People Are Finally Figuring Out: Austerity is Stupid

Well, since I am in favor of funding the government primarily through user fees and tariffs, just about any tax cut works for me.

I do agree that some tax cuts don't have anything to do with growth per se, but would remove distortions from the economy which impact real activity.

 

Using "ideological" as an epithet? In 2012?

Just as with opinions and assholes, everyone has an ideology. Don't think you're sitting somewhere in the ether looking down on us mere "ideologues".

Pathetic ad hominem, just like Breen said.

 

Andrew Mellon -- Treasury Secretary to three presidents -- advised Hoover at the outset of the Depression to:

"liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."

While I am today in favor of tax cuts to goose consumption, stimulus directed at refurbishing and modernizing infrastructure (fixing the bridges etc.) ... generally pro inflation at this point in the cycle I do concede that there is a fair chance that even that level of 'loose" will not work.

If it did work then would would be insane not to extract from a more robust economy the funds to begin the decades long process of reducing debt, cutting waste etc. Of course the politicians have demonstrated infinite capacity for just that type of insanity.

The problem (although not the solution) is simple to state. We spent like drunken sailors in good times, bad times and all times. No serious student of economics ever pretended that could work. if we can't inflate our way to a respite -- and it may actually be past that point -- then whether we like it or not Mellon's prescription will be imposed on us.

Maybe we have one more at bat ... I don't know. But I am pessimistic enough to believe we do not have two. BTW ... I know I am advocating more poison before beginning the "pay back" but, like chemotherapy, I think it makes sense to try.

 

Here it is Ed. I've taken the liberty of putting key paragraphs in blue type, and I underlined one sentence that I especially want to call to your attention. I know you'll get as much valuable information out of this article as I did.

"
Economic View
That Wishful Thinking About Tax Rates
By CHRISTINA D. ROMER
Published: March 17, 2012


¶ <font color=000990>AT least since Calvin Coolidge, politicians have trumpeted the supply-side benefits of cutting marginal income tax rates. Lower rates will unleash economic growth and the cuts will largely pay for themselves — or so it’s often said. Yet careful studies find little evidence of such effects. Perhaps it’s time to reform tax policy based on facts, not worn-out assumptions.</font>



¶ A family’s marginal tax rate is what its members pay to the government if they earn another dollar. If the government takes a smaller chunk of that dollar, a family has more incentive to earn it. Workers may choose to work additional hours, or a stay-at-home spouse may decide to work outside the home. Likewise, entrepreneurs may invest in a new enterprise or expand an existing one. Lower marginal rates also reduce people’s incentives to shield income from taxes, through legal and illegal means.

¶ The main question is whether these incentive effects are large. If they are, cutting marginal rates could cause a sustained surge of hard work and entrepreneurial activity — and thus reported income. This idea was the essence of President Ronald Reagan’s theory of supply-side economics, and his justification for large, permanent tax cuts in the early 1980s. Mitt Romney, now seeking the Republican nomination for president, cited a similar argument when he proposed cutting all income tax rates 20 percent.

¶ If the incentive effects are small, however, the situation is very different. Cutting taxes would still raise output for a while by putting more money in people’s pockets, and so increasing their spending — a temporary demand-side effect. But lower marginal rates wouldn’t greatly raise output over the long haul through the supply side.

¶ History shows that marginal federal income tax rates have varied widely. Since World War II, the top rate has ranged from less than 30 percent (at the end of the Reagan presidency) to more than 90 percent (throughout the Eisenhower years). The 1964 Kennedy-Johnson tax cut significantly reduced the typical marginal rate paid by American families, but rates rose greatly over the next 15 years as inflation pushed people into higher tax brackets. Rates fell sharply under President Reagan, rose under President Bill Clinton and fell again under President George W. Bush.

¶ If you can find a consistent relationship between these fluctuations and sustained economic performance, you’re more creative than I am. Growth was indeed slower in the 1970s than in the ’60s, and tax rates were higher in the ’70s. But growth was stronger in the 1990s than in the 2000s, despite noticeably higher rates in the ’90s.

¶ Of course, many factors affect the economy, so a lack of correlation doesn’t prove that marginal-rate changes have little impact. That’s why economists have devoted thousands of pages in journals to testing the effects more scientifically.

¶ ONE standard approach is to look for natural experiments in the tax code. Often, a law changes the marginal rate for one group and not others. For example, the 2001 Bush tax cut lowered marginal rates sharply for married couples with taxable incomes of around $50,000, but did little to rates for couples earning slightly less. Using household survey data, economists can compare the behavior of taxpayers whose rates did and didn’t change.

