BBO Discussion Forums: The budget battles - BBO Discussion Forums

Winstonm, on 2011-August-15, 18:44, said:

It really isn't this simple. For one thing economies are too complicated to simply pull out a couple of random data streams and look for correlation.
(1) Many people in the high income bracket have most of their wealth income in businesses. If a business simply reinvests its profits, rather than paying out a dividend, it will increases its share price rather than produce income for investors. This can be used to avoid high rates of income tax, and pays corporation tax/capital gains tax instead. E.g. Berkshire Hathaway has never paid out a dividend, which is why Buffet's tax is so low.
(2) Rich people save more, and that is a good thing too, as savings are the primary method by which capitalisation of the economy occurs. That is to say, that an economy with more capital can change more rapidly to match economic conditions. Lack of capital can undermine growth by preventing investment.
(3) High capitalisation is particularly important in countries with high population growth like the USA, as expanding the economy just to keep up with increases in population, rather than to increasing productivity, already requires lots of Capital.
(4) The salaried upper class, ie not business owners/the mega rich, but highly paid professionals, are far more mobile now than ever before. Many can move abroad to find more favourable tax regimes.
(5) One of the USA's primary advantages over western Europe is that your salaried upper class simply works more hours than Europeans. Many empirical studies have shown that changes in income tax lead to changes in hours worked, especially among the well off, who can normally afford to work less, and due to the decreasing utility of higher income.
(6) Saving is generally a good thing. In effect, an economy has both goods and supply. If I work and then save my money, the economy is better off by the value of my savings until such time as I choose to spend it. Saving money increases the purchasing power of money spent, a high savings rate acts like the opposite of inflation. While this may seem counter intuitive, that paying more to the lower economic classes will not necessarily lead to higher consumption as they are competing for the same amount of goods, it is really this that leads to the "wage spiral" in periods of higher inflation. (In practice I do not necessarily agree with this argument, I suspect wealth transfer in the long term leads to a different supply profile, so that overall demand is increased).
(7) It isn't clear that it is possible to tax "idle rich" successfully. If someone is to consume more of the goods produced, someone must buy fewer, given that in a given (short) time period the amount of goods is a constant. Thus taking away money from rich people who aren't spending it, and spending it, is effectively reducing the purchasing power of poor people. Of course, this is just the collary of point (6) that spending savings is inflationary, whereas saving is anti-inflationary. Everyone should read this exchange. As with (6) I have long suspected in the long run that wealth transfers do work, by changing the supply profile. That is why the high tax regimes of western europe produce economies with less manufacturing and more services, literally because more people can afford services like fast food/cleaners etc. And the economy can afford to have more people in only marginally productive jobs, because wealth transfers mean that people can subsist on lower salaries. But I do not think it is a short term fix.
(8) Finally, passedouts argument about velocity, effectively assumes that the output gap is made up of the kind of thing that poor people will be buying. This is not necessarily the case. Normally when the middle-upper class cut their spending (by assumption the poor classes are still spending their income) the things to go are Ipods and Iphones and Cars and Holidays. No amount of wealth transfer will realistically lead to the poorest classes buying designer jeans. For wealth transfer to work in the short term it is necessary that the output gap is made up of those things that poorer people will want to buy. It is not at all clear that this is the case. (But I think its a good idea in the long run, I just don't thing it will work right away, or at least, it will not work nearly aswell as some people think).


That said, I do think the US needs more taxes on richer folk, and more taxes generally. However, I also think that the division between private and government spending is misplaced (sometimes). For example, healthcare spending is (beyond basic, and generally cheap medicine to help younger people get well) always an economic drag. Whether government is spending it, or the consumer through insurance, it is the same money being spent. The USA could quite easily half their spending on healthcare under a single payer system, and still have outcomes significantly better than Western Europe. That would free up some extra 7-8% of GDP for extra consumption of non healthcare goods. Clearly a win in the long run since comparison with WE suggests that your healthcare system is about half unproductive spending.

I do not think that one can expect consumer spending to rise until consumer debt is significantly reduced. I suspect that government debt is also a drag on companies, who are expecting that either they or consumers will have to pay for all that debt in the medium to long term. However, America's expanding population at least gives it more leeway that western europe, as expanding population = expanding gdp without too much effort.

There is also this link which gives a nice graph of total federal taxes in the US. It shows your system to be moderately progressive.

Here

Working out total tax incidence is a complicated buisness, but I trust that the CBO (source for the graph) knows what it was talking about. The figures are from 2009.

Winstonm, on 2011-August-15, 17:20, said:

That's not GDP. GDP would be a dollar figure. I suspect it's probably GDP growth. Ah. I see you properly labelled it in a later post - but then your tax rate numbers aren't quite the same. Different source?

There's a correlation. Is correlation cause?

It seems to me the drop in the tax rate in and since the 80s was out of proportion to the drop in GDP growth.

luke warm, on 2011-August-16, 03:46, said:

A check from just me would be insufficient to fix the problem. Seriously, you might have been able to figure that out for yourself...

