Giving tax cuts to the rich so they will spend the money and employ people at Rolls Royce dealerships is not supply side economics, it is trickle down economics. No one has ever advocated trickle down economics, it is the strawman against which liberal politician love to campaign. The actual reasoning behind supply side tax cuts are that they encourage productivity by reducing dead weight loss and the substitution effect. The Laffer curve says that tax rates of 0% and 100% both raise the same amount of revenue. This is uncontroversial. What is controversial is where the curve has its inflection point. Most people think it is around 60%. This is because if work is less renumerative, obviously people will engage in less of it. The tax revenue maximization point is somewhere around 60%, but the economic output maximization point is much lower. No one know exactly where it is, but above a certain point every percentage the MTR is raised destroys a certain amount of economic productivity. The closer the MTR gets to the inflection point the more productivity is destroyed. Until so much is destroyed that raising the MTR costs the government revenue.
Given the propensity for high marginal tax rates to destroy productivity the best way to boost productivity is to find the highest MTRs and reduce them. The rich face the highest MTRs and so tax cuts for the rich are the best way to increase productivity via tax policy. This is the supply side case for tax cuts for the rich.
Keynesian economics says that the problem during recession is a lack of aggregate demand (AD). Therefore the way out of a recession is to get people to spend money. Direct government spending was once thought of as having the highest multiplier. Ironically research by Romer cast doubt on this and now tax cuts are generally seen as having a higher multiplier. Since the bottom 60% of income earners in this country pay zero or nearly zero income tax the only way to cut taxes is to cut them for the top two quintiles of income, since they pay almost all of the income taxes. Payroll tax cuts have been floated by some, but since the future of entitlement deficits is so horrific already, this seems to be politically impossible.
Since many liberal politicians are Keynesians, they have traditionally seen low AD as the cause of recessions. Since the rich are thought to be less likely to spend the money they keep from tax cuts, lowering taxes for those at the bottom income brackets was thought to be the best way to boost AD. The research mentioned in the OP puts the standard liberal argument against tax cuts for the rich in question. It suggests that if AD is really the problem the best solution is to cut taxes for the rich.
You completely skipped the middle class in your analysis. That is where tax breaks will have the greatest impact on AG. The rich are sitting on 2 trillion dollars now. Investors are begging them to spend it. Giving them another trillion will not have much change at all. The multiplier effect is at its greatest in the middle and poor classes.
Obama is trying to cut taxes to the middle class now. The Repubs demand keeping the tax cut for wealthy in place. That is not economic logic, but delivering for those who finance them.
Well, to the extent that you consider the Bush tax cuts “stimulus” then there is some truth to what you say but it wasn’t JUST the tax cuts that caused this mess. It was the overall conservative economic philosophy associated with the Republican party, loosely labelled supply side economics.
I can’t promise not to do any handwaving and you are probably going to accuse me of conflating Republican policies with supply side economics when the technical definition of supply side economics doesn’t include half the shit Republicans endorse but whatever supply side economics started out as, it has become synonmous with Republican economic policies.
Lets start with the tax cuts of 2001 and 2003. Our economy did fine under the Clinton tax regime so there is no evidence that the tax burden was too high. Yet the supply siders felt it necessary to cut taxes without correspondingly cutting spending as soon as they got the chance. This caused deficits which had a Keynesian effect and spurred the economy. Combine this with a Fed Chairman who worshipped Ayn Rand cutting interest rates and keeping them low (causing a monetarist acceleration of the economy). Both Keynesians and monetarissts would tell you that this sort of intervention in the economy should be limited to situations where the econmoy is slipping into a downward spiral and slipping into recession and should be stopped when the problem has been addressed.
