Could Obama be a (gasp) supply sider?

Great Debates
102

Talking only about taxes now, you’re trying to push the economy by targeting only a small part of it. If you want to push something, you push the critical part of the mass, not a small little segment of it. Next time you’re trying to get an elephant to go somewhere, try leaning against it’s side, then try pulling it’s tail. See which method gets the best result.

Sam Stone detailed the problems with infrastructure spending above. I actually agree with you in theory that it would be a great way to stimulate the economy. In theory. Practically, it just takes too long to get it going, now you’re trying to move the elephant by tugging on it’s ear. It’ll work, but by the time the elephant notices and responds, the danger you were trying to avoid has overtaken you.

Annnnd now you’re back to the same place. You haven’t demonstrated that the tax cuts will stimulate the economy, you haven’t shown that the stimulus package will create more tax flow, so you’re defaulting to “why not give it to the people whose lives will be most improved?”. Your solution is not based upon what will work best for the economy, but on what will financially benefit one segment of the population. As you said, it’s an easy sell. “Free” money always is. But it’s not a solution to the problem.

“Improving the lives”. Why? Why is it the job of the government to improve anyone’s life? I don’t want the government improving the lives of the rich, and I don’t want them improving my life. Where do you get that it’s government’s job to “improve” anyone’s life?

Could you please explain what “distortions” you are talking about aside from the tired old class warfare shibboleth that rich people are rich, therefore we should make them pay and pay and pay for what the rest of us want but don’t have because they can afford it?

Yup. They sure were. And they gamed the system for personal wealth while destroying it. I think that they should all be boiled in oil. Slowly. Satisfied? That being said, what does that have to do with the correct response moving forward? Now that the problem has been identified, pass laws that make sure that it won’t happen again, then move on. That is what we wound up doing after the ability of people to buy stock on spec in the 20s caused the Great Depression, that is what we should do now. Identify the problem. Ensure that it’ll never happen again through targeted regulations, then move on. You correct the problem by eliminating the possibility of having it happen again, you don’t try to create a solution that tries to compensate for what was lost.

You have no problem taking from successful people and giving it to less successful people just because you can? I do, I have a big problem with that. In any other context it would be called theft, and no matter how you want to justify it, it’s still wrong.

103

If we need 300 billion of stimulus to push the elephant, then that’s the figure. If there’s 300 billion dollars worth of middle-class taxes that can be cut (and there is), then we can get the 300 billion that way. The goal is moving the elephant, and any 300 bil will get that job done, no matter where it comes from. Obviously, we want it done in the most efficient way, and that’s up for debate. But the middle-class collectively pays more than enough in taxes to get the job done, if the administration chooses to go that route.

Sam Stone’s objections almost entirely involve giving up the good because it’s not perfect. Corruption is lamentable, but we learned recently that one single man in the private sector can manage to destroy 50 billion worth of wealth. Infrastructure projects are slow, but they can be fast-tracked. There could be some structural unemployment but there’s no reason to believe it will be serious. And there are no other distortional effects, none, that compare with the cost of losing 1/4th of our retail capacity in the next year. The depth of this recession by itself is the single best protection against misallocation. You can’t crowd out resources that aren’t even being used. Meanwhile, infrastructure is all domestic, providing a guarantee of a high fiscal multiplier, and the fruits of that construction continue to provide value over time, which won’t happen if tax rebates all end up in bank vaults.

It’s been pointed out what the overwhelming majority of experts think. Their disagreement is not whether the stimulus should be done, but how. If they don’t convince you, then nothing I say can either.

Yes, it potentially is. The economics is clear. I don’t like it as much as direct spending, but it could work.

I’m not going to argue theories of government. It’s a value judgment, and there is no possibility that we could change one another’s minds on this.

When we bring out the guillotine, you can complain about class warfare. Until then, that rhetoric is as ridiculous as when the left complains about the evils of faceless corporations.

Finance executives were paid vast sums of money so that they could destroy wealth. This was done because their incentives were not in line with their output. They were paid regardless of success. This problem is shared, to a lesser extent, in other industries. That is a distortion. It has been argued by professional economists that this distortion could potentially be mitigated with higher marginal rates. I have not stated that this is a fact. I’d have to read much more about it. But marginal tax rates were extremely high during the 50s and 60s, and we had excellent growth. Sam can argue all he likes that that was because of a lack of competition for experienced corporate leadership at the time. I don’t believe him right now, because executive compensation is much lower in other advanced countries, and yet there is no great apparent difference in performance.

