The New Republic

Well it's out there now. The GOP has no ideas other than to inflict pain on the vulnerable and protect the rich. Shame on them.

- Sophia

December 3, 2012 at 11:02pm

I don't even understand why the White House is negotiating about revenues. They should let the tax cuts expire and then dare the Republicans not to enact a new, time-limited tax-cut for the so-called middle-class. If the Republicans want to refuse to vote in favor of the new tax cut, let them. We would be better off for it and they will take the blame for sure. The negotiations should be over expense cuts and stimulative spending to replace the agreed upon sequestration -- and an end to the debt ceiling hostage-taking. Here too, the administration has the upper hand as the Republicans are much more unhappy about the distribution of the sequestration than the Democrats are. The sequestration protects entitlements. So, if the Republicans want entitlement cuts, they will have to agree to what the Democrats want otherwise. It is in fact inappropriate to re-structure entitlements in this context. They are not the cause of the immediate budget problem anyway. Military spending and the Bush tax cuts, and the unfunded drug benefit, are the cause of the problem. Hence, they should be the solution. It makes exactly no sense, and would be damaging to the country and its prosperity, to make further cuts in non-defense discretionary spending. We either raise taxes on the rich even more, or cut the military. Let the Republicans choose which. If there are to be cuts in entitlements, then Obama should propose means-testing Medicare and Social Security and tougher controls on medical costs. On the latter, see, Krugman. The cost panel should be expanded much more aggressively to specify what will be paid for under what circumstances and how much will be paid. It should be the beginning of government standards/protocols for insured care and cost, not just some vague set of recommendations. Once they are set up and working smoothly, all we need is a law that medical providers have to accept the government payment, whether paid by the government or by private insurance, as payment in full and may not bill patients for any difference. Voila! Instant single-payer without a single-payer.

- roidubouloi

December 3, 2012 at 11:24pm

roid, at least one powerful reason for the White House to negotiate about revenues is to maintain the appearance that is is open to compromising. Now, we unfortunately know that there is also the possibility that Obama, by dint of his personality and/or his political and policy (mis)calculations, might be willing to cut a deal too far toward the Republican end of the spectrum. But one of many ways of swaying some Americans to his side is to paint himself as the moderate dealing with an intransigent opposition. Will he go too far toward accommodating them? I hope not, not least because he's negotiating from relative strength compared to the last time around. I also hope, pardon the mixed metaphor, that after that last, disastrous round he's learned some lessons, opened his eyes to the nature of the opposition, and most of all grown a pair.

- Thunderroad

December 4, 2012 at 12:52am

Roid's got it. Just go over the damn cliff and have the Senate propose a temporary decrease in middle-class taxes and dare House Republicans to vote it down. Once the economy comes back, taxes can be raised again on the the middle class. But right after we go over the cliff the president HAS to address the nation and make sure the Republicans get the blame they deserve. He could bring up specific examples of their intransigence. For example, he's wanted for years to allow the government to foster competition and negotiate for Medicare drug prices, like it does at the VA. But the GOP wants their CEO buds at the drug companies to continue gouging the taxpayers, because it means much more in profits. The GOP does NOT want free enterprise. They want monopolies that gouge consumers and taxpayers. As long as profits are maximized, they don't care who suffers. Republicans are never going to give in on taxes. Rich people and corporations are making record profits. Higher taxes means less profits. It's as simple as that. Let's go over the cliff, kids. It'll be a lot less painful than the near-depression the Republicans brought us under Bush. And it will bring a bonanza of opportunities to blame the Republicans again. The majority of Americans already blame them for the mess we're in now. Do it!

- magboy47.

December 4, 2012 at 1:09am

I'm all with you and roid, magboy, in terms of standing up to the Republicans. But I really wish everyone would stop using the term "fiscal cliff." As Krugman and others have noted, it's much more of a slope. Calling it a cliff fools some folks into thinking it's imperative to reach a compromise in the next month, when in fact we won't drop into an economic chasm if Obama holds his ground in the negotiations.

- Thunderroad

December 4, 2012 at 2:05am

I would like to believe, along with roid and lots of others, that Dems can gain an upper hand by allowing the sequestration to take effect and then demanding tax cuts for those below $250,000. That hopeful outcome is overshadowed by the fact that we are dealing with Boehner, who has repeatedly shown he is willing to wreck the country to get the goods for his billionaire handlers. Boehner and McConnell have repeatedly said they really don't care what effect their obstructionism causes to the economy and the country. I hope and believe Obama will negotiate in good faith, but believe the GOPers will continue with their parade of stupid pet tricks. So I believe it is inevitable that GOP will sell us out for their favorite people, corporations, my friend. I hope Obama reads that move as authority to save the economy by using his constitutional mandate to pay the bills of the US Government, and raises the debt ceiling by decree. And I believe We The People will recognize that as his only option to save us from the treasonous GOPers. After the 2014 midterms, we should abolish carried interest; capital gains' rates should be progressive and a a function of total income; force repatriation of a reported $30 trillion plus in off-shore accounts; abolish income cap for social security tax; re-establish inheritance tax; abolish farm and oil subsidies; establish a carbon tax; and of course raise the income tax rates for incomes over $250,000 for openers. And Obama could establish some of these by decree until the resulting lawsuits make it up to The Supremes.

- smabry03

December 4, 2012 at 6:17am

Of course, Roid's suggestion would have been good in 2010 as well. Didn't happen then, won't happen now. Part of my frustration with this "process" is the confusion created by the media. For example, the NYT's series on the fiscal cliff is titled "Debt Reckoning", suggesting that the "fiscal cliff" is a calamity of runaway debt when, in fact, it's the opposite - shouldn't it be called the "austerity cliff". Indeed, isn't the austerity cliff the answer to the right's warning about the impending inflation crisis - lower spending and higher taxes would avert that impending "crisis". And for a President who handily won re-election under very difficult circumstances, why are Democrats, including even some who served in the Administration during the first term, undermining the President by presenting their own plan to compete with the President's? The latest alternative is offered by, among others, Lawrence Summers and William Daley, and is the subject of today's segment in the NYT on Debt Reckoning. With "friends" like these who needs Boehner and the Republicans. [Though to be honest, the proposal by these "friends" has some very good features, like raising the capital gains rate to 28%, taxing dividends as ordinary income, and ending the "carried interest" loophole. But those good features are offset, somewhat, by raising the threshold for the 39.6 marginal tax rate to taxable income above $422,000 (married and single taxpayers) from $250,000 ($200,000 for single taxpayers) as proposed by Obama.] Obama is being forced to compete not only with the Republicans but with poobahs in his own party! What this reveals, to me anyway, is that it's impossible to get a clear-eyed look at the alternatives, the consequence of which is that the Democrats lose the political advantage with the vast majority of taxpayers when those taxpayers can't tell who is offering what. Go over the cliff and the contrasts between the different proposals and who is presenting them will be much clearer to everybody.

- rayward

December 4, 2012 at 7:21am

This is a popularity contest when it should be the best way of governing. The Bush Tax Cuts sunset because they significantly increase deficits and sunsetting was required under the Byrd Rule when the Republicans used reconciliation in 2000 to pass them. The cuts did significantly increase deficits. They aren't helping the economy and, I argue, the capital gain dividend preference is sucking investment capital away from ownership of 35% taxed small business into the secondary purchases in the 15% stock market. But if we took away from the Republicans their raison d' etre of low top rates and showed it to be plain wrong, they would have only unpopular social concerns.

- Nusholtz

December 4, 2012 at 7:28am

From your mouth to Obama's ears. The biggest risk in all of this is that Obama will begin believing his own hype, and accept a crappy deal rather than go over the so-called "cliff". Shoot, go over the cliff, why not? Once you do, everything becomes a "tax-cut". And everyone likes voting for a "tax-cut", that should make everything so much easier. As far as I can tell, this so-called "deal" is simply retreaded Republican talking points from the election -- and the electorate rejected those already, because they're bad for America.

- AllanL5

December 4, 2012 at 8:35am

Sadly this is not true because while the automatic cuts are only enforced by year end, the reaction in the real US economy would be immediate and that impacts all savers and those who have pensions as returns will fall. They need to solve this now

- squin43

December 4, 2012 at 9:49am

I agree Jonathon, but we need to be sure to have the Republicans underneath us when we land at the bottom of the cliff to cushion the fall. - DonMc

- NR138704

December 4, 2012 at 10:35am

"The proposal doesn't specify which cuts, but they'd be above and beyond those automatic cuts..." Does Boehner's offer, then, specifically keep sequestration cuts to discretionary spending and then add another $300 billion? Because otherwise, if Boehner's deal were accepted, those automatic cuts wouldn't happen at all, right? If so, Obama should club House Republicans over the head with the fact that the Republican offer to avoid the "fiscal cliff" in fact pushes the middle class and working poor over an even steeper cliff. Or have I missed something?

- frippo

December 4, 2012 at 10:49am

roi is right. but so is ray. Insofar as the past predicts the future, betting that BHO and many Senate Dems will not compromise away whatever has not been a good bet.

- drofnats1

December 4, 2012 at 11:06am

Yes, Boehner's offer is lousy, but it's clearly an opening gambit that even Republicans widely expect to fail. My sense is that Republicans themselves want to go over the fiscal cliff, exactly because of what Allan says: then they are simply voting for tax decreases. The problem for Republicans is that they then have no leverage to push for entitlement reforms and other non-defense cuts. At that point, they'd have to give in on stimulus to get the kinds of cuts they want, and even then the cuts would probably not look as good to them. It would be much better for Republicans to accept higher tax rates now (especially if they can push for a higher income line, such a $500k) in exchange for their preferred set of cuts and entitlement reforms. But I don't think they want that, all because of blinkered ideological commitment to no rising tax rates.

- polcereal

December 4, 2012 at 11:07am

Perhaps we need a campaign to rename the "Fiscal Cliff" to the "Austerity Bomb"? Framing is everything.

- Nari224

December 4, 2012 at 11:50am

This article is wrong on so many counts it’s hard to choose which to write about first. The author ignores basic principles of economics, the most obvious of which is, if you tax something, you get less of it. Raising tax rates on high incomes won’t decrease the deficit, it will likely INCREASE it. The rich will find additional ways to shelter income, the increase in tax revenue will be far lower than estimated by static analysis (which assumes that when tax rates change, behavior does NOT change), and, most importantly, investment, job creation, and therefore the GDP and associated tax revenues will grow more slowly than if we did the reverse, which would be to lower marginal tax rates, particularly on investment income like dividends, interest, and capital gains (for all income brackets). Even static analysis says the increase in tax revenue from not extending the Bush tax cuts for the top 2% would offset only 8% of the current trillion-dollar-a-year deficit. How can the author ignore that fact? We should also cut the corporate tax rate to zero, because corporations don’t pay that tax anyway, their customers pay that tax, as taxes are passed through to customers in corporations’ prices. In fact, the corporate tax is the most regressive tax there is, because it is akin to a sales tax on everything consumers buy, with nothing excepted. The percentage of income represented by the corporate tax is much higher for the poor and middle class than it is for the rich. And this does not even count the harmful effects on U.S. job creation and competitiveness of a corporate tax rate that is much higher than in the rest of the world and that raises U.S. prices in relation to our global competitors. The corporate tax rate is one way politicians hide the amount of tax they are actually collecting from those who actually pay taxes, namely human beings, not legal entities such as proprietorships, partnerships, and corporations. Also, has anyone asked what is magic about the retirement age of 65? If we accept the author’s arguments, can’t we make a valid case for reducing the retirement age to 63, or even 60, for example? The bottom line is this: The current administration’s policies have been disastrous for hiring and the economic recovery rate, which rate, as one recent study of the past 130 years shows, is well below the past recovery rates of economies that have experienced a financial crisis during that period. The Administration’s business-unfriendly attitudes and actions have led to a 4-year strike by risk-taking, job-creating entrepreneurs, despite the availability of trillions of investable dollars, a vast pool of 23 million persons available to fill jobs, and low borrowing rates. Had Romney won the election, that job-hurting environment would have changed overnight. Instead, we are facing 4 more years of an Administration seemingly ignorant of basic economics, of how and why jobs are created, and of what needs to be done to close the current 15% gap between potential and actual GDP at a faster rate. Nearly every proposal recently made by Obama does the OPPOSITE, which is why Republicans oppose those measures. Republicans believe the way to help the poor and middle class is to provide a business-friendly, supportive, sensible-regulation-driven environment for private, risk-taking entrepreneurs, in large companies and small, to do what is in their DNA, which is to create or expand businesses, provide new or improved products and services, and, by hiring workers, to simultaneously expand both PRODUCTION and DEMAND. Space does not permit a presentation of the evidence, but such policies worked well under 4 different administrations during the past 51 years – Kennedy/Johnson, Reagan, Clinton, and G.W. Bush. Yes Bush, under whom unemployment declined to the second lowest rate in history – 4.4% in late 2006 and early 2007 - before the bursting of the housing bubble, which bubble and its bursting were UNRELATED to tax policy or the Bush tax cuts, and which bubble and its bursting caused the 2008-09 financial crisis and recession. What the Administration, its supporters, and even some Republicans seem to miss is that every new job creates both new PRODUCTION and new INCOME. The new demand needed to justify new jobs comes from the salaries and wages of the new hires THEMSELVES, and NOT from existing job holders, who are already spending as much as they can comfortably spend, or from government transfer payments from one consumer to another. Those who say demand has to come first are mistaken. By nature, entrepreneurs are the most optimistic persons on earth. To a person, they believe that if they build it, demand will come. The new jobs and new income they create turns into demand for what they have just produced. For example, despite the very high failure rate for new restaurants, every year tens of thousands are opened. Each one requires a substantial investment – in space, equipment, and workers – all done before there is even a single dinner reservation. There is no line of people outside waiting to be fed. Nothing new or mysterious here - no “trickle down,” no “magic,” no “voodoo.” Just simple cause and effect. It’s the way economies have grown for thousands of years. Entrepreneurs taking risks, investing their money, and creating jobs and income.