In 2001 there very well might have been some cause to engage in economic interventionism. It wasn’t just the effect of the dot com bubble bursting it was also Enron/Worldcom/etc. (I would say that both the dotcom bubble and the Enron type accounting scandals were failures of government to adequately regulate the market, either by policing the conflict of interests within investment banks between the analysts and the investment bankers; or by not adequately policing accounting firms and having woefully outdated disclosure rules) and lets not forget the economic effects of 9/11 (both in terms of direct effects and the costs associated with teh Dept. of Homeland security. So even a Democrat would probably have interveened in the economy and grown the government back then.
The problem arises when you have an ideology that doesn’t view this sort of deficit spending as something that should be temproary or if you fail to admit that it is deficit spending at all. For far too long people who knew better pretended that cutting taxes would more than pay for itself at todays tax rates and said “supply side economics proves this is true”. They did this because they didn’t want to incur the painful politcal cost of cutting spending that would go hand in hand with cutting taxes. They wanted to pretend they were still being fiscally responsible while they cut taxes in a way that benefitted the wealthy a lot more than they benefitted average Americans.
Another point that I feel get overlooked is that Greenspan is an Ayn Rand worshipping ideologue. My pet theory is that Greenspan really wanted these supply side policies to succeed to prove his lifelong beliefs correct. So he pushed interest rates lower than they should have gone and he kept them there longer than they should have been and it caused a bubble. There is no doubt that the bubble was caused by institutions chasing marginally higher returns in a really low interest rate environment. This opened the door for TripleAAA rated (with the help of credit enhancements) private label mortgage securities (with a some credit enhancement) to flood the market with significantly higher yields than fannie maes or freddie macs. These private label securities were mostly sponsored by non-bank lenders like countrywide and ameriquest.
The overall philosophy of a laissez faire government has been an utter and total disaster and now that the Demcorats haven’t been able to clean up the mess fast enough (one election cycle), the answer seems to be more of the stuff that created the mess in the first place. I’m afraid we will get what we wish for and Republicans will be put back in charge just in time to take credit for a recovering economy which they will proceed to destroy with yet more laissez faire policies.
Money is fungible. There is no difference to the government coffers between cutting payroll taxes and funding it out of the general revenue and cutting the general revenue.
cite please.
I specifically noted, perhaps in another post, that there are situations where tax cuts to spur investment (and tax cuts for the rich might do that) are warranted. And sorry for not being precise enough, but I was clearly referring to the restoration now under question, which is top bracket rates, not any of the other things you mention, which may or may not be effective depending on the circumstances.
The fact remains that of the ways we can “spend” government money (quotes to avoid rants about forcibly taking money from the wealthy) some are more effective than others, and maintaining the cuts for those over $200K ($250K joint) is not particularly an effective way of doing it.
The summary of Sam’s post is what I came in to say. Tax reductions affect different wealth demographics differently. Give a dollar to a poor person and it gets spent. Give it to a wealthy person and it gets invested.
Ultimately, governments don’t create wealth, they spend it. The more money they spend, the less of it is available to create wealth. In addition to removing money from the market it is possible to increase or decrease the desire to generate wealth through tax rates. Wealth will always flow toward the best rate of return and that is usually associated with the lowest tax rate.
What we’ve seen recently and in the buildup to 1929 though is that when you’ve got an economy in which the wealth is going increasingly to the wealthy then it causes problems. The money gets invested in capital markets and causes bubbles. And even what is invested in the actual economy means you eventually outstrip demand and you get a contraction.
Right now we’re in a liquidity trap and the evidence of the past couple of years shows that the government can spend even more than they are doing and it won’t cause interest rates to rise, it’s still possible for business to borrow at super low rates. Government spending isn’t preventing any investment, lack of demand is. The marginal rate was 70% in the seventies but investment rates were much higher then than they’ve been since, US businesses are sitting on a couple of trillion dollars in cash that they’ve accumulated mainly since 1980, they can’t find enough worthwhile investments despite taxes having fallen dramatically over the past 30 years.
And governments can create wealth. Governments funded DARPA, they fund mass education, transportation infrastructure and so on. Even in a small government scenario the state is still undertaking a lot of important functions that allow the economy to function more effectively.
