[Rodney26]

 PassedOut, on 2010-November-01, 12:00, said:

Government debt should indeed be reduced during good times, as Professor Krugman has often noted. That was done most recently during the Clinton years, over the unanimous opposition of Clinton's opponents. An important reason for chopping down the federal debt is to give freer rein to government spending during bad times like these. But, with two unpaid-for wars, a large (previously) unfunded new drug entitlement, and poorly thought out tax cuts, that was not done during the Bush years.

Clinton never reduced spending, but he can be credited for keeping government spending on a steady path despite enhanced revenues for the dot-com bubble. I don't think there is a lot of evidence he was trying to pare down debt but he certainly was more fiscally responsible than Obama or Bush. I agree with the first two points on Bush, but the lower marginal rates resulted in more federal revenues, not less. So, they weren't "poorly thought out" at all -- they worked.

Quote

The deficit from the first Obama fiscal year was less than that from the last Bush fiscal year, and Obama has taken strong measures to reduce the projected deficit in the future. However, Obama's deficit reduction at this point works against job creation, so the tension between those goals must be resolved. That's what I'd like to see candidates, not just Professor Krugman, discuss.

There's just no evidence whatsoever of this. Obama's first fiscal budget was close to one trillion dollars in deficit. Saying it was better than Bush's last budget (which included the bank bailout and was also ridiculous) is like arguing who killed more people between Stalin and Mao. Both budgets were extraordinarily irresponsible. Trying to spin the second worst budget of all time as better than the worst is an exercise in futility.

Quote

It's not just the Bush tax cuts that are due to expire. One-third of the Obama stimulus was in tax cuts that are also due to expire next year. Like all responsible voters, I would like to see every one of those tax cuts expire to chop away at the federal debt. But the question is how to do that without also depressing job growth. I'd like to see one honest politician explain that.

China and Singapore are two countries that currently have very high personal rates of savings and excellent economic growth. If Krugman's theories were correct, these economies would be in deep recessions. Instead, they are the best the world has to offer today. The expiring tax cuts probably will result in lower revenues and not higher ones based on past history. What we need is more saving, investment, and ultimately production from the US. We can't eat our way to prosperity as all these Keynesians surmise.

[mike777]

I do think that those who claim/hint that productivity is huge...should say more.....

Dont say what we should NOT do.....



Suggest/hint what we should do!

[phil_20686]

 PassedOut, on 2010-November-01, 08:15, said:

Paul Krugman discussed the effect of debt on job creation yesterday in the NYT: Mugged by the Moralizers

Paul Krugman has been wrong before. And multiple other high profile economists disagree with him. His internal logic of his post is somewhat sketchy: he says someones debt is someone elses asset, and therefore borrowing leads to no net change in world income. By the same logic borrowing less can never lead to a change in world income. Therefore it can hardly to be to blame for the extended recession.

Probably there is some truth in what he says, but more likely it is the recapitalisation of the financial industry that is taking time. The financial industry is responsible for most investment, as it takes money from savers and invests it in companies in a (hopefully) productive manner. Normally as one person pays down their debt the banks invest that money either in more loans, or in the stockmarket etc. However, now they wish to enhance the mount of capital then they must do it by taking in the money from loan repayments and *not* investing it. This will obviously depress job creation. Whether banks do it now or later is somewhat irrelevant. Having large governments pay of their debts will help to recapitalise the financial industry, as it will convert bonds into capital. How much depends on who holds the bonds, which I don't know, but it may well be that continued government borrowing from financial markets, by slowing recapitalisation, may slow the process of recapitalisation and lead to a longer recession.

I see the arguments in both directions. Macro economics is complicated, and Paul krugman pretending that the answer is simple doesn't really help anyone.

====================

Suppose I make the following argument:
1) There is only so much capital in the world.
2) Government borrowing extracts capital from the financial markets
3) Investors in possession of free capital try to find somewhere to invest it.

Thus, government borrowing always reduces private investment.

