American Economics Rule #1: correlation = causation for positive outcomes when Republicans are in office.

American Economics Rule #2: correlation != causation for negative outcomes when Republicans are in office.

American Economics Rule #3: any positive outcomes which occur while Democrats are in office are caused by delayed effects of the last popular Republican administation.

American Economics Rule #4: any negative outcomes which occur while Republicans are in office are caused by delayed effects of the last Democratic administation.

American Economics Rule #5: when outcomes are positive, and the president is a Republican, the primary factor on the economy is the president and his policies.

American Economics Rule #6: when outcomes are negative, and the president is a Republican, the presidency has minimal effect on the economy.

American Economics Rule #7: when outcomes are negative, and the president is a Democrat, the primary factor on the economy is the president and his policies.

American Economics Rule #8: when outcomes are positive, and the president is a Democrat, the presidency has minimal effect on the economy.

American Economics Rule #9: Democrats always control spending, even if they have no power to pass spending bills.

American Economics Rule #10: if more than one Rule is applied during a conversation and the Rules appear to contradict or conflict with each other, that is the fault of the listener, not of the person applying the Rules.

Examples:

anything good that happened while Clinton was in office is attributable to Reagan (not Bush I). see Rule #3.

the deficit was a result of something Clinton did, not because spending exceeded income when Bush reduced income. see Rules #2 and #4.

Bush's tax cuts worked in 3 years, though Reagan's took 12. see Rules #1 and #3. for some reason, Reagan's stopped working the minute Clinton left office. i don't know which Rule explains that.

Do tax cuts supercharge the economy?

Of course they do. John McIntyre of Real Politics explains why reality based analysis says it is so.

Link

"I'll just look at what happens in the real world.

Nations that pursue pro-growth economic policies and expand their economy at 3%-4% a year (or more) create wealth and a better life for their people, and also generate considerably more tax revenue to their governments. Nations that stifle economic growth with policies of high regulation and high taxes, create less wealth and less tax revenues for their governments.

Why has Chile prospered for 25 years, while Argentina languishes? Why are the treasuries of Hong Kong and Singapore flush with revenue? Why have the U.S. and Britain shown tremendous growth since Reagan and Thatcher while Continental Europe with their pseudo-socialism putters along with chronic double-digit unemployment? Go around the world these last 25 years and compare nations with high tax rates to countries with low tax rates, you'll find a pattern. "

Of course they do.

the same way tax increases do, apparently.

Al,

States in the US are more alike than countries. I assume that what you mean by "pro growth policies" are low taxes. In that case, states that have historically had "pro growth policies" - mostly in the South - have not done well over the past few decades compared to states that have historically had high tax burdens. Despite the fact that now and again there are exceptions to the rule, the drivers of the American economy have generally been places like tax-happy California, Taxachussetts, New York, etc. We're not talking about one year or two here, but decades. Why is that?

That's a great list, Cleek.

Oddly, Chile and the UK have been under center-left leadership for most of the past 10 years, and the UK still manages to pay for a national health care system with its *cough* low, low taxes.

Odder still, Real Clear posted this tangential, statistic-free discussion of "the real world" in response to Sebastian Mallaby's article accusing Republicans of failing to address the fact that tax cuts don't pay for themselves. In fact, Real Clear proved Mallaby correct by doing exactly what conservative pundits always do when confronted with evidence against voodoo economics... he changed the subject.

Smoke, meet mirrors.

FACT: I was making about 30% more working less hard in 1998 than I am today. This may be anaedotal from anyone else's point of view. But from my point of view, the Bush Recovery has been a no-show.

My wife's been happy that we've actually saved a few hundred bucks on taxes. But she doesn't seem to buy into the ugly fact that that money was just borrowed, and now we're paying for it in unmeasured inflation. Yes, costs of just about everything are going up, yet somehow, the way they measure "inflation" says there is none, just a danger of inflation. And my earning power has decreased. I don't know why economists insist on measuring the economy via metrics that have no bearing on reality, but there it is.

Al - actually the Danish unemployment rate is down to below 5% - most economists tend to call this full employment.

We may be an exeption, but by God we're as pseudo-socialist as pseudo-socialst comes ... universal healthcare, free education and all that commie stuff.

Go figure.

A number of of my Republican friends have sent all the money that they made in the nineties to the U. S. treasury because they are convinced that Clinton era growth was not real and just a mirage.

American Economics #11: Macro Economics is Political Slogans with Charts.

(I like the use of the singular verb there.)

Al,

I went to Tax Foundation site. They've got impeccable credentials among right wingers.

New York (http://www.taxfoundation.org/taxdata/show/471.html) has always ranked 1 or 2.

Tennessee (http://www.taxfoundation.org/taxdata/show/481.html) had its highest tax burden (ranked as high as 40 out 50) in 1970, but has generally been in the high 40s. (i.e., going as far as the Tax Foundation shows, Tennessee has always one of the lowest burdens among states).

They also show the state tax climate rankings for 2005(http://www.taxfoundation.org/taxdata/show/1371.html)... for whatever reason, they flip the order (i.e., lower is more pro-growth) in that table.

Again... it seems that pro growth states don't do so well. Why is that?

I'm thinking it's not so important whether it's tax cuts or tax increases as it is what you do with them. George probably could have managed a quicker recovery if he'd directed the tax cuts to the lower classes where it would get spent and actually fuel the economy. Instead, of course, he gave it away to the rich who may or may not do anything with the money, now or later, depending on what suits them. Great for them, not so great for the economy.

Clinton won the lottery. He was President under the dot com bubble. Using his terms as an example of anything related to the economy proves nothing. Unless you want to give him credit for creation of the internet, internet companies, and the dot com bubble. In that case he also deserves credit for the failure of the dot com bubble.

The dot com bubble burst in 1999. Clinton's budget surpluses came later. Try again.

james: Clinton won the lottery.