As a patriotic American, Buffett is willing to do his share to solve the US deficit problem, as am I. But I'm not willing to mail an extra check to the IRS to support the free-lunch people who so fervently beg others to pick up their share of the bill. Seriously, you might have been able to figure that out for yourself...

phil_20686, on 2011-August-16, 04:08, said:

You are clearly right that about half of US healthcare spending is "unproductive." Any business person can look at the numbers and see that right away. And a single payer system (politically impossible to obtain in the US these days) would be much more efficient. But many people in the US receive paychecks from the healthcare system. Eliminating jobs (admittedly unproductive ones) by making the healthcare system more efficient would offset some of the gains.

In the US, much of healthcare and defense spending has no real value except to put money into the hands of those who will spend it. Those jobs are a form of "workfare." But eliminating unproductive spending makes it necessary to find other work (ideally, productive work) for the folks displaced. That does not happen automatically, nor immediately.

PassedOut, on 2011-August-16, 08:20, said:

This kind of argument would lead to the conclusion that automated production methods are of questionable value. In fact they are not. While you are right that it removes jobs, it increases the supply of goods, i.e. makes stuff cheaper. Thus there is a definite gain across the economy, even though there is a loss to some.

It has long been my contention that globalisation and more efficient production methods increase the need for significant wealth redistribution. Before, when you had a new idea, you could be the premier seller of drawing pins in your city circa 1800. Now with a better production method you can become the premier seller to the whole world. This has a tendency to concentrate wealth ever more strongly into the hands of innovators.

The victory of capitalism is that even people on the dole in the uk have a standard of living equal to the richest ten % in 1960. (ofc, hard to measure these things, but that is a comparison of purchasing power).

phil_20686, on 2011-August-16, 08:35, said:

I'm not disagreeing with you about this. I'm just pointing out that the gains are not immediate and are not painless.

I have never been fond of the argument that unneeded jobs need protection because after all we need jobs. This argument takes many forms. Here in Maryland this argument is given to line up government support for horse racing. It's a dying industry because people are not all that much interested. You cannot make people get interested in something that doesn't interest them so the natural solution, it seems to me, is to let the industry wither. In some quarters, making such a suggestion could be downright dangerous.

I know I sometimes oversimplify (I am not alone in this) but I believe that if this country is to prosper we have to have workers producing things that people actually want and need. This is not sufficient of course, but it seems like a good basic starting position.

kenberg, on 2011-August-16, 08:52, said:

yep... like food, or caskets - or oil... some might be nimbys, but they only really bitch when they can't get gasoline, or when it gets cold in the winter or hot in the summer and the power companies slow down (out of necessity) output

kenberg, on 2011-August-16, 08:52, said:

Of course unneeded jobs should not be protected. But if you propose to eliminate huge numbers of unneeded jobs at the same time, you need a way to handle the resulting shock to the economy.

The US is now at the mercy of 12 negotiators looking for a partial solution to the budget deficit. If they fail to reach an agreement, a large number of objectively unneeded jobs in the defense industry will be eliminated. It's fine to point out -- correctly without a doubt -- that those jobs should not be protected. But if those losses happen all at once, unemployment will balloon and the economy will be hurt big time.

From the situation we are in, with very many folks depending upon salaries from unneeded jobs in both defense and healthcare, we need a staged approach toward moving folks into the production of things that people really want. The argument that a staged approach is wrong because it temporarily "protects" unneeded jobs seems to me short-sighted.

Staged is fine. Generally speaking, gradual is preferable to sudden. And really, I have no confidence at all that if this trigger cuts defense spending then it will be the unneeded people or programs that will get the axe.

i see nothing wrong with attrition doing my downsizing in targeted areas

Phil,

I saw a lot of ideological positing in your post but no data to back up your claims. I understand the classical and neo-classical viewpoint you present; what I don't see is evidence that the viewpoint is accurate.

Winstonm, on 2011-August-16, 17:09, said:

To much reliance on data is terribly misleading, mostly because economies are so complicated, and so many things affect so many other things, that it is really impossible to pull out instrumental variables. If you try, this happens. Secondly, data on the present is notoriously hard to come by. One usually only gets reliable figures even for easy things like gdp a year after it has happened. For more complex phenomena you may have to wait five years to put all the pieces together.

There is no part of the classical economics models that have not been tested. Those that have not worked have been discarded, and those that still exist do work. However, case studies where they have worked in the past are no guarantee that they will work again in the future, because economies are complicated enough that there are always effects that one has overlooked, and just occasionally these over rule the normal factors that went into your models.