- truthman

December 4, 2012 at 11:51am

"has anyone asked what is magic about the retirement age of 65" No, because that's a *dumb* question. What is magic about it is just that it's the status quo. Thus, any change ought to be fully considered for unintended consequences. This article points out the unintended consequence of raising the retirement age; the consequence of lowering it would, of course, be more government expenditure, so in the context of how to change it to lower government spending, no one would seriously consider doing that, and so Cohn's logic doesn't even begin to point that way. Next straw man, please. " To a person, they believe that if they build it, demand will come." And yet they are not building, even though the allegedly "business-unfriendly" environment of the Obama years have seen record profits. In that context, the Galt-like "strike" of job creators you mention seems particularly spoiled and petulant. Meanwhile, if new demand comes from new job-holder's incomes, then clearly firing a bunch of people will lower demand, yes? And yet the virtuous phrase "cutting government spending" obscures the reality of kicking public-sector employees out of their jobs. In the last three recessions, public-sector employment grew (google Ezra Klein's "Public-sector austerity in one graph"); this time, it has shrunk, and is now at its lowest point relative to the population in three decades, according to the Hamilton Project. And this is a slower than usual recovery, you say.

- frippo

December 4, 2012 at 12:39pm

The above comment makes zero sense. We have had Republican economic policies in place for more than 30 years (at least) and during this time we have seen vast growth in social and economic inequality. We've had similar displays of this kind of malarkey before, in the 1920's, which culminated in the crash and the Great Depression. Low taxes do not, based on history, encourage "investment." They encourage speculation and/or the hoarding of cash. And, if you guys are serious about the deficit, which I doubt, you would do anything to increase the revenue stream which would include raising more money via increasing tax rates on rich people who can afford it. This would include ending corporate entitlements that take money away from future energy, education and infrastructure projects (greatly needed and job creators besides) and put it into war and oil - both of which are destructive and at the same time highly profitable - for a few. Our "defense" budget for example is ridiculous and so is our continued subsidizing of the oil industry which essentially has the global economy by the short hairs because we won't break that chain - we the people are paying for our own enslavement and environmental destruction. That is both crazy and obscene. It's also absurd that giant corporations making billions in profits pay zero taxes at all (like GE) and it's also flat out morally wrong that vast sums of "investment" money are taxed at lower rates than earned income, money actually made by people from their work. This is discouraging beyond words. Workers see this, understand it, suffer because of idiotic decision-making at the top - losing jobs, pensions, life-savings and are forced to struggle in old age and go bankrupt trying to afford basic medical care but we're told the rich need more coddling. Give me a break. One fails to see how Walton family members "earning" $300,000 per DAY is helping the economy, or how their paying more taxes on that obscene sum would hurt them OR the economy. Can ANYBODY even spend that kind of money? WHERE is that money going? Is it going to pay Walmart workers a living wage with benefits? Or to help with our so-called deficit problem? Of course it isn't. In fact, huge numbers of workers (including Walmart workers) are forced into low wage, part time, no benefit jobs and that DOES hurt the economy, in a very obvious way: this has created a class of working poor who also must rely upon government assistance (food stamps, Medicaid) just for basics of survival. And, they're too poor to spend money and increase demand. Finally there is a moral issue here. If you can't figure that one out you cannot be helped.

- Sophia

December 4, 2012 at 12:43pm

I was referring to "truthman's" comment not frippo's, obviously.

- Sophia

December 4, 2012 at 12:44pm

As for the magic of the retirement age. 65 is already too old for people in certain professions. Also people get sick and age at different rates. Some are dead long before they get to 65. As it is, in at least one category of Americans, working class white women, life expectancy has been falling, not rising. And long life spans are much more likely to be the privilege of the economically well-to-do. Duh.

- Sophia

December 4, 2012 at 12:48pm

"Just simple cause and effect. It’s the way economies have grown for thousands of years. Entrepreneurs taking risks, investing their money, and creating jobs and income." truthman, You shattered your whole argument with your last sentence. American entrepreneurs, who have been making record profits for years under Obama and have well over $2 trillion in the bank, are taking very few risks and investing almost none of their money. meaning that they are creating almost no jobs and no income. Just simple cause and effect. Cowardly, anally-retentive entrepreneurs = almost no investment, jobs, or new consumer income. A lot of your "facts" are wrong, too. There was zero job growth under Bush--before the Wall Street crash that was caused by Bush's fanatic deregulation. One of the main reasons the Democrats took Congress back in 2006 was the rising unemployment. You're a bit loose with the truth, truthman.

- magboy47.

December 4, 2012 at 12:51pm

Truthman wrote: "This article is wrong on so many counts it’s hard to choose which to write about first. The author ignores basic principles of economics..." Truthman is apparently here practicing for his role in an upcoming film about walking conservative stereotypes. He has the self-aggrandizing name, the blanket accusation that the author doesn't know anything about the topic at hand, and the whirlwind tour of economic misconceptions that he probably gleaned from a quick review of some conservative website devoted to 'educating' the public. Method acting at its finest. Of course, it may not be an act, but that's too depressing to contemplate.

- Fishpeddler

December 4, 2012 at 12:52pm

Mr. Cohn's view is that the best way to resolve the the debt crisis is to increase taxes, while minimizing spending cuts. Fine, I get that. However, I take exception to his characterization of families making over $250k as "wealthy" or "rich". Income and wealth are two very different things. For example, one could have high income, but be in severe debt, living very modestly. A family of two engineers working 140 hours per week to bring home 280k is not necessarily living high on the hog. They may have debt, children with special needs, low net worth, uncontrollable expenses, etc. You can't assume that these people have stacks of money lying around. I don't like the idea of sticking a political minority with our collective bill.

- Nicomachus

December 4, 2012 at 1:41pm

Now we have truthman (is this seattleeng by another name?) spouting the standard supply-side nonsense. It has not worked since Reagan first began to put the nonsense into effect. It has never worked. It never will work. Because it is all wrong. The empirical evidence is all to the contrary, not that these guys care about empirical evidence. The though Romney was winning the election too. The supply-side/libertarian lie now being urged upon us most fervently as we face the completely mis-named "fiscal cliff" is that the rich will merely "shelter" their income if we raise their tax rates. Nonsense. Tax shelters are not things discovered in the natural world like bacteria or fossils or stars. They are written into the tax code at the behest of the wealthy who then take advantage of them both honestly and dishonestly (by mischaracterizing their income and transactions). We can eliminate them, and we can enforce our tax laws if we have the will to do so. We had the Clinton tax rates under Clinton and were much more prosperous and were growing much more rapidly. truthman assures us that what actually happened is impossible according to his alternate-reality economics. Same old, same old. One thing is certain: truthman is in no position to tell anyone anything about economics. As fishpeddler points out, he is merely re-cycling standard garbage from conservative/libertarian websites.

- roidubouloi

December 4, 2012 at 1:43pm

The "political minority" that Nicomachus is so worried about -- the poor oppressed upper 5% of earners -- have increased their share of national income enormously since 1980. In 1980, the top 10% had 33% of GDP. Now it is almost 50%. The 17% difference alone is $2.5 trillion, more than enough to fund the entire operating budget of the Federal government. It is not sticking the top 10% with our collective bill to tax them much more aggressively. They have all the income, they have to pay the taxes. Income taxes can and should be used to redress the growing income inequality, both as a matter of equity and because the maldistribution of income is sapping demand and growth. Increasing taxes on the top 10% is a win-win-win. We reduce income inequality, we reduce the deficit, and we stimulate growth all at once. There is no downside.

- roidubouloi

December 4, 2012 at 1:48pm

There is no point in raising the retirement age while we have under and unemployment. If we get to full employment and we do not see productivity improvements sufficient to maintain per capita GDP (which I am quite certain we would), then there is time to raise the retirement age to increase the labor pool. Our problem is not lack of labor; it low labor income and lack of demand. If anything, we should lower the retirement age and shrink the labor force.

- roidubouloi

December 4, 2012 at 1:50pm

Everyone seems to be obsessed with not allowing an increase of "tax on the middle class." In fact, letting the Bush tax cuts expire does not raise income tax at all on families with taxable income under $70,700, which corresponds, depending on deductions and exemptions, to a gross income around $100,000 -- not lavish but hardly poverty territory. The Obama camp has been circulating the number $2,000 as the additional tax bite on a "middle class family", but that corresponds to a taxable income of $170,700, or probably a gross income of $200,000. Somehow I fail to have much sympathy for a family with $200K income having to pay up an extra $2K in taxes. The administration should just get off that hobby horse and jump over the fiscal cliff, then repair the damage with fresh legislation next year.

- harrisaw

December 4, 2012 at 3:29pm

"if you tax something, you get less of it." Does this explain why the economy was fine under Clinton's tax hikes and the economy did poorly under Bush's tax cuts? No. It is not true that when you tax income you get less income. It is true that money will seek its highest rate and if you tax small business at 35% and investment in the stock market at 15%, that you will get less small business activity, which is what we have had under the Bush Tax Cuts. But if you tax all income the same, you will never cause income to go away, ever.

- Nusholtz

December 4, 2012 at 4:00pm

If you tax something you get less of it if there is a substitute. There is no substitute for income. Some economic models portray leisure as a substitute for income, but it is really more like a particular good, indeed, a type of luxury good the demand for which rises as other needs and desires are satisfied. When you don't have enough for food, clothing, and shelter, leisure is not a high priority. Reducing income by taxation can actually lead to more work being sought. As for the impact of taxes on investment, investment is a function of consumption demand, not rate of return. If there is inadequate investment to serve consumption demand, then the return to capital will rise until sufficient capital is induced into the market. We are not short of capital in our economy. We are short of demand, a typical condition for an advanced industrial economy, the solution to which is greater income equality, through progressive taxation if need be.

- roidubouloi

December 4, 2012 at 4:31pm

People of a certain income are not "political minorities." Economic minority, yes - and - we're not "sticking them" with our collective bill in any case merely stating that marginal rates for this income group should rise to Clinton era levels. Why is this so terrible. In fact though, issues cited by Nichomachus (disabled child, etc) are a reason to be careful about ending deductions. In a case like that, income taxes would be lower. It's true that income isn't wealth per se - for that reason high income people should be careful about attacking "entitlements" lest they lose their jobs and wind up being poor and requiring Medicaid and food stamps.

- Sophia

December 4, 2012 at 4:32pm

"if you tax something, you get less of it." Haven't observed the supply of land drying up based on taxing it, or even the supply of land which is taxed at a considerably higher rate than undeveloped land (i.e. we keep on converting the the latter into the former) so this would appear to at least need one caveat, if not a boatload of them.

