The US Economy

You got me here. I didn't say anything because I wasn't sure what to say. On the one hand, I think the New Deal, Johnsons Great Society programs and so forth demonstrated that government can smooth out the income distribution quite well. But I have to admit that these were also times of low immigration. It would be nice to have evidence from a time and place where government spending and ethnic diversity pushed in different direction. But I don't have any such evidence.


I know. And I am convinced they are wrong, and that the 80s where mostly a business cycle recovery after an especially bad recession. But I suspect this discussion would fill a thread of its own, so I'll leave it for now.


That's because the Democratic rhetoric is about the tax structure, and the Republican rhetoric is about the income tax structure. Both sides are technically correct in what they say, but one side is misleading in what it insinuates. And it isn't the Democratic side.


Sure. And I'm on your side on vouchers vs. more of the same. At the same time, I think there are two orthogonal questions here. One is how much America should spend on education, and how this spending should vary from place to place. The other question is how to organize the providers of schooling to make the most efficient use of the funds. These two questions can be discussed and answered seperately


I am generally skeptical of government-run services too. What convinced me otherwise in this case was to look the correlation between health care spending and life expectancy. The US system turns out to deliver mediocre performance for a high price, compared to countries with universal, state-provided health insurance systems. For reference, look at figure 1.8 in this IMF report. Sorry, it won't open if I put it in this post directly.


But you already got similar results as the Netherlands when you abolished the prohibition of alcohol! What is so different about the sociology and economics of Cocaine, Cannabis, and Heroin?


I sure hope to. After all, what's the point of spending time abroad if people there run things just like we run them at home?

Thomas, Thanks for cleaning up the garbage. timber, All under the bridge.

I agree about Paul Voelker's interest rate hike and disagree about Reagan's tax reduction. To avoid bloating the thread, here's just my strongest piece of evidence. The 1979 edition of Dornbush and Fisher, the leading Macro textbook of the time, predicted how a disinflation scenario would play out based on the monetary policy alone. In terms of joblessness, interest rates and growth, it predicted correctly what turned out to happen in the early eighties. Given the usual uncertainty of economical models, this is pretty strong evidence that the tax cuts had little effect on how things played out. The main part of the action was a deliberately caused recession to disinflate the economy, a demand-driven recovery after that recession, and no big change in trend growth until the beginning of the 90s (End of Bush I administration.)


No it doesn't, and I think that's a mistake, for the same reason it's a mistake for the US. Main reasons: 1) In several cases, most notably Columbia, we are financing both sides of nasty civil wars. Our governments finance their government, our drug consumers finance the rebellious drug lords. By legalizing Cocaine, Heroine etc, prices in the drug market would fall dramatically, cutting off most of the drug lords' profits. 2) Really, really hard drugs are only profitable if drugs are illegal. As a businessman, you certainly know that products which routinely kill your customers are not just immoral, they're unprofitable. The reason crack is profitable is that a customer, once addicted with free 'samples', is locked in to buying the stuff from his one dealer once he raises the price. In a competitive drug market as the one created by legalization, users can undercut this behavior by the sellers simply by switching suppliers. This causes the 'don't kill your customers' effect to dominate. I think the Cato institute has several good policy studies on its website that make the case.

Which countries do, btw, permit the open sale of heroin and cocaine (- if any)?

Thomas,

Well I'm certainly glad not to be paying the 70+ % marginal tax rate (exclusive of state taxes) that prevailed before the Reagan tax cuts.

I don't believe that the mere fact that a contemporary liberal economic study predicted a similar recovery without a tax cut, constitutes a convincing argument that Reagan's tax cuts were not a significan part of the 20 year expansion that followed a 12 year period of stagnation. There were many other studies that either predicted different outcomes under those conditions or recovery, such as occurred, under different conditions. Comparing facts with such speculations is hardly fair to the facts.

It is perhaps too easy at this juncture to forget the energy that was then (early '80s) going in to the creation of limited partnerships and other devices involvig the misallocationof capital, all merely to avoid income taxes. In addition we were developing a substantial underground cash and barter economy for the same reason. We emerged from the subsequent expansion with a budget surplus and a (relative to other advanced economies) low level of public debt. What good would government have done with the extra tax revenue (in the early years, before its inhibiting effects were felt) ? A fairly convincing case has been made that Federal tax receipts over the subsequent decade were greater as a result of the tax reductions (I recognize that the same criticism as mine above could well be raised in objection to this point.)

Good for you! We all hate paying taxes.


1) These weren't liberal economists, and it was a textbook, not a study. Dornbusch is about as liberal as Milton Friedman. I don't know Stanley Fisher's politics. It's possible he's a liberal, but certainly not the kind that lets his politics get in the way of professional judgment.

2) As best I remember (the copy of the book was in the university library), the scenario was calculated as a finger excercise for applying the standard, monetarist, macroeconomic textbook models. Reagan's "morning in America" was hence exactly what you would expect based on textbook economics and the monetary policy that happened. By the way, this doesn't diminish Reagan's contribution. Few presidents would risk their re-election, as Reagan did, to let the Fed do the right, but wildly unpopular, thing.



