September 20, 2005

Dangerous Curves

Perhaps inevitably, given the high volume of traffic from ideologically disparate quarters and the presence of a Krugman link, the comments to the post below have turned into a fight over economic policy. If anyone wants to continue that thread, do it here.

Posted by John Tabin at September 20, 2005 08:20 PM
Comments

The thread so far:

What marketing genius came up with, " Our print circulation is down, so let's start charging our loyal web viewers for op/ed content. That should increase our readership!"
Sounds alot like the Bushie mantra of "We're in debt up to our eyeballs, let's cut taxes!"
Posted by: Molderon at September 20, 2005 01:27 PM

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Molderon,

You show the leftie's normal third grade grasp of economics. It goes like this.

1. Cut taxes

2. More money in circulation for investment/purchases.

3. Economy grows

4. More tax revenue.

It's called Supply-side Economics. It was employed by President reagan to pull us out of the crapstorm left by the Carter Administration. Case in point...last quarter when the MSM was reporting an unexpected 100 billion dollars of extra tax revenue. The only people for which it was unexpected was the MSM and the third grade level economists of the Democratic Party.

Cheney in '08!!
Posted by: Chuck at September 20, 2005 03:58 PM

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Thank you so much, I have been looking for ways to read the NYT columnists I really like - Krugman, Herbert, Dowd, occasionally Brooks, seldom Kristof or Friedman and no way Tierney... I will definitely come use these links!

And chuck, really... lefties know very well the theory of supply side but it is just that, a theory, that has NEVER been demonstrated to work! No economists believe in it, only idealogues.
Posted by: cass at September 20, 2005 04:35 PM

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cass:

If Chuck's supply side theory review is wrong, what's the liberal alternative? What happends to tax revenue in the long run when taxes are RAISED?
Posted by: Bostonshepherd at September 20, 2005 05:05 PM

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chuck,

You're a self deluded faith based nutjob. Supply side doesn't work. Take this comment as fact:

"People on fad diets put their health at risk but rarely achieve the permanent weight loss they desire. Similarly, when politicians rely on the advice of charlatans and cranks, they rarely get the desirable results they anticipate. After Reagan's election, Congress passed the cut in tax rates that Reagan advocated, but the tax cut did not cause tax revenues to rise."

Some Marxist? Ted Kennedy? Dem economist? No it is none other than Gregory Mankiw who just happens to be Duhbya's Chairman of the Council of Economic Advisors

Chuck, the earth is round, we go around the sun, tax cuts have a mixed results...Under Bush, tax receipts ARE DOWN..saying they are up 100 billion is like saying I just got a D in my econ class, up from an F..
Posted by: King at September 20, 2005 06:12 PM

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Here's Art Laffer explaining, with historical data, how the Laffer Curve has, in fact, "worked." And yes, Laffer is, in fact, an economist.

Posted by: John Tabin at September 20, 2005 06:56 PM

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John,

Its should be called a "Laugher" curve. Its been discredited. In fact, tax revenue rose faster under Clinton/Bush 1 when taxes were raised.

Another point, personal income tax make up about 42% of total revenue, with another 47% coming from social security taxes which have steadily risen and in fact account for the fastest growing segment of revenue.
Posted by: King at September 20, 2005 07:16 PM

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No, King, the Laffer Curve hasn't been discredited, only the media-driven caricature has been. All the Laffer Curve says is that revenues will fall slower with a tax cut, and rise slower with a tax increase, than a static analysis would suggest. It never said you'd get more money in the first year after a tax cut than you did in the year before, only that over the long term tax cuts will in some cases generate more income than prevailing high tax rates. Says Laffer:

The Laffer Curve itself does not say whether a tax cut will raise or lower revenues. Revenue responses to a tax rate change will depend upon the tax system in place, the time period being considered, the ease of movement into underground activities, the level of tax rates already in place, the prevalence of legal and accounting-driven tax loopholes, and the proclivities of the productive factors.

(My emphasis on the oft-misunderstood point.)
Posted by: John Tabin at September 20, 2005 07:40 PM

Posted by: John Tabin at September 20, 2005 08:29 PM

C'mon, would we be having this discussion if the damn theory actually worked?

Look at all the caveats in your above statement.

The facts are that positive results (if there are any) from the revenue side is swamped by the bad economic side effects of huge deficits.

