s speech at CPAC earlier this week (and a spirited debate of advocates for Santorum and Romney) comes this note from a Newt admirer regarding Newt’s downsizing the ‘federal government’ in the 1990’s (and to his credit linked appropriately). He uses one of Mike’s early charts on executive branch civilian employment measures of compararing Presidents:

To: American Constitutionalist  

Chart of federal civilian employees…big decline under the Newtster, even while the economy was booming. The decline leveled off post-Newtster. We can see the Carter/Bush eras saw declines in their recessions but Newt kept it going in good economic times.

Another commenter not linked to here chased the link (to his/her credit) to the OMB tables and but then came to the conclusion Mike made up the numbers.

I am not proposing cosmic signigicance here, but a scratch of the head and a ‘WTF’.   As a leftie I suppose the conclusion could be that President Clinton found Newt’s tenure as Speaker so less than challenging he decided that he didn’t need the staff. Aside from all the other business. Thanks Ken for the idea.   🙂

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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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Looking Beyond Election Day

NYT Robert Reich calls our attention to post election 2012 life and political realities:

Looking Beyond Election Day

By Robert Reich, Robert Reich’s Blog

Most political analysis of America’s awful economy focuses on whether it will doom President Obama’s reelection or cause Congress to turn toward one party or the other. These are important questions, but we should really be looking at the deeper problems with which whoever wins in 2012 will have to deal.

Not to depress you, but our economic troubles are likely to continue for many years – a decade or more. At the current rate of job growth (averaging 90,000 new jobs per month over the last six months), 14 million Americans will remain permanently unemployed. The consensus estimate is that at least 90,000 new jobs are needed just to keep up with the growth of the labor force. Even if we get back to a normal rate of 200,000 new jobs per month, unemployment will stay high for at least ten years. Years of high unemployment will likely result in a vicious cycle, as relatively lower spending by the middle-class further slows job growth.

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The Effect of Individual Income Tax Rates on the Economy, Part 6: 1981 – 1993

by Mike Kimel

The Effect of Individual Income Tax Rates on the Economy, Part 6: 1981 – 1993

This post is the sixth in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940, the third from 1940 to 1950, the fifth looked at 1950 – 1968, and the sixth from 1968 to 1988. Because the Reagan era is so pivotal in the American psyche, though it was covered in the last post, I intend to focus on it again. The last post included the lead in to Reagan’s term, this post contains the follow-up to his term. In this post I’ll look at the period from 1981 to 1993.

Before I begin, a quick recap… both the 1901 – 1928 period and the 1929 – 1940 failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. It is worth noting that growth from 1933 to 1940 was generally quite a bit faster than at any other peacetime period since data has been available, both on average and for individual years. Not quite quite what people believe, but that’s what it is.

In the 1940 – 1950 period, we did observe slower economic growth following a tax hike and faster economic growth followed a tax reduction. However, that happened when the top marginal tax rate was boosted above 90%.
Interestingly enough, though the so-called “Kennedy Tax Cuts” are often used as one of the prime exhibits on the benefits of cutting taxes, a look at the 1950 – 1968 period yields no such conclusion. Growth rates were already rising before the tax cuts occurred in 1964 and 1965, reached a peak when the tax cuts took place, and started shrinking immediately afterwards. The other period that is always pointed to as evidence that tax cuts spur growth is the Reagan years, which showed up in the 1968 – 1988 post. It turns out that put into context, the Reagan years produced one year of rapid but not particularly extraordinary growth a few years after tax cuts began. That’s it.

Real GDP figures used in this post come from Bureau of Economic Analysis. Top individual marginal tax rate figures used in this post come from the IRS. As in previous posts, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate. Let me stress this point again as I’ve been getting people e-mailing me to tell me I’ve got the growth rates shifted a year. That is correct, and is being done on purpose (and is shown on the graph labels). To avoid questions of causality, the growth rate in year X used in this post is the growth rate from year X to year X+1. And when I say “to avoid questions of causality” – you’d be amazed at how many people write me when I don’t do this and insist that sure, higher tax rates seem to be correlated with faster growth, but that’s because when growth is faster governments feel more willing to charge higher tax rates.

With the preliminaries out of the way, let’s get started. The first graph shows the tax rates from 1981 to 1993 along with the t to t+1 real GDP growth rates.

Figure 1.

It goes without saying that what the graph does not, repeat, does not show is that lower tax rates have much to do with faster economic growth. In fact, some of the slowest sustained economic “growth” that occurred during the Reagan-Bush years coincided with the lowest tax rates: 28% and 31%. The one standout year occurred when tax rates were at 50%, and had been at 50% for a few years. And yet, somehow this period has entered the public consciousness as Exhibit A that Tax Cuts Work.