- Nari224

December 4, 2012 at 4:45pm

Same point, nari. You get less of something when you tax it only if there is a substitute (that is taxed at a lower rate). There is no substitute for land, and if land is to be used, there is no substitute for developed land. Likewise, there is no substitute for income. Therefore, there is no reason at all to expect less of it because it is taxed.

- roidubouloi

December 4, 2012 at 6:43pm

roi Gross investment activity may be a matter of demand therefor, but within investment activities, a preference can be created under the tax laws that shift investment between different opportunities. For example, do IRA's create more investment or just move investment from taxable to nontaxable investment? Does the capital gains preference create more capital gain activity or does it just cause people like Romney to re-qualify salary as capital gains? Incidentally, on the substitute of leisure for income, that is more likely to happen at higher income levels and higher top rates, theoretically, would work in reverse making leisure marginally less attractive.

- Nusholtz

December 4, 2012 at 7:56pm

Sophia writes: "We have had Republican economic policies in place for more than 30 years (at least) and during this time we have seen vast growth in social and economic inequality" Uh, inequality under Obama has increased in the last few years. The lede from a recent Bloomberg article noted: "If President Barack Obama is trying to spread the wealth, he doesn’t have much to show for it. Republican Mitt Romney has attacked the president for supporting the use of government programs to redistribute income and for a free-spending response to the 2008 financial crisis. Yet since Obama took office in January 2009, wealthy Americans have continued to pull away from the rest of society. In the aftermath of the recession, income inequality in the U.S. reached a new high in 2011, Census Bureau data show." As I've said previously, trying to punish the wealthy will always hurt the economy, and that will in turn raise unemployment, which will then depress wages. FDR couldn't figure this out either. A decade a punishing the fat cats resulted in endless misery for everyone EXCEPT the fatcats. Remember, Clinton minted more millionaires than any other time in history. I know everyone loves to dream about the 1950's...just remember the entire world was in rubble, and everyone was looking to the US to build products in their still-standing factories. It was a unique time that will never happen again. And absent that, the rule remains true: It never sucks to be rich. Ever. The rich will always do better than the middle class. PS. Bring on the cliff. We need the revenue. I'm only half joking here.

- seattleeng

December 4, 2012 at 8:27pm

Nush, my point was that taxes don't induce less of something unless there is a substitute taxed at a different rate. You are making the same point a different way, that taxation can induce shifts among substitutes. But if there is no substitute, there is no change. There is no substitute for land. There is no substitute for income. There are certainly lots of alternative investments and different modes of investment and different characterizations of income under our system. If we taxed all of them alike, in a unitary system, there would be no inducement to shift from one to the other.

- roidubouloi

December 4, 2012 at 9:34pm

The claim that US prosperity from 1950 to 1980 was due to "rubble" in the rest of the world is just one more counter-factual supply-side claim. The US had a modest trade deficit, even without petroleum, in almost every one of those years. The trade deficit did not really surge until about 1984 with a predictable adverse effect on growth. What was different about the years 1940 to 1980 in the US was unprecedented income equality. That created the demand that induced the high rate of GDP growth. In 1980, income inequality began its inexorable climb, exacerbated by US fiscal, trade, and tax policies, to the level last seen in 1929, before the last big crash. GDP growth has slowed in tandem with the growth in income inequality. For that reason alone, the tax system, through progressive taxation, should mitigate the increase pre-tax income inequality. Supply-side voodoo economics is based on flat-earth denial of the most basic facts of economic life.

- roidubouloi

December 4, 2012 at 9:45pm

"Uh, inequality under Obama has increased in the last few years." Faced with the Great Recession to combat and outrageous Republican obstruction, Obama has done nothing to alter Bush's tax policy and little to alter his fiscal policies beyond the stimulus package that succeeded in halting our economic free-fall. Hence, inequality continues to increase. Let's hope that in his second term Obama throws Bush's policies on the junkheap of history where they belong, beginning with the ruinous Bush tax cuts.

- roidubouloi

December 4, 2012 at 9:49pm

Frippo, Sophia, magboy47, Fishpeddler, roidubouloi, Nusholtz, and Nari224: Wow, no disrespect meant, but there are lots of misconceptions and inaccuracies among your comments. Thanks for weighing in. Debate like this is instructive. By the way, I don’t read conservative websites. In many instances, that would be the analog of preaching to the choir, as my economic opinions often seem aligned with so-called “conservative” views. What is “conservative” and “liberal” changes over time. During the Kennedy/Johnson Administration, Democrats supported the 1964 reduction in the top marginal rate from 91% to 70%, while many Republicans opposed it, on the grounds it was not fiscally responsible. My opinions are based on my 48 years of experience in the business and investment world, as well as prior education in engineering, economics, and business management. I often read “liberal” websites like “The New Republic,” which is why I happened to see Mr. Cohn’s story. It’s helpful and educational to see what others might be thinking. If you read only what supports your own view, you will be neither well informed or have enough information to form a correct conclusion. My opinions on what is discussed here are not political, they are economic. I don’t really care if they are labeled “conservative” or “liberal.” That isn’t important. What IS important, I believe, is that they be based on facts and experience and be a reasonable reflection of reality - one in which one can obtain a desired effect from a chosen action or cause. And I am not seattleeng in disguise, although I agree with much of what he or she said on this thread today. Responses to some of your comments follow: ON THE MEDICARE RETIREMENT AGE: My point is that if the retirement age were currently 63, the same arguments could be made against raising it to 65. At some age, the negatives of an even older retirement age outweigh the positives for the economy. It’s a matter of judgment what age that is. ON THE SLOW RATE OF JOB CREATION: Entrepreneurs are not creating jobs at a fast enough rate to generate a robust recovery, I think we can all agree on that. If you think that’s because entrepreneurs are “Galt-like,” “spoiled and petulant,” “cowardly,” or “anally-retentive,” you are wrong. There is a whole spectrum of potential new projects for entrepreneurs to consider, with varying degrees of risk and reward. Right now, many projects have too much risk and either not enough or too-uncertain rewards. Low risk projects and investments having to do with maintenance of existing production are being undertaken, but higher risk projects having to do with expansion are not being undertaken at adequate rates, because the perceived risks are too high and the perceived rewards are too low. What we need to accelerate the recovery is an improvement in the risk/reward ratio of projects currently on the shelf. Those are business decisions about how best to manage both one’s own resources and those of investors, for which investors’ money entrepreneurs have fiduciary responsibility and for which decisions entrepreneurs are exposed to lawsuits if those decisions are imprudent. It has NOTHING to do with being spoiled, petulant, cowardly, or anal-retentive. But whether the job-creation rate is fast or slow, it is entrepreneurs in large companies and small taking risks, investing money, and creating jobs and income that has driven most economic growth for thousands of years. Some people like to call this “supply-side” economics and say not only that it has NEVER worked, but that it CAN’T work. That is not only illogical, but also flies in the face of history, as it is exactly that so-called “supply-side” process that has driven the growth of nearly every economy in history. Logically, how could it be otherwise? There is tons of evidence from both the past and present that economies that stifle entrepreneurs (like the former Soviet Union and to a lesser extent, Europe today) grow more slowly than economies that encourage entrepreneurs (like the U.S. (except under Obama) and China). Many who deny that “supply-side” works, do so because it is inconvenient to their political agenda. Those who think Reagan originated “supply-side” ideas are wrong. In the past 50 years, JFK was the first to employ them in the U.S. (“A rising tide lifts all the boats.”), and before that, there were countless others in the U.S. and throughout the globe, though it was not called “supply-side” before the mid-1970’s, when Jude Wanniski popularized the term. One of the most notable practitioners was Napoleon Bonaparte, when he set off an economic boom in France by establishing a tax code and slashing marginal tax rates from their former confiscatory levels. It is what has driven China’s far-above-average growth rate the past 30 years; it’s ironic that Communist China is one of the most successful “supply-side” economies in history. Incidentally, guess what some have raised as a resulting “problem” in China – it’s growing income inequality! Again, when everyone’s standard of living grows, the growth is NEVER evenly distributed. The price of that growth is that some benefit more than others. Sorry, that’s just the way things are. Again, the current slow rate of job creation is NOT due to lack of demand. How could it be? Demand has to come from workers’ salaries and wages, not from government transfer payments, which simply transfer purchasing power from one consumer to another, with no net gain, and not from some mythical group of consumers waiting on the sidelines, whose spending or the lack of it adds to or subtracts from demand. The producers and the consumers are the SAME persons. It follows that to increase demand, we have to create more jobs. Right? As I said in my earlier post, the slow rate of job creation is due to an inadequate risk/reward ratio for entrepreneurial activity brought about by the anti-business policies of the Obama Administration the past 4 years. Fix that, and job creation will surge, as there is substantial pent-up demand for job creation and huge unused resources in terms of idle money and unemployed persons available to hire. ON JOB GROWTH UNDER G.W. BUSH: Bush2’s job record would have been better if he had resigned in January 2008, which was the all-time PEAK for nonfarm payroll employment. The number that month was 138,023,000 jobs, which was up 5,557,000 from the 132,466,000 jobs in January 2001, when Bush took office. Yes, before the financial crisis, there were 5.6 million net new jobs created under Bush. Those are official government (BLS) numbers. Not incidentally, under Obama, using the preliminary number of 134,792,000 for October 2012, jobs are still 3,231,000, or 2.3%, less than that January 2008 peak of 138,023,000 under Bush. Between January 2008 and January 2009, Bush lost 4,462,000 of those jobs. The following is important: The reason for that reputation-destroying job loss and the accompanying financial crisis and what the Administration has called “the mess it inherited,” was the collapse of the housing bubble, the primary responsibility for which lies with: (1) Democrats who, beginning with President Carter and ending with Barney Frank and Chris Dodd (who ironically co-sponsored a bill designed to prevent the very ills they had sponsored) promoted subprime lending to extend home ownership as widely as possible and Republicans who agreed with those policies on a bipartisan basis (including G.W. Bush), and (2) the widespread, but erroneous, assumption that house prices would never decline, which led Wall Street firms to sell and invest in trillions of dollars’ worth of subprime mortgage packages and derivatives based on those packages and rating agencies to ill-advisedly rate many of those securities AAA. The resulting job loss and financial crisis had nothing to do with the Bush tax cuts. Strong economic growth under Clinton would have been even stronger had he not raised the marginal tax rate on ordinary income from 31% to 39.6%, the smallest increase he could get away with. But it was after Clinton cut capital gains tax rates from 28% to 20% for higher incomes and from 15% to 10% for lower incomes and reduced certain other taxes in The Taxpayers Relief Act of 1997 that Clinton signed into law on August 5, 1997, that U.S. unemployment declined to the lowest level in history (3.8% in April 2000) and the budget went into surplus. Finally, the banks were deregulated in 1999 under President Clinton, not under G.W. Bush (see http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act). ON THE FACT THAT THE FIRING OR LAYING OFF OF GOVERNMENT WORKERS WILL REDUCE DEMAND: Clearly, it will, to the extent unemployment benefits are lower than salaries or wages. But if government employment goes down, it may be encouraging enough to entrepreneurs that they will more than offset that public-sector decline with private-sector hiring, which would usually result in a more efficient allocation of the nation’s scarce resources and thus be of benefit to ALL citizens, whether employed or not. And clearly, if we took action to shrink the labor force to reduce unemployment, as someone here proposed, the economy would suffer accordingly. ON INCOME INEQUALITY: With due respect to the opinions of those who believe that growing income, social, or economic inequality is the cause of slower growth or other economic problems, I say the evidence actually points the other way. The greatest growth periods in our history, including the past 30 years, have been periods when both the worker population and the productivity per worker have been growing the fastest (those are the only two components of real GDP growth). Those rapid-growth periods have usually coincided with periods when so-called inequality has also been growing – when most persons saw their wealth, income, and standard of living increase, but the rate of increase was faster for some than for others. In addition, according to an excellent op-ed and graph in The Wall Street Journal on December 6, 2011 by economist Alan Reynolds, that inequality is not as great as many seem to believe. Reynolds' article is based on information from the Congressional Budget Office, which shows that the share of income received by the top 1% of earners increased from about 8% in 1979 to 11.3% in 2009 (the last year studied). I recommend the piece (see the WSJ archives on-line). The question is, would you rather have slower-to-no growth for everyone, but greater equality, or faster growth, but also the resulting greater inequality? And remember, in our society, the opportunity to be part of the group that is contributing to that inequality is open to anyone. The claim that the U.S. grew at high rates from 1940 to 1980 because of “unprecedented income equality” is absurd. I know of no economic theory that supports such an assertion. If that were true, the former Soviet Union, where income inequality was rigorously enforced (except for those at the very top), should have grown at astounding rates! The truth is the exact opposite. Rapid growth comes from a favorable environment for job-creating, risk-taking, private entrepreneurs, incented by both the desire to build and create and the desire for profit. That is a process that inexorably leads to income inequality, as some persons are more suited to the role of entrepreneur than others. Income inequality is a RESULT, not a CAUSE, and is the result of the same factors that lead to rapid growth. When the economy grows rapidly, however, EVERYONE benefits, even those who are not suited to such an economy, whereas, in the former Soviet Union, everyone except those at the very top suffered mightily. ON THE CONTRIBUTION OF LOW TAXES TO INVESTMENT: I suppose Sophia is arguing that to prevent “speculation” and “hoarding of cash,” the government should take the money from its citizens through high tax rates. The things wrong with that idea are too numerous for mention in this discussion. It should be obvious that the more money an individual has to invest, the more he or she will invest, if only in so-called passive investments like money-market funds, where trillions of idle dollars are currently stashed. Some of those investments are speculative, of course; that’s part of the risk/reward calculation. Speculation is not necessarily bad. We need more of it right now in the job-creation sphere, NOT LESS. Speculators also create market liquidity by taking the other side of the trade, which is a good thing. Cash is hoarded when the risk/reward ratio is unfavorable, which is true now and is caused by the economic policies of the Obama Administration. Far from it being “morally wrong,” to tax investment income at a lower rate than so-called “earned income,” it is morally RIGHT, because it can help create jobs for everyone, with accompanying benefits for the poor, the middle class, the indigent, the otherwise disadvantaged, and, obviously, society as a whole. Walmart has made a huge contribution to the poor and middle class by lowering the costs of distribution and thus making the items it sells more affordable. The Walton’s after-tax wealth, that which they have not donated to charity and which they have earned by taking risks, is almost 100% invested in job-creating enterprises, some their own and some of others, who they have supported with their money and which is more productively invested than it would be if it had been taxed away. As you say, no one could spend that amount of money. And I assure you, it is not under the mattress or buried in the back yard. Contrary to what someone on this thread said, the supply of NEWLY DEVELOPED land would surely be hurt if taxes on newly-developed land should rise. Ask yourself, what if the tax rate on developed land were 100% of its value, or even more? Not only would there be no newly developed land, existing developed land would be abandoned, as no one could afford to own it. That would not happen, but ask yourself, at what point would the tax rate on land’s value be high enough to see some of those effects? Again, it’s a spectrum. There are many abandoned houses and much abandoned land right now, because of the inability of owners to pay the taxes. In like manner, there will be less income if taxes on income rise, because economic growth will be less than it would be otherwise. ON EQUALIZING TAX RATES ON ORDINARY INCOME AND CAPITAL GAINS: Low capital gains tax rates do NOT reduce the money available to small business taxed at 35% in favor of stock market investments taxed at 15%. The reasons include the following: (1) entrepreneurs regard their businesses as less risky than stock market investments, (2) in most instances, entrepreneurs want to build their own businesses, not finance someone else’s business through the stock market, (3) when entrepreneurs cash out by selling their businesses, their gains are taxed at capital gains rates, even though they may have been taxed at 35% on their income from the business (and they often pay themselves a low salary for just that reason), (4) when small businesses grow, they often go public, and so depend on stock market investors for financing, and (5) historically, most great fortunes have been made through the establishment and ownership of a business, not through stock market investment (Buffett and certain hedge fund managers are exceptions). If you do not understand by now why jobs are not being created at a fast enough rate during this recovery, I suggest a reread of these postings.