I believe that, and I think I may well have overstated my case. Very high marginal tax rates are inefficient, and its a good thing they came down from 70% to 35%. It's just not as great a deal as the supply siders say it was. In particular, while there's a lot of good evidence that high tax rates diminish efficiency and hence output, there is much less evidence that they diminish growth. I am very skeptical of claims that we owe the productivity surge in the 90s to Reaganomics.

Thomas, it seems to me that it is clearly the case an enhancement of discressionary income, as brought about by a reduction in tax rate, has a dirrect effect on the economy. Looked at from both the upper and lower tiers of income level, the effects are different, but they are there. Those in the lower tiers will spend that money, circulating it into the economy. Those in the higher tiers will be more likely to invest it, thereby providing capital investment in the means of production, which in fact is the only way to bring about growth. Those of lower income will buy more goods and services. Those with higher income will seek to grow their income by means of providing for greater production of goods and services. If folks aren't investing in business, business is unable to provide jobs which provide income which is used to consume the goods and services produced by business. Encourage capital investment, while freeing individual personal income for the pursuit of consumables and durables, and you encourage the overall economy, thereby enhancing tax revenue through a larger flow of taxable income all around.

I may well agree, depending on your definition of "larger flow". Larger than what? Larger that you would expect if tax & spending cuts had no impact at on output at all? If that's your definition, I kind of agree, provided the effect of the tax cut isn't offset by monetary policy (which I believe happened in the 80s.) But if you mean "larger than tax revenue would have been without the tax cut", then you are repeating an assertion that I have heard very often, but have never seen any good evidence for. But I always like to learn, and if you have evidence for that latter claim, I'll be happy to take a look at it and reconsider my opinion.

Thomas,

OK Dornbusch & Fisher is a standard text on Macroeconomics. I will look up a copy and attempt to follow the arguments in it. The prospect of a trip through sections of an economics text is not one I would ordinarily choose, but you have piqued my curiosity.

I'm quite willing to stipulate that the supply siders likely oversell the beneficial effects of tax reduction. Moreover I know that many Republican strategists view tax reductions as a politically necessary prerequisite for any reduction in what they consider to be wasteful government programs - starving the government beast is their avowed intent. Both factors likely influence the Republican policy initiatives.

In the same breath one must also acknowledge that the recent Democrat (liberal) affection for surpluses and fiscal discipline is also motivated (chiefly) by the desire to be able to continue funding the various government programs that give them and their supporters status and power. History does indeed teach us that government will always spend whatever revenues it gets its hands on (and often more) and rationalize whatever is needed along the way.

On the subject of educational reform you suggested the subjects of the amount of government funding for educational programs can and should be considered as orthogonal to and independent of the manner in which it is spent. While this is (mostly) true objectively, it is not generally possible in the real world of political debate in which positions are taken on a visceral basis and defended with whatever argument (or sophistry) may be available. Opponents of vouchers argue that vouchers will deprive public schools of needed funds, even when the vouchers are valued at 80% of the actual per capita student cost, and even in cases in which the vouchers are funded separately and in addition to existing public school funds. Moreover this argument usually goes unchallenged, and appears to be effective, at least to those already inclined to hear it. In fact there is some truth in the assertion, despite these qualifications - supporters of vouchers truly are trying to break the public school monopoly and eventually apply competitive cost pressures to it.

I believe that something generally like this operates as well in the area of tax reductions, monetary policy, and economic growth. Advocates of less government have a preference for individual enterprise, as opposed to public solutions, and see tax policy in terms of competition between government and the private sector for available capital. Less tax collection means more individual choice on spending and investment, and therefore more growth. Never mind that government borrowing for deficits will have the opposite effect for a time - ultimately individual enterprise will lead to growth.

Trying to find a cause and effect of one tax cut to our economy without considering all the actual variables that influence it is a bluff in disguise.

George, at the danger of ruining the discussion, I think we agree more than we think. There is a good case that taxes and subsidies reduce efficiency (deadweight loss and all that). That suggests a one-off loss of output when taxes are raised, and a one-off jump in output when taxes are cut. If taxes are cut continuously over several years, it will show up in the statistics as a rise in growth while the taxes are cut. But once they are cut to any given level, and once the deadweight loss is squeezed out, the standard case for low tax rates doesn't predict any rise in growth beyond this one-off effect.

As for schools, you may well be right about the political tactics involved in doing the right thing. Much of what I say in these debates is a preemptive strike against arguments I expect based on past debates with other conservatives. The reason I stressed the orthogonality of vouchers and schooling budgets is that I often hear the argument: "We spend more on our schools than we used to, but get worse results than we used to, and worse results than most other comparable countries. Therefore we need vouchers". While all the premises of this is correct, the "therefore" doesn't follow, because America didn't have vouchers back when its schools performed better, and the other countries don't have vouchers either. You, of course, haven't made this argument, so if I unfairly lumped you together with other people who share your conclusions, I apologize.