Alternatively I could argue:
1) Government spending stimulates the economy.
2) Higher consumption makes investment more appealing.
3) This will lead to greater investment in the local economy.

Krugman obviously thinks the second argument is sounder than the first. Perhaps, since the second argument being a argument for investing in america, as opposed to generally, so it could be true that government borrowing reduces world investment but increases the proportion invested in america, which means you would be founding your future prosperity by keeping other countries in poverty. Alternatively it could be the case that these effects are automatically of the same size, and provided the government uses the money wisely, it has no effect on total investment.

If economists really knew the answer to these questions, there would be a consensus, the lack of consensus shows that no one really knows what will happen. Compare this to the overwhelming consensus of economists that the bank bailouts were a good move.

[hrothgar]

 mike777, on 2010-November-01, 23:38, said:

Dont say what we should NOT do.....

Suggest/hint what we should do!

I seem to recall being fairly specific in times past regarding what I'd like to see, however, lets try again:

Short term

1. A real stimulus policy (large enough to have an actual impact on on the economy)
2. Revenue neutral carbon tax (announce it today, phase it in starting in 2014)
3. Single payer system for health care

Medium Term

1. Eliminate all the Bush tax cuts for everyone
2. Start making significant cuts to the defense budget
3. Tax code simplification (eliminate deductions, treat capital the same as wages, look into a VAT)
4. Start means testing social security

[mgoetze]

 Gerben42, on 2010-November-01, 12:23, said:

With the investors I mean the normal individual who lost their money by investing their pension in some fund that was rated AAA+++ super duper by a rating agency that hadn't disappointed anyone for decades, but who had no realistic chance of checking what was in the package.

I don't think pension funds were a big buyer of CDOs/CMBSs. Certainly no responsible pension or life insurance fund had more than 1% or 2% of their portfolio in such assets. If someone was looking to invest in a pension fund and accidentally invested in a hedge fund instead, then yes, they might be a victim. They are probably rather naïve as well.

But really, the large bulk of the "investors" were institutions such as German state banks, hedge funds, etc. They get no sympathy from me.

[phil_20686]

 hrothgar, on 2010-November-02, 05:19, said:

I seem to recall being fairly specific in times past regarding what I'd like to see, however, lets try again:

Short term


2. Revenue neutral carbon tax (announce it today, phase it in starting in 2014)

Never really saw the point of this. Why not just levy a massive tax on energy. Suddenly anything that saves energy starts to look economic . Since governments build build their own energy plants themselves the carbon tax doesn't really do anything from the supply side. Just seems like a massive bureaucracy for no reason. In fact, in most proposals that I have seen (for most businesses) it comes down to how much energy to you use from the grid anyway....

[hotShot]

 phil_20686, on 2010-November-02, 05:38, said:

Never really saw the point of this. Why not just levy a massive tax on energy. Suddenly anything that saves energy starts to look economic . Since governments build build their own energy plants themselves the carbon tax doesn't really do anything from the supply side. Just seems like a massive bureaucracy for no reason. In fact, in most proposals that I have seen (for most businesses) it comes down to how much energy to you use from the grid anyway....

If you tax any energy, you would also make wind and solar energy more expensive.
If you use a carbon tax, wind and solar energy can be sold a little cheaper than carbon based energy and still have a great margin of profit.
This should make it more interesting to invest money in such concepts.

[hrothgar]

 phil_20686, on 2010-November-02, 05:38, said:

Never really saw the point of this. Why not just levy a massive tax on energy. Suddenly anything that saves energy starts to look economic . Since governments build build their own energy plants themselves the carbon tax doesn't really do anything from the supply side. Just seems like a massive bureaucracy for no reason. In fact, in most proposals that I have seen (for most businesses) it comes down to how much energy to you use from the grid anyway....

I don't give a rat's regarding energy consumption.

The purpose of a carbon tax is to correct for a specific negative externality.