The problem is clear. Perhaps the solution is not. I’m going to study this more, but it can’t be doubted that real distortions exist, and it’s worth investigating ways of reducing that problem. Taxes might just do the trick. I’ve also heard about keeping bonuses in escrow, which sounds like a great idea, too. As I read more, I might settle more definitely in a certain opinion, but for now, I’m simply stating what seems to be the case.

A higher marginal tax rate is one law that could potentially keep this from happening again, or at least reduce the damage from future mishaps. Taxes are often used to reduce externalities. It’s a standard economic tool. Perhaps it’s not the best tool for this situation. But I’m not concerned with whether you have an ideological opposition to this tool. My interest is the practical effects of a tax.

If you had actually read the portion of my post that you quoted, you would’ve seen that it’s not just “because I can”. I said explicitly that I’m interested in a better economy as a whole. If we can ensure healthy economic growth with more future stability and less risk of breakdown with a tax, then I will support that tax. I have now explained in more detail how that distortion works, complete with a cite.

If the plan works to decrease macroeconomic volatility, then I don’t care how you label it. Call it “theft” if you want. No one will care about your empty terms of disparagement if we’re enjoying the benefits of a smoother economy.

104

What seems plausible is that people who are in debt will be more likely to spend a government check on that debt, rather than on consumption. The current recession seems to be a crisis of debt. Thus a ‘stimulus’ spent on debt is not likely to address the issue, since such a stimulus is merely the transfer of debt from the consumer to the taxpayer.

If investment is not the issue, why do we need to spend so much in infrastructure? If the idea is to increase consumption, then the Obama plan does not seem to have been well thought thru.

This “middle class tax cut” seems to be driven (under Obama) by two things - deficit spending, and an increase in taxes on the upper class. (Yes, yes, I know he said he was going to cut taxes overall, but even if he meant it then, he doesn’t now). What is necessary is to show that a middle class taxpayer, burdened by debt and fears for the future, is going to spend money on consumption more than a rich person who is not so burdened. And, that the middle class debtor is benefited by a transfer of his debt from him to his government.

In other words, in your case the stimulus will not work - you have not increased consumption, and will not even if you receive a check.

I have always been a deficit hawk. The failure of the Bush administration to cut spending and balance the budget was his greatest failure.

Now that the Democrats have gained control of Congress (and are about to gain control of the White House), the deficit has doubled. And what they are talking about is deficit spending in the trillions. Trillions. Every fucking year - spending a trillion dollars we don’t have.

You allege that Greenspan is too trusting of Wall Street. It seems Obama is a little too trusting of the notion that you can borrow your way out of debt. ISTM that the market is a bit more reliable than that.

“Created”? Could you describe how this money is “created”? I thought was going to be taken from the rich, or borrowed and would need to be paid back with interest. How do you believe that taxes are “creating” money, or that deficits “create” money?

This is now the, I believe, second time in which you have mischaracterized my position. If you would like to continue the discussion, I would prefer if you could actually address things that I have said, rather than making things up. Thanks in advance.

Could you please produce a cite that shows a hundred bridges in need of earthquake retrofitting, demonstrating that these infrastructure improvements will more than pay for themselves. Also that, as Sam Stone mentions, there is significant unemployment among structural engineering firms.

That is exactly my point. Projects would be funded, not to increase productivity, but simply for the sake of spending money we don’t have. Then the recession ends, and we have a whole bunch of projects that need to be paid for, and no increase in productivity to pay for them. And a staggeringly huge debt.

See the comment from Sam Stone on the Japanese lack of success in trying this solution.

This is exactly the sort of thing to which I object.

‘We can’t tell if this will help or not. So let’s spend a trillion dollars doing it.’ I once worked with a guy who phrased it

The consequences of finding out that we can’t are rather high. I would prefer to look around and see if others have been flitting around overhead, before I make the leap myself.

Regards,
Shodan

105

Krugman addresses this in his column yesterday. As I said, for one check you are right, but as the increased income becomes accepted, more of it goes to consumption. The current crisis, by the way, is a crisis of liquidity, not debt. The purpose of the infrastructure program is to create jobs while making needed improvements. Surely you’ve noticed a lot of press on our crumbling infrastructure from before this crisis hit?

He has always said he would roll back the Bush tax cuts - that’s where McCain’s charges that he was increasing taxes came from. it looks now like he will wait for them to expire in 2010 to avoid fighting with the Republicans over this. And you contradicted yourself above. You are right, in my case the stimulus wouldn’t have worked, which I suppose means Bush was right in not giving me one. I have no debt to speak of, so I wouldn’t be paying it down, but I would have saved it. Ditto for a really rich person. Now, reducing debt reduces interest costs which effectively increases buying power, but Obama is right in not wanting a one time stimulus, but a continuing one. It appears he is going for a 40% share in a tax cut and 60% in infrastructure. Some of this may be political, since it will be hard for Republicans to vote against a tax cut, and some may be from the availability of infrastructure projects, but it looks like there is no obvious single right answer.