That said, I’d like to point out that unlike the folks who venerate Reagan today, Reagan himself did have a reason, an excellent reason, in fact, to try tax cuts… at least the first round of tax cuts. Looking back from the vantage point of 1980 and leaving out the WW2 years, real economic growth when tax rates were in the 90% + range was lower than it was when tax rates were in the 80% to 89.9% range, and that was slower than when tax rates were in the 70% to 79.9% range, and that in turn was slower than when tax rates were in the 60% to 69.9%. That is shown in the graph below.

Figure 2.

Note that all the information contained in Figure 2 was available by the time Reagan took office. If the information in Figure 2 is all you have, it isn’t unreasonable to wonder whether further reductions in the tax rate will lead to faster economic growth. Of course, Reagan did have a bit more information available. He also had growth rates from the last time tax rates were in the 24% and 25% range (i.e., the start of the Great Depression) which were negative… and which might have tipped him off that the relationship between tax rates and growth is actually quadratic. But I guess its a bit much to expect any of Reagan’s advisors to consider anything like a quadratic relationship.

In any case, we can combine Figures 1 and 2 to put the Reagan – Bush rates into context:

Figure 3.

If you’re wondering, during seven of the 12 Reagan-Bush years, growth rates were actually below the average rate observed when top marginal tax rates were above 90%… and the really slow growth during the Reagan – Bush era occurred disproportionately when tax rates were at the 28% and 31%. That is to say, when tax rates were at their lowest levels in the Reagan – Bush era, growth rates were also at their lowest. And as the graph also shows, every single year, repeat, every single year of the Reagan Bush had a lower average growth rate than when tax rates were in the 60% to 69.9% range.

So… what we don’t from the Reagan – Bush era is anything that supports the notion that lower tax rates correlate with faster economic growth. (Note… correlation does not imply causality, but lack of correlation certainly does imply lack of causality.) We do see that it could have been a rational experiment for Reagan to cut tax rates from 70% to 50%. It was not a rational experiment, based on what happened at 50%, to cut rates further, and the result was easily predictable.

And speaking of rational… the story the data tells is strongly at odds with what is commonly believed. And this isn’t ancient history. Most of us lived through this. It isn’t rational for us to believe things that aren’t true. But collectively, we do. And its leading to crummy growth rates. What a surprise.

Next post in the series… 1993 to the present.

As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel (note that I’m not from the wealthy branch of the family that can afford two “m”s – make sure you only put one “m” in there) at gmail period com.

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Extrapolated September 2010 Debt, by President

by Mike Kimel

Extrapolated September 2010 Debt, by President

Cross-posted at the Presimetrics blog.

This one is quick and dirty because I’m very low on time…. Anyhow, these days there’s a lot of talk about the debt, and some talk about how irresponsible Obama is, or maybe its GW. Who knows, there’s a lotta talk and very little hard facts, much less context. So, from working on Presimetrics, I had some debt data lying around and started with that.

The table below shows the total national debt and ending national debt for each President for December of the year before he took office and the growth rate over that time period. For grins I threw in the President’s extrapolated September 2010 debt. That was computed by taking the debt in December (in September 2010 dollars) of each President’s last year in office, and, assuming the rate at which debt had increased during his term would continue all the way to September 2010.

All data is in September 2010 dollars.

To interpret:

In December 1980, a month before Reagan took office, the debt was 2.354 trillion (Sept 2010 dollars). A month before he left office, in December 1988, that debt had increased to 4.866 trillion, which is an annualized growth rate of 9.50% a year. Starting with 4.866 trillion in December of 1988, and increasing at a rate of 9.50% a year would give you 35 trillion and change by September of 2010.

A few things to note… the two Presidents who added to the debt at the quickest rate were GW in first place and Reagan in second. They were followed by Ford, and then Obama, with GHW Bush not far behind. Now, I’ve been pretty critical of Obama for continuing GW’s policies (see Presimetrics, the book I wrote with Michael Kanell, and this) but all in all, as lousy as he’s been, he’s far, far from the worst perpetrator when it comes to fiscal irresponsibility. (And please, spare me the whole “the banks needed saving” when so did many businesses and households… which weren’t saved. I’d be less inclined to carp if the money was spent on keeping Main Street afloat rather than seeing so much flow to Wall Street.) I wonder how the Tea Partiers would react to that information, and whether they are are angrier at GW and Reagan than they are at Obama. Somehow I doubt it.

