The New Republic

The statement that “Changes over the past 65 years in the top marginal rate and the top capital gains tax rate do not appear correlated with economic growth” implies that changes in tax rates have NEITHER A POSITIVE NOR A NEGATIVE correlation with economic growth. In other words, the standard interpretation of the report's language is that tax rates neither help nor hurt economic growth. So the report seems to be refuting the premise of this post, i.e. that higher taxes might help economic growth.

- NateG

December 12, 2012 at 1:08am

It's not just that capital is favored over labor, prejudice against labor is so pervasive that even the term "labor" has negative connotations, with images of Eugene Debs, "agitators", and larceny. In my part of the country the Great Recession is blamed on labor, or more specifically unions, even though we have very few unions and most people don't know anybody who belongs to a union. That there is a glut of savings and trillions of dollars lying mostly idle doesn't deter those who promote policies to increase savings among the already wealthy and add to the glut. If cutting taxes paid by the wealthy hasn't spurred economic growth, then the answer must be to cut taxes paid by the wealthy even more! Why has such nonsense become conventional wisdom? Look no further than yesterday's article in Politico, in which Politico's cracker jack reporters provide the way out of our economic plight as divined by the Very Serious People: cut tax rates and entitlements. Many, including, I suppose, Judis, are optimistic that the election has galvanized the president and this time he will insist on rational tax and economic policies. Me, I've decided to join the irony nation and the hipsters and not take any of this seriously. To do otherwise might make me a cynic, or take a walk over Mark Brazaitis's bridge.

- rayward

December 12, 2012 at 8:21am

There may be no discernible correlation of tax rates with growth, but there is a clear correlation between income equality and high growth and between income inequality and low growth. That implies that income taxes should be used to mitigate growth in income inequality, a perfectly achievable policy.

- roidubouloi

December 12, 2012 at 8:24am

NateG I think it is more complicated than you imply. If lower top rates and capital gains are not associated with growth, it does not necessarily follow that they are not associated with a recession. If a report said that overeating was not associated with improved health, it would not follow that not eating would not be associated with poor health.

- Nusholtz

December 12, 2012 at 8:42am

good to see someone bringing the Congressional Research Service report that was deep-sixed by McConnell back to the fore. that McConnell felt it necessary to disappear the report rather than factually dispute it says more about the veracity of the report than anyone who could be dismissed as partisan could ever say.

- teoc

December 12, 2012 at 1:12pm

Really bad economic analysis is not a good argument for Obama's efforts to raise taxes on the wealthy. The argument for joint sacrifice is a good one. Relying on flat earth arguments -- that the MPC varies with income when we have known in the data for 60 years that it does not, or that tax cuts inflate bubbles, makes it embarrassing to support the President. The Republicans make such stupid arguments in favor of keeping their tax cuts for the top 2% that just repeating what they say should be enough. But this article makes me want to switch to the Boehner-McConnel-Ryan coalition just to get away from this anti-science.

- bwickes

December 12, 2012 at 1:31pm

Surely even the author can agree that growth would be adversely affected by applying a 100% tax rate to all income of all Americans. No one would work. And, surely the author would agree that a 0% tax applied to all income would spur growth, because all Americans, rich and poor alike, would have more disposable income. Given these two points, we know that the correlation between tax rates and economic activity is negative; i.e., higher rates will result in less activity. I, for one, can attest to the truth of this point. I earn about $1.5 million per year, and my income is coveted by Obama and the Democrats. Where do my marginal dollars (the ones that would be confiscated by a higher taxe rate) go: They buy cars for members of my extended family; they send my housekeeper's children to the same private schools that my children attended; they provide the primary income ($15/hour) for the undocumented worker who takes care of our barn and associated acreage; and, they help to support the American Cancer Society through tens of thousands of dollars in donations. I doubt seriously that the government will make a higher and better use of those dollars as and when they raise my taxes.