- truthman

December 4, 2012 at 10:52pm

Thank you for the book truthman. I would like to address just one point and that's the Walmart issue. Impoverishing workers is doing them no favors. This includes the workers in China. Cheap goods are not doing anybody any favors when it comes down to it - what for example happens to craft workers and artists and skilled textile workers here in the US? They are SOL is what along with small local stores. Walmart and similar business models are actually very bad for workers but also small businesses and communities. And wealth inequity to the degree exemplified by the Waltons vs their workers is obscene. You claim they're "giving back" this money via charity and investments. I say bs. If their workers were treated well then you might have an argument. But they are not. And their lousy pay and short hours and lack of benefits also adds directly to the taxpayer's burden because it places an entire class of workers near or below the poverty line. Why not just have a plantation? OK one more thought: I would like to address the Medicare age thing AGAIN. No, it wouldn't matter if the age now were 63. Aging is a fact it isn't an opinion and although it does vary from person to person raising the Medicare age makes no sense. On the one hand it takes the healthier, younger people out the Medicare system which reduces the viability of THAT program and on the other hand it puts older people, already suffering from age and illness, at risk and at the mercy of private insurance. The correct way to deal with the health care issue is universal health care, period. But if we don't have that it makes no sense to toss older people to the wolves.

- Sophia

December 4, 2012 at 11:06pm

Roid, I don't think there is any concrete proof that greater income equality leads to a better economic outcome. There are many countries that have higher income equality after taxes and transfers than the US, but continue to struggle with periodic recessions, e.g. France, Hungary, Spain, Germany, etc. Equality is certainly no panacea to economic cycles. Furthermore, there is a myth, most often spread by left wing agenda pushers, that inequality in the US has skyrocketed in recent times. Actually, it has been vacillating slightly in the same ballpark for 40 years when adjusted for taxes and transfers. The proponents of income redistribution want it for reasons that have nothing to do with economic outcomes. They consider it to be an intrinsically desirable goal on its own and regardless of any impact to the economy - we should be debating on that basis.

- Nicomachus

December 4, 2012 at 11:09pm

Sophia, the reason Walmart exists is because people want cheap goods, which in turn drives that Walmart low cost provider machine. Your quarrel is not with the Waltons, but with the billions of Walmart customers who insist on purchasing cheap goods. Personally, I don't get it. I never liked the cheap crap they sell at Walmart, but then again, my family is one of the evil criminal wealth mongers who dare to make over $250k per annum.

- Nicomachus

December 4, 2012 at 11:19pm

"Actually, it has been vacillating slightly in the same ballpark for 40 years when adjusted for taxes and transfers." This is not even remotely the case, nichomachus. Just another standard right-wing talking point detached from reality. You cannot discern the relationship between income inequality and growth by looking across economies, because there are too many other factors that you would have to eliminate or correct for. And you certainly cannot draw any conclusions from an economy such as that of the Soviet Union which was not demand-driven. Indeed, the Soviet model was the ultimate supply-side experiment -- if you make the investment and generate the output, the economy will thrive without regard to demand. Completely backwards. A market economy is driven by demand, a socialist economy is driven by supply. The weakness of a capitalist economy is inadequate demand. The weakness of a socialist economy is inadequate investment. Yet supply-siders keep insisting, contrary to all evidence, that we must stimulate investment. Our economy is not even remotely short of investable funds. If the demand is there, investors will fall all over themselves to try to capitalize it. The fastest growth in our economy began in 1940 with a huge drop in income inequality. The high rate of growth continued for 40 yours during which income shares remained relatively constant. The supply side myth was that high end tax cuts would spur growth, but just the reverse has happened every time that has been tried, under Reagan/Bush and under Bush II. (JFK's tax cut was classic Keynesian demand stimulus in a slack economy.) There could be a variety of explanations, but the most straightforward is that too much income in the hands of the investor class results in an imbalance between consumption and investable funds -- too much money to invest, not enough demand to support the investment. Hence, the rate of spending and therefore the rate of growth slows. The contra case is that Clinton raised taxes and we had a boom. While one cannot be certain of causes when talking about the economy, the one thing that is for sure is that supply-side doesn't work because it has never worked. The evidence that exists is all directly to the contrary. Truthman, your post is full of so much economic nonsense -- all of it standard right-wing, supply-side talking points although you claim to have discerned all of it on your own -- that I wouldn't even know where to begin. But since you say you are a businessman, ask yourself this: Would you ever make an investment if you did not believe that there was demand for the output so that you could both recover your costs and make a profit for your risk? It is demand that drives a market economy, not investment. The economy only needs the amount of investment for which there is adequate consumption demand. Investment does not generate demand for the output. It is NOT the case that if you build it they will come. Further, it is high and rising wages that generates technical change that improves productivity, the only source of per capita income growth. This claim by you, truthman, is flat-out wrong: "Those rapid-growth periods have usually coincided with periods when so-called inequality has also been growing – when most persons saw their wealth, income, and standard of living increase, but the rate of increase was faster for some than for others." This is simply not the case. The period of our greatest rate of growth, 1940 to 1980, coincided with our period of greatest income equality. When, beginning in 1980, inequality began to rise, growth slowed and has remained slow. Without regard to what is cause and what is effect, your empirical claim is directly contrary to the facts. You must at least have the observable facts right before you start to advance economic arguments. Otherwise, you end up with nonsense.

- roidubouloi

December 5, 2012 at 1:17am

I meant to say also that there were several causes of the 1929 stock market crash and the following great depression, but income inequality wasn’t one of them. Among the causes were: (1) 10% margin requirements on the NYSE, which encouraged over buying and over leveraging, so that small declines in stock prices resulted in large forced selling to repay margin debt, (2) the Smoot-Hawley Tariff Act of 1930 that hurt our foreign trade, (3) widespread runs on banks and bank failures that destroyed money and that were largely due to inadequate bank regulation and the absence of insurance on deposits (bank runs and banking panics happened periodically in our economy before 1930, and for the same reasons), (4) the resulting 30% decline in the supply of money in the U.S., which the Hoover Adminiistration failed to counter and which was naturally accompanied by a comparable reduction in economic activity, as illustrated by the equation of exchange – M times V equals P times Q, or the supply of money times its velocity (turnover) equals the unit price level times the quantity of output (or nominal GDP). If the supply of money falls, unless its velocity speeds up comparably, GDP will also decline (see: http://en.wikipedia.org/wiki/Equation_of_exchange). Someone on this thread said that: “One of the main reasons the Democrats took Congress back in 2006 was the rising unemployment. You're a bit loose with the truth, truthman.” Actually, unemployment was FALLING in 2006, not rising, and declined to the second lowest level in history of 4.4% in October and December of 2006 (bracketing the Congressional election of 2006) and March and May of 2007, before finally succumbing to the downward pressures of the housing bust. The only lower unemployment rates in history were scored in the final years of the Clinton term and the first 5 months of the following Bush term - from April 1998 through May 2001 (still benefitting from the internet boom), and which fell as low as 3.8% in April 2000 and 3.9% in September-December 2000 under Clinton (see: http://data.bls.gov/pdq/SurveyOutputServlet, where you can plug in the range of years for which you want the monthly unemployment rates in both tabular and graphical form). Finally, regarding Walmart, no one is forced to work there. If job creators were encouraged by the Administration, instead of bashed, there would be a WORKER shortage now instead of a JOB shortage, and Walmart would have to raise its salaries and benefits accordingly to attract sufficient help.

- truthman

December 5, 2012 at 1:22am

Au contraire, truthman, income inequality was indeed a primary cause of the crash. The 1920s saw the same rise in income inequality that peaked just before the crash at virtually the identical 50% for the top 10% level as in 2008. The dynamics are the same. Too much money in the hands of investors with too little consumption demand to support investment results not in new investment but in an asset bubble as investors, with no place to put their money, bid up asset pressed. Meanwhile, demand slackens because workers have too little money to spend. When the discrepancy is too great, the bubble bursts. This notion that so called job creators get in a good mood and higher workers is, frankly, ridiculous. Just like investment, firms higher workers when they need the labor to serve demand. If the demand goes away, they lay off the workers. They don't keep labor for which they do not have demand because the feel encouraged. There would only be a worker shortage if we had booming demand. You are just repeating supply-side nonsense. It is pure fiction, like climate-change denial or Romney election loss denial. There were quite a few post-war years with lower unemployment than 2006, truthman. You gotta get your facts right and stop re-cycling phony supply-side claims. As well, the monetarist claim that money supply drives the real economy is discredited. You seem to be reading from some ancient supply-side talking points.

