—Agreed, I think, but wasn’t ‘supply side’ marketed as a dislike for taxes?—
Yes. That’s what happens when journalists and politicians try to pretend they are economists. It gets turned into a simple proscription rather than a complex model.
flowbark, just so we are clear: I am not arguing that government spending has less or equal amount of stimulus as a tax cut. I am arguing the question of whether it is a good way to fight recessions (whether the benefits are worth the costs)
Lucid. Thanks. 
—The point here is that the exact same tax cut was claimed to be good for both.—
I agree: it does seem a little boneheaded. But then, we shouldn’t be so sloppy in our criticism of it either.
—Specifically, it is not considered good policy to try to fight a recession by giving most of the money from the cut to the rich.—
Considered by who?
Not all of the rationale for weighting the tax cut to rich has to be justified as fighting recession, or even economic stimulus at all. Just because there is a recession doesn’t mean that all policies must address it, or be bad. It can (and does) have a good recession fighting effect while still being justified along other lines.
—Hardly the case for the government.—
Maybe your problem is that you think of the government’s finances are something other than a collective claim on the people’s finances. Yes, when we have a huge expense coming up (Baby Boomers getting Social Security), and aren’t thinking about priorities about what to spend on, that’s bad. We can always tax ourselves out of almost any debt: but dowe want to be in that situation in the first place? (see my Carol/Bill story)
—Gee, I could swear that I heard the Republicans whining about the debt for years!—
I’m not sure what your problem is. You act as if I was blanket defending the Republicans, and so you saying something nasty about the Republicans has anything to do with anything. Yes, the Republicans have whined about the debt when it served their interests, just like the Democrats, and in doing so have misrepresented the problem. So? My purpose here isn’t to attack either party (because both could use a lot of newfound honesty in discussing economic matters) but rather to argue about the real impacts of policy.
—The markets seemed to appreciate the responsibility demonstrated by a surplus and decreasing debt - not all the boom was the bubble.—
Seemed how? If you could read the mind of “the market” so easily, why aren’t you filthy rich yet?
No, not all boom was bubble… but that doesn’t necessarily mean it had anything to do with the surplus either. In fact, causality certainly worked the other way at least somewhat: rosy predictions about the booming market are what led the government to predict a surplus. The sad thing was that running a surplus for a bit might have been a GOOD idea. But instead everyone in both parties crowded around to use it up before we even really knew whether or not it would really pan out.
—Um, Elucidator may have been claiming that a consensus among economists existed against the Supply side framework.—
I guess I wasn’t sure. Anyway, if so, he’s right. SSecon (which is not just a perchance for tax cutting, but rather is the idea that we are already SO heavily taxed that we can actually increase revenue by decreasing taxes in a simple and straightfoward way)
The dirty little secret of economics is that it is MUCH more unified than it was even a few decades ago. Even the split between micro and macro is not so huge anymore. A lot of the really important work being done today as far as figuring out the economy is being done via econometric study: a lot of the underlying theory is agreed upon, but the applicability of various key assumptions are always under question, and need some serious examination to justify.
Example: the recent Princeton study on the minimum wage which found very little unemployment effect in practice from the institution of the minimum. Now some people think that study is good. Others think it’s crap. But no one in this discussion seriously disagrees with the basic story of how minimum wages cause unemployment. What they disagree with is the magnitude of the effect, given other realities. It’s down to the real world data, which has to be explained in terms of the ways in which it deviates from the classic model (if it really does), before we can create more refined models.
I don’t know anything about economic theory, but I remember there being A LOT of discussion about “paying down the debt”. And it certainly made sense to me: The reasoning was that there is a great deal of ineffeciency in a large portion of tax revenue going to pay interest on the debt. I mean, that’s why I paid off all my credit cards - you can’t get ahead if all your money is going towards interest.
So I have to admit I was a little miffed when it was announced that there was a budget surplus, and being naive, I guess, I thought that the first thing the govt. would do would be to start paying down the debt, as everyone had been clamoring for for years. But of course, the general outcry immediately changed from “pay down the debt” to “give the money back to the taxpayers”.
But Apos, you seem to be saying that the whole concept of reducing the debt was flawed in the first place. I wonder if you might explain that in a little more detail (hmmm…or maybe LESS detail), for non-experts such as myself. I have to admit I kind of lost you on the little Bill & Carol story.
Disclaimer: This post was composed last evening, but I wasn’t able to send it:
squeegee Dang, I missed your post on the previous page. Sorry.
Let me try again.
If the government increases spending, total spending will increase by more than that change
in govt. expenditures. That is, producers of our fabled $1000 hammer will get paid and they,
in turn, will buy something else.