Rule #8

Facts have a liberal bias

James james james Do you remember anything about the 90's or just what the rightwing ding tell you.Clinton, like him or not knew how to do small adustments here and there to keep the Economy going strong.That's all we heard from the right was how bad this move is and how bad that move is.Well a 10 trillion dollar surplus was his prize,as bad as you wingnuts hate it,Clinton will always get credit for that not Reaganomics.

James,

Clinton may have won the lottery, but he had the good sense not to waste his winnings.

Government spending as a share of GDP began to drop immediately when he took office (data at: http://www.whitehouse.gov/omb/budget/fy2007/sheets/hist01z2.xls) - this was before the Republican Revolution, I might add. Conversely, government spending as a share of GDP began to rise the first year GW took office.

In real dollars, total government spending actually fell in Clinton's first year in office.
http://www.whitehouse.gov/omb/budget/fy2007/sheets/hist01z3.xls

Maybe fiscal responsibility looks like "winning the lotto" to people who admire someone who can't live within his means?

HA!

As if you Dems will ever tell the Truth!

What helps the economy is cutting taxes, expanding government spending, and borrowing trillians of dollars from the Chinese!

Match those curves with productivity growth from :
http://www.frbsf.org/publications/economics/letter/2005/el2005-05.html

Productivity has been steadily increasing, while total hours worked has been decreasing, through both Clinton and Bush; while productivity dropped under Reagan.

But why has the total hours worked steadily dropped under Bush and Reagan, but held steady under Clinton.

The numbers tell me that people work less when government grows beyond its optimum, and that, in this day and age, there is not much for government to do to help productivity with direct investment.

In short, Clinton-I, overall, wins the economic game. We have to wait to see how Hillary does.

The dotcom bubble happened in the late 90s. This chart goes from 1990-1995. The dotcom boom had nothing to do with it.

And I do mean "trillians," not "trillions"!

And poverty increases under Bush, which motivates all those lazy bums!

High Priestess Bush is also for bringing the sun back to the north every spring.

Basically, Clinton came into office under a mandate to fix the deficit. Clinton, Rubin and Greenspan met in the oval office and agreed that if taxes went up, Greenspan would ease off on interest rates, and Rubin was going to use Treasury bonds to keep a steady interest rate yield cuve. All the big money knew right away it was good times for stable investment.

The left wing of Clinton's party screamed bloody murder, "Quit serinvg the bond holders," they said, and Clinton took some heat for that.

Clinton got bonus points for the not quite unexpected suprise that government size reduced relative to the private sector.

So tell the Democrats to run on tax increases in 2006 and 2008. Or sit down and shut up.

Mr Drum don't save space by cutting off the title of the graph. The graph is entitled "Investment in the 90s and Current Business Cycles. I'm allegedly an economist and I couldn't guess what it was. An excellent graph, since the supply side claim must be that a cut on taxes on capital income causes increased capital income, but a much better graph with the title that without.

Al you are being silly. It is true that anti market policies can be terrible for growth. However that does not mean that a tax code like that enacted under Clinton is terrible for growth. Argentina did many absurd things, so the example does not tell us what our tax code should be. In particular, Argentina did *not* collect lots of taxes (they can't people evade). According to the theory that the problem is taxes, they should have done fine.

To tell the effect of taxes as opposed to protectionism, nationalisation of industry, corruption, price distortions etc etc etc etc you have to look at many countries. The evidence, such as it is, is that the evidence that taxes are bad for growth is very very weak (amazingly I think the JME special issue paper by Easterly and Rebelo in 1993 or so is still current). In contrast, there is a huge negative correlation between budget deficits and growth.

Looking at two (count them two) countries and concluding that the only relevant difference is the tax code is insane, crazy and nuts. A serious effort to distinguish the effects of taxes on growth from the many other factors came up with no particular evidence one way or the other.

No one should take this seriously, but I can't help mentioning that there is a paper in the Journal of Public Economics in 2000 with a fairly standard theoretical growth model in which taxes are good for growth even if the revenues are wasted. Search for Pelloni if you are interested.

"Government spending as a share of GDP began to drop immediately when he took office"

Driven by reduced defense spending, due to the end of the Cold War.

BREAKING: Canadians eye opportunity to take back Maine

Monday, May 15
AP-With the announcement by President Bush that he will deploy National Guard troops along the Mexico-U.S. border, experts fear the Canadians may use the opportunity to invade the Northeast. "It's just too enticing an opportunity", said a top administration official.

Without revealing their sources, White House officials cautioned that the Canadians were stock piling arms in preparation for action. "They're not moving hockey pucks up there. I think this could get hot real soon", said the WH source.

The Canadian Prime Minister, Stephen Harper, denied making any threatening troop movements. "I don't know what they are smoking down there, but I think they have lost it."

Pentagon officials worried that Canada could have moved as early as this week when it appeared that the last Canadian hockey team may get eliminated in the playoffs. But the sudden resurgence by the Edmonton Oilers against the San jose Sharks may have delayed things. "There is no way they would make their move while there is still a Canadian team alive for the Stanley Cup. We assume if the Oilers lose all hell with break loose", said the official.

Republican in Congress have been demanding a preemptive move, possibly a series of air attacks against key Canadian installations. "We know where they are stashing their weapons, we need to move now before a disaster occurs", said Sen. Lindsey Graham.

"They call them "Curling Rinks", but we know better", said the Vice President Cheney during a foreign visit to Libya. "We've tried to negotiate, but it's all been one sided."

BREAKING: Canadians eye opportunity to take back Maine

Are we talking Aroostock County, or the whole state?

Frankly Mexico can have TX, NM, AZ, CA, etc. What do I care? All deserts look the same to me.

But Maine, that place is beautiful! Let's nuke Canada. Really it's our fault - we never should let the Tories hightail it up North.

" "Government spending as a share of GDP began to drop immediately when he took office"

Driven by reduced defense spending, due to the end of the Cold War."

OK. I gotta ask. Do any of you people actually look at any data before writing something?