Umm, the increase in the deficit comes from Paulson’s bailout. I supported that, not imagining he would let the banks hide the money under their mattresses. Krugman also noted that Friedman’s monetary solution to the recession is being tried and is failing big time (Bernacke is a fan of it) so maybe it is time to try a Keynesian solution. Obama is not borrowing his way out of debt - he is borrowing his way out of a financial meltdown. The debt problem needs to be solved by a reasonable tax and spending policy after the economy recovers.

You really don’t know how the Fed increases the money supply? It has nothing to do with taxes.

Well, not all, but your main objection to the infrastructure program is that politicians will force funding of useless projects. As Hellestal mentioned, no one thinks that this will be pure as the driven snow, but especially given the need to start now with already approved projects I think the chance of made-up ones is within reason.

You clearly don’t live in California. The Bay Bridge retrofit (botched to be sure, but necessary) is way north of a billion bucks by itself.

Here is the problem with the payback model that you seem to have. If there is never another earthquake that affects a bridge, the retrofit is useless. If there is, the cost of not doing it would be immense. Not in lives lost, which would be relatively minor, but cutting off the major means of moving from the East Bay to San Francisco would have immense productivity costs. One thing that governments can do because they are not profit making entities is to be on the safe side for things like this. I have data (and experience) from engineering that shows that management does not make the right decision in cases where the benefit is based on the probability of bad things happening in the future. In the case we’ve studied, people did the right thing for other reasons, and got major unexpected rewards for it. Our literature search shows that there aren’t a lot of papers on probabilistic ROI. By the way, the stuff we did is in peer-reviewed publications, so I’m not totally talking out of my ass.
See the comment from Sam Stone on the Japanese lack of success in trying this solution.

Ever see Butch Cassidy? Sometimes jumping off the cliff is the right answer. My point, btw, is not that you would irrationally find the projects not worth doing, but that based on what assumptions you make on the probability of problems you can logically support them or oppose them. No one is going to be able to give you an iron-clad ROI computation. But I think it is pretty much agreed that letting everyone fail is not a good answer.

106

I have an idea about all this dreadful corruption and waste that is sure to emanate. As you no doubt expect, its a radical notion, kinda crazy, but I’ll put it out there because I haven’t any credibility to lose on that front.

Let’s trust the people. OK, calm down, its not that damned funny!

We got blogs galore, and blogs that filter blogs. Every such expenditure may be openly discussed and thrashed out, experts will chime in, morons will chime in, facts are likely to emerge. Reputations will be put at risk, election prospects along with them. Projects that are questionable will be examined, projects that are ridiculous will be ridiculed, with the appropriate damage done to the Congresscritters who propose them.

Power to the people! To coin a phrase…

107

Well, he claimed during the campaign that he would make a “net tax cut” that would be “paid for by spending cuts”. Nobody in their right mind believed him, which is no doubt how he got a majority, but that’s what he said.

Now he is no longer pretending that he will cut spending, or how we will pay for the $775 billion that he is talking about now.

Umm, so? The increase in the deficit under Obama will come from the bailout of practically everyone else - as mentioned, Obama has abandoned the notion that he will pay for his tax cuts with reduced spending.

So how exactly does Obama propose to prevent the middle class from “hiding their tax cuts under the mattress”, as you say the rich would and that you did?

Good idea. All that is necessary is to cut a half a trillion dollars a year from the federal budget, and we will be right back where we were under Bush. Then we can cut another trillion dollars a year, and balance the budget. Then we can cut other spending by enough to pay for all the infrastructure we ordered. Or raise taxes by the same amount, and go back into recession, as you said happens when the budget is balanced.

So Obama was lying when he said he would pay for his tax cuts with spending cuts? I agree.

Unless you are suggesting that he will pay for the enormous increase in deficit spending by inflating the currency, or cutting interest rates? Is that what you are saying?

You keep making my point for me. The Bay Bridge project you mentioned was hugely expensive, and “botched”, and did not (apparently) do much to improve the California economy. Therefore, you and Obama would like to do a hundred more just like it. :dubious:

So even the fact that the Japanese jumped off the same cliff and drowned does not seem to you a good indication that maybe you can’t swim?