Finally, its not clear what data you would like to see. I mean, studies of government spending multipliers have repeatedly shown that tax cuts have better multipliers than spending, which kind of supports point (8) on the output gap. Essentially as far as I can see the only way these could be different is if the government buys things that the economy doesn't really need. Supposedly the best study on government multipliers was done by V. Ramey, and gets about 1.4, the best study on tax cut multipliers by Romer and Romer, and gets about 3. Obviously, if you search hard enough, you will find people who disagree.

Even more finally, economics is not a pure science in the sense of being disconnected from the prejudices of its practitioners, partly because what is an acceptable solution is partly based on what seems just. For example, its pretty clear that a period of high inflation would help clear out the debt overhang. Say 7% inflation for 5 years. This would have lots of positive effects: It would lift people out of negative equity, it would shore up banks balance sheets by reducing their expose to bad loans. It would help people pay of debt. However, to many people it seems somewhat unjust, after all inflation is effectively just a wealth transfer from savers (like pensioners) to people with debt (like people with overly large mortgages). Thus whether you think it is a "good" economic policy is based at least partly on whether you think its fair to transfer money from people who saved prudently, to those who overspent, in order to get the economy going again. Thus, I do not think one can really do economics without some idealology.

I'll climb into this a little here. A demonstration of the difficulty of prediction recently came from the stimulus package. Simply put, it did not behave as advertised. That does not necessarily mean that it was a mistake, quite possibly things would have been worse without it and better had it been larger. But there is no getting around the fact that claims were made for it that did not materialize.

To my way of thinking, the correct response is neither gloating nor denial, but rather an examination of causes. I have, for quite a while, been pushing the idea that one of the culprits is the large personal debt held by so many people. It may well apply to taxes as well. Giving people some money, say by suspending payroll taxes, is supposed to spur spending. But my guess is that all but the most brain dead have suddenly become aware of the fact that high debt is a serious personal threat. Almost everyone knows of a house in foreclosure or a family in a financial crisis. There but for the grace and all that, so people alter their habits. Give them money and they pay down their debt. The flat screen has already been bought, they don't need a second one, they need to pay for the first one. And so giving them money does not produce the expected result.

A mixture of ideology (we can hardly think without some such basis) and a careful respect for what is actually happening is what is needed.

Here's wikipedia's article about fiscal multipliers, suggesting that increased government spending does more to help the economy than tax cuts. Here's an article from an online economics repository saying the same.

If you want some more authoritative sources, here's Nobel prize winning economist Paul Krugman arguing that the stimulus should include more spending and less tax cuts. And here are some numbers by Mark Zandi, economist for Moody's.

Of course, there may also be articles supporting Phil's view that tax cuts are better stimulus than government spending. But his suggestion that this is somehow a "settled matter" amongst economists is obviously untrue.

awm, on 2011-August-16, 20:56, said:

Thanks for posting that, Adam. I'm an economist (Masters degree with distinction and 28 years so far as a professional economist in both the public and private sectors) and Phil's post left me fearing I had missed something here. I think there is a case that can be made that tax cuts may have a better medium term effect on the economy in some circumstances than spending, but to imply that this is true of the activity multipliers they produce is a very different matter.

From awm's January 2009 Krugman link:

Quote

As Obama was putting his plan together, the Congressional Budget Office was reporting that U.S. economic output would average 6.8 percent below it's potential for the next 2 years, or $2.1 trillion in lost production (per Krugman).

A hemorrhaging patient loses 2.1 trillion units of blood. You restore 775 billion units.

The patient is still looking a little peaked.

You conclude what exactly?

Recording - "Hello, Welcome to the Psychiatric Hot-line."

If you are obsessive-compulsive, please press 1 repeatedly.

If you are co-dependent, please ask someone to press 2.

If you have multiple personalities, please press 3, 4, 5 and 6.

If you are paranoid-delusional, we know who you are and what you want. Just stay on the line until we can trace the call.

If you are schizophrenic, listen carefully and a little voice will tell you which number to press.

If you are manic-depressive, it doesn't matter which number you press. No one will answer.

I think that a big factor in the current perception of the stimulus was the mishandling of the politics of it by the White House. What happened is something that Bill Clinton would never have permitted.

Many of Obama's opponents have said that he (or his administration) promised that the stimulus would hold unemployment to 8.5%. Of course that never happened. Much as John Kerry falsely assumed that the swift-boating charges against him would go away simply because they were untrue, the Obama administration let the 8.5% promise claims go unchallenged for so long that even folks who should know better give the charges some credence. Clinton would have punched back immediately to prevent that from happening.

The basis for the 8.5% claim was a report developed by Christina Romer and Jared Bernstein in the weeks before Obama took office and released early in January 2009. At that time the CBO was projecting that unemployment would reach 8.5% in 2009 and 9% in 2010. The Romer/Bernstein report projected that the stimulus would improve on the CBO projection by about 1%. However, that same report made clear that the CBO projections were fraught with uncertainty and that without the stimulus the unemployment rate might reach 11%.

It's always a political mistake to let an opponent's lies go unchallenged. And, for the life of me, I can't figure out why they still do that.