Yes, there was a reduction in defense spending as a percentage of GDP when the Clenis took office (20.7 percent to 19.8 percent).(Data at: http://www.whitehouse.gov/omb/budget/fy2007/sheets/hist04z2.xls)

However, as per the table I cited previously, the share of spending going to defense had been falling since 1987, when it had hit a maximum of 27.3 percent. (Therefore... it had already fallen through the tail end of the Reagan administration and the entire Bush 1 administration from 27.3 percent of GDP to 20.7 percent.) And yet federal government outlays were not falling as a percentage of GDP in that time. (Total federal government spending as a share of GDP was 21.6 percent in 1987 and 22.1 percent in 1992.)

If Clinton's luck is due to him dastardly cutting the military, Clinton must have been some sort of a sorcerer - after all, with smaller cuts in the military he managed to achieve much larger savings.

Kevin,

Don't you think it is dishonest not to label the 9/11 attacks on the chart? Comparing the Bush I recession with the Bush II recession is a bit odd given the impact of the terrorist attacks.

You're supposed to be a leader in the reality-based community right?

When I asked above "Do any of you people actually look at any data before writing something?" - it was addressed to the likes of "a" and James. Sorry about any confusion.

Oops,

Aroostock = Aroostook

If you're gonna start a nuclear war over a place, at least you oughta spell it right.

Sad and pathetic.

THE TAX CUT that is like a 100 pound gorilla compared to Bush pere's and Clinton's tiny tax increases and W's relatively modest tax cut is Reagan's cuts in the early 80s. Any chart since then will prove it: Reaganomics, the original "voodoo economics" was RIGHT ON!

Note if you will all the PROMINENT AND VIABLE DEMOCRATIC LEADERS calling for a return to tax levels that existed in 1980 . . . ZER0.

The score: Reagan 10, Regressive-Democrats (Carter/LBJ heirs) 0. It's a shut out, thanks for playing.

TOH

Does borrowing a few hundred billion dollars, then spending it, have a tendency to provide a short term boost to the economy? Conversely, it would seem that when we stop spending a few hundred billion that we do not have, combined with paying back the interest and principle on the already borrowed billions, we may see a negative impact.

Correction... the data I provided was not defense as a share of GDP, but rather defense as a share of total spending. But the point remains the same.

That's the telling test of the Laffer curve: you have to prove which exact portion of whatever happened in the economy was due to *the tax cuts* and not something else! That means controlling for all other factors. That isn't easy to do. See what Brad DeLong has to say over at his joint.

For those who *need* a fix *right now* on the Rove situation, afraid of ending up weeping in a fetal position from stress or disappointment, I have some bittersweet counter-rumors to offer.

This is *very* interesting, altho the crusty cognoscenti are saying it will indeed happen, but on Wednesday or Friday (why not Thursday?) despite denials by Rove's lawyers:

(http://www.opednews.com/articles/opedne_steven_l_060515_karl_rove_indictment.htm/)

Karl Rove Indictment an elaborate Hoax? Did Jason Leopold get Rolled?
Most of US Media Waiting to see with Held Breath
by Steven Leser

http://www.opednews.com

Steven Leser

Despite right wing media and blogosphere accusations, Jason Leopold has been a reliable source for some time. For now, I am willing to take it on faith that he has numerous well placed sources that did in fact tell him that Karl Rove had been indicted. As a journalist for Truthout ( http://www.truthout.org ), Jason has broken numerous stories ahead of the rest of the media which up until now have all proven to be true. If his story on the Rove indictment is incorrect, and I want to stress that we do not know either way right now, I have a theory as to what might have happened. Admittedly, like many theories, mine has several assumptions and ‘what ifs’ but each reader will have to decide for themselves what they believe. Eventually the truth will come out anyway.

We know that the Bush White House detests leaks perhaps more than any other administration in history. It is a relative certainty that Leopold’s past articles have gotten the attention of many in the administration. Assume for a moment that an internal White House investigation was conducted to ferret out those leaking information to Leopold. Once discovered, these individuals would be an excellent avenue with which to discredit Leopold by providing them false information which would then be transferred to the reporter. Again, I am making assumptions and I want to dutifully make that clear. Now, assuming the White House had accurately identified the leakers. Let us take it one step further. Let us assume the White House sat on that information until an opportune moment presented itself. Such an opportune moment presented itself when it became clear that an embarrassing piece of evidence regarding Vice President Cheney was going to be submitted in a filing by Fitzgerald. The administration could provide a tasty bit of disinformation to Leopold’s sources and the attention of the reporter along with a fair amount of the progressive press would be turned to a story that would turn out to be false. This story and the rapid discovery that it was a hoax would overshadow the embarrassing filing by Prosecutor Fitzgerald. Indeed, it would overshadow the entire CIA Leak-Gate investigation or at least the reporting thereof for some time.