- roidubouloi

December 5, 2012 at 2:22am

"and hire workers"

- roidubouloi

December 5, 2012 at 2:22am

"ON THE MEDICARE RETIREMENT AGE: My point is that if the retirement age were currently 63, the same arguments could be made against raising it to 65. At some age, the negatives of an even older retirement age outweigh the positives for the economy. It’s a matter of judgment what age that is." We would in fact benefit if Medicare were extended to all to replace our existing insurance system. Medicare has been much more successful than the private system at controlling costs. If we had experience growth in costs at the rate of Medicare, we would be saving in excess of $1 trillion today. _____________________ "The claim that the U.S. grew at high rates from 1940 to 1980 because of “unprecedented income equality” is absurd. I know of no economic theory that supports such an assertion." Check out John Maynard Keynes some time. Then you will at least know that there is an economic theory that supports such an assertion. ______________________ "Contrary to what someone on this thread said, the supply of NEWLY DEVELOPED land would surely be hurt if taxes on newly-developed land should rise." No, the price of the output would rise to cover the cost. This raises a question about the effective incidence of a tax, but the conclusion that we would get less of something for which there is no substitute is wrong. ______________________ "Far from it being “morally wrong,” to tax investment income at a lower rate than so-called “earned income,” it is morally RIGHT," Been reading Ayn Rand again? Labor is actually more essential to output than capital. Without labor, the entrepreneur earns nothing and hence cannot employ anyone. By your logic, we should therefore tax labor income at a lower rate than investment income, because that would create jobs and prosperity for both labor and capital. This silly argument that capital, rather than demand, creates jobs is always used to explain why the wealthy should enjoy special privileges although the identical argument can be used to justify the reverse. _____________________ "But if government employment goes down, it may be encouraging enough to entrepreneurs that they will more than offset that public-sector decline with private-sector hiring," This is the austerity nonsense that the supply-siders keep pushing. Turns out, it is just wrong, as Keynes called to our attention. All the countries that have been trying this have been shrinking as a result, doing worse than those that are not implementing austerity. Turns out that entrepreneurs are not encouraged by mass unemployment to hire more workers, only to reduce wages. This is typical for supply-side, substituting a theoretical fantasy of this ideologized pseudo-economics for empirical evidence of how economies actually do work. Even when the empirical evidence is directly to the contrary, the supply-siders simply keep pretending that the evidence doesn't exist and spout the same nonsense theory. Voodoo economics. ______________________ "ON EQUALIZING TAX RATES ON ORDINARY INCOME AND CAPITAL GAINS: Low capital gains tax rates do NOT reduce the money available to small business taxed at 35% in favor of stock market investments taxed at 15%." In other words, truthman, when it is convenient for your ideology, higher tax rates do not lead to less of something -- small business risk-taking. __________________________ "The question is, would you rather have slower-to-no growth for everyone, but greater equality, or faster growth, but also the resulting greater inequality?" Except that our history shows that we enjoy faster growth concurrently with greater inequality. Unfortunately, supply-sider Randians are so committed to the virtue of inequality that they would rather suffer slow growth for everyone than take steps to reduce the inequality. Utterly perverse. ___________________________ The housing bubble was indeed an outcome of the Bush tax cuts. Too much investable money without enough investment opportunities had the investor class looking for income-generating investments. Wall Street was all too happy to generate trillions of phony investments to accommodate the demand -- there we go with demand again. The housing bubble was investment, truthman, exactly what you say we benefit from when taxes on the rich are low. Except that the gain was temporary because the investment was disproportionate to the income of workers. All we ended up with in the end was a massive crash and recession. This is EXACTLY what happens when taxes on the wealthy are too low and income inequality grows to large. The logical chain is very simple, but your ideology forbids you from understanding the obvious. _____________________ You can say that slow growth causes income inequality, or income inequality causes slow growth, or they are mutually causing, as happens in economics. But you cannot say that fast growth and income inequality are associated because they aren't. Supply-side economics is oblivious to reality. It bears the same relationship to reality as creationism, climate-change denial, or the belief that the earth is carried through the heavens on the back of a giant turtle. I could go on like this all day, truthman, picking apart your little book, but I don't have all day. You believe in tendentious economic fantasies. Whether they are liberal or conservative, they are unmoored from reality.

- roidubouloi

December 5, 2012 at 8:16am

"I could go on like this all day, truthman, picking apart your little book, but I don't have all day. You believe in tendentious economic fantasies. Whether they are liberal or conservative, they are unmoored from reality." I only had time for a quick scan of Truthman's posts, but I had the same reaction. This line stood out as particularly ridiculous: " If job creators were encouraged by the Administration, instead of bashed, there would be a WORKER shortage now instead of a JOB shortage..." In other words, we'd have full employment if Obama weren't such a big meanie. Utterly clueless.

- Fishpeddler

December 5, 2012 at 10:17am

Roid, you never really addressed my argument that there is no proof that effective income equality leads to prosperity or prevents recessions. The only "argument" you mustered was your standard "this is a common right talking point" defense. You also wrote that it is "not even remotely the case" in reference to my assertion that income equality has been vacillating slightly in the same ballpark for 40 years when adjusted for taxes and transfers. You went on to add your standby ad hominem attack that "Just another standard right-wing talking point detached from reality." You then went on to give a lengthy dissertation about absolutely nothing pertinent to my statement. I never made any claims about the Soviet Union. Income equality is something that can be empirically measured. The most prominent measurement accepted by the World Bank and Organization for Economic Co-operation and Development is the Gini Coefficient. Here is the data for GC, after taxes and transfers in the US: 1970s: 0.316 1980s: 0.337 1990s: 0.348 1995: 0.361 2000: 0.357 2005: 0.380 2010: 0.378 Compared to Mexico where GC is consistently around .45 and France where it is around .29, the US has more or less been in the same general vicinity for 40 years. Clearly the US is one of the most "income unequal" industrialized nations, that is not in dispute. One can also reasonably conclude that income inequality has risen marginally since the 1970s. However, one can hardly say that it has "skyrocketed" or that the US economy has performed poorly in relation to more "equal" nations. The data does not support your assertion that income equality causes national prosperity. Furthermore, the data supports my conclusion that income inequality, despite the steady rhetorical drumbeat from the left and the media, has not changed much in the past 40 years.

- Nicomachus

December 5, 2012 at 10:59am

Nicomachus, Roid will probably make a more substantial response than I'm willing to, but I have to question your claim that the US GC has "more or less been in the same general vicinity for 40 years." 0.316 and 0.380 are not at all essentially the same numbers. You give the impression that you glanced at those figures and used everyday analogues to get a sense of them: "Hmmm. Should I put the t.v. stand 0.316 inches from the wall or 0.380? Ah, who gives a shit -- same either way." "Honey, do you think I need to go on a diet? The bathroom scale says I'm 0.380 ounces over 110 lbs. Last time it was just 0.316 ounces." "No dear, you look fine." As to the Gini Coefficient, though, this is significant movement and should not be so blithely dismissed.

- Fishpeddler

December 5, 2012 at 11:32am

Nichomachus, the right constantly claims that reducing high-end taxes and tolerating income inequality leads to faster growth and greater prosperity. There is no proof, as the proposition cannot be proven without being able to run multiple experiments on the economy. Neither can it be proven that greater income equality "causes" both faster growth and a more resilient economy. However, ALL the evidence of the course of the US economy for the past hundred years is consistent with the latter hypothesis and inconsistent with the former, right-wing hypothesis. Both of the biggest crashes were immediately preceded by peak values for income inequality. The period of highest growth and greatest resilience, 1940-1980, was also the period of greatest income equality. Cutting taxes on the high end has never led to faster growth, only greater economic fragility -- busts. Raising high-end taxes under Clinton was associated with a boom. That is not sufficient to PROVE that income equality is the cause, but it is strong evidence. It is, however, sufficient to prove that the supply-side claims are all wrong. There is no instance one can point to in which they have been right. ________________________ Fishpeddler is right about the Gini coefficient, Nichomachus. The range between equal and unequal amongst nations is essentially from .30 to .40. The US is now at .45, amongst the very worst offenders in the world. Your numbers show that we have moved from being near to the relatively equal group to being an outlier amongst industrialized nations in being amongst the most unequal. That is a huge change in the past 40 years. It seem small only because the Gini coefficient, as a ratio, only operates within a small section of the theoretical, but completely unobtainable, extremes of 0 and 1. _________________________ http://www.theatlantic.com/international/archive/2011/09/map-us-ranks-near-bottom-on-income-inequality/245315/ "The U.S., in purple with a Gini coefficient of 0.450, ranks near the extreme end of the inequality scale. Looking for the other countries marked in purple gives you a quick sense of countries with comparable income inequality, and it's an unflattering list: Cameroon, Madagascar, Rwanda, Uganda, Ecuador. A number are currently embroiled in or just emerging from deeply destabilizing conflicts, some of them linked to income inequality: Mexico, Côte d'Ivoire, Sri Lanka, Nepal, Serbia. Perhaps most damning is China, significantly more equal than the U.S. with a Gini coefficient of 0.415, where the severe income gap has been a source of worsening political instability for almost 20 years. Leagues ahead of the U.S. on income inequality is India, Gini coefficient 0.368, where outrage over corruption and income inequality recently inspired a protest movement that shook the world's largest democracy. (The data for India is from 2004, however; income inequality has likely worsened since then.) Russia, which has seen three popular revolutions in the last century against the caviar-shoveling oligarchs who still run everything, is also less unequal than the U.S., at 0.422 Gini. Here's another map, also based on the CIA data, that shows countries by whether they are more or less equal than the U.S. The red countries have greater income inequality, the blue countries less; the U.S. is again purple. Income inequality is more severe in the U.S. than it is in nearly all of West Africa, North Africa, Europe, and Asia. We're on par with some of the world's most troubled countries, and not far from the perpetual conflict zones of Latin American and Sub-Saharan Africa. Our income gap is also getting worse, having widened both in absolute and relative terms since the 1980s."

- roidubouloi

December 5, 2012 at 1:25pm

Truthman: thanks for the informative and politely argued post. I'll limit myself to the following: " My point is that if the retirement age were currently 63, the same arguments could be made against raising it to 65." Yes, and if marginal tax rates were lower than they are now and being raised to their current levels, we'd see precisely the same charges of job destruction we do in the actual situation. Someone who believed in good faith that raising taxes must always cost jobs ought, in fact, to raise the issue. The only reasonable answers to such an argument would be to try to prove that raising taxes *doesn't* cost jobs, or that the resulting job loss is outweighed by the benefits (e.g., reduction of the deficit). Simply pointing out, however, that the low-tax fan might, if he had his druthers, prefer a still lower tax rate, even if true, would not constitute a valid counter-argument. Our putative anti-tax warrior would likely shrug and say, "yeah, so?" -- and he would be right to do so. And so in this case we must limit the discussion to the Medicare age that actually exists, and whether, in order to cut spending, we should raise it. As you say, this a matter of weighing pros and cons, which is precisely what Cohn was doing. "government transfer payments, which simply transfer purchasing power from one consumer to another, with no net gain..." This seems like it makes sense, but it doesn't. It's not like taking $50 from one person and giving it to another, but more like taking a buck from 50 people. Suddenly the recipient can make a purchase that was impossible before, and the producer of his purchase can make a sale, while the purchasing power of the other 50 people is not significantly reduced. But in fact the choice is not simply between private-sector employment and "transfer payments"... "if government employment goes down, it may be encouraging enough to entrepreneurs" Then why isn't it doing that now? It has already fallen to its lowest point relative to population in 30 years.

- frippo

December 5, 2012 at 4:39pm

Roid, the interesting Gini coefficient for the purposes of our discussion is the one that is adjusted for taxes and transfer payments. This represents that amount of spendable income a person retains at the end of the day. The Atlantic article you site is looking at pre-tax, pre-transfer income as reported by the CIA factbook. Here is the real data: http://stats.oecd.org/Index.aspx?QueryId=26067&Lang=en We have already established that the US has one of the highest levels of income inequality in the industrialized world - whether this is negative remains to be seen (more on this later). First, let’s get some empirical things correct. In this data table, there are measurements for 34 countries over the past 40 years or so. The minimal measured GC is 0.177 and the maximum is 0.560. On this list, the most recent US measurement is 0.386, clearly in the middle of the range. However, this discussion is not primarily concerned with relative position to other nations, but with the 40 year trend. The US delta between 1970s and late 2000s is .07 or an increase of 22%. This is not insignificant, but not astounding either. For example, Sweden, not a country known for its inequality or lack of transfer payments, went from 0.212 to 0.259, an increase of an equivalent 22%. Finally, I don’t think we have enough evidence to conclude that equality leads to general economic success. The top 3 most “equal” countries on this list are Hungary, Slovak Republic, and Czech Republic. Not exactly paragons of economic prosperity. I also can claim that the US is a successful “unequal” nation. US GDP has done well in relation to the GDP % deltas of more “equal” nations. For every, data point you can offer, I can offer a counter example. This is of course partially due to the influence of confounding variables. We can’t isolate the effect of “equality” on the economy with all other variables held constant. You may very well be right as I do not see convincing evidence to the contrary, but there is just too much noise to make a positive determination in my opinion. On a personal note regarding “equality”.. I have never been one to look into the pocket of my neighbor. I do not care if someone else is making trillions as long as I am fairly compensated for my efforts. Nor do I feel entitled to “equal” income regardless of what type of contribution I am making or how it is valued by others. If I want something from someone, I make a trade - value for value, mutually agreed upon by informed parties. If I can’t get what I want at the trading table, I try to improve; I do not try to collect anyway at the political table.