[kenberg]

 hrothgar, on 2010-November-02, 05:19, said:

I seem to recall being fairly specific in times past regarding what I'd like to see, however, lets try again:

Short term

1. A real stimulus policy (large enough to have an actual impact on on the economy)
2. Revenue neutral carbon tax (announce it today, phase it in starting in 2014)
3. Single payer system for health care

Medium Term

1. Eliminate all the Bush tax cuts for everyone
2. Start making significant cuts to the defense budget
3. Tax code simplification (eliminate deductions, treat capital the same as wages, look into a VAT)
4. Start means testing social security

Remarks on short term 1 and medium term 4.


Stimulus: Perhaps I agree but I think that it is not simple. Start with me: We just had our back porch replaced. This was not due to the extra $250 the the Social Security put in my bank account. If it gives me a much larger stimulus, I will not add on a second back porch. OK. maybe I am not the target. But a lot of people are concerned about their debt, their future in general and their house in particular. Give them some stimulus and I would recommend, if they asked me, that they pay down their credit card bill, pay down their second mortgage, or put it in the bank. I am guessing they don't need me to tell them this, and they will do just that.
Added: To the extent that "stimulus" involves spending on infrastructure, that would seem useful. Spending money on things that need doing is good.

Means testing for Social Security: Maybe, but for it to produce significant amounts this may have to involve me as well as the rich. Yes I can afford to pay a couple of hundred or so to take my wife to the Kennedy Center. On occasion, not regularly. But I have trouble remembering when we last went. If we go out with others to eat we split the check without looking over who ordered what, but no one picks up the check for everyone. There are lots of people my age who are in this financial stratum. Definitely comfortable, definitely not rich. A person who tells me I have enough and I don't need my Social Security is going to get an argument. I got my card when I was setting pins (that would be 1953) and I am still paying into it when I take on a job. I'll listen to arguments but the person presenting them had better be ready to explain what his contribution to reducing the national debt will be if he wants to decide on mine.

I applaud the presentation of a list. All the suggestions are good for thought. I am not convinced they are all workable.

[PassedOut]

 hrothgar, on 2010-November-02, 05:19, said:

I seem to recall being fairly specific in times past regarding what I'd like to see, however, lets try again:

Short term

1. A real stimulus policy (large enough to have an actual impact on on the economy)
2. Revenue neutral carbon tax (announce it today, phase it in starting in 2014)
3. Single payer system for health care

Medium Term

1. Eliminate all the Bush tax cuts for everyone
2. Start making significant cuts to the defense budget
3. Tax code simplification (eliminate deductions, treat capital the same as wages, look into a VAT)
4. Start means testing social security

It certainly would help the US get back on track if these measures were taken. And, to the extent that they are not, our problems will continue to fester. I would also like to see the age for social security eligibility continue to rise gradually.

I'm not optimistic though, in view of the current political climate.

[PassedOut]

 phil_20686, on 2010-November-02, 05:16, said:

If economists really knew the answer to these questions, there would be a consensus, the lack of consensus shows that no one really knows what will happen. Compare this to the overwhelming consensus of economists that the bank bailouts were a good move.

We've had some real-life experiments in the US that demonstrate the power of deficit spending to stimulate the economy. World War II effectively ended the great depression here. Massive deficits fueled the boom times of the 1980s.

And we have seen the effects of the Bush tax cuts: job creation was abysmal throughout the Bush years, and still is.

[nige1]

IMO...

Individuals (eg house-holders, ordinary citizens) lost. Other individuals (eg past bank-directors and share-holders) gained but the only loss to the system as a whole is the cost of the half-baked and ineffective measures concocted to deal with the crisis.

Big accountancy firms acted as bank-consultants to advise on attractive ways to package sub-prime loans. The same accountancy firms acted as bank-auditors to over-value the resulting instruments (through a "Chinese wall"). They should bear some of the costs of the debacle they colluded in creating.