Again, we do not know at this point whether Leopold’s story is accurate or not and it if is not, we do not know why but I want to point out that if it turns out to not be accurate, there are a lot of possibilities. Rushing to a negative judgment of Jason is unfair until all the facts come out.
~~~

Heh - I think Jason will be very negatively judged if this craps out - but he may be pitied if innocently punked.

Objective Historian,

"THE TAX CUT that is like a 100 pound gorilla compared to Bush pere's and Clinton's tiny tax increases and W's relatively modest tax cut is Reagan's cuts in the early 80s. Any chart since then will prove it: Reaganomics, the original "voodoo economics" was RIGHT ON!"

Right on meaning what? The top tax bracket was at about 70% in 1980 and 1981, and was at about 50% in 1982. (http://www.irs.gov/pub/irs-soi/histaba.pdf) Upon its enaction, real tax collections dropped for three years in a row despite the fact that the population was growing at the time. (http://www.whitehouse.gov/omb/budget/fy2007/sheets/hist01z3.xls)

On the bright side, the drop in real per capita income only lasted one year (http://www.bea.gov/bea/dn/nipaweb/TableView.asp#Mid - see Table 7.1, line 9).

How many names have tbitch and DonGopper used today?

BTW, Jason Leopold (by inference) will be on the Ed Schultz show tomorrow.

Objective Historian: The whole point of the Laffer curve is that reducing tax rates from brutal levels like 50 or 70% will ultimately enhance revenue as such, but around 30-something the whole thing gets dicey. Have you know appreciation for quantitative reasoning?

Even David Stockman disagress with "Objective Historian." And there are 8 trillion other reasons he's full of shit that the folks down at the Treasury could tell you about.

Are we talking Aroostock County, or the whole state?

All they're going to get is apples, broccoli, potatoes, and some very old cars. (Just kidding. It's pretty up there in The County. Yo, Caribou!!!!)

It's interest rates not tax pollicy that matters.

JJ: All they're going to get is apples, broccoli, potatoes

But they're American apples, broccoli, potatoes - infinitely better than the canadian crap [makes sour face and spits on ground].

It's been 167 years, but Aroostook County is back on the front lines! Thank God, motherhood and apple pie for those patriotic Maniacs standing guard.

What helps the economy is cutting taxes, expanding government spending, and borrowing trillians of dollars from the Chinese!

Bingo. I'm an economic ignoramus, but isn't it a fact that deficit spending is what has fueled the fairly mediocre recovery we've seen over the past couple of years?

And isn't it also true that median income has stayed even or declined each of the past five years, despite the "trickle-down" tax cuts?

And doesn't "trickle-down" ultimately translate to "piss on your head and tell you it's raining"?

I love this graph. You can't spell it out any simpler.

Supply-siders, Intelligent Design advocates and global warming skeptics -- the Republican party is just filled with integrity, isn't it.

I, for one, really wonder what will happen to California Land Values when the US defaults on it's loan, and has to fork over the Golden State as collateral.

osama_been_forgotten: I, for one, really wonder what will happen to California Land Values when the US defaults on it's loan, and has to fork over the Golden State as collateral.

Maybe we can drive a hard bargain with the Chinese and just give them SoCal. The joke will be on them - without Colorado River water the place is worthless.

read the whole thing.

another quote: Moreover, overall, the economic recovery is still below average, relative to other post-World War II recoveries, with respect to growth in GDP, investment, net worth, consumption, employment, and wages and salaries; only corporate profits have grown rapidly.[15] If tax cuts are crucial to economic growth, then with at least one major tax cut a year for four straight years, the current recovery should stand out brightly in comparison to previous recoveries. Instead, it has remained comparatively weak, particularly with respect to job creation. Overall employment growth in this recovery has been slower than during any comparable post-World War II period.

You could reasonably ask: For this we borrowed an extra $1.5T?

Well, if tax decreases or increases both turn things around.

I like tax cuts better. Wouldn't you?

Good work Mr. Bush! When the US sneezes Asia catches a cold. Good, to have good economics in the world's largest economy.

Take my bait. Please.

Re: Canadians eye opportunity to take back Maine

Maine??!! Jeebus Murphy. That's exactly what we need: more snowy, coniferous black bears habitats. If I were in charge, we'd be gunning for the Flordia Keys.

But, please, feel free to bomb the curling rinks.

That's plausible Kevin. It's nice when you present ideas and information without making insane assumptions and drawing far-fetched, reaching conclusions.

Now, what does this suggest about governement spending when the private sector is stagnating.

No really if tax cuts or tax raises have the same growth effect, why not have the tax cut?

Americans want their new flat screen TV's.

"The Center on Budget and Policy Priorities provides this handy chart demonstrating the difference between the recession of 1990 and the recession of 2001. Bottom line: the economy eventually got better both times!"

The entire premise is faulty.

* We are down MILLIONS of jobs since the 1st QTR of 2001 (there are actually fewer workers in the national workforce now, as a percentage, than there were in 2000)

* The total amount of money Americans have to spend after taxes relative to overall output of goods and services has hit the LOWEST level in 25 years

* American's wages have DECLINED every year

* Poverty is UP every year

* Bankruptcies are at the HIGHEST level in history, home foreclosures are at the HIGHEST level in history, federal budget deficits are at the HIGHEST level in history

* The savings rate went NEGATIVE for the first time since the Great Depression

* We have a RISING number of uninsured

* Long-term Unemployment is at the HIGHEST level in thirty years

* The Dow, in inflation-adjusted dollars, would need to be over 13,000 just to get back to it's peak of 11,722.98 in 2000

Where's the evidence that the economy "got better" since 2001 ?
.

Objective Historian: The whole point of the Laffer curve is that reducing tax rates from brutal levels like 50 or 70% will ultimately enhance revenue as such, but around 30-something the whole thing gets dicey. Have you know appreciation for quantitative reasoning?

Posted by: Neil' on May 15, 2006 at 8:25 PM | PERMALINK

This is a fair call. How about you drop it to 30 and raise it from there if you need to. E.g. have a tax cut with a sunset than make it permanent if growth occurs. Y'know exactly like Bush's tax cut.

I think the fairest assessment of Reagan is that the tax cut worked. Because even the most unelectable left-wing Democrat isn't proposing tax rates higher than 50% anymore. That would suggest his tax cut from 80% to 50% is now conventional wisdom. So for the most part he was right.

The question whether the motivational effects implied under the Laffer curve apply when cutting from 50 to 40 or 40 to 35...are of course the subject for debate.

'McA' posted:

"I think the fairest assessment of Reagan is that the tax cut worked."

Only if the intention was to transfer MASSIVE amounts of money from the U.S. Treasury to the extremely wealthy and thereby create MASSIVE federal debt.