- horsefly

December 12, 2012 at 1:36pm

Horsefly: Thanks, yet again, for your story of success and dang those covetous Democrats - they are after your money, those Democrats, each and every penny. You've mentioned your cars and your housekeepers' children before ... bully for you. I might believe all of what you write about your fabulous success, if your basic economics were not so, well, illiterate. I find it hard to believe that anyone who has so little understanding of basic economics could make a good living. Then again, if you do, it goes to show that there is no correlation between "merit" and wealth in this country. I refer to this gem: "And, surely the author would agree that a 0% tax applied to all income would spur growth, because all Americans, rich and poor alike, would have more disposable income." The premise is so completely false, it is difficult to begin where to challenge it. First, in the absence of "taxes", one of two options exist for government operations such as, you know, the police, the army, the law courts and so on that maintain property as we know it. Either there is no government, in which case good luck with your $1.5 million a year; or else government is funded through other means - such as, for example, sale of natural resources. (Assuming you do not roll these into taxes.) But of course, natural resource spending in the economy results in inflation, which causes its own anti-growth problems; and there are few governments in the world that can, in fact, live only on natural resource expenditure. The United States is not one of them. Second, historically, your assertion is false. There were no income taxes before the First World War in much of the Western World, and the absence of taxes did not have any impact on the boom and bust cycle of capitalist economies, which is an ill-understood feature of capitalism and has nothing whatever to do with levels of taxation. And demonstrably so: there is no correlation between the severity of recessions in the US or in northern Europe, and marginal taxes. The only difference is the misery people suffer as a result of the recession - this is more severe in the US than in northern Europe, and for obvious reasons. And, of course, the US went through a boom with 91% marginal taxes on the highest incomes in the 1950s. "Given these two points,", as you say, "we know that the correlation between tax rates and economic activity" is ... not entirely clear, but in any event, not at all what you suggest.

- icarus-r

December 12, 2012 at 3:45pm

P.s. re "disposable income" ... All the money raised by a government in taxes is "spent", and most of it (unless you are a Republican bent on war abroad) in the country. In this sense, while you might question the allocative efficiency of money spent by the government and money spent by individuals, there is zero difference in sheer economic impact between taxed-and-spent money and "disposable income". To the extent that by disposable income you are referring to spent funds, they have the same economic impact. The problem with your assertion is the assumption that higher income people also spend all their "disposable income", which is not at all the case. And, in fact, the US tax code ensures that the economic value of rich people's marginal income to the US economy is considerably less than the economic value of poor people's disposable funds. One example: capital gains tax is lower than income tax, and funds invested offshore are subject to deferred taxation. Here is the simple calculation: A family of four earning $50,000 a year (median US income) "spends" practically every dime. You, on the other hand, can easily afford to take $50,000 off the top of your income each year, stash it in an offshore account, and shield it and the income it derives from taxation. Over ten years, the median family will have contributed $500,000 towards growth of the national economy, whereas you will have taken the sme amount, and any incomes from it, out of the national economy, in support of some other economy. It really is that simple. All of your protestations of couvetous Democrats cannot hide the basic math and logic of Economics 101.

- icarus-r

December 12, 2012 at 3:56pm

icarusr- We had no income tax until about 1915, and we managed in those 130+ years to become the most powerful nation on earth, and to have a thriving economy. Our government can be funded without an income tax. ANd, if you dont think that letting all individuals keep and spend 100% of their income would help to spur economic growth by putting lots of extra money in the pockets of spenders,then I suppose we just disagree.

- horsefly

December 12, 2012 at 4:02pm

"Our government can be funded without an income tax." You do know the sources of federal funds and the responsibilities of the US Government before 1915, don't you? You really think that you can fund a $800 billion a year armed forces - let alone all other functions - out of tariffs on imports? ",then I suppose we just disagree." We "disagree" in the sense that you say the Moon is made of green Swiss cheese and populated by large bees, and I point to the origins of the solar system and basic principles of astrophysics. Your assertion about nontaxation is 100% and demonstrably false. You can disagree all you want, but don't expect your assertions to be persuasive to rational beings.