- Nicomachus

December 5, 2012 at 9:39pm

That's a great chart, Nichomachus, thanks. However, it tells the same story. The Gini ratio is a very compressed scale because it is a ratio. The US went from .316 in the mid-70s to .378 in the 2000s. As fishpeddler pointed out, that is a huge change. Also, the US is not at all in the middle of the range, or at least not in the middle of the pack. Try using the arrows to sort the list by rank. Only Chile, Mexico, and Turkey are worse than the US. Sure, if you define the range to include Chile, a huge negative outlier, then you can say the US is in the middle of the range, but it is very far from the middle of the pack and an extreme outlier amongst industrialized economies. We are very wealthy because we have long been very wealthy. But since 1980 our rate of growth has slowed considerably and virtually all of the gains have gone to a few at the top. Everyone else is standing still or losing ground. THAT is the direct consequence of supply-side nuttery. When Clinton moved the other way, things improved. When Bush II went back to supply-side nuttery, things got worse again. Supply-side is empirical nonsense, nichomachus. As regards other countries, it does not make sense to say that the relative performance of different economies is a direct function of income equality or inequality. There are too many other factors that affect a country-by-country comparison. The claim, rather, is that our economy performs better when income is more equal. In particular, the impact of income equality or inequality depends keenly on whether a particular economy is demand-constrained or supply-constrained. As a very high-performing economy, we are demand constrained, our growth is limited by demand. We are not supply or capital constrained. We have slack labor markets and all the capital we can use and then some. For us, income inequality matters a lot. In weaker economies that are supply constrained, short of capital, income inequality could actually help to the extent that the excess income of the rich is being invested in local capital.

- roidubouloi

December 6, 2012 at 12:35am

There are 34 countries listed. We are number 4 in income inequality. Also, it is not the case that anyone who finds this appalling is counting other people's money. It is an empirical question, unless you are Randian or a socialist.