Note – the data, data sources, and analysis used in this post are available here.

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Private-sector leverage says that it’s not Bill Clinton

What’s your answer? “Thinking about the past few decades… to the best of your knowledge, which ONE of the following U.S. Presidents do you think did the best job of managing the economy?”

  • Bill Clinton
  • Ronald Reagan
  • Barack Obama
  • Lyndon B. Johnson
  • George W. Bush
  • Richard Nixon

That’s question #11 of the the Allstate-National Journal Heartland poll. 42% of the 1201 adults polled last month answered Bill Clinton.

I wonder why near half of those polled think that Clinton did the best job of “managing the economy”. Using one simple metric, private-sector financial leverage (accumulated dissaving), Clinton ranks among the top three worst economic managers, behind George Bush (Jr.) and Ronald Reagan.

The chart illustrates private-sector leverage as a stock of debt to GDP indexed to the start of each Presidential term. Therefore, the numbers are not the debt ratios, rather the appreciation of the debt ratios since the onset of each President’s term. The data are from the Fed’s Flow of Funds Accounts.

The sector financial balances model of aggregate demand posits that fiscal policy must shift in order to normalize GDP amid deviations of the private-sector surplus (desire to save) and the current account (see Scott Fullwiler’s article on the sector financial balances model of aggregate demand, which references similar work by Bill Mitchell and Rob Parenteau; or you can see last week’s answers and discussion to Bill Mitchell’s quiz for a simple outline).

When the private sector is levering up, the public sector is not doing its job. Since the 1990’s, the private sector loaded up on debt (ran private-sector deficits) in order to maintain GDP closer to full employment in the face of shrinking government deficits relative to those of the current account (since 1991 the current account trended down as a % of GDP). Deregulation, of course, contributed as well.

According to this metric, Barack Obama ranks highest to date, thanks to the automatic stabilizers and the ARRA. But we’ll see what happens when 2011 rolls around: the waning stimulus will drag economic growth; the Congressional tides may turn; and the immediacy of the crisis continues to fade. Unless firms start to “dissave” and pass on profits to households via hiring and wage growth, we may be in for a rocky ride, since the household desire to save will hover at very high levels for years to come (see David Beckworth’s post on the growing mismatch between mortgage debt load and real estate valuations).

Rebecca Wilder

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Presidents, the Tax Burden and Corruption – Explaining Economic Growth

by Mike Kimel

This post appeared in the Presimetrics blog.

Presidents, the Tax Burden and Corruption – Explaining Economic Growth

One of the topics we cover in Presimetrics is the relationship between the tax burden (i.e., the share of income going to taxes) and economic growth. As shown also in a recent post, Presidents who cut the tax burden tended to produce slower growth than Presidents who raised the tax burden.

In this post, I want to begin to address causality. As we stated in the book and as I’ve since said a few times, I don’t think higher tax burdens in and of themselves cause faster economic growth, but rather that increasing tax burdens are correlated with some other criteria that create conditions that help produce economic growth.

But let us start by addressing the issue of timing first. A number of people have indicated in comments or offline that perhaps the reason for the strong correlation between tax burdens and economic growth could be because when the economy is growing rapidly, Presidents feel comfortable boosting taxes.

I’ve pointed out a few a problems – theoretical and empirical – with this line of argument, but I think I can illustrate it best with a simple graph. Since 1929, the first year for which data is available from the Bureau of Economic Analysis’ National Income and Product Accounts (NIPA) tables, there have been five Presidents that have served an eight year or more term: FDR, Ike, Reagan, Clinton and GW. Additionally, there are several more “quasi-eight year terms.” These are instances in which a VP took over upon the death or resignation of the President and maintained a similar a policies similar to those of his predecessor (JFK/LBJ and Nixon/Ford), or in which a VP took over a mere few months into a new terms and thus could put his own stamp on just about the entire eight years (Truman).

The graph below shows the change in the tax burden in the first two years of each administration on one axis and the growth in real GDP per capita during the remaining six years of each administration on the other axis.

Figure 1

Notice… increases in the tax burden in the first two years of an administration tend to be followed by rapid growth during the remainder of that administration. Conversely, administrations that greatly decreased the tax burden during their first two years suffered from poor economic growth during their remaining six years. This relationship, at least, is very difficult to explain by insisting that administrations which enjoyed rapid growth simply were more able to raise tax burdens than administrations which grew more slowly. It is also impossible to explain by anything said by anything you hear out of the Austrians or the Chicago school.