What occurred recently differs greatly from 1929 because the bubble that collapsed was housing and that was artificially enhanced up by government intervention in the market. On top of that, poorly-regulated financial instruments were used to back up the housing market.
Businesses are not expanding because there is great uncertainty in the costs associated with health care legislation including 1099 changes. On top of this there is still talk of increased energy costs due to cap and trade tax increases. These are all real costs that have to be sorted out.
Government’s cannot create wealth unless a product is sold. All they can do is purchase products from tax money collected. To the extent that has a positive roll in society depends on what product is purchased. There is no argument that a business needs a road to connect customers and employees.
Specifics, please? I’ve heard a lot of blanket condemnations of capitalism/Republicans/supply side economics/tax cuts from the left, but never really much in the way of specifics. What could Bush have done differently, and how would it have prevented the crisis?
No, it hasn’t. It’s used sloppily and sometimes tendentiously by the left, but that doesn’t mean it’s become synonymous with Republican policies by anyone else. Certainly Bush’s attempt at social security reform had nothing to do with supply side economics. Neither did Sarbanes-Oxley, or the first 2001 tax cut, or the rebate cheques, or Bush’s near-doubling of the budget of the Dept. of Education, or his steel tariffs, or the two wars begun under him, or the major increase in overall size of government and regulations that happened on Bush’s watch.
In fact, most Republicans who are angry with Bush are angry because he wasn’t a supply sider. He was like his dad - an establishment politician from a patrician background who believed in big government so long as it promoted the right ‘values’. For example, Bush was more than happy to cut taxes on the middle class and poor, so long as he could wrap it around family and children. So he increased child tax credits, lowered the ‘marriage penalty’, and so forth.
Come on, be fair. Clinton benefited from a peace dividend and a boiling hot economy due to a tech bubble. Before Bush took office the economy was already cooling rapidly and a recession was starting.
Again, you’re using ‘supply sider’ basically as shorthand for “nasty Republicans”.
These are the income tax changes in the 2001 tax cut:
[ul]
[li] a new 10% bracket was created for single filers with taxable income up to $6,000, joint filers up to $12,000, and heads of households up to $10,000.[/li][li] the 15% bracket’s lower threshold was indexed to the new 10% bracket[/li][li] the 28% bracket was lowered to 25% .[/li][li] the 31% bracket was lowered to 28% [/li][li] the 36% bracket was lowered to 33% [/li][li] the 39.6% bracket was lowered to 35% [/li][/ul]
Just what in that list would you consider to be a ‘supply side’ tax cut? Anything? In fact, the entire justification for the marginal rate reductions was justified on Keynesian grounds, to prop up demand during a slowing economy. And in fact, the Democrats currently want to extend all of these cuts - for the same reasons. Does that make them supply siders?
Now, there were some other provisions in the 2001 tax cut. Joint filers were given a higher standard deduction, to reduce the ‘marriage penalty’. Again, this was aimed at middle class families, and was explicitly sold as an attempt to ‘put more money in the pockets of cash-strapped American families’ if I remember the rhetoric correctly. Any Democrat could easily have offered the same cut. It sounds like something Obama would support.
The child tax credit was increased, and the child care deduction was increased. These measures were also aimed at middle class families.
Retirement savings limits were increased - not a supply side cut. And retirement plans were added to encourage employers to set up retirement plans for retirees - a plan surprisingly similar to Cass Sunnstein’s “nudge” ideas. Sunnstein is an advisor to President Obama.
Now, there were a couple of things in the 2001 tax cut you might call ‘supply side’. The capital gains tax was reduced by 2% - a small part of the overall cost of the 2001 tax cuts. And estate taxes were lowered, which I suppose you could argue would encourage wealthy people to keep investing. But that’s about it. The bulk of the 2001 tax cuts were not supply-side in any way.