- roidubouloi

December 6, 2012 at 12:40am

12/05/2012 - 2:22am EDT | roidubouloi ROID: “Au contraire, truthman, income inequality was indeed a primary cause of the crash. The 1920s saw the same rise in income inequality that peaked just before the crash at virtually the identical 50% for the top 10% level as in 2008. The dynamics are the same. Too much money in the hands of investors with too little consumption demand to support investment results not in new investment but in an asset bubble as investors, with no place to put their money, bid up asset pressed. Meanwhile, demand slackens because workers have too little money to spend. When the discrepancy is too great, the bubble bursts.” TRUTHMAN’S ANSWER: The rise in income inequality was a result of the 1920s boom, not a cause of the 1930s crash and depression. The crash and depression occurred, not because investors had no place to put their money and so bid up asset prices to unsustainable levels, but for the reasons I stated in a previous post on this thread. Again, demand comes from the income produced by productive investments made by persons with money to invest. In 1929, there were plenty of productive investment opportunities for those with investable funds. The notion that there were not is absurd. The stock market crash of 1929 came partly because investors wrongly believed that stock prices would never again fall (“Stock prices have reached what looks like a permanently high plateau,” Irving Fisher, three days before the October 1929 crash), and so bid prices to unsustainable levels. The crash was heightened by minimal 10% margin requirements that created a margin debt bubble that finally burst. Excessive use of margin was partly caused by the assumption prices would not fall. Those same two related errors caused the recent housing bubble: the wrongful assumption that house prices would never fall and minimal margin requirements for professional investors buying mortgage-backed securities and their derivatives. The depression of the 1930s was primarily a banking crisis, bank panic, and deflation similar to many that had occurred in previous economic cycles, was not properly addressed by the Hoover Administration, and has been avoided since by increased banking regulation, deposit safeguards, and greater government activism to prevent financial panic demonstrated by the Federal Reserve and the U.S. Treasury during the recent financial crisis. Prior to the 2008-09 financial crisis, there were plenty of suitable and profitable places for investors to put their money, just as there are now. In the mid-2000s, however, imprudent government policies, on both sides of the aisle, meant that investable funds were misdirected into the housing market, instead of into more productive investments (space does not permit a larger discussion of the reasons for that misallocation, of which there were many, most of which were preventable). The bottom line was that government intervention in the housing market caused a misallocation of investor money into unproductive and unneeded housing investment where value could not be sustained. Currently, there are plenty of places for investors to put their money, but a lack of willingness to do so because of inadequate risk/reward ratios caused, again, by government policies, this time policies that discourage investment. ROID: “This notion that so called job creators get in a good mood and higher workers is, frankly, ridiculous. Just like investment, firms higher workers when they need the labor to serve demand. If the demand goes away, they lay off the workers. They don't keep labor for which they do not have demand because the feel encouraged. There would only be a worker shortage if we had booming demand. You are just repeating supply-side nonsense. It is pure fiction, like climate-change denial or Romney election loss denial.” TRUTHMAN’S ANSWER: You apparently know little about entrepreneurs or why they do what they do. Again, they are risk takers. They thrive on creating, building, doing. That is the very thing that keeps a recession from spiraling down into a depression. When interest rates go down and money and labor become plentiful during a recession, entrepreneurs start doing their thing. They just can’t help it. It’s what they do. It takes a lot to keep them from doing it, but Mr. Obama has managed to do that. They are not as active as they would normally be coming out of a recession, because they believe the risks of much of what they would like to do are high and the rewards not high enough to compensate for the risk. This has nothing to do with demand (reread my restaurant example – tens of thousands opened every year before even one dinner reservation). Entrepreneurs usually think if they build it, demand will come. Right now, they are not as sure of that as they normally are. What I just said has been said by entrepreneurs, economists, consultants, investment analysts, bankers, business reporters, trade association executives, pollsters, and other business observers at least 5,000 times on CNBC the past 2 years (at least ten times a day for 500 broadcasting days). How could you have missed it? I’ve heard only two executives on CNBC say the Administration’s policies were having no effect on their hiring, and both of them spoke at the Democratic National Convention, where they had been invited because of their views. To quote one of your favorite economists: “…. a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation,…. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities…. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die…” John Maynard Keynes This is what we have today – animal spirits have been crushed by the Obama Administration, spontaneous optimism has faltered, and job creators are on strike. Enterprise is fading and could die in 2013 if we go over the cliff. Keynes’ “spontaneous optimism” equates to the “good mood” you label “ridiculous,” don’t you think? And his “mathematical expectation” to your notion that: “firms [only] higher [sic] workers when they need the labor to serve demand.” It seems there is something for every persuasion in Keynes. ROID: “There were quite a few post-war years with lower unemployment than 2006, truthman. You gotta get your facts right and stop re-cycling phony supply-side claims. As well, the monetarist claim that money supply drives the real economy is discredited. You seem to be reading from some ancient supply-side talking points.” TRUTHMAN’S ANSWER: Not true Roid; as I said in my third post, the only lower period was the end of the Clinton term and beginning of the Bush term, from April 1998 to May 2001. Check the BLS page referenced in my post. If you find any other months lower than the Bush years of 2006 and 2007, please list them for all of us to see. And whatever gave you the idea monetarism has been discredited? By whom, can you tell me? If you think money doesn’t drive the economy, you are sadly mistaken. Why do think good old Ben has been pumping it out like crazy the past 4 years? Not for kicks, that’s for sure. It hasn’t been helping much, because the “V” part of the equation (velocity of money) has been going the other way, thanks to our wonderful folks in the White House, who with their anti-growth policies have slowed investment and the recovery to a crawl. And BTW, monetarism is NOT part of what the popular culture likes to call “supply-side” economics, but is independent of whether or not one believes that government drives economic growth and demand or private, risk-taking entrepreneurs drive economic growth and demand. You apparently did not read carefully. The economic processes and events you say are “phoney” have been the growth drivers of nearly every economy in history. Economies where such drivers were suppressed, such as the former Soviet Union, saw little or no growth. Again, there is a spectrum of experience here. Economies with the strongest so-called “supply-side” elements and the most active and aggressive entrepreneurial activity, such as today’s China, have grown the fastest. Economies with the least of those elements and the least active and aggressive entrepreneurial activity, such as many countries in Europe, have grown the least. Sorry, but them’s the facts, man. It makes sense, too, doesn’t it? I commend to you an interesting article on this subject in the July 28, 2012 issue of The Economist, entitled “Europe not only has a euro crisis, it also has a growth crisis. That is because of its chronic failure to encourage ambitious entrepreneurs.” Moreover, what do think drove most economic growth before the advent of the modern financial system, before government transfer payments like unemployment insurance, food stamps, social security, Medicare, and other “entitlements.” In earlier days, Keynesian stimulus measures were chiefly limited to public works – highways, railways, bridges, canals, dams, parks and recreation facilities, cathedrals, government buildings, and the like, and in ancient times, the Pyramids, the Great Wall of China, the Terra Cotta Warriors, temples, viaducts, tombs, amphitheaters, monuments, and so on. Such infrastructure projects employed lots of people, but it was still individual entrepreneurs and their employees who produced the bulk of the income and wealth that made those efforts possible and drove those economies. Some were shopkeepers, artisans, artists, musicians, entertainers, farmers, inn keepers, stable keepers, ship owners, manufacturers, doctors, lawyers, educators, clergymen, and the like and some were feudal lords or merchants who headed large commercial, transportation, or agricultural enterprises, but all were essentially entrepreneurs whose collective efforts drove those economies. Also, I don’t “gotta” do anything, but you should do some research before you post incorrect information again. As I said before, I’m not reading from anything. My comments are based on 48 years of study and experience in business, economics, and investments. And please drop the insulting tone. 12/05/2012 - 8:16am EDT | roidubouloi ROID: “We would in fact benefit if Medicare were extended to all to replace our existing insurance system. Medicare has been much more successful than the private system at controlling costs. If we had experience growth in costs at the rate of Medicare, we would be saving in excess of $1 trillion today.” TRUTHMAN’S ANSWER: I favor the system AARP uses to manage its medi-gap policies, where AARP serves as an agent for United Health Care (UHC) and markets, manages a range of UHC medi-gap policies, and provides the point of contact for policy holders. I’ve been a UHC medi-gap policy holder for 11 years and my relatively inexpensive policy has covered nearly 100% of my Medicare co-pays during that period. It has been virtually seamless, with virtually no issues, and I have never spoken with anyone at UHC. All my conversations have been with AARP, where a knowledgeable human being has been almost instantly available whenever I’ve called, which is rarely. Annual increases in my UHC premiums have been in low-single-digit percentages. For example, for 2013, my UHC monthly premium will increase by $6.25, or by 2.5%. I see no reason why the AARP system could not be expanded to cover all health care. An AARP-like quasi-governmental body would act as an agent and make available a range of policies of varying coverages and rates, which coverages would be assigned to a number of private insurers on a competitive bid basis. All citizens would be required to participate, just as all citizens pay taxes, and the penalty for non-compliance would be similar to the penalties for not paying taxes, for the Supreme Court was correct – the mandate is a form of tax, the justification for which is the overwhelming public good that would result. It would be analogous to car insurance, where in most states or perhaps all, car owners and drivers are required to have insurance. Regarding health insurance, if one is living, one would have to be covered. One could opt out by not living. Universal participation is needed if pre-existing conditions are to be covered at affordable rates. After a number of decades, there would be no such thing as a pre-existing condition, as everyone would have been covered from birth. Premium rates and health care provider compensation schedules would NOT be set by the government, but by private insurance companies competing in the open market. The government’s only functions would be to act as an agent between the insurance companies and their policy holders and to set minimum coverage requirements. The unit costs of providing coverage would drop, because of universal participation and because one of the reasons Medicare’s costs have been lower than private insurers’ costs would no longer exist, that is, the costs of denying coverage to persons with preexisting conditions. I have no idea why Obama did not adopt this AARP-like system, except that he seems ideologically committed to a single-payer solution, which would be a disaster from a quality and service standpoint, as it has been in other countries. ______________________ TRUTHMAN: "The claim that the U.S. grew at high rates from 1940 to 1980 because of “unprecedented income equality” is absurd. I know of no economic theory that supports such an assertion." ROID: “Check out John Maynard Keynes some time. Then you will at least know that there is an economic theory that supports such an assertion.” TRUTHMAN’S ANSWER: You seem to be correct. Keynes apparently DID think periodic redistribution of wealth and income from investors to consumers was necessary to keep demand growing fast enough that investors would keep creating jobs (although at least one reference I checked implied that this was a thesis advanced by Keynes’ followers and not by Keynes himself, but based on his work and findings). No matter. I think in this instance, he was wrong. Who is wise enough to know when that point has been reached and how much to redistribute to keep the economy growing? Moreover, if this were true, tax rates on “the rich” would have to constantly change – low during recessions and high when, because of a boom, some persons get “too rich.” Seems like a treadmill, doesn’t it? Work like crazy and then throw it back in the pot so we can do it again. ______________________ TRUTHMAN: "Contrary to what someone on this thread said, the supply of NEWLY DEVELOPED land would surely be hurt if taxes on newly-developed land should rise." ROID: “No, the price of the output would rise to cover the cost. This raises a question about the effective incidence of a tax, but the conclusion that we would get less of something for which there is no substitute is wrong.” TRUTHMAN’S ANSWER: I think your mistake is your assumption that there is no substitute for land. That assumption presumes we use only the surface of the land (no multi-story buildings) and that every square inch of the surface is used. I can think of no instance other than agriculture in which that is the case within anything but a very small area zoned for single story use. Bottom line, there are plenty of substitutes for land. If the taxes on developed land rise, there will be incrementally less demand for newly developed land. Even in farming, substitutes are available. If taxes on farmland in a given region rise, there will be less farming in the region and thus a greater demand for imports from other regions, rather than a rise in the prices of produce produced in that region to compensate for the higher taxes. Unless there are truly no substitutes (such as in a monopoly), in our system, prices are determined by competition, not by the cost of something, per se. ______________________ TRUTHMAN: "Far from it being “morally wrong,” to tax investment income at a lower rate than so-called “earned income,” it is morally RIGHT," ROID: “Been reading Ayn Rand again? Labor is actually more essential to output than c apital. Without labor, the entrepreneur earns nothing and hence cannot employ anyone. By your logic, we should therefore tax labor income at a lower rate than investment income, because that would create jobs and prosperity for both labor and capital. This silly argument that capital, rather than demand, creates jobs is always used to explain why the wealthy should enjoy special privileges although the identical argument can be used to justify the reverse.” TRUTHMAN’S ANSWER: Actually, I’ve never read one word of Ayn Rand. I have no interest in what she has to say. How does her writing relate to what I’m saying? Taxing investment income at a lower rate than earned income is morally right because it’s the best way to help the poor, the middle class, the indigent, the needy, and the otherwise disadvantaged. Do you want to help them or not? I’m sorry, but capital is more essential than labor. Without capital, no one gets hired no matter how many are unemployed, unless they agree to work in the open air, without equipment, and for free. This “demand” you speak of - where does it come from, do you think? From some mysterious, magical source? That kind of thinking is truly “voodoo economics.” No, the demand needed to justify existing jobs comes from the salaries and wages earned by those with existing jobs. The producers and the consumers are the SAME persons. What is it about that simple concept that you don’t understand? Why do you insist on calling it “ridiculous,” “silly,” “phoney,” “nonsense,” “fantasy,” “pseudo-economics,” “voodoo,” “fiction,” tendentious,” and so on, without once showing why that concept is untrue (you can’t, of course). It follows that, in the aggregate, the sustainable demand needed to justify NEW jobs comes from the salaries and wages of the NEW jobs. New demand can also come from the lower savings or increased borrowings of those with existing jobs, but such demand is not sustainable. OK, then if the demand needed to justify new jobs comes from the salaries and wages of the new jobs, what do we need to PAY those initial salaries and wages? Why, it’s CAPITAL! What do you know, to create jobs, we need capital! What a revolutionary discovery! ____________________ TRUTHMAN: "But if government employment goes down, it may be encouraging enough to entrepreneurs that they will more than offset that public-sector decline with private-sector hiring," ROID: “This is the austerity nonsense that the supply-siders keep pushing. Turns out, it is just wrong, as Keynes called to our attention. All the countries that have been trying this have been shrinking as a result, doing worse than those that are not implementing austerity. Turns out that entrepreneurs are not encouraged by mass unemployment to hire more workers, only to reduce wages. This is typical for supply-side, substituting a theoretical fantasy of this ideologized pseudo-economics for empirical evidence of how economies actually do work. Even when the empirical evidence is directly to the contrary, the supply-siders simply keep pretending that the evidence doesn't exist and spout the same nonsense theory. Voodoo economics.” TRUTHMAN’S ANSWER: Pardon me, but as I’ve pointed out, the empirical evidence as well as logical thinking shows that economies work and grow the way I’ve been saying they do, which way you keep calling “supply-side,” as if that were some sort of pejorative term, the mere mention of which should prove what I’ve said is wrong. I’m sorry, but you will have to do more than that – do more than make unsupported claims and statements. You will have to prove my thesis wrong. And please don’t tell me again it was discredited by Keynes. I want to hear it in your own words, please, as I have done. You don’t hear me referencing economists a lot. That's because I prefer to think for myself. It’s really NOT a difficult subject. Shrinking government is NOT so-called “austerity,” per se, any more than shrinking or writing off any other unproductive or sub-par investment or enterprise is austerity. If something isn’t working, we replace it with something that DOES work, something with better returns and greater benefits. Come on, use your head. If we grow from “x” number of government employees to “y” number of government employees, why do we then think that “y” number of employees is the most advantageous number, just because it happens to be the number we have now? If those additional employees are not needed, we are using the nation’s resources inefficiently and will be better off if those workers are shifted to more productive jobs in the private sector. Downsizing enterprises that are below-average in productivity in favor of enterprises that are above-average in productivity benefits EVERYONE. I will now do what I previously said I don’t do a lot, and reference an economist (Schumpeter): Shifting the means of production from one user or product to another is called “creative destruction,” and applies to government as well as to the private sector. The reason the shift from the public to the private sector isn’t working as well as it should in Europe is that most European countries and cultures discourage entrepreneurial activities, so when government shrinks, there is less-than-adequate entrepreneurial activity to take its place. That is NOT true in the U.S., except under Obama, who entrepreneurs rightly see wants to take us in the direction of Europe, for what reason, God only knows, and so are taking fewer risks than usual. ______________________ TRUTHMAN: "ON EQUALIZING TAX RATES ON ORDINARY INCOME AND CAPITAL GAINS: Low capital gains tax rates do NOT reduce the money available to small business taxed at 35% in favor of stock market investments taxed at 15%." ROID: “In other words, truthman, when it is