(Incidentally – I have a simple explanation for why some administrations appear above the regression line and some below. I know that it applies to the administrations that begin in 1952 because I’ve written about it in the past. I’ll collect the data going a bit further back and some time in the future will write a post on that.)

So what is going on here? Michael Kanell and I advanced several theories in Presimetrics but the one I think makes the most sense is that changes in the tax burden are a sign of the degree to which an administration enforces laws and regulations. Consider this graph that appeared in a post last week:

Figure 2

Notice that among the Presidents to increase the tax burden are some who raised marginal tax rates (FDR, Clinton), others who decreased it (LBJ), and others still under whom marginal tax rates didn’t change. Similarly, tax burdens fell under some Presidents who cut marginal rates (Reagan, GW), Presidents who raised marginal rates (Bush Sr.), and others who left it unchanged. And for tax burdens to fall at a time of increasing marginal rates really requires more people avoiding taxes they legally owe. Similarly, for tax burdens to rise at a time of decreasing marginal rates one would need more people paying the taxes they legally owe. Thus, enforcement.

Furthermore, an administration willing to turn a blind eye toward one set of laws and regulations is probably more than willing to turn a blind toward other rules and regulations. It is not a coincidence that aren’t keen on tax collection also tend to view the government as the problem and not the solution.

Now, corruption (and let’s call it what it is) is a tough thing for which to test. But I think I there are signs that often appear among corrupt regimes, and one of them is the displacement of private sector by the government. Running an honest business when the government is dishonest is very difficult. The government will side with its favorites and everyone else will have a tough time. It becomes easier to make a buck by playing legal technicalities than by actually doing something useful. This is not to say that some countries do not succeed in having large government sectors without remaining honest and transparent – I suspect Denmark and Singapore are examples of that, though I’m not all that familiar with data for those countries. But we are not Denmark, and if a regime populated with flacks who insist they believe in small government takes over a growing piece of the economy despite taking steps to “encourage the private sector” it probably isn’t a good sign.

So with that… the next graph shows changes in the tax burden in years 1 and 2 on the one hand, and changes in the size of the federal government’s expenditures as a share of GDP during the remaining six years on the other hand.

Figure 3

Notice that administrations that started off by cutting the tax burden also went on to increase the government’s share of the economy. That relationship is stronger and more evident if one looks at changes in the tax burden in the first four years of an administration against changes in the size of the federal government during the remaining four years.

Figure 4

Clearly, in general, the more an administration cut the tax burden in its early years, the smaller the private sector’s share of the economy it its later years, contradicting all rhetoric of the tax cutters, not to mention all Chicago or Austrian “economic theory.” After all, those folks will tell you that lower taxes are going to jumpstart the private sector, right? Not what happened in the real world, is it?

Notice also that the relationship is stronger for the four post-War Presidents that served a full eight years than for the entire sample. A switch in administrations could lead to a break in our little “lower taxes as a sign of corruption shrinks the private sector” story. I note also something else… take a look at where FDR sits on the graph above. Does that fit with the accepted FDR narrative in this day and age?

Which leads me back to corruption. If cuts in the tax burden are a sign that the federal government is tolerating corruption, one would expect that administrations that start off by cutting that burden would end by seeing the private sector shrink relative to the public sector. And that is precisely what we have seen.

Do you have a better explanation?

Data sources and comments.

The definition of the tax burden used in this post is Federal government current receipts from line 1 of NIPA Table 3.2divided by GDP from NIPA Table 1.1.5, line 1. Real economic growth was measured as the change in real GDP per capita, which was obtained from NIPA Table 7.1, line 10. The government’s share of the economy is measured the federal government’s current expenditures (line 23 of NIPA table 3.2) divided by GDP.

Note that in past posts I have tended to only consider the first eight years of the FDR administration to avoid even getting close to the war years. As noted in previous graphs, even leaving out the years after 1938, FDR oversaw the fastest economic growth or any President for whom there is reliable data available. However, in this post, I was trying to remain consistent by sticking to 8 year stretches of data. Note also that, as shown in the fourth graph, the federal government’s share of the economy actually shrunk from 1936 to 1940.

Growth rates are measured from the year before a President took office to his last year in office. Note also… if its not obvious, this post deals with the tax burden, the share of GDP going to the Federal government, and not marginal tax rates. Please do not insist on commenting on a topic unrelated to this post.

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Presidents, the Tax Burden, and Economic Growth

by Mike Kimel

Presidents, the Tax Burden, and Economic Growth

This post also appears at the Presimetrics Blog. It contains some information that has appeared in a few different Angry Bear posts, but I think I’m starting to manage to put it into a more coherent narrative. And as I’m able to do that, I’m able to move slowly to the next part of the story.