¶ <font color=000990>A useful summary measure of such changes’ supply-side effects is the sensitivity of reported income to marginal rates. If people work and invest more in response to tax cuts, their reported income will rise when marginal rates fall. True supply-siders believe that this sensitivity is well over a value of 1, implying that cuts in marginal rates raise reported income enough that government tax revenues nevertheless rise. But a critical review of several natural-experiment studies concluded that the best available estimates of this sensitivity range from 0.12 to 0.40. The midpoint of the range, 0.25, implies that if the marginal tax rate for high earners decreased from its current level of 35 percent to 28 percent (which Mr. Romney proposes), reported income would rise by just 2 1/2 percent.

¶ In a new study, David Romer and I found that changes in marginal rates in the 1920s and ’30s had even smaller effects. (Mr. Romer is my husband and a colleague at Berkeley.) The rate shifts in that era make those after World War II look tame, and varied greatly across income groups. The Revenue Act of 1935, for example, raised marginal rates on the very highest earners to 79 percent from 63 percent, but barely raised rates at all for those below the top one-fiftieth of one percent of households. (Now that was class warfare!)</font>

¶ We found that an increase in marginal rates on an income group leads to a decrease in its reported taxable income relative to other groups. Indeed, because the variation is so large, the effect can be pinned down much more precisely than in most postwar studies. But the estimated impact is very small — almost at the bottom of the postwar studies’ range. One likely reason is that the tax system between the two world wars was very simple — all the instructions and tax forms for the personal income tax fit on just six pages. As a result, there were few legal methods of shielding income.

¶ Where does this leave us? I can’t say marginal rates don’t matter at all. They have some impact on reported income, and it’s possible they have other effects through subtle channels not captured in the studies I’ve described. But the strong conclusion from available evidence is that their effects are small. This means policy makers should spend a lot less time worrying about the incentive effects of marginal rates and a lot more worrying about other tax issues.

¶ Most obviously, the federal budget is on a collision course with reality. Reining in the long-run deficit will have to involve slowing the growth rate of spending. But unless we choose to gut Medicare and Medicaid, additional tax revenue will be needed. This essential truth is the No. 1 factor that should be driving tax policy. <font color=000990>And anyone who tells you that the way to raise revenue is to cut marginal tax rates is arguing from ideology, not solid evidence.</font>

¶ Many people have proposed raising revenue by cutting back on deductions and loopholes — so-called tax expenditures. Indeed, all else being equal, such changes are preferable to raising marginal rates. After all, higher rates do have some disincentive effects. Eliminating special tax provisions would also simplify tax preparation, and give people less incentive to try to game the system.

¶ But if moderate increases in marginal rates wouldn’t much affect behavior, a mix of rate increases and cuts in tax expenditures might be a sensible path. Some tax expenditures, like the favorable tax treatment of employer-provided health insurance, may have worrisome effects (by encouraging overly generous plans) and so should be trimmed. But others, like deductibility of charitable giving, may be worth keeping.

¶ <font color=000990> Finally, income inequality has surged in recent decades. Raising marginal rates on the wealthy is a straightforward, effective way to counter this trend, while helping to solve our looming deficit problem. Given the strong evidence that the incentive effects of marginal rates are small, opponents of such a move will need a new argument. Invoking the myth of terrible supply-side consequences just won’t cut it.</font>

¶Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers."

A version of this article appeared in print on March 18, 2012, on page BU7 of the New York edition of the New York Times with the headline: That Wishful Thinking About Tax Rates.

 

Logic, we all have at any one time particular points of view. Call those viewpoints, if you like, a persons ideology. Some of us however, it seems, are more flexible in our ideologies than others, and that perhaps allows us to be more easily swayed by facts. Others it seems can look a fact in the eye, and if it doesn't square with their preconceptions will easily find a way of rationalizing why it can't possibly be correct.

This is not the place to delve into personal ideologies, but if there is anything you want to know about mine, just PM me. I will be happy to respond. I can tell you that I plan to vote for Ron Paul in the next election, though my vote won't count in my State. If it did count, I might not be able to vote for him. I am not a member of any political party.

 

Swan, I am discouraged when I think of how difficult it will be to turn this economy around. I keep asking why it is so difficult to form a consensus in Washington and get most everyone pulling in the same direction? Is it because our political system is broken? What if it is unrepairable without major changes to the Constitution? I can't imagine how that could be carried off without a well-functioning government -- short of revolution. I hope I'm wrong because if we need a well-functioning political system to get us off this road to endless debt and inflation, and we need changes in the Constitution to mend our government, we are in a catch-22 situation. So for me, the question is can we do it given our present poorly functioning Congress.