Federal income tax revenues PLUMMETED dramatically after Reagan's "tax cut". David Stockman, who was Reagan's Director of the Office of Management and Budget (1981-1985), stated:

"Ronald Reagan's original across-the-board income tax cut would have permanently reduced the federal revenue base by 3% of GNP ... the Reagan tax-rate cut alone would have strained the nation's fiscal equation beyond the breaking point. As of August of 1981, Uncle Sam had been left to finance a 1980s-sized [federal government] and defense build-up from a general revenues base that was now smaller relative to GNP than at any time since 1940 !"

Which is why Reagan had to sign into law FIVE subsequent tax increases.

One more time for all the Bizarro World RightWingers:

Raising tax rates INCREASES revenue. Cutting tax rates DECREASES revenue.
.

Cleek,
My compliments on that concise summation of national economics. Well Done.

Which is why Reagan had to sign into law FIVE subsequent tax increases.

Posted by: VJ on May 16, 2006 at 6:02 AM | PERMALINK

Tax rates when he took office were 80%. There were tax raises later, so maybe he overshot when he cut. But you can't find a credible politican to champion an increase beyond 50%...

The cut from 80-50% is now conventional wisdom amongst his opponents - and that is his legacy.

McA, please restrict your economic fantasies to your own country. thanks.

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Try this one on for size:

Bush Plays Chicken with Global Capital Markets
Posted by Rob Shapiro at May 15, 2006 10:34 AM | TrackBack

An administration that says it believes in capital and in markets has spent the last several years thumbing its nose at global capital markets. Since at least 2003, the White House has continued to run up record-high trade and budget deficits that force us to turn to foreign investors and foreign governments for loans of $600 billion to $700 billion a year. It adds up quickly: By the latest count from the Bureau of Economic Analysis, the U.S. assets now held by non-Americans – roughly $12.5 trillion worth – equal 20 to 25 percent of all the assets in the American economy. Americans own about $10 trillion in foreign assets, so that leaves us $2.5 trillion in the hole -- and it’s still going up fast, every year. It also leaves America forfeiting the interest, dividends, capital gains and rents that we would otherwise have earned on that $2.5 trillion difference. In the past, a current account deficit anywhere near the dimensions our country has run under the Bush administration has always led to a currency crisis – when everybody begins to move out of the currency running the deficits, forcing the home country to sharply raise interest rates even if it stalls out the economy. So what is the Bush administration doing to head off such a crisis for all of us? They’re cutting more taxes (mainly for high-income people, naturally), which will only force us to borrow even more from abroad by further reducing our national saving rate. By any reasonable measure, this administration’s stewardship of our country’s global economic interests has now moved from careless to reckless.
Rob Shapiro, March 15 2006 http://www.ndnblog.org/archives/001579.html

I'm past 'annoyed'. I'm furious.

The tax cut is a small part of the deficit. I don't get what the concern is. The problem isn't the tax cut, it's spending. Even ignoring any possible stimulus effects of the tax cut, it didn't hurt us. And yes, the tax cut had the effect of making taxes more progressive.

Sorry, got ahead of myself. Don't know if the tax cut made taxes more progressive (don't think it could). But, collections have become more progressive since the tax cut despite/because of it.

David Mastio: Comparing the Bush I recession with the Bush II recession is a bit odd given the impact of the terrorist attacks.

yeah....they were the same length....

a quick check of nber.org

http://www.nber.org/cycles/recessions.html

will show you that the recession that started in march-2001

ended two months AFTER 9-11...

as for daddy bush...nbr says:

"The eight-month period between July 1990 and March 1991 is a recession in the NBER's chronology."

dead enders....so many excuses....so little time

left

If the government takes in taxes it does pump the money back into the economy, stimulating the economy.
The government would employ people, provide services like health, education, housing, infrastructure including roads, improving quality of life.

Reducing taxes for the wealthiests allows them to take the money and invest it in other countries or just play the markets moving the money around without producing anything.

The Bush people reduced taxes and grew the ecomomy by borrowing the billions of missing $$$from China and other countries, a kind of economic stimulation too. The consumption is purely military, we spend billions to destroy Iraq and the private sector runs on credit which will have to be paid someday.

One easy way to pay off government and private debt is simple, devalue the currency.

That is called republican economics???

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. . . the lesson from this is not that tax increases are great for the economy, but that "weak recoveries eventually tend to improve, whether there are tax cuts, tax increases, or no tax changes at all." —Kevin Drum

No. The lesson from this is that the completely unpredictable business cycle is still with us. There is no "new economy." And, as economists have known for decades, tax cuts or increases have no effect on this whatsoever.

The tax cut is a small part of the deficit. I don't get what the concern is. The problem isn't the tax cut, it's spending. Even ignoring any possible stimulus effects of the tax cut, it didn't hurt us. And yes, the tax cut had the effect of making taxes more progressive. Posted by: aaron

Someone posting something this ignorant should refrain from entering such discussions.

'aaron' posted:

"The tax cut is a small part of the deficit. I don't get what the concern is. The problem isn't the tax cut, it's spending."

Wrong.

Federal income tax receipts fell to 1959 levels.

While it's true that spending on the Military Industrial Complex has exploded, according to CBO data, the cost of the Bushies enacted tax cuts is almost THREE TIMES as great as the cost of the Iraq war (including the costs of the military operations and subsequent reconstruction), all homeland security expenditures, the costs of rebuilding after September 11, all military action in Afghanistan, and all other costs of the so-called 'Global War On Terrorism', COMBINED.

.

"Even ignoring any possible stimulus effects of the tax cut"

There were none. There never has been any stimulative effect of tax rate cuts.

.

"it didn't hurt us"

Massive federal deficits and debt is a 'Good Thing' ?

.

"And yes, the tax cut had the effect of making taxes more progressive."

I'm afraid not.

.

"Sorry, got ahead of myself. Don't know if the tax cut made taxes more progressive (don't think it could). But, collections have become more progressive since the tax cut despite/because of it."

Still wrong.
.

The dot com bubble was actually 1997-2001. The lead in to this began in 1994.

http://en.wikipedia.org/wiki/Internet_bubble

It also leaves America forfeiting the interest, dividends, capital gains and rents that we would otherwise have earned on that $2.5 trillion difference.

Posted by: CFShep on May 16, 2006 at 9:36 AM | PERMALINK

That's funny. Attracting foreign investment is often a sign of a good economy in analysis of Asian economies.