Someone should tell noted Keynesian Dr. Paul Krugman about this, because not only was he a whole-hearted supporter of Greenspan’s low interest rate policies, but he felt that Greenspan didn’t go far enough and should have lowered interest rates further. Krugman advocated this specifically to stimulate spending.
So how come the Obama administration says that the economy is recovering, yet more stimulus is needed? And why is Paul Krugman advocating for a much larger stimulus?
Then why did the Obama administration forecast that growth by 2012 would be ‘robust’, yet budget for large deficits throughout the next decade? Are they part of that same ideology?
For too long, people who knew better have said that fiscal stimulus would pay for itself through a large ‘multiplier effect’ and said “Keynesian economics proves this is true.”
You might be interested to know that there is NO evidence in the historical record for spending multipliers of the magnitude today’s Keynesians are claiming.
Absolutely true. That has nothing to do with ‘supply side economics’. It has more to do with the fact that it’s always politically easier to give the public goodies from the public trough than it is to inflict pain on them to pay the debt incurred. This is true for Republicans and Democrats.
Substitute “public unions” for “the wealthy”, and you just described what happened under Obama’s stimulus plan.
There is zero evidence for this. There’s no evidence that Greenspan is still a follower of Rand’s, or if it is that he enacted public policy according to Randian philosophy. The fact is, everyone including Democrats thought Greenspan was a genius. I can remember breathless articles in the mainstream media wondering what would happen to America when Greenspan retired. Could anyone else fill such massive shoes? There’s a reason why he reigned as chairman of the Fed so long. And as I said, at the time Paul Krugman was a big fan.
Greenspan did what he did for one reason: He wanted to stimulate the economy. He managed to justify this to himself by believing that the economy had been fundamentally changed by computers and the internet, and could therefore sustain high growth rates for a long period of time because productivity would grow along with it.
None of this has anything to do with Ayn Rand or her beliefs. And the very notion of central banking and a single man controlling the money supply of the nation through manipulation of interest rates would have been antithetical to Ayn Rand.
No, the bubble was caused by low interest rates and government policies which promoted home ownership. Combined, these two effects kicked off a speculative bubble in real estate. That in turn drove up demand for mortgages, which the banks provided with the full support and backing of the U.S. government, and a hearty “way to go!” from regulators both Republican and Democrat.
The real estate bubble drove up the ‘paper wealth’ of American homeowners, creating a ‘wealth effect’ that caused them to spend more money than their incomes warranted, creating massive amounts of debt. Then the whole thing collapsed, the public discovered it was deep in debt and stopped spending, and here we are.
But Fannie and Freddie allowed those mortgages to be bundled up and sold to them as securities, offloading risk from the banks. The banks in turn lowered lending standards. Again, Democrats and Republicans were heartily in favor of all this - Democrats because it got more poor people into homes, and Republicans because it helped create their desired “ownership society”. It was social manipulation on a large scale.
Fannie and Freddie then gave the de-facto government stamp of approval to those securities. Investors (rightly, as it turned out) assumed that Fannie and Freddie had the full faith and credit of the U.S. government behind them.
Let’s see… We had government policies pushing for home ownership. We had tax code distortions that favored housing investments over other investments. We had a government central bank holding interest rates artificially low. We had two government-sponsored enterprises in the middle of the whole mess, buying up securitized mortgages. We had government agencies pressuring banks to lend more money. We had regulators like Chris Dodd accepting fishy loans from the big mortgage lenders at below-market rates.
And out of all this, your conclusion is that ‘laissez-faire’ was to blame. Truly an astounding conclusion.
I do believe there were market failures here. Specifically, mathematical models that allowed traders to convince themselves that there was less risk in the system than there was. There were crooked lenders like Countrywide in the mix. Plenty of blame to go around.
But you want to absolve government of any blame (other than ‘supply siders’ who fit into this in some still-undetermined fashion), and lay the cause of the crisis at the feet of ‘laissez-faire’ capitalism, despite the fact that the financial industry is heavily regulated.