The amount by which a unit of government spending increases total spending is “the multiplier”. In my example “the multiplier” was 5. In reality, it is closer to 2 (over 5 quarters).*
What I will refer to here as the “tax multiplier” is smaller than the government spending multiplier, but it is certainly larger than 1 over long periods of time. (In my example, it would have been .8 * 5 = 4). In particular tax multiplier = govt spending multiplier*(MPC), I think.
MPC = marginal propensity to consume
—But Apos, you seem to be saying that the whole concept of reducing the debt was flawed in the first place.—
It’s not that it’s flawed. There’s nothing WRONG with paying down the debt. But it shouldn’t be presented as a matter of something we must do now, instead of doing other things.
The moral of the Bill/Carol story is this: you are Carol. The government is Bill. When Bill runs up debts on your behalf (supposedly for your good, but we need not concern ourselves with whether or not it is, because it doesn’t matter in the least once the debt is incurred), he can either take money from you now (increase taxes) or borrow (using his line of credit) and take money from you tommorow.
At first gasp, it might seem like a sound thing that Bill takes the money from you today to pay down the debt: who wants debt hanging over their heads, incurring interest?
But looking deeper into this story suggests that it is, all other things equal, in fact something of a matter of indifference whether Bill takes from you today or tommorow. Sure, the debt Bill rung up on your behalf incurrs interest. But so can the money you hold onto by not paying your taxes right away! Indeed, the money you save today can go towards all sorts of things that, in future value (because money today is worth more than money tomorrow: you can’t compare present dollars to future dollars and conclude that $100 paid today is better than paying $110 tommorow), might well be worth more than your future tax bill.
In fact, (and this is a simplified example, because it ignores the complications like those involved with the government taxing income from bonds) if you want, you can “pay off” your share of the debt anytime you want: just figure out what your share of the “debt” is, and then buy a government bond for that amount. The bond will get the same amount of interest that the government debt is incurring, and cover your future tax bill (provided the government doesn’t unexpectedly single you out to pay more than your share of taxes). That’s really no different than the government taxing you today: with the bond strategy, you’d pay the exact same amount of money today even though the government will tax you tommorow.
Think about what’s going on in this strange case: you are essentially lending money to YOURSELF at an equal interest rate. You are both a creditor (the national debt is owed to you) and a debtor (you owe money to pay off the national debt).
Now, that example is not advice: you don’t need to run out and do this- but it does help clarify a little of what is actually going on with the national debt.
But the kicker is that the government (Bill) almost always gets a much better rate for HIS borrowing (on your behalf) than you could ever get on your own behalf (let’s say that the taxation today so impoverishes you that you have to take out a private loan to stay afloat: this loan incurrs interest at, let’s say 14%, while the government debt might have only incurred interest at 6%) That means that it might well be BETTER for you to get taxed tommorow than taxed today, because you would incurr LESS interest.
Now, for diverse and individual people, it might NOT be a matter of indifference when the debt gets paid off. Some people might value spending more money now than later, and so would prefer to defer paying taxes. Some people might feel the opposite way, and want to pay taxes upfront.
But the fact remains that on average, what is far more important than how we finanance the debt is whether or not we incurr debt in the first place, and whether or not its cost can be justified. Once we incur debt, the big questions are all over. The only consideration at that point is how we intend to finance it. There are many options, but as long as you are wise about it, they are all pretty much equally good from the perspective of requiring you to pay the same amount of money, adjusted for present value.
—I mean, that’s why I paid off all my credit cards - you can’t get ahead if all your money is going towards interest.—
First of all, the government is not like you, and not just because of favorable interest rates. The government, unlike a person, can tax those it represents. The interest on the debt is simply the price of not getting taxed for the full amount now. You can think of it as the government loaning you the money equal to the amount that it would have otherwise taxed away.
But second of all, I’m not sure what you mean by “all of your money is going towards interest.” What is inherently bad about that? Would you really have wanted to pay for something entirely upfront? Interest is the price for NOT doing that. Now, someone who isn’t very savvy about the difference between present and future value might well “spend beyond their means” and end up buying things that they can’t actually afford to finance, even over time. But that’s not the same thing as saying that paying interest is a bad thing.
spoke -
Just to be fair, my quote from the State of the Union speech was abbreviated; there was also verbage about stimulating business investment.
Here’s another cite, from almost a year earlier:
“A tax cut now will stimulate our economy and create jobs.”, President George W. Bush, radio address, February 3, 2001
I composed this last evening. The hamsters seem to working through a sizable backlog…
squeegee Dang, I missed your post on the previous page. Sorry.
Let me try again.
If the government increases spending, total spending will increase by more than that change
in govt. expenditures. That is, producers of our fabled $1000 hammer will get paid and they,
in turn, will buy something else.
The amount by which a unit of government spending increases total spending is “the multiplier”. In my example “the multiplier” was 5. In reality, it is closer to 2 (over 5 quarters).*
What I will refer to here as the “tax multiplier” is smaller than the government spending multiplier, but it is certainly larger than 1 over long periods of time. (In my example, it would have been .8 * 5 = 4). In particular tax multiplier = govt spending multiplier*(MPC), I think.