Pay attention:

>Inflation has been redefined in the business press as "core inflation". That is, energy inflation doesn't count any more for public discussion. This is an interesting caveat. As anyone who follows bls statistics knows "core inflation" is an inflation number without energy, the argument being that this "strips out" the "volatile" food and energy sector. However, this is doubly dishonest. First, food and energy have been running ahead of the rest of inflation for some time now, second there are simple financial formulas to get rid of what is called "marginal behavior". If people want to know what the "non-volatile" number for inflation is, then the simplest tool is to take a moving average, not to remove particular components. If one wants a more sophisticated tool, one can take kendall's tau of the inflation series over time – which is a statistical tool to find the correlation between two data sets removing the differences in volatility from both. Finally one could apply GARCH – an algorithm for analyzing numbers that are not only volatile, but have changing rates of volatility.

The above graph is the ratio between CPI-U and its "core" number, and CPI-W and its core number. If removing "Core" inflation was simply removing a series that was simply stripping out volatility, one would see the same curve, – as it was in the 1990's – then you would see rises and falls above and below a mean value.

In 1983 the asset inflation in housing was removed from CPI. This has the effect of allowing booms to go on longer, because it eliminates the "housing bubble" effect, and thus allows the Fed to keep interest rates lower long, and it means that recessions will be slower to recover from, because when housing bubbles "pop" that doesn't show up as a drop in inflation. It has also masked the massive housing bubble that we have now. This is important because money is created when banks lend, they can lend based on assets, and housing asset prices are counted there. This may sound simple, but it is John Kenneth Galbraith who noted that "the process by which banks create money is so simple, the mind is repelled."

The net effect of this is that the money supply is based on asset inflation, but the interest rate is not. This has created a perverse incentive for administrations and the Federal Reserve – allow housing inflation. Since housing does not generate export, but, on the contrary creates import demand for energy and consumer goods such as home electronics – the net effect of this is to increase the money supply, which drives general inflation, and to increase the trade deficit.

There have been calls for consumption taxes, but this is backwards, the better mechanism – the free market one – is simple to make it so that the Fed is no longer allowing asset inflation in the first place. Otherwise what one is really doing is using home owner equity as a means of creating money to speculate with.

This may sound complex, but the effect is visible: an ever growing trade deficit, as more and more effort is poured into housing, which runs well ahead of inflation, and that housing creates demand for imports, both by creating the desire, and providing a "wealth effect" to fund it with. That's demand in economics – desire plus money.

The redefinition allowed inflation numbers to be reduced – very important both for consumer and business confidence, and because the government is "on the hook" for inflation in the form of Social Security – lower inflation means smaller Cost of Living Adjustments to Social Security. This means smaller social security checks.

However, even this adjustment is no longer enough – instead, inflation is, effectively, being redefined again to exclude energy costs. Energy inflation no longer "counts" for considering economic condition. This means there is a direct transfer of real wealth from everyone else, to energy producers. Don't blame Exxon for high energy prices, blame policy which now has the implicit objective of transferring money to energy producers, without any requirement that they reduce inflation.

There is a good reason for this. Energy producing nations provide much of the liquidity to cover our trade deficit. They will want an assurance that we are not going to tax them in order to fund our deficits, or indeed anything else. This indicates that a fundamental mechanism of neo-liberalism is dead. Namely, that developed nations will not impose self-discipline to prevent energy prices from going up.

To explain, between 1982 and 1998 an important pillar of policy in the G-8 was not to import more energy from OPEC and other energy producing nations than they exported. The idea was that this would squeeze energy exporters, and prevent them from gaining too much control over the world financial system. For what ever the problems with this system, it worked – energy prices marched downward, and with them commodity prices. While the gold bugs are screaming about it now, the current trend of energy getting more expensive than other goods began with the response to the Asian financial crisis, and somewhere in 2003 the decision was made, or not made, to restrain federal spending in the US, or use monetary or tax policy, to bring the movement of energy inflation back into line. This has become general commodity inflation – gold, steel, copper and so on.

This means that this new "redefinition" of inflation is directed at keeping the holders of US instruments, namely energy exporters who don't have stake holders, and so can invest abroad, not at any underlying fundamental irrelevancy of energy to general inflation. Or as Barry Ritholtz puts it "Inflation is fine so long as you don't move or eat."

In short, since 1983 we have been pretending that housing inflation doesn't count, and now even that isn't enough, and we are having to pretend that energy inflation doesn't count either. The first allows loose money, but creates excessive energy demand. This worked so long as policy kept inflation prices in line. Now policy has let the energy genie out of the bottle, and is trying to hide behind a talking point that is rotten to the core.

The first redefinition produces chronic current account deficits, because it shifts efforts from production, to consumption. It also creates a pool of easy money looking for returns. The second shifts real wealth from the US and developed nations, to energy producers and resource producers. This produces wealth in poor countries - among those who control the energy supplies. This is why Putin of Russia is becoming more and more aggressive, this is why energy socialism is sweeping Latin America - because there is a fight to use that energy money to do more than buy luxuries for the upper classes. In places like Dubai, there is the reverse effect - conspicuous super-consumption by the small elite that receives all of the oil revenues.

This is creating a more and more unstable situation, as the financial power in the world is flowing to groups that do not have an interest in the political or economic stability of the developed world. Far from being a "clash of civilizations", our present problems are driven largely by a series of attempts to delay dealing with problems.

Perhaps that was the right decision in the early 1980's, as many technologies required to move away from a petroleum driven economy were in their infancy. But in the present, it is a bad decision, because it leads down a road that is more costly than the other choices - the opportunity cost of building mcMansions and inflation wagons, that's SUVs - is very high at this point.