Name a ‘laissez-faire’ policy Republicans have passed in the last twenty years. Name a government agency that has been shut down, or a year in which the number of regulations on the books decreased. Name a year in which overall government spending decreased in real terms.
If you can’t do that, you might want to consider just how much ‘laissez-faire’ had to do with anything.
Do you have a cite for that? Perhaps an academic paper which links the formation of bubbles to the supposed increase in wealth for the rich?
Since government has to take money from other ventures to support these things, there is opportunity cost. Furthermore, I wouldn’t hold the U.S.'s education system up as a model of government wealth creation, consider that the U.S. spends more than almost all other countries on education but gets middle-of-the-pack results from the money.
Housing collapsed back in 1929 too. There were even a bunch of securities derived from mortgages that collapsed in value back then too, issued by the forerunner of Citibank unbelievably. Plus ca change and all that. The recent housing bubble was artificially enhanced by the government not intervening in the market and not preventing firms like Countrywide issuing hundreds of billions of dollars of unsafe unregulated loans which were then sold directly to unregulated securities firms.
There is no more uncretainty over helathcare costs after they passed the recent bill than there was before, and almost certainly less. Businesses know they’re still going to go up but at probably a slower rate of increase before. Businesses also know that there’s zero, zero chance of any cap and trade bill being passed in the forseeable future. Both these arguments are just standard conservative boilerplate to blame the demand-based recession on Obama policies they want to defeat, like almost all conservative arguments they have no basis in reality. They also bang on about how Obama tax increases are going to prevent economic growth. You gorgot to mention tax increases!
Governments purchsed products like DARPA and CERN from taxes collected, I’m sure you’ll agree that those programmes have created a great deal of wealth. Similarly government spending collected taxes on the product of education has paid off nicely over the decades, and so on.
The only two times wealth has been as concentrated as it is now have been the 1920s and the 2000s. There’s so much money in the hands of the top 1% that they have to invest it somewhere, and this creates asset inflation – too much money chasing too few stocks let’s say – just like regular inflation is created.
Regardless of how the US education system performs in relation to others are you seriously arguing that a national education programme is a bad thing? How about child labour laws? Jeebus.
You’re conflating wealth and income again.
You’re also ignoring the fact that we know exactly where the last bubble came from, and who participated in it. It wasn’t ‘the wealthy’. If only it was: then there wouldn’t be so many upside-down mortgages.
I have a suspicion that you simply went data mining for any statistic you could use to hang the blame for bubbles on ‘the wealthy’. It seems far more likely to me that you found an inverse correlation - that the income of the wealthy goes up dramatically during bubbles, then collapsed back to normal when the bubble pops.
That’s why I asked for actual scholarly research, and not just a graph you found somewhere. I’m not denying the possibility of a feedback loop between income of the wealthy and the formation of some bubbles, but I’d like a little more evidence than wild speculation.
As has already been pointed out to you before ad infinitum, the GOP appointed banking lobbyists to run the financial regulatory agencies, they allowed the credit ratings agencies to self-regulate, literally took a chainsaw to mortgage regulations in 2003, allowed investment banks to lever up their debt:assets ratio from a historically safe ten to one to thirty and over to one, etc. etc. No matter how much you have this stuff explained to you you just can’t stop yourself trying to defend your fuckwitted discredited ideology, can you?
The meltdown still hasn’t palyed out yet. Let’s give it five minutes after it eventually ends so that somebody has time to write something. And there’s no difference between wealth and income, we’ve already been through this before and you ended up trying to disprove the words of your own source on the subject to great hilarity. Like you know more than the country’s most-referenced expert on wealth!