Few bank-directors are stupid, lazy, or ignorant. Most are bright and know their core-business. Like the accountants, most bank-directors knew exactly what they were doing with sub-prime mortgages. Naturally they were reluctant to admit that the emperor had no clothes when they were making so much money for themselves. Perhaps we should be grateful that the scam was exposed so quickly because the damage was escalating fast. We have the internet and a handful of whistle-blower risk-managers to thank.

Naturally, banks treat government help as another wind-fall opportunity to exploit. In Britain, after government bale-out, banks continued to make 100%+ loans to house-buyers and to hand-out massive bonuses and golden-goodbyes to directors responsible for the mess.

In hind-sight, it might have been better to let the banks sort their problems out for themselves. More banks would have collapsed. Some citizens would have lost their savings. But the banking industry as a whole would have survived. And banks would have been more careful about using their own money to rescue each other. And done a better job of it. So, although some ordinary citizens would have suffered more, most would be far better off.

[PassedOut]

 Rodney26, on 2010-November-01, 23:21, said:

Clinton never reduced spending, but he can be credited for keeping government spending on a steady path despite enhanced revenues for the dot-com bubble. I don't think there is a lot of evidence he was trying to pare down debt but he certainly was more fiscally responsible than Obama or Bush. I agree with the first two points on Bush, but the lower marginal rates resulted in more federal revenues, not less. So, they weren't "poorly thought out" at all -- they worked.

Clinton stopped the massive explosion of debt as a percentage of GDP that resulted from the voodoo economic policies of Reagan and the first Bush. Clinton fixed that (and it was intentional on his part), at great political cost to his party, by adjusting tax rates so that the revenues collected came very close to matching federal expenditures. Then when the economy grew, the additional revenue reduced the federal debt in absolute terms as well.

Quote

I agree with the first two points on Bush, but the lower marginal rates resulted in more federal revenues, not less. So, they weren't "poorly thought out" at all -- they worked.

I do not know where you got this misinformation, but it is plain wrong. The Bush tax cuts lowered revenue collections as a percentage of GDP, but he did not adjust expenditures downward to match. That inevitably caused a ballooning of the debt as during the Reagan-Bush years. In fact, over twice as much of the current deficit comes from those poorly thought out tax cuts as comes from the wars in Iraq and Afghanistan combined.

Because other folks sometimes make the same type of claim, let's take a look at the basic arithmetic of the situation with a couple of simple examples.

Suppose the total GDP is $1000 and the tax rates are set to collect 50% for the government, exactly $500. Suppose we decide to stimulate the economy by cutting the tax rates to 40%, letting the taxpayers keep another $100. That will certainly stimulate the economy, but how much? For the government to continue to collect $500, the total GDP would have to go up to $1250. That is, the extra $100 for the taxpayers would have to stimulate the economy enough to raise the GDP by $250.

Now suppose that the GDP is $1000, but that the proposed tax cut is from 30% to 20%. Now to get back the $100 dollars lost, the GDP would have to increase to $1500. Each tax cut dollar would have to generate $5 of increase to the GDP.

It's not logically impossible for this to happen. If every tax cut dollar is spent over and over -- instead of being used to pay down debt or saved -- the GDP rises accordingly. When anyone makes the claim that cutting taxes results in increased revenue, that person necessarily argues that the multiplier on those tax cut dollars is high enough to get back more than the revenue lost. And the lower the tax rates go, the more difficult this is to do.

In fact, the answer to the question is known: The multiplier is not anywhere near high enough for tax cuts to increase tax revenues in the US. No serious economist, liberal or conservative, maintains that it is.

[luke warm]

 PassedOut, on 2010-November-03, 08:26, said:

Clinton stopped the massive explosion of debt as a percentage of GDP that resulted from the voodoo economic policies of Reagan and the first Bush. Clinton fixed that (and it was intentional on his part), at great political cost to his party, by adjusting tax rates so that the revenues collected came very close to matching federal expenditures. Then when the economy grew, the additional revenue reduced the federal debt in absolute terms as well.