The continual repetition of "core inflation remains tame" is not a good sign, because industrialized nations make "core" items, and import "non-core" items. One man's inflation is another man's pricing power - saying "core inflation remains tame" is another way of saying that manufacturing does not have pricing power globally.

This leads into a discussion of currencies, and why the current currency problem is the result of this basic dynamic of needing to appease bond holders with oil revenues.

by Stirling Newberry
http://www.bopnews.com/archives/006389.html

And to this too:

>Robert Freeman: 'A tale of two theories: Supply side and demand side economics'
Date: Monday, May 15 @ 09:36:12 EDT
Topic: Economic Policy

Robert Freeman, Common Dreams

It was the best of times. It was the worst of times. It was the era of low taxes. It was the age of high deficits. Prices were up. Wages were down. Oil and gold soared. Housing and big cars cratered. Foreign powers threatened. Foreign currencies beckoned. Some saw a new Jerusalem in the nation's future. Others saw only the glaucoma of gluttonous greed. It was the summer of economic hope. It was the winter of economic despair.

In short, the early eighties were an economic time not unlike our own--a time that scared the Dickens out of most sober observers.

The common thread that unites the two times is Supply Side Economics. In the eighties it was new and promising. In the aughts it is recycled and damaging. In both eras, it stood against Demand Side Economics in its prescription for how to manage the economy. But it is in their outcomes that the two theories present such stark and measurable differences.

In the late seventies, the U.S. economy was falling to pieces. Johnson's Great Society programs and the Vietnam War had produced enormous inflationary pressures. But these were only the beginning. In 1973, Arab oil sheikdoms tripled the price of oil and in 1978, they tripled it again. Inflation soared, interest rates skyrocketed, and the economy tanked.

Higher prices cut into corporate profits, forcing employers to cut back production. The higher prices also reduced the purchasing power of workers, causing a slowdown in the economy. It was the worst of both worlds: a stagnant economy with rampant inflation. Economists called it "stagflation." They were at a loss for a cure.

Traditionally, to fight inflation, governments raise interest rates and cut spending, tampening down demand. To fight unemployment, they do the opposite: cut interest rates and raise spending, increasing demand. But now they had both problems at the same time. The cure for stagnant growth (lower interest rates and higher spending) would only aggravate the inflation. And the cure for inflation (higher interest rates and lower spending) would only aggravate the stagnation. The problem seemed insoluble. Enter Supply Side Economics.

Supply Side Economics claimed that if the government cut taxes on the wealthy, it would jump-start the economy as the wealthy plowed their tax savings back into investments. New factories fitted with new technologies would produce goods at lower cost, taming inflation. And the newly hired workers would tame unemployment. It would, in effect, square the economic circle, fixing both inflation and unemployment at the same time.

Even better, more output meant government tax receipts would grow. The government could continue to spend money without having to raise taxes -- it would simply materialize as a byproduct of higher levels of production! The economy would bootstrap itself in an ever-expanding, virtuous circle of tax cuts, investment, productivity, employment, and rising tax revenues. It was the proverbial "something for nothing" story. It seemed too good to be true.

It was.

In 1980, Ronald Reagan promised that, if elected, he would cut taxes, raise military spending AND balance the budget--all at the same time. His opponent, George H.W. Bush called it "voodoo economics". But Reagan won the election and kept his promise. He cut the marginal tax rate on the highest income earners from 75% to 38%. What happened?

In 1982, the first full year for Reagan's policies, the economy shrank by 2%, the worst performance since the Great Depression. Investment -- the magic transmission belt through which all other Supply Side benefits were supposed to flow -- actually declined as a percent of GDP over the 1980s. Worse, Reagan's Supply Side policies created the biggest budget deficits in history. The numbers tell the story.

Jimmy Carter's last budget produced a deficit of $77 billion. At the time, it seemed huge. But Reagan's first budget swelled the deficit to $128 billion. By the next year, 1983, it had exploded to $208 billion and was creating severe problems for the economy. By 1992, at the end of the "Reagan Revolution," (under Reagan's Vice President and successor, Bush, Sr.) the deficit was approaching $300 billion a year.

Annual deficits, of course, accumulate to the national debt. In 1980, the national debt amounted to less than $1 trillion. By the end of 1992, it had reached $4.35 trillion. In other words, the debt, which had taken over 200 years to reach $1 trillion, quadrupled in the 12 years of Supply Side Economics. A more complete, definitive repudiation of Supply Side's claims could not be imagined. What went wrong?

According to Supply Side "theory," tax cuts should go to the wealthy for only they can afford to use the extra income to invest in the economy -- to increase its capacity to "supply" goods. But there is nothing to make sure they actually invest, especially in the U.S. economy.

The new money might simply sit in the bank, or be spent on expensive foreign imports. It might be wasted in misdirected speculation, or invested in fast growing markets like southeast Asia. Without the ability to ensure that tax cuts are, in fact, invested in new productive assets, Supply Side Economics cannot ensure any real linkage between tax cuts and the hoped-for economic boom.

Revealingly, Supply-Siders strenuously resisted calls to tie tax cuts to actual productive investments, that is, give the tax cut only after the investment had been made. This led critics to suspect the real motives behind the "theory." The only thing that was certain was that the rich would become richer and revenues to the government would be lower. Beyond that, it is all just wishful thinking.

Contrast this wishful thinking with Demand Side economics. Demand Side Economics, says that if taxes are to be cut, they should go to those who earn the least amount of money. The reason is that low-income workers spend virtually all of their incomes. Money given to them goes right back into circulation, fueling a boom in consumer spending. This is essentially the policy that rescued the U.S. economy from the Great Depression. This, say the Demand Side economists, is the real foundation for an expanding economy. How has this theory held up in practice?

Bill Clinton reversed Reagan's Supply Side policies, raising taxes on the wealthy and lowering them on the working and middle class. This Demand Side formula was fiercely resisted by Republican leaders in Congress who predicted a stock market crash and another Great Depression. Indeed, every single Republican member of Congress voted against it. It took a tie-breaking vote by Al Gore in the Senate to get the bill passed. What happened?