Like President Bush himself said, "Fool me once, shame on you, fool me twice...and I won't get fooled again"..

How many more real world experiments do you brain dead fuckers need?

Posted by: King at September 20, 2005 11:57 PM

C'mon, would we be having this discussion if the damn theory actually worked?

I don't really see what you're getting at; they're still debating what caused the Great Depression.

The facts are that positive results (if there are any) from the revenue side is swamped by the bad economic side effects of huge deficits.

That's almost exactly backwords. Deficits affect interest rates. But graph deficits against interest rates, and you'll see no pattern-- because fiscal and monetary policy overwhelm the effect.

Since you apologized for the profanity in the other thread, ("Sorry for the above language. I really do appreciate your linking the NY Times stuff.") I'll let the last comment slide, except to say that the Laffer article linked about is full of "real world examples" from the Harding-Coolidge, Kennedy, and Reagan tax cuts. If you're so inclined, you might try reading it.

Posted by: John Tabin at September 21, 2005 12:26 AM

My not-liberal American economic history prof (who agreed to write my grad school recommendation "despite the many disagreements we had in class") noted that neither Laffer nor anyone else can look at the theory and know where tax rates are supposed to be to maximize revenues. Yes, you can say that obviously if you have 0% tax rate, you get no revenues b/c there is no tax, and if you have 100%, you get no revenues b/c people give up working when they keep none of the money, but that doesn't tell you at which points people are 'overtaxed' or (if conservatives can believe in such at thing) 'undertaxed' for the purpose of maximum revenue. The same prof also looked at Bush's tax policies and said they seemed to be based more on the president's sense of morality regarding taking people's money than on economic analysis; why does Bush appear to consider taking any more than a third of income to be so terrible? what's so special about 33%?

So to assume that the current tax regime in the long run will produce more revenue than the prior one would have is a pretty large claim that cannot be supported just by citing Laffer. That economics is complicated is actually one of the justifications for limited government intervention.

I don't know of an economist who thinks that cutting taxes is the kind of one-size-fits-all response that Bush appears to believe it. Early 2001: the economy is down and we're at peace -- cut taxes. Early 2003: the economy is recovering and we're at war -- cut taxes. Does anyone know of a situation in which Bush would consider it correct to raise taxes?

Posted by: PG at September 21, 2005 03:31 PM

PG: It is never correct to raise taxes.

Posted by: T-R at September 21, 2005 07:47 PM

PG-- everything you learned about the Laffer Curve is correct; it's a pedagogical tool, not, by itself, a device for measuring the optimal tax rate. The only numbers on it are 0 and 100.

I don't think your prof's explanation of Bush tax policies is quite right, but I understand why he'd say that. Bush's tax policy, particularly in the first years of his presidency, often seemed economically incoherent because it was run by Lawrence Lindsey, who explained his unusual approach to economics like this:

I still think largely in Keynesian terms, but I do think that the ideas that Hayek raised that we now might call neo-classical or supply-side, and ideas that Friedman raised, or monetarist ideas, are also valid ideas, valid paradoxes. It's not that one is right and one is wrong; it's that you really need all three to function. Each one of those basic ideas has within it concepts that are applicable to economic decision-making. Some work better than others. Keynes works very well in the short run, particularly when you need stimulants. Friedman works beautifully over the longer run, particularly for determining the price level. I think Hayek and some of the neo-classical people, the supply-siders, have a better idea of how individuals behave and probably the best way of fostering long-term economic growth.

Few economists would completely agree with that. For one thing, most supply-siders reject monetarism in favor of a monetary policy driven by commodity prices, especially gold. More relevant to tax policy, it's really hard to adhere to Say's Law (supply creates its own demand) and in Keynes's inversion of Say's Law (demand creates its own supply), but it does explain why the administration would make, as National Review put it, "Keynesian arguments for watered-down supply-side measures."

As to your last point, I can name an economist who's always in favor of tax cuts: Milton Friedman. I suspect that the Administration's decision to push for repeated tax cuts was more related to politics than economics, though-- that and a (mostly correct) belief that deficits rarely matter much, either economically or politically. (I think we're now at the point where they do start to matter politically, by the way.)

Posted by: John Tabin at September 22, 2005 01:46 AM