A couple of weeks ago I had a post on the Presimetrics blog, also on the Angry Bear blog looking at economic growth rates and political parties. The post shows that from 1929 (that’s as far back as GDP goes) to 2009, growth in real GDP per capita was faster when the president was a Democrat than when the President was a Republican. Furthermore, growth was faster for Democratic Presidents who faced a Democrat-majority Congress during their entire term than for those who did not face a Democrat-majority Congress for at least part of their administration. Similarly, Republican Presidents facing Democratic majority in Congress during their time in office tended to better than Republican Presidents facing Republican majorities for most or all of their term. It isn’t a message you’ll hear very often, but it is the only one that is compatible with the data, as you can easily check yourself.

In this post, I want to look at one of the major distinctions between Democrats and Republicans, and that is tax policy. Let’s start by looking at the Federal tax burden (total Federal government current receipts / GDP) by President. The data comes from the Bureau of Economic Analysis’ National Income and Product Accounts (NIPA) tables. Federal government current receipts were pulled from line 1 of NIPA Table 3.2, and GDP comes from NIPA Table 1.1.5, line 1. (Note – this is slightly different than the way we do it in Presimetrics but it is nice to change things up now and make sure that results don’t change.)

The graph below ranks the Presidents by the annualized change in the tax burden. The change is measured from the year before a President took office (the “baseline” level) to his last year in office.


Figure 1.

(As is my practice in these posts I tend not to include the years through after 1938 for FDR because otherwise someone is going to claim that whatever happened while FDR was in office was due entirely to World War 2.)

The graph shows that there is some correlation between the parties and changes in the tax burden. Every single Republican president for whom there is data reduced the tax burden. Conversely, every Democrat except Truman has raised the tax burden. Obama, at least during his first year, is on track to follow Truman and lower the tax burden.

The next graph shows growth rates in real GDP per capita (obtained from line 10 of NIPA Table 7.1)


Figure 2.

The graph shows very clearly that Presidents who hiked the tax burden produced faster economic growth – by far – than the Presidents who cut the tax burden.

And should there be any tea-partiers reading this, yes, in his first year, Obama cut the tax burden. A lot. The so-called stimulus package involved a lot of tax cuts. But as I’ve already noted, to get out of a recession, government spending has historically been much more useful as a stimulus than tax cuts.

Here’s another way to look at things:


Figure 3.

The graph below repeats Figure 3., but it includes a few labels if you want to know which point represents which President.


Figure 4.

In any case, it’s pretty clear that if lower taxes provide any benefits to economic growth, those benefits are extremely well disguised. In fact, it appears that lower taxes are a prescription for slower, not faster economic growth. (Try reconciling the data with Republican, libertarian, or Austrian economic theory.)

Now… I do not believe that higher taxes, in and of themselves, are a cause of faster economic growth. In the book we suggest a few reasons why higher tax burdens might correlate with faster economic growth. But since the book went to press, I’ve had a bit of time to think about ways to test some of these ideas, and I’ve come up with a few new thoughts as well. I hope to try out a few of these ideas in blogs in future posts.

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More on Presidential Administrations

Via Kathryn (who previously pointed us to a similar exercise for the U.S. election), Theo Gray expands on the work of Tommy McCall (as published in the NYT under the title “Bulls, Bears, Donkeys, and Elephants,” which was glibly dismissed by Greg Mankiw*).

While his conclusion will be heartening to Brad DeLong:

And one more thing, notice the little gray figure labeled “Current value under Both”. That’s the figure if you had just left your money in the market the whole time regardless of party affiliation. Notice that it’s much bigger than either the Republican or the Democratic figure. Not a bit bigger, much bigger, so much bigger that if you check the box to graph the “both” curve (basically the index value itself) we have to let it go right off the scale in order to make the other two lines visible at all.

Play with the policy delay slider and you can see the Democratic and the Republican curves fighting it out in the noise at the bottom of the graph while the steady-as-she-goes full-time investment curve towers over them laughing at their silly antics. It doesn’t matter who is in charge, the market is saying, in the long run it’s going to be OK.

the whole thing is worth reading, especially as Mr. Gray has sent the model up so that you can “playing with it” yourself.**

*We might justly ask Mr. Mankiw to then justify several of his Very Public Statements about the value to the market provided by the Current Administration when he worked for them. But that is for another time.

**I hope to do the playing maybe this weekend, by which time I might expand the details of this post. Meanwhile, I note that The Skinny Brown Man has made an interesting start by putting it into a much larger context.

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