The economy produced the longest sustained expansion in U.S. history. It created more than 22 million new jobs, the highest level of job creation ever recorded. Unemployment fell to its lowest level in over 30 years. Inflation fell to 2.5% per year compared to the 4.7% average over the prior 12 years. And overall economic growth averaged 4.0% per year compared to 2.8% average growth over the 12 years of the Reagan/Bush administrations.

It wasn't even close. The economy performed dramatically better in almost every way once Supply Side policies were replaced with Demand Side policies.

The most dramatic outcome was the reversal of the Reagan-era Supply Side deficits. Clinton's Demand Side policies not only paid down the Reagan/Bush deficits, they produced the first budgetary surpluses since 1969. By the time Clinton left office, the government was running surpluses of almost $140 billion per year. This is what he turned over to George W. Bush in January of 2001.

Bush, of course, returned to the Supply Side policies of Reagan and his father. He lowered taxes on the very rich -- his "base" as he calls them. His $1.6 trillion in tax cuts give 45% of the benefits to the top 1% of the population. It is classic Supply Side economics. What happened?

According to the Economic Policy Institute, "By virtually every measure, the economy has performed worse in this business cycle than was typical of past ones." GDP growth since the bottom of the 2001 recession has averaged 2.8%. But it grew at an average rate of 3.5% over the prior six recoveries dating back to World War II. Or consider jobs: 1.3% more jobs under Bush versus 8.8% more during earlier upswings.

Private sector jobs -- an especially telling measure of economic health -- are up only 1% since 2001 versus an average of 8.6% for past recoveries. Investment? That Holy Grail of Supply Side orthodoxy? Up 3.6% compared to the 8.2% average for the six earlier rebounds. Pick your measure: growth, jobs, income, spending, investment. The recovery based on the Bush II Supply Side tax cuts is one of the weakest ever recorded.

The one thing the Supply Side revival did excel at -- not surprisingly -- is debt. Bush turned a $136 billion surplus from Bill Clinton into a $158 billion deficit in his first year. When he took office, the national debt stood at $5.8 trillion. It now stands at $8.1 trillion and is projected to hit $10 trillion by 2008 when Bush's second term is over. The ten-year cumulative deficit forecast by the non-partisan Congressional Budget Office has changed from a $5.6 trillion surplus in January 2001 to a $3.4 trillion deficit in March of this year--an almost inconceivable swing of $9 trillion to the worse in only six years.

After more than 17 years of experience with Supply Side economics, we now know beyond doubt that this is not an accident.

These mammoth debts are a huge boon to that rich "base" that Bush loves to coddle. It is they, the very rich, who loan the money to the government to fund its debts. And since more borrowing drives up interest rates, they get to do so at higher and higher rates of return. This is simple supply and demand. By increasing the demand for borrowed money in the economy as a whole, Supply Side deficits drive up the cost, not just of government borrowing, but of ALL borrowing--everything from credit cards and mortgages to car loans and municipal bonds.

In other words, Supply Side economics rewards the rich both coming and going. Higher government debt leads to higher interest rates for all borrowing -- or in their case, lending. And then, they get to pay lower and lower taxes on their higher and higher earnings. It is a magical two-fer worth hundreds of billions of dollars a year.

This is the real reason Bill Clinton was so relentlessly hounded while in office. It wasn't that he was being serviced by an intern or that he was a particularly radical president. Indeed, Clinton himself described himself as "an Eisenhower Republican." His big faux pas was that by paying down the Republican debts, he lowered interest rates, the basis of Republican earnings. In fact, real interest rates declined 40% while Clinton was in office. You can see why he simply had to go.

This is the real magic of Supply Side economics: greater-debts-leading-to-higher-returns-but-lower-taxes for the rich. It is one of the reasons the top 20% of income earners has raised its share of national income from 44% in 1980 when Supply Side policies began, to 50.1% last year. They now earn more than all of the rest of the people in the economy combined.

But it only works for the rich. If you're not rich, it is you who are paying those higher and higher interest rates and it will be you -- or perhaps, more precisely, your children -- who will be stuck with the bill for the higher government debts. Paying off those debts can only come at the expense of future economic growth for income spent paying off inflated debts is money that is not available for college tuitions, job retraining, repairing infrastructure, etc.

Rarely in matters of public policy do we have the luxury of such starkly clear, repeatedly proven, empirically founded contrasts. Demand Side economics, as we saw in the 1990s, while far from perfect, produces robust growth, budgetary surpluses, and broad based prosperity. Supply Side economics produces middling growth, soaring deficits, and broad based debt. Mountains of debt. And the mountains are growing.

If we are to salvage any kind of economic sanity and prevent the bankruptcy of the nation, the next Congress must reverse the Supply Side agenda and return the country to a responsible fiscal course.

Robert Freeman writes on history, economics, and education.

Source: Common Dreams
http://www.commondreams.org/views06/0514-20.htm

This article comes from The Smirking Chimp
http://www.SmirkingChimp.com

The URL for this story is:
http://www.SmirkingChimp.com/article.php?sid=26087

From: 'Budget Deficits and Current Account Deficits'- Dean Baker

"There is also a secondary concern, that when the annual deficit and/or debt grow sufficiently large relative to GDP, lenders could begin to question the government’s creditworthiness and then demand very high interest rates. This would have serious consequences for investment and growth.

A current account deficit means that the United States is selling off assets (e.g. stocks, bonds, real estate) to foreigners. As a result, in the future, income from these assets will go to foreigners rather than people in the United States. In other words, the United States will be poorer, just like with a budget deficit. There is also a secondary concern, that when the annual current account deficit and/or foreign debt grow sufficiently large relative to GDP, lenders could begin to question the country’s creditworthiness and then demand very high interest rates. This would have serious consequences for investment and growth.

Okay, I shouldn’t have used the exact same words to describe the nature of budget crises and current account crises. The latter will typically take the form of a plunging currency, leading to higher inflation (import prices rise when the currency falls, leading to higher prices generally) and higher nominal interest rates. The result is likely to be a recession, with several years of stagnation and high unemployment (e.g. the East Asian financial crisis in the 90s). A budget crisis is likely to be resolved with sharp cuts in spending and/or large tax increases, also likely to lead to a period of stagnation and high unemployment."

Got that, McA? You're a moron.

Once again and for reasons I don't understand I can't put the URL in the window without the whole thing going nuts. URL follows.

http://beatthepress.blogspot.com/2006/04/budget-deficits-and-current-account.html