I do not know where you got this misinformation, but it is plain wrong.

you're a business man, can you increase revenues by cutting prices? of course you can (wal mart proves this every day)... static models, such as your examples above, do not give the full story... they assume static responses by static people... this is not what happened in the '60s or '80s... for example, from '81 - '84 tax revenue from individual taxpayers was $286B, $298B, $289B and $298B, and this in spite of small economic growth (in part due to recession) of 2.5% in '81 and 1.9% in '82... the revenues from '85 - '88 were $335B, $349B, $392B and $401B... the problem with the reagan cuts were - a recession occurred and expenditures increased (gov't grew)... it can't be denied that tax cuts, other things being equal, have historically led to strong economic growth... the problem comes about when politicians increase spending rather than reducing it...

i see nothing wrong with a gov't that at least makes an attempt to balance the budget... i understand that the gov't can't be run like a business - i do not understand that it must be run into bankruptcy

[PassedOut]

 luke warm, on 2010-November-03, 08:58, said:

it can't be denied that tax cuts, other things being equal, have historically led to strong economic growth... the problem comes about when politicians increase spending rather than reducing it...

Historically, the effects of lowering or raising tax rates on economic growth is a mixed bag. It is absolutely clear that deficit spending, such as during the WWII and the Reagan years can spur economic growth. However, that leaves the problem of debt service for folks down the line. I certainly agree that the federal government should aim to keep the budget in balance over the long haul, particularly so that deficit spending can be used to pump up the economy in bad times, such as we have now.

David Stockman, Reagan's budget director, explained in detail what would happen to the federal debt as a result of tax cuts without corresponding spending cuts: "red ink as far as the eye can see." (Arithmetic is not wrong, no matter how you try to wriggle around it.) Reagan nevertheless chose irresponsibility, as did both Bushes. In between, Clinton chose fiscal responsibility, and that was the only bright spot for 30 years.

A consequence of the poorly thought out Bush tax cuts is the huge deficit we face now, making it difficult for the government to expand the successful and necessary stimulus program. And the republicans have made it perfectly clear that they intend to fight Obama's programs to restore fiscal responsibility, just as they did Clinton's. The republican appeals to the free lunch crowd have just now helped them to take control of the house.

[Rodney26]

Quote

I do not know where you got this misinformation, but it is plain wrong. The Bush tax cuts lowered revenue collections as a percentage of GDP, but he did not adjust expenditures downward to match. That inevitably caused a ballooning of the debt as during the Reagan-Bush years. In fact, over twice as much of the current deficit comes from those poorly thought out tax cuts as comes from the wars in Iraq and Afghanistan combined.

Read this. A letter from Orzlag to Senator Conrad when Orzlag was at the CBO.

Quote

Growth in Federal Tax Revenues From 2003 to 2006
Total federal revenues grew by about $625 billion, or 35 percent, between fiscal
year 2003 and fiscal year 2006. CBO’s analysis of that increase in revenues since
2003 is necessarily preliminary because relevant data are not yet fully available.
CBO examined the available data using the commonly employed method of
analyzing the sources of revenue growth as a percentage of GDP. Had revenues
grown at the same rate as the overall economy between 2003 and 2006, federal
receipts would have increased by only $373 billion. The other $252 billion of the
actual increase in revenues represents growth in excess of GDP growth. As a
result, receipts as a share of GDP rose from 16.5 percent in 2003 to 18.4 percent
in 2006, an increase of 1.9 percentage points (see Table 1, attached).

The cratering of revenues from tax cuts that you're constantly insisting that happened didn't actually happen. As pointed out several times, there is a point on the elasticity curve between 0 and 100 that will maximize government revenues. It is not necessarily at a higher rate of taxation.

[PassedOut]

 Rodney26, on 2010-November-03, 10:16, said:

Read this. A letter from Orzlag to Senator Conrad when Orzlag was at the CBO.

The cratering of revenues from tax cuts that you're constantly insisting that happened didn't actually happen.