MPC = marginal propensity to consume
Apos: I composed this last evening. I’ll respond to your other comments later. (Thanks). (Naturally, I assumed that the last one didn’t post a couple of hours ago. :smack: )
Apos: 1) Thanks.
----- 2) "Some think that the costs are worth the benefits most of the time, some think they usually are not worth it, but in any actual situation it’s usually a matter of empirical study as to which effects dominate and why. "
I’m having difficulty understanding which aspect of the literature you are alluding to. There’s the rational expectations stuff, which I must admit I tend to dismiss. There’s the empirical work suggesting that Congress is not especially competent in implementing a counter-cyclical fiscal policy, which I take more seriously.
----------3) But my key point is that the extra short-term $1 gained via government spending (vs. tax cuts) should not be thought of as a free lunch, mana from heaven (which is what it might seem from your story).
Well, if the government is drawing purely on excess capacity (eg. government spending during the Great Depression), then it is a “free lunch” scenario. Extra spending merely puts unused labor and capital to work (ignoring natural resources, I suppose). In more recent times, though, I concede that government spending during hard times will both utilize unused capacity (good) and crowd out other activities (which may or may not be ok, depending upon how the government spends the money).
----------4) Um, who in their right mind would “advocate Ricardian Equivalence”?
Um, I believe Barro wrote a paper which purported to assert its existence. As for myself, I believe that families don’t enhance their savings as a response to a government decision to cut taxes without reigning in spending. To a nontrivial extent at least.
-----Whether government spending or government cutting taxes is ultimately the best way for governments to fight recessions is very much a matter of debate, and shouldn’t be presented as anything else.
I confess that I have not seen any academic papers on this. Or secondary sources referring to the same. (I trust they exist, of course.)
--------- The point of the story is to get an idea (or, more importantly, a model) of what the entire playing field is like, so that you don’t make the mistake of forgetting that there’s a “rest of the story” when you look at some policy impact. Neglecting where the money comes from, and the harms that processes might cause, is just such a mistake. It isn’t a conclusive mistake (it doesn’t mean that government spending ISN’T the best out): it’s just a misleading way to tell the story.
Fair enough. I may have the habit of restricting the debate to ideologically convenient areas (though I try to be fair within those areas). At the same time, methinks that introducing generational accounting in this context is a bit of a tangent. Though it is certainly very pertinent when considering fiscal policy in non-recessionary periods. But that’s a judgement call.
The free lunch I am reffering to is ignoring where the money the government spends comes from, not crowding out other things (which actually I argue is very rarely a real problem). The dollar that the government spends is a dollar taken from someone (whether in the future, via deficit spending, or right now). What the government is doing is forcing the whole of that dollar to be spent right now, instead of spread out over time (some of being spent now, or a little later, and some saved and then spent even later than that).
Even if the spending stimulus has employment and capacity effects, that doesn’t mean that the end result is the best one, and that spending is the best policy. To criminally oversimplify, spending costs money (1$ in present value, taken from someone at some point). Tax cuts don’t in the same way, plus they have efficiency gains. Both have short term benefits for fighting recessions. But while fighting recessions with tax cuts may not be as dramatic as spending in the short term, (dollar of spending vs. a dollar of tax cuts), the long term, the spending has other costs, while the tax cut has other gains. It’s a real matter of debate as to which is ultimately better for the economy as a whole, and anyone claiming to know is probably overeaching, because it’s a wide open question. Most of that debate is empirical, not theoretical: it has to do with which of various effects (all of which are part of accepted theory) dominate in practice.
Apos: I’m not sure where I should start.
------"The dollar that the government spends is a dollar taken from someone (whether in the future, via deficit spending, or right now). "
Frankly, this isn’t clear to me. If there’s a shortage of aggregate demand in the current day, and the government succeeds in putting unused human and physical capacity to work, this represents a gain in wealth both currently and intertemporally.
If the short-term spending is financed with bonds, that may affect the relative consumption of net savers and net borrowers in the future, but I can’t see how it should magically shift consumption from the future back to the past.
During conditions of full employment, in contrast, extra governmental (noninvestment) spending financed by bonds will borrow from the future by tapping into national savings and reducing investment (purchases of machinery and equipment). So in that context, one can speak of shifting consumption from the future on to the present, via the investment mechanism.
Now usually, when one says, “Cite?”, one is implying a certain dubiousness. I don’t want to do that, but I really would like some context. Could you give me a reference to a paper that reflects your framework? Are you using an Auerbach/Kotlikoff framework or is this from a recent intermediate macro text? (Or both?) Just curious.
I know you can’t sketch out a model here (and if you did, I probably wouldn’t crank through it) but I’d like to get a sense of the provenance of your ideas.