There are alternatives. One is the "Mellon" solution you mention, and the others are even worse.

 

I'm not sure I consider the "Melon" scenario as much an alternative as a consequence. the western world has been incredibly irresponisble.

 

Yes. Indeed.

 

Piezoe, you accused me of writing drivel (ck sp), you said I was ideological, you said I misstated facts or that I had no facts, you said I had a closed mind and you generally dismissed everything I have written in this thread without specifically citing to anything I wrote and showing how and why it was wrong. Then when I pointed out you had replaced a weak argument with personal attack, you said I might be a nice guy and then wrote another six or so paragraphs without saying anything that was factual.

This all comes about because you made a broad claim that was wrong and I said so. I quoted what you wrote ("one fact remains overwhelmingly supported by actual economic data and that is that increased spending is a far more effective means of stimulating the economy in times of recession than are tax cuts.") and asserted that Christina Romer, President Obama's original head of his Council of Economic Advisors, had written a seminal paper on the subject that contradicted what you said. She did write such a paper that is a fact. Brass introduced her paper earlier in this thread, with a link to it. He introduced the paper to support his claim that there was documented econometric evidence of a multiplier effect in response to fiscal stimulus. I wrote a criticism of the paper and argued from the paper itself that it did not make an econometric conclusion but actually admitted that it was not possible, so they did an historical analysis which is not econometric and theorized that if a multiplier could be shown that it would be more likely to show that tax increases harmed economic growth and that tax reductions would promote growth more than stimulus spending. I wrote that in this thread and you can link to the paper in this thread and you can argue against me...but there is no absence of fact or misrepresentation in my argument as you falsely suggest.

So, I called you on your avoidance of addressing the fact that Romer who is the purported liberal establishment authority on the subject of stimulus effect contradicted your claim. I told you that you had to do more than personal attacks; you had to deal with Romer.

So, now you copy a NY Times op-ed that she wrote in this past March. It is not her paper that we spoke of. It is not an academic writing. It is a blatant political writing in support of political policy and electioneering. I don't know what you think this proves...does it undo her paper?

In any case, since I have already written 1,000 words on this, I will take you lazy tactic and copy a rebuttal from Brian Dimontrovic that was published in Forbes three days after Romer's NYT Op-Ed. Dimontrovic is the author of 'Econoclasts' the history of Supply-Side economics...which was the subject that Romer attacked in her Op - Ed. So, here is Dimontrovic on Romer (if you want me on Romer's paper...page up and read it):


Christina Romer Fluffs Her Supply-Side Economics

President Obama’s main economic advisor from early on in his term, Christina Romer, is trying to discredit supply-side economics. On Sunday, she took to her column in the New York Times to dismiss the “worn out assumptions” at play when “politicians have trumpeted the supply-side benefits of cutting marginal tax rates.” In particular, she has Mitt Romney in her sights. Romney has called for across-the-board reductions in income tax rates of 20%, with the top rate taken back to its 1980s low of 28%.

Romer writes: “History shows that marginal federal income tax rates have varied widely….from less than 30 percent to more than 90 percent….If you can find a consistent relationship between these fluctuations and sustained economic performance, you’re more creative than I am.”

Here is the only evidence Romer offers in support of her claim that marginal tax rates don’t correlate with economic growth, a claim which ostensibly includes the economic history of the past 100 years, since the institution of the income tax in 1913. The lone citation is: “[G]rowth was stronger in the 1990s than in the 2000s, despite noticeably higher rates in the ’90s.”

Noticeably higher? The average marginal tax rate from 1990 through 1999 was 36.72%. From 2000 through 2009, the average marginal rate was 36.23%. An 0.49% difference is not in the universe of “noticeable.” And yet this 1990s example must be Romer’s strongest case, because it’s all she offers.

The record stretching back to the 1920s is of course borderline unambiguous. One of the most brutal recessions the nation had ever seen came in 1919-21 as taxes were raised at the top to 77%. In 1921, the United States announced a program of tax cuts that would take that maximum rate down by two-thirds, to 25%. A boom immediately ensued that remains among the greatest in history.

After World War II, the high tax rates instituted in the Depression and World War II presided over five recessions in sixteen years, from 1944 to 1960, and a per annum growth rate of about 2%. In 1961, John F. Kennedy moved into the presidency talking of major tax cuts. He came through on the corporate side in 1962, and his successor Lyndon Johnson did so on the personal side in 1964. Again, the persistent poor performance of recent years was sloughed off in favor of a multi-year boom at 5% growth per year.