And how about answering my first post in this thread? Back when you were extolling supply side economics, before the pretzel-like ideological gymnastics you’ve performed over the past couple of weeks as people have called you on your previous posts, surely you’d have an answer to the questions I asked. Here it is again:
http://boards.straightdope.com/sdmb/showpost.php?p=12910815&postcount=6
Here’s the last time we discussed wealth. You can reply anytime now :
http://boards.straightdope.com/sdmb/showthread.php?p=12263393&highlight=wolff#post12263393
When President Bush tried to introduce oversight into Fannie Mae (in 2003) it was shot down by Barney Frank who said: **“These two entities – Fannie Mae and Freddie Mac – are not facing any kind of financial crisis,” “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” **
the fuckwitts were Barney Frank and those who used legislative power to force banks into making bad loans as part of the federally guaranteed insurance program starting with the Community Reinvestment Act of 1977:
**In 1977, the Carter Administration and the United States Congress passed and signed the Community Reinvestment Act of 1977, or CRA. The CRA provided that federally insured banks, as a quid pro quo for being covered in the FDIC agreed to “help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations.”
**
This was exacerbated by Clinton:
In 1999, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the CRA of 1977.[10] Because of the increased ratio requirements, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans. Shareholders also pressured Fannie Mae to maintain its record profits.
Fannie and Freddie had nothing to do with the meltdown. What used to happen in the mortgage market was that banks and mortgage lenders made mortgages, then partly laid those mortgages off to F and F which allowed the mortgage lenders to make more loans, increasing the number of mortgages that could be made. This worked fine until the GOP literally took a chainsaw to mortgage regulations in 2003 :
Nortgage lenders now didn’t even have to hold any mortgaes until maturity and could sell them as soon as 90 days after they’d issued them. And there was a huge new market for them, Wall Street securities firms who wanted to buy them to turn into securities. So big new unregulated firms like Countrywide issued hundreds of billions of dollars of unregulated mortgages and instead of selling them to F and F, the previous business model for the industry, sold them direct to Wall Street.
In 2005 along Fannie Mae lost 56% of her market share to WS securities firms. If F and F had never existed the same thing would have happened. F and F are just the only wat conservatives can blame the meltdown on the Democrats or “government”, just like your previous post and healthcare/cap and trade being the cause of the recession.
And the CRA! That’s even sillier than blaming F and F. The CRA worked fine for 30 years previously to the meltdown because it actually required that CRA borrowers were creditworthy, it actually had a level of standards it insisted on unlike Countrywide giving million dollar mortgages to unemployed meth dealers! CRA borrowers actually had to have jobs and a checkable credit history.
And do you know the percentage level of subprime mortgages written during the bubble years that were covered by the CRA? Six percent, and that’s according to a Fed investigation. All the bad mortgages were written by firms like Ameriquest who were giving no document mortgages to anybody who wanted one and then selling them to WS immediately.
The CRA actually required that borrowers have documentation, credit history etc. and that it all be checked out before the mortgage was issued, unlike the unregulated firms.
Here’s Federal Reserve Governor Elizabeth A. Duke talking to the American Bankers Association in February, noting that a tiny minority of loans were under the CRA:
I would like to dispel the notion that these problems were caused in any way by Community Reinvestment Act (CRA) lending. The CRA is designed to promote lending in low- to moderate-income areas; it is not designed to encourage high-risk lending or poor underwriting. Our analysis of the data finds no evidence, in fact, that CRA lending is in any way responsible for the current crisis…. In fact, the analysis found that only 6 percent of all higher-priced loans were made by CRA-covered lenders to borrowers and neighborhoods targeted by the CRA. This very small share makes it hard to imagine how CRA could have caused, or even contributed in a meaningful way, to the current crisis. Further support for this conclusion comes from our finding that serious delinquency rates for subprime loans are high in all neighborhood-income categories, not only those in lower-income areas, as might be thought if the CRA were a contributing force to the subprime crisis.
The mandate didn’t work in the real world and the ratios of risky loans were changed to meet those mandates. Government interference in banking practice meets the law of unintended consequences.
Bad loans were promoted with government backed money.