convenient for your ideology, higher tax rates do not lead to less of something -- small business risk-taking.” TRUTHMAN’S ANSWER: I’m sorry, I thought I pointed out in detail why long-term capital gains taxed at 15% do NOT reduce the money available to small businesses taxed at 35% on their profits. As I’m sure you must appreciate, creating and growing a small business is a completely different activity than investing in the stock market. One does not substitute for the other. Again, it has to do with the relative risks and the relative long-term rewards of the two types of investments, as well as the personal preferences of entrepreneurs for what they do with their lives. What part of my explanation did you not understand? However, higher tax rates on either activity – on long-term capital gains and/or small business profits – would decrease the attractiveness of each of those activities, separately. __________________________ TRUTHMAN: "The question is, would you rather have slower-to-no growth for everyone, but greater equality, or faster growth, but also the resulting greater inequality?" ROID: “Except that our history shows that we enjoy faster growth concurrently with greater inequality. Unfortunately, supply-sider Randians are so committed to the virtue of inequality that they would rather suffer slow growth for everyone than take steps to reduce the inequality. Utterly perverse.” TRUTHMAN’S ANSWER: I believe you meant to say. “faster growth concurrently with greater equality,” which is what you argued earlier. First, so-called “supply-side” concepts have nothing to do with Ayn Rand, as far as I know. If you think so, please explain. Please stop connecting them in your comments. Inequality of outcome is a natural effect of greater growth, as some persons are better able to benefit from faster growth than others. Or would you say all persons benefit equally from more rapid growth? In fact, you have argued that the more rapid growth of the 1920s and the more rapid growth under Clinton and Bush until the housing bubble burst led to greater inequality of income. You have followed that by saying incorrectly, that the inequality of income was the cause of the stock market crash of 1929, the Great Depression of 1930s, and the housing bust and financial crisis of 2006-09. You argue that the growing amount of money in the hands of investors with no useful place to go led them to bid up asset prices to unsustainable levels, which was followed by a crash. That is, to quote someone on this thread, malarkey. As I said before, it was the wrongful assumption that asset prices would never fall and the low margin requirements that encouraged excessive leveraging of the unequally distributed investable funds that caused both the crash of 1929 and the housing bust of 2006-09. The crash of 1929 turned into the great depression because of a banking panic. The crash of 2006-09 caused a recession, but a banking panic was avoided because of greater activism by the Federal Reserve, the U.S. Treasury, Congress, and the Administration than during the Great Depression. In both cases, growth was interrupted by misallocation of funds to enterprises of lower potential returns and overleveraging, NOT to the absence of suitable, more profitable investments. Blame the mania and misjudgments of those with the money and not the fact that they had it. By the way, you argued that the period of 1940-1980 was a period of greater economic resilience and growth because there was greater equality of income. Counting the World War II years and extending that period to 1982, because economic effects operate with a lag, there were 9 recessions in 42 years, or one every 4.7 years, on average. During 1982-2012, when you say incomes were growing more unequal, there were only 3 recessions in 30 years, or one every 10 years, on average. So during the period when you say the economy had the “greatest resilience,” recessions occurred more than TWICE as often as during the more recent period. __________________________ ROID: “The housing bubble was indeed an outcome of the Bush tax cuts. Too much investable money without enough investment opportunities had the investor class looking for income-generating investments. Wall Street was all too happy to generate trillions of phony investments to accommodate the demand -- there we go with demand again. The housing bubble was investment, truthman, exactly what you say we benefit from when taxes on the rich are low. Except that the gain was temporary because the investment was disproportionate to the income of workers. All we ended up with in the end was a massive crash and recession. This is EXACTLY what happens when taxes on the wealthy are too low and income inequality grows to large. The logical chain is very simple, but your ideology forbids you from understanding the obvious.” TRUTHMAN’S ANSWER: You again don’t understand either what caused the housing bubble or why it burst. The wrongful assumption that house prices would never go down and the use of too much leverage (borrowed money) were the root causes. It wasn’t investment, it was speculation in a market that most participants did not understand, so they underestimated the risks and invested too much and borrowed too much to do it – on all sides – the persons who took out the subprime mortgages, the mortgage lenders who originated the original instruments, the government agencies like Fannie and Freddie who bought the original mortgages, the Wall Street firms who packaged them and sold the packages to unknowledgeable investors (professional, but still unknowledgeable), the rating agencies who rated most of what was actually junk AAA, and the regulatory agencies who stood idly by and watched it happen. All this came to no good end, NOT because the amount of investable funds was disproportionate to the income of the workers, but because investment was MISALLOCATED by a massive delusion that house prices would keep rising forever. That kind of mass hysteria happens periodically in free markets – the South Sea Bubble, the Tulip Bubble, the Florida Land Bubble of the twenties, the late 1920’s bull market, the recent housing bubble, and many lesser bubbles in between are examples. Those periods of temporary insanity do not occur because investors don’t have better places to put their money, either because “demand” is so low there are no attractive and sustainable investments to make or because investors have too much money. They happen because of ignorance and greed. If we try to prevent such episodes by periodically draining funds from “clueless” investors’ hands and under the all-knowing wisdom and infallibility of the folks in Washington redistributing that money to consumers to create more “demand” for investment, we will do JUST THE OPPOSITE. Faced with that kind of confiscation, investors will create FEWER jobs than they otherwise would, which will create LESS demand than otherwise, because THE JOB HOLDERS AND PRODUCERS ARE ALSO THE CONSUMERS. If we have fewer jobs, the total of salaries and wages will be lower, as will spending and demand. JOBS COME FIRST - DEMAND FOLLOWS. Please write that on the palm of your hand and read it whenever you feel like posting here. Next, please explain to me how it could be otherwise, unless existing jobholders save less or borrow more, NEITHER of which is sustainable. Where will the new demand come from, if not from the newly hired workers? Tell me, from where? From some pot of gold buried somewhere, or what? Some magical source? Those who keep telling us we need “more demand” to get entrepreneurs to create more jobs never tell us where that demand will come from. Don’t list government transfer payments or spending, please. Those are transfers from one consumer or investor to another, and don’t increase aggregate demand one whit, except as such actions may give a lift to the confidence of either job creators or consumers, which is why the stimulus programs Washington has favored have had so little effect. Regarding the confidence effect of the stimulus programs (which Paul Krugman calls “the confidence fairy”),if job creators gain confidence, they will put some of their idle funds to work creating jobs, income, and demand. Such actions are sustainable. If existing jobholders in their role as consumers gain confidence, they may decide to save less or borrow more, neither of which is sustainable. _____________________ ROID: “You can say that slow growth causes income inequality, or income inequality causes slow growth, or they are mutually causing, as happens in economics. But you cannot say that fast growth and income inequality are associated because they aren't. Supply-side economics is oblivious to reality. It bears the same relationship to reality as creationism, climate-change denial, or the belief that the earth is carried through the heavens on the back of a giant turtle. I could go on like this all day, truthman, picking apart your little book, but I don't have all day. You believe in tendentious economic fantasies. Whether they are liberal or conservative, they are unmoored from reality.” TRUTHMAN’S ANSWER: Sorry guy (I assume from your tone you’re a guy), it’s you who are unmoored from reality. I’ve already answered every point you just made. Please spend your time defending what you repeated in the past two paragraphs. Please use logic to make your points this time, instead of labels and insults. 12/05/2012 - 10:17am EDT | Fishpeddler ROID: "I could go on like this all day, truthman, picking apart your little book, but I don't have all day. You believe in tendentious economic fantasies. Whether they are liberal or conservative, they are unmoored from reality." FISHPEDDLER : “I only had time for a quick scan of Truthman's posts, but I had the same reaction. This line stood out as particularly ridiculous: " If job creators were encouraged by the Administration, instead of bashed, there would be a WORKER shortage now instead of a JOB shortage..." In other words, we'd have full employment if Obama weren't such a big meanie. Utterly clueless.” TRUTHMAN’S ANSWER: Your last sentence is absolutely correct, except I never said Obama was a meanie. But you are correct, Obama IS clueless. Maybe not “utterly,” but nearly so. As I said earlier, the fact that entrepreneurial job creation and private sector investment has been seriously hurt by the uncertainty created by the Obama Administration’s anti-business attitudes, policies, and actions has been loudly and forcibly said by business executives, entrepreneurs, economists, consultants, investment analysts, bankers, business reporters, trade association executives, pollsters, and other business observers at least 5,000 times on CNBC the past 2 years (at least ten times a day for 500 broadcasting days). How could you have missed it? I’ve heard only two executives on CNBC say the Administration’s policies were having no effect on their hiring, and both of them spoke at the Democratic National Convention, where they had been invited because of their views. Instead of scanning, try a reread, but this time with an open mind. There ARE other ways to think about things than yours, and some of might even have some value. 12/05/2012 - 1:25pm EDT | roidubouloi ROID: “Nichomachus, the right constantly claims that reducing high-end taxes and tolerating income inequality leads to faster growth and greater prosperity. There is no proof, as the proposition cannot be proven without being able to run multiple experiments on the economy. Neither can it be proven that greater income equality "causes" both faster growth and a more resilient economy. However, ALL the evidence of the course of the US economy for the past hundred years is consistent with the latter hypothesis and inconsistent with the former, right-wing hypothesis. Both of the biggest crashes were immediately preceded by peak values for income inequality. The period of highest growth and greatest resilience, 1940-1980, was also the period of greatest income equality. Cutting taxes on the high end has never led to faster growth, only greater economic fragility -- busts. Raising high-end taxes under Clinton was associated with a boom. That is not sufficient to PROVE that income equality is the cause, but it is strong evidence. It is, however, sufficient to prove that the supply-side claims are all wrong. There is no instance one can point to in which they have been right.” TRUTHMAN’S ANSWER: Au contraire, Roid, I’ve answered all those points previously. Cutting taxes on the high end has ALWAYS led to faster growth than would otherwise be the case, according to the bulk of reputable economists. As you say, it can’t be absolutely proven, because in economics, we can’t have do-overs or double-blind tests, but it makes more sense than any other thesis. And the fact that SEQUENTIALLY, economic growth rates increase and unemployment declines when marginal tax rates are reduced should be a clue. The mistake many make is trying to correlate or compare the tax rates and growth rates of two widely separated periods (Clinton vs. Reagan or Bush is a favorite of the Dems). That has pitfalls, because too many things other than tax rates can be different between different periods, and it’s a matter of opinion which things have the largest effect on what one is trying to measure. Correlating and comparing SEQUENTIAL changes has the greatest validity, because the periods being compared are close together in time, which tends to minimize EXOGENOUS effects. Suggest a reread. Oh, and by the way, as I said earlier, your period of greatest “resilience” and income equality, 1940-1982, had 9 recessions, or one every 4.7 years, while the next 30 years, with growing income inequality, had only 3 recessions, or one every 10 years. 12/05/2012 - 4:39pm EDT | frippo FRIPPO: “Truthman: thanks for the informative and politely argued post. I'll limit myself to the following: TRUTHMAN: "My point is that if the retirement age were currently 63, the same arguments could be made against raising it to 65." FRIPPO: “Yes, and if marginal tax rates were lower than they are now and being raised to their current levels, we'd see precisely the same charges of job destruction we do in the actual situation. Someone who believed in good faith that raising taxes must always cost jobs ought, in fact, to raise the issue. The only reasonable answers to such an argument would be to try to prove that raising taxes *doesn't* cost jobs, or that the resulting job loss is outweighed by the benefits (e.g., reduction of the deficit). Simply pointing out, however, that the low-tax fan might, if he had his druthers, prefer a still lower tax rate, even if true, would not constitute a valid counter-argument. Our putative anti-tax warrior would likely shrug and say, "yeah, so?" -- and he would be right to do so.” TRUTHMAN’S ANSWER: Thank you much for your thought. I believe the empirical evidence that tax rates are too high is that 3 1/.2 years into this recovery, there are still 23 million persons without a job and the unemployment rate is still a high 7.7%. There are other factors, of course, and I mentioned earlier that between two periods, there are always factors other than taxes that affect growth and employment. What one must do as best one can is to adjust tax rates so they compensate as much as possible for the factors that are hurting employment in order to bring the economy to its full potential (full employment) in a robust fashion. Obama and his policies have failed to do that. Unfortunately, there WAS a simple solution to the entire issue of the fiscal cliff, employment, and the potential growth of the economy for the next 20 years or so that the majority of voters voted against on November 6 – the election of Mitt Romney. FRIPPO: “And so in this case we must limit the discussion to the Medicare age that actually exists, and whether, in order to cut spending, we should raise it. As you say, this a matter of weighing pros and cons, which is precisely what Cohn was doing. TRUTHMAN: "government transfer payments, which simply transfer purchasing power from one consumer to another, with no net gain..." FRIPPO “This seems like it makes sense, but it doesn't. It's not like taking $50 from one person and giving it to another, but more like taking a buck from 50 people. Suddenly the recipient can make a purchase that was impossible before, and the producer of his purchase can make a sale, while the purchasing power of the other 50 people is not significantly reduced.” But in fact the choice is not simply between private-sector employment and "transfer payments"... "if government employment goes down, it may be encouraging enough to entrepreneurs" Then why isn't it doing that now? It has already fallen to its lowest point relative to population in 30 years.” TRUTHMAN’S ANSWER: Actually, with regard to the top 2%, I think it’s the other way around. It’s like taking $50 each from 2 people and giving the other 98 persons $1.02 each, isn’t it? That’s called “spreading the wealth [of the few] around [to the many].” Redistribution hurts pools of aggregated capital that are large enough to create and expand businesses and therefore create jobs. Andrew Carnegie, one of the greatest entrepreneurs in history, who gave away most of his huge fortune to libraries, schools, universities and other charitable causes during his lifetime, (see http://en.wikipedia.org/wiki/Andrew_Carnegie) once famously said to a beggar who asked him to share his wealth: “Fine,” he said, reaching into his pocket, “Here’s YOUR dime.” The decline in government employment is miniscule and it’s taking place NOW. What entrepreneurs are concerned about are the increases in tax revenue Obama is proposing to fund government spending increases GOING FORWARD, his plans to fleece the pockets of investors, entrepreneurs, and job creators to get that money, and the effects of that fleecing on job creation, the economy, and the returns entrepreneurs can expect if they risk their money to create jobs now. The small declines in government employment we’re seeing are just not meaningful. While government employment may be flat to down, it’s the DOLLARS of spending that count. With modern technology, one government employee can oversee the transfer of $1 billion dollars from one consumer or investor to another almost as easily as he can $1 million, I believe. 12/06/2012 - 12:35am EDT | roidubouloi ROID: “That's a great chart, Nichomachus, thanks. However, it tells the same story. The Gini ratio is a very compressed scale because it is a ratio. The US went from .316 in the mid-70s to .378 in the 2000s. As fishpeddler pointed out, that is a huge change. Also, the US is not at all in the middle of the range, or at least not in the middle of the pack. Try using the arrows to sort the list by rank. Only Chile, Mexico, and Turkey are worse than the US. Sure, if you define the range to include Chile, a huge negative outlier, then you can say the US is in the middle of the range, but it is very far from the middle of the pack and an extreme outlier amongst industrialized economies. We are very wealthy because we have long been very wealthy. But since 1980 our rate of growth has slowed considerably and virtually all of the gains have gone to a few at the top. Everyone else is standing still or losing ground. THAT is the direct consequence of supply-side nuttery. When Clinton moved the other way, things improved. When Bush II went back to supply-side nuttery, things got worse again. Supply-side is empirical nonsense, nichomachus.” TRUTHMAN’S ANSWER: Supply-side is empirical truth, which if you study economic history, both of the past 100 years and before, you will easily see is true. Go back and REREAD! As I explained in detail before, CLINTON was a closet supply-sider. He raised ordinary income tax rates as little as he could get away with and on August 5, 1997, signed into law the Taxpayer Relief Act of 1997, which contained a number of “supply-side” tax cuts, after which the U.S. unemployment rate declined to the LOWEST level in history and the federal budget went into surplus for the first time since 1969, which, 1969 surplus, not incidentally, was at the top of the KENNEDY/JOHNSON economic boom, which boom was ALSO touched off by the Kennedy “supply-side” tax cuts of 1964. As Kennedy said, “A rising tide lifts all boats.” See: http://www.davemanuel.com/history-of-deficits-and-surpluses-in-the-united-states. When BUSH built on those Clinton cuts, the economy recovered from its 2001, 9/11-related recession and boomed to the SECOND-LOWEST unemployment rate in history in late 2006 and early 2007, before the bursting of the housing bubble, which event had nothing to do with tax rates. REAGAN was the 4th member of this quartet, all of whom used so-called “supply-side” tax cuts to improve our economic growth rate and lower unemployment. Obama, his Democratic supporters, and the liberal media have never told this story accurately, but it’s on the record in the official government statistics, should you care to check. You should, as you have been misled. TRUTHMAN: Correction to one of my previous posts: In the following paragraph, with respect to the former Soviet Union, I meant to say “income equality was rigorously enforced,” not “income inequality.” "The claim that the U.S. grew at high rates from 1940 to 1980 because of “unprecedented income equality” is absurd. I know of no economic theory that supports such an assertion. If that were true, the former Soviet Union, where income inequality [should be income equality] was rigorously enforced (except for those at the very top), should have grown at astounding rates!"

- truthman

December 9, 2012 at 5:11pm