And then there was Ronald Reagan’s 1982-89, which shamed the stagflationary long 1970s beyond a shadow of a doubt.
You can make arguments all you want about how there’s no correlation between this and that, but you’ve got to prove them with evidence—at the minimum you have to try. Here’s Romer on this matter: she’s made “careful studies” that marshal “strong evidence” showing “that the incentive effects of marginal tax rates are small.”

Then she changes the subject. After first claiming there’s no correlation between marginal tax rates and growth, her proof has nothing to do with the claim. Instead, the proof shows that people don’t realize that much more income after tax cuts than before. Notice: she makes a claim about there not being a correlation between tax cuts and growth, but chooses to buttress that claim by citing tangentially relevant evidence.
In logic, this is known as an argument with a false warrant. To be valid, an argument has to present evidence that is directly relevant to the premise. Romer’s argument is specious, in that the premise is about tax cuts and growth and the evidence is about tax cuts and income realizations.

Bad evidence (the 1990s in comparison to the 2000s example), bad logic (as above)—all that’s left is mischaracterizing your opposition, or “building a straw man” to knock down, as they say.
Sure enough, it comes: “Lower rates will unleash economic growth…and the [tax] cuts will largely pay for themselves—or so it’s often said.”

Or so it’s often said? I have a 1-terabyte hard drive filled with virtually everything the advocates of supply-side economics have put down on paper over the past half century, and I’ve been studying the material intensively for the better part of a decade. I can confirm that this stuff about increased revenues given tax cuts has not been “often said.”

In fact, no historian has ever been able to confirm that supply-siders “often said” that tax cuts raise revenues. This, rather, is a claim that the opposition to supply-side economics has long imputed to its adversaries—the old straw-man technique.
What you do see “often,” however, is the insistence on the part of supply-siders that without strong-dollar monetary policy, tax cuts can be rather useless, a position that acquits the supply-siders very well in slow-growth-tax-cut eras such as the George W. Bush years. That Romer makes no mention of supply-side monetary policy as she casts aspersions against supply-side economics with a broad brush is finally to render her position ludicrous.

People who make comprehensively faulty arguments are prone to one more misstep, and that is preening. Romer gets trapped here as well. Aside from her arguments being “careful,” hers are “based on facts” (and as opposed to those “worn-out assumptions”). Unlike supply-side advocates, “Economists” like her “have devoted thousands of pages in journals to testing [tax-cut] effects more scientifically.” And Romer argues not from “ideology” but from “solid evidence.”

Supply-side economics has encountered this kind of comic establishmentarian opposition ever since the get-go back in the 1960s. This is one of the reasons its torchbearers took the fight out of the academic and into the political sphere in the Reagan years. Nothing succeeds like success, and the track record of supply-side tax and monetary policy is one of epic winning every time it has been tried. If the deniers still want to mess things up in the likes of the New York Times and the Obama campaign machine, let them.

 

Piezoe, Here is a quote from Christina Romer taked from the Council of Economic Advisors at the White House Web site. She wrote this on July 28, 2010 and referred to the paper she wrote before she joined government...before she started trying to say her inconvenient facts could be changed everytime the political winds changed. She wrote this:

"In fact, tax cuts designed in the right way can be highly effective. That is why the President supported numerous tax cuts in the Recovery Act and why continuing the middle-class tax cuts from 2001 and 2003 is so important. The view that tax cuts focused on the middle class can be important to the recovery is consistent with a wide range of research, including a paper that I wrote with David Romer before coming to government and that was recently published. This paper showed that tax changes in the postwar United States had larger short-run impacts on output growth than previously believed. Since most postwar tax changes have been broad-based, our evidence indicates that broad-based tax cuts have large effects. But it’s important to note that our study did not distinguish among tax cuts for different groups and did not focus on high-income earners."

In fairness she was trying to argue in this blog that although her previous study showed that tax cuts were effective stimulus that her anaylsis had been broad based tax cuts on an historical basis and that she did not test high income marginal rates seperately but that if she did the study might not support tax cuts for the wealthy...typical Romer squirming about what her objective work meant when it no longer fit her political purpose.

In any case, Piezoe, the Romer passage directly contradicts your specious claim that, "one fact remains overwhelmingly supported by actual economic data and that is that increased spending is a far more effective means of stimulating the economy in times of recession than are tax cuts."

Christina Romer disagreed with you. Don't be sad, I think she disagrees with me this week too.