------In fact, (and this is a simplified example, because it ignores the complications like those involved with the government taxing income from bonds) if you want, you can “pay off” your share of the debt anytime you want: just figure out what your share of the “debt” is, and then buy a government bond for that amount.
Now why would I want to do that? Why don’t I just encourage the government to borrow like crazy and leave future generations to pick up the bill. Implicitly, you’re giving us a model with infinitely lived agents. (Although admittedly I seem to recall some paper suggesting that even a very weak bequest motive will produce similar results.)
---------erl said: "I thought that the problem with the economy had everything to do with 9/11 fears and the recent corporate scandals, not the refund from, what, a year and a half ago? and some tax cut. "
Let Unca flowbark give your question a shot. You can break aggregate spending down into consumption, investment and government spending. In contrast with past post-war recessions, consumption has held up pretty well: it is business investment (purchases of machinery, telecommunication equipment and the like) which has tanked and stayed tanked.
--------Apos: “If the tax cut hurt the economy, we can’t tell. It could have helped, but we can’t tell… we need some complex story that models reality well enough to be convincing. We don’t have that yet: maybe in 10 to 20 years, looking back at the data in hindsight.”
Hmph. Well, there are a number of large-scale econometric models (which are, at bottom, mostly based on intermediate Keynesian models) that do a fairly decent job of modeling the economy (except when something unprecedented happens, such as the 1974 oil shock but NOT the 1979 oil shock). For example, the average GDP forecast error in the 1983 DRI model was something under 1 percentage point. That’s not tiny, but it’s not huge either. Furthermore, it is my understanding that smaller models predict the big aggregates better (though they are unable to translate these forecasts into individual product demands, of course).
Finally, I must re-emphasize Sam’s point (which Apos will agree with, methinks). If you want to ask what the effect of policy X is, you have to compare what happened under policy X to what would have happened in the absence of policy X. In economic parlance you have to “pose the counterfactual”.
How do you figure out what would have happened? That’s where the econometric modeling comes in. Casual empiricism (never mind casual headline-watching) will only take you so far.
Cheers.
-flowbark
—Frankly, this isn’t clear to me.—
It’s not all that complicated. This isn’t quite a matter of theory: it’s more like a matter of the conservation of energy. Where is the dollar the government is spending coming from? It’s not appearing out of the blue. It’s ultimately always coming from someone who has that dollar (or its future value equivalent) taxed away. Now, I agree, if they hadn’t had it taxed away, they might not have spent it all at one time. They might have saved some of it… but of course, only to spend it later. In the end, we are left with the reality that the government financing ends in SOMEONE having the dollar (or its time-value corrected equivalent) taxed away from them. It isn’t a free lunch. Goverment spending (especially for the pure sake of spending) is just forced private spending, usually on something that a private citizen wasn’t inclined to spend on in the first place.
—Now why would I want to do that? Why don’t I just encourage the government to borrow like crazy and leave future generations to pick up the bill.—
The fallacy here is pretending that the bill isn’t to at least some degree offset by all the extra money floating around due to it not being taxed away. Sure, my children inherit my debts… they also inherent my savings, and even if I simply spend everything I have, an economy that’s been working without the burden of taxation it otherwise might have faced.
—How do you figure out what would have happened? That’s where the econometric modeling comes in. Casual empiricism (never mind casual headline-watching) will only take you so far.—
What the heck is “casual empiricism”? What the heck do you think econometrics works with if not empirical data? The models tell you what is expected given certain assumptions and given certain empirically measured values (which are always both error prone and liable to change).
Spoke:
Ah yes. I did say it before. I stand corrected on that point.
But no, that doesn’t look look “magic bullet” language to me.
Fair enough, Scylla. Then we have a reasonable disagreement over the extent to which Bush promoted the tax cuts as a cure for the ailing economy. Cheers, buddy.
Five months later, with the stock market still hovering around 7900, with unemployment still rising, and with Bush proposing yet another “stimulus package” (i.e., tax cut for the wealthy), I thought it might be an appropriate time to revive this thread.
Funny, by the way, how Republicans label tax cuts for the wealthy differently depending on how the economy is going. When the economy was healthy and we had a surplus, they wanted to “give the surplus back to the taxpayers” (i.e., cut taxes for the rich). Now that the economy’s in the crapper, and we’re facing ballooning deficits, they want to enact a “stimulus package” (i.e., tax cuts for the rich). :rolleyes:
Still waiting to be stimulated.
Dang that Bill Clinton, anyway. Look’s like it’s going to take yet another another term for Bush to fix his mess.
Peace,
mangeorge
Dang that Bill Clinton, anyway. Look’s like it’s going to take yet another term for Bush to fix his mess.
Peace,
mangeorge
Any more of his brand of fixing and we’re going to be right in the crapper.