You must be joking. Receipts as a percentage of GDP during the Clinton years were at about 20%, as was the spending. As your own exhibit shows, receipts stayed much lower than that during the Bush years, even though federal spending as a percentage of GDP went up. And we are facing the consequence of that poorly thought out tax cut today.

[phil_20686]

 PassedOut, on 2010-November-03, 08:26, said:

Suppose the total GDP is $1000 and the tax rates are set to collect 50% for the government, exactly $500. Suppose we decide to stimulate the economy by cutting the tax rates to 40%, letting the taxpayers keep another $100. That will certainly stimulate the economy, but how much? For the government to continue to collect $500, the total GDP would have to go up to $1250. That is, the extra $100 for the taxpayers would have to stimulate the economy enough to raise the GDP by $250.

Now suppose that the GDP is $1000, but that the proposed tax cut is from 30% to 20%. Now to get back the $100 dollars lost, the GDP would have to increase to $1500. Each tax cut dollar would have to generate $5 of increase to the GDP.

It's not logically impossible for this to happen. If every tax cut dollar is spent over and over -- instead of being used to pay down debt or saved -- the GDP rises accordingly. When anyone makes the claim that cutting taxes results in increased revenue, that person necessarily argues that the multiplier on those tax cut dollars is high enough to get back more than the revenue lost. And the lower the tax rates go, the more difficult this is to do.

In fact, the answer to the question is known: The multiplier is not anywhere near high enough for tax cuts to increase tax revenues in the US. No serious economist, liberal or conservative, maintains that it is.

You are missing the point - Compound interest always wins. If I drop tax rates by 99% and get 1% extra growth per year, I will still win in the long run, it will just take 0.01*1.01^n>1 which by my calculation this is about 470 years. For all the years before that revenue is less, but for all the years after that revenue is more. Therefore, and over a millenia I will collect 20 000 times as much total revenue. (the point where both strategies are equal being about 640 years by my calculation).

Obviously I have produced an absurd example, but the point is clear, the argument is not that tax cuts maximise total government revenue now, clearly you collect a smaller fraction of GDP now. The argument is that the increase in % growth is enough that at some point in the future a smaller slice of a bigger pie, will be worth more total revenue. The question is should you aim to maximise goverment revenue in the short term (tax rises) or the long term (tax cuts). America's lower tax rates have meant its GDP has grown about 1% faster per year in the long term since the end of WW2 compared with other developed nations. Thats why you are a lot richer than us now . (The reasons the difference does not appear as stark as it might is that Americas population has grown a lot more than other developed nations).

(Obviously I know that tax rises are probably not the only factor that affects growth and the real picture is pretty complex but this is food for thought).

[phil_20686]

i dont get it. The exhibit shows that tax revenue under bush increases faster than gdp ==> real tax rises. His income tax cuts seem to drop the budget by less than that when they were enacted - estimated as 700bn over 10 years. Thus taxes rose under bush despite the tax cuts. Mainly due to "bracket creep" and increased corporation revenue.

[PassedOut]

 phil_20686, on 2010-November-04, 06:16, said:

i dont get it. The exhibit shows that tax revenue under bush increases faster than gdp ==> real tax rises. His income tax cuts seem to drop the budget by less than that when they were enacted - estimated as 700bn over 10 years. Thus taxes rose under bush despite the tax cuts. Mainly due to "bracket creep" and increased corporation revenue.

Yes, the bracket creep (and other factors) had the same effect during the Clinton years, where receipts gradually rose as a percentage of the GDP, topping out at about 20.8%.

I absolutely agree that lowering taxes stimulates the economy, and appreciate any responsible spending cuts that allow that to happen. But the free lunch argument that lowering taxes increases tax revenues -- so that you don't have to make those spending cuts -- is dead wrong.

In your earlier post you seem to have overlooked that compounding also applies to the debt and debt services over time. That compounding overwhelms the effect you noted. There is no free lunch.