Spending money like a drunken sailor did not head off this recession. Spending money like three drunken sailors did not help the Great Depression. Spending money like a drunken sailor did not help the Japanese.

But hey - this time it’s gonna work!

Regards,
Shodan

108

He also said it would be funded by increasing taxes on the top 5%. Now McCain said he’d pay for his increased tax cut by eliminating earmarks (which is actually a trivial expense, relatively speaking) and nonsense like across the board cuts, which never work. Obama’s spending cuts, by the way, were supposed to come from eliminating unnecessary programs. Neither exactly answered the many questions on the details of this during the debates. You don’t tell particular groups that they are going to lose out if you are elected, unless they are a small minority, like the rich. I suppose if you think Obama is a saint, not a politician, this is shocking.

You said the increase came when Democrats took over Congress, neglecting to mention that the proposal came from the Republican administration. In any case - no spending cuts. Only an idiot cuts spending during a major recession possibly teetering on a depression. If you dispute this, you can argue with mainstream economists - and I include most U of C ones in this category.

Do you want the economy to sink into a depression? Do you think everything will get better if you just ignore unemployment, the reduction in consumer spending, and the liquidity crisis?
Bailouts are one time things, so they are different from long term entitlements. So is infrastructure improvements. Remember, a lot of the bailout should be loans and investments in companies, some of which might actually pay off later.
Balancing the budget does not force you into recession. Balancing the budget during a downturn makes it worse, as anyone with a modicum of economic knowledge knows. Balancing the budget is a good thing to do during an upturn, where the economy generates more taxes and less call for welfare and other costs. Too bad Bush never figured this out. This whole mess was not caused by Clinton, Barney Frank, or Jimmy Carter. This mess was caused by free market ideologues shirking their responsibility to call attention to risky behavior by the markets.

You might recall that this was before the full extent of the damage the Bush administration did to the economy became apparent. Is he supposed to let the economy go totally into the toilet to please you? He isn’t going to be increasing taxes on the rich next year either; too bad, but understandable due to changed circumstances. Happily Obama isn’t Bush, and doesn’t seem to want to pursue a course of action despite changed circumstances.

Are you understanding anything I’m saying? I wasn’t here then, but I understand that when 880 in Oakland collapsed in the last earthquake it screwed things up big time. Let me put this another way. Do you have term life insurance? If you go a year without dying, do you feel you’ve been ripped off by the insurance company? Earthquake retrofits are like insurance. If we’re lucky, we’ll never collect on the benefit, but if we’re not lucky we are going to be very glad we made it.

This recession was not caused by the deficit. The deficit came from the war, (poured overseas) and tax cuts for the rich, not useful for improving the economy. The recession could have been moderated without spending lots of money. Now it is out of control, it is a different story. For the umpteenth time, when FDR followed your advice and stopped spending money in order to balance the budget, in 1937, a big downturn resulted.

So, what do you think is the cause of the problem, and what do you think should be done about it?

109

The Japanese example isn’t nearly as illustrative as Sam has argued. Or if it is, it’s to the opposite conclusion. The Japanese arguably did not pursue an aggressive fiscal policy. They were entirely inconsistent and undershot their recommended spending goals year after year.

You’re mistaken about the the New Deal as well. It was helpful on the net, but it wasn’t anything close to a big honking stimulus. FDR didn’t pursue truly aggressive spending until after the war started, which not incidentally is when the country left the Depression. The New Deal was helpful on the whole, but its expansionary fiscal policies were comparatively small and eventually given up for a time, which caused huge problems. FDR reversed course with higher taxes and less spending to try to balance the budget, and the economy seized again. This would not have happened if he had continued to pursue a proper Keynesian response.

110

You’ve constructed a hypothesis where you can’t be proven wrong… ever.

If gov’t spends 1 trillion in fiscal stimulus and it doesn’t work, then of course, the only thing wrong with it was that it wasn’t 2 trillion. And if 2 trillion doesn’t work, then the plan was flawed because the govt didn’t spend 4 trillion, and so on and so forth.

You spent 10 trillion and it didn’t work?! Fools! It didn’t work because it wasn’t “aggressive” enough! 100 trillion maybe, but not 10 trillion!

You’ve got any guidelines for the threshold of fiscal stimulus? 5% of GDP? 2000% of GDP? Is Obama’s plan not aggressive enough? Too aggressive? How can you tell?