As for fiscal discipline under Clinton, I think we owe that to gridlock more than to any of the parties involved. The Democrats didn't want a balanced budget, but preferred it to the tax cuts favored by the Republicans in Congress. The Republicans didn't want a balanced budget, but preferred it to the welfare state extensions the Democrats wanted. Thus the fiscal discipline we saw in the 90s were basically an accident. It was still a good thing in my opinion.

Interesting, thoughtful statements, Thomas.

Thomas,

Nothing unfair at all, and certainly no apology is needed. I have very much enjoyed the discussion, and have learned from it as well.

It is evident we do agree on most of this. However, I also find even the differences in interpretatioon both interesting and illuminating.

are school vouchers educational welfare for a select few?

What is more interesting at this point in time is GWBush's SOU address. He said that our deficit will be reduced by 50 percent in the next five years. Anybody else see the problem with this statement?

No, because those who accept them forego their access to public schools as a result. They merely collect a public benefit in a different form.

Here's a recent release by CNNMoney on the topic of my previous post. http://money.cnn.com/2004/01/21/news/economy/election_deficits.reut/index.htm

c.i. , there's no argument at all that spending must be reigned in. Notable in that article was mention that current spending increases are running on par with those of four decades ago, which accompanied the last war in which we found ourselves. Perhaps overlooked is that war is involved. The effect of that state of affairs is reflected far more broadly than the mere accounting of funds and resources dedicated strictly to the war effort.

The fiscal year for The US runs through September. I will be unsurprised if the October Actual Budget Deficit Figure release is among the inevitable "October Surprises". I don't expect that surprise to work to the advantage of The Opposition, as projected budget deficit estimates as announced last year are based on a tax revenue capture opportunity based on a GDP growth estimate already handily surpassed, with further, and vigorous, growth strongly indicated through at least calendar Q3 of this year. If The Current Administration can show that the deficit turned out to have been significantly less than had been projected, they will be perfectly able to play that as a "Victory". The timing probably couldn't be better for The Current Administration.

BTW, According to The US Bureau of Public Debt , at Close of Business the day before Inauguration Day 1993, The Official Public Debt, all Federal debt held by individuals, corporations, state or local governments, foreign governments, and other entities outside of the United States Government, including, but not limited to, Treasury Bills, Treasury Notes, Treasury Bonds, United States Savings Bonds, State and Local Government Series, Foreign Series, and Domestic Series, stood at $4,188, 092,107,183.60. At Close of Business the day before Inauguration Day 2001, The Official Public Debt was $5, 727,776,738,304.64, a growth of some 37% across the 8-year tenure of The Previous Administration.


The Fiscal 1993 interest expense for The Public Debt was $292,502,219,484.25. In 2000, the interest expense was $361,997,734,302.36, having increased every year over the period encompassing the tenure of The Previous Administration. The 2001 interest expense declined to $359,507,635,242.41, in 2002 the cost dropped to $332,536,958,599.42, and for 2003, the cost was lower yet, at $318,148,529,151.51, the lowest since 1994, when it stood at $296,277,764,246.26. The actual cost to service The Public Debt, the burden to The Taxpayer, the actual impact, both in absolute-dollar terms and considered as a percentage of Gross Domestic Product, thas decreased every single year during of The Current Administration, something it has not done even one year for decades. Those who whine that "Bush has mortgaged our children's future" ignore the facts that the mortgage predates Bush the Younger by generations, and that he has reduced the minimum payment required, the critical first step if available resources ever are to begin to pay down the principal. The cost of The Public Debt is dropping significantly, having come down some $43.85 Billion since Bush the Younger took office, and is at the lowest it has been in nearly a decade, following decades of increase. That is not spin, that is fact.

Here's the information on the public debt from the US Treasury:

PUBLIC DEBT HELD BY:
P = Public 1st column
G = Government 2nd column
T = Total 3rd column

JAN 20, 2004 4,047,849,469,707.93 2,958,984,602,727.56 7,006,837,072,435.49

JAN 16, 2004 4,048,012,264,080.65 2,954,865,660,338.16 7,002,877,924,418.81

JAN 2, 2004 4,044,509,837,786.03 2,936,967,285,085.83 6,981,477,122,871.86

DEC 31, 2003 4,044,243,829,239.60 2,953,720,418,578.68 6,997,964,247,818.28

NOV 28, 2003 4,032,904,791,048.37 2,892,160,708,832.97 6,925,065,499,881.34

OCT 31, 2003 3,990,508,094,197.53 2,882,167,744,909.14 6,872,675,839,106.67

SEPT 30, 2003 3,924,090,106,880.88 2,859,140,955,862.74 6,783,231,062,743.62

SEPT 30, 2002 3,553,180,247,874.74 2,675,055,717,722.42 6,228,235,965,597.16

SEPT 28, 2001 3,339,310,176,094.74 2,468,153,236,105.32 5,807,463,412,200.06

Link to US Treasury: http://www.publicdebt.treas.gov/opd/opdpdodt.htm