111

Complete nonsense. FDR’s experience is exactly consistent the theory, which is a huge reason why the overwhelming majority of economists are Keynesians to one degree or another. FDR wasn’t perfect, but when he was pursuing stimulus, it was working (though not quickly because the stimulus was relatively small). When he stopped, the economy tanked again. When the war spending started, the economy really got moving. The example of Japan is less clear but also seems to jive, though there’s been considerably less study of that particular incident. Still, when the stimulus was strong in Japan, there was strong growth. When it wasn’t strong, there was little to no growth. And if the stimulus had been cut entirely, we could reasonably have expected a severe downturn.

You measure the shortfall in output, the difference between what the economy is producing and what it should be producing at optimum output, and then you introduce the stimulus to return as close to possible to that optimum level. This is a quick and dirty example from Krugman.

112

You and Krugman (and his math) assume a non-broken foundation economy. These fiscal stimulus ideas try to “fix” a “consumption economy” as if that’s the optimal economy we want to have. Worrying about velocity of money is also misguided when the underlying economy is built on consumption. You guys are spending money on trying to optimize the output matrix of horses, horsebuggies, horseshoes, and blacksmiths instead of spending money (e.g. tax cuts or incentives for innovators and producers) to rebuild the nation’s economy to cars and rockets.

Others have touched on the infrastructure structure initiatives so I’m skip that for now. However, I’d like to hear why you think sending $200 billion or more to consumers will help USA productivity and competitiveness? Consumers got $2 trillion from the private sector (mortgages + credit cards) since 2005 They didn’t get any productivity gains or competitive advantages from all that money. They bought imported crap which ended up in landfills. How would they spend govt money any differently? (Assuming they spent it all instead of paying down debt.)

Why is this perpetuation to “smooth” out this consumption economy so important to you and Krugman? Is it sustainable? Why is fixing the mechanism of money flows in this economy more important than fixing what the economy is?

113

SamStone, I am sorry it has taken me so long to respond to your post.

I agree. American companies compete with European and Japanese companies that don’t shoulder the burden of high cost health care for their employees. Other countries don’t have environmental or labor laws. And CEOs in other countries don’t earn the mind blowing salaries compared to American CEOs.

Creative accounting, tax shelters, and a host of other tricks make the actual tax rate much lower. Cheating has become a normal business practice. There is a thriving consulting industry devoted to tax evasion for corporations and the mega rich.

The idea that any tax increase on the wealthy will cause them to leave the U.S., taking all the jobs and tax revenue with them is an empty threat to take away something that doesn’t exist: shared prosperity.

Globalization has radically changed the way goods are produced. Some corporations outsource to a web of contractors and subcontractors others outsource everything to temps.

The amount of money saved with a steady supply of cheap labor outweighs any tax incentive. White collar jobs are next. There are plenty of highly qualified accountants in other countries willing to work for much less than their American counterpart. American workers can’t compete in the cheap global labor market. There are winners and losers in capitalism. The losers in the global market are Americans.

I think it is important to consider the economic and social cost of globalization. There needs to be new rules to assure a fair system that protects those without power and wealth.

Most Americans didn’t shared in the enormous economic growth since 1980. For the bottom 90 percent, the slice of the income pie is less today than in 1980 and average income has remained stagnate. The average income for 90 percent of Americans was slightly less in 2005 than in 1980. Emmanuel Saez and Thomas Piketty used tax return data to analyze and document income distribution since 1913. The charts in the document are excel and can’t be linked or copied. http://www.thenation.com/doc/20080630/extreme_inequality
UNICEF ranks the U.S. 20 out of 21 nations for child well being. The UN ranks the U.S. 17 out of 20 countries for material well being and 20 out of 25 top economies for digital opportunity. The US has one of the highest infant mortality rates in the world and ranks 28 out of 31 countries for healthy life expectancy.

http://www.itu.int/ITU-D/ict/doi/index.html
http://www.unicef.org/media/files/ChildPovertyReport.pdf
http://www.americashealthrankings.org/2008/othernations.html#note1

114

The Fed says productivity growth has averaged 2.7% a year since 1996. So I don’t think productivity is the issue. Capacity certainly isn’t the issue in a shrinking economy. Checked the desperate sales at retailers lately? People today are buying neither buggy whips nor rockets. As for what producers produce, don’t you think the market can work that out, assuming consumers have enough money to buy anything?

The debt that consumers took out kept the economy afloat in an environment with stagnant wages. The reason they bought imported stuff, crap or otherwise, is that manufacturing moved off shore. How do you propose to solve this problem? Force manufacturing back? Tariffs? Prevent consumers from buying crap?

If we don’t have a consumption economy, where are employers going to get money to pay workers? Maybe we can force the Chinese to buy stuff? Frederik Pohl had a story where automated factories produced so much stuff, they had to build robots to consume it to keep the economy going. Is that your plan?