- icarus-r

December 12, 2012 at 4:10pm

horsefly Surely even the author can agree that growth would be adversely affected by applying a 100% tax rate to all income of all Americans. No one would work. Assuming you only hire people on the basis of making a profit, would you hire someone at a 60% tax rate if you only got to keep 40% of the profit as opposed to 50% of the profit at a 50% rate. Keeping in mind that payroll is full deductible and that taxes apply only to profits, any tax rate less than 100% will not discourage hiring.

- Nusholtz

December 12, 2012 at 4:16pm

Nush: math is too difficult for the guy making $1.5 mill a year :) ... he'll just disagree with ya.

- icarus-r

December 12, 2012 at 4:21pm

Icar Anyone who makes $1.5 million a year knows better than to tell anyone about it. Even Romney wouldn't release his back tax returns under the pressure of his candidacy.

- Nusholtz

December 12, 2012 at 5:47pm

The US national security sector is rather like the Chinese capital goods sector...in that workers who inspect baggage at airports or torture prisoners or hang out in Afghanistan earn claims on resources, yet produce nothing that can be consumed. Three percent of all paychecks come from the Sec. of Defense -- directly, never mind multiplier effects. Tax dollars to support these guardians of civilization drive down aggregate demand and slow job creation...or we borrow the money and drive up the debt. Less for guns means more for butter, yet Republicans and even some good liberals hector the White House daily for new weapons commitments for any dodgy insurgency willing to scream democracy. Going over the fiscal cliff and taking the whopping defense cuts might be a good, if painful, step toward rationalizing these costly involvements.

- jacksaunde

December 12, 2012 at 8:25pm

And the moon is made of green cheese, too. Honestly. Rather than rewrite, I’ll simply revise and repost what I posted in 4 segments on December 4,5, and 9 on “The Fiscal Cliff Is Better than Boehner’s Lousy Offer,” TNR, 12/3/12, by Jonathan Cohn, who seems equally convinced that taking money away from job creators will make them want to create more jobs. Picture that as an SAT question. How many contributors to TNR would get it right? By the way, lest I be accused of recycling talking points from conservative blogs, as I was on Cohn’s thread, 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, however. 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 and Mr. Judas’ stories. 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. But I digress. Mr. Judis’ 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 or lift the economy, it will likely INCREASE the deficit and hurt the economy. 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. 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. The following is from my second post on Mr. Cohn’s article, which post answered certain replies to my first post on Mr. Cohn’s article and which answers also apply to Mr. Judas’ article: 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, because of the anti-business attitudes, policies, and actions of the Obama Administration, 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 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 earlier, 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 both 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 Taxpayer 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 GOVERNMENT WORKERS WILL REDUCE DEMAND: Clearly, it will, to the extent unemployment benefits are lower than government 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 by some that the U.S. grew at high rates from 1940 to 1980 because of “unprecedented income equality” is absurd. If that were true, the former Soviet Union, where income equality 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: Some argue 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. Most of the wealth of the rich is working for the poor and middle class. An example is Walmart. 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 backyard. 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 excepted). 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. The following is from my fourth post on Mr. Cohn’s article, where I answered specific objections raised by other posters: 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. 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] hire workers when they need the labor to serve demand.” It seems there is something for every persuasion in Keynes. 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. 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, to select the private companies that will provide coverage, 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’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. Perpetual motion? 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’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 greater 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’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’S ANSWER 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 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. 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 unwise 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 both sold the packages to unknowledgeable investors (professional, but still unknowledgeable) and bought them themselves, 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 minor 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 limited confidence effect of the stimulus programs, if job creators gain confidence, they will put some of their idle funds to work creating jobs, income, and demand. Such actions, although limited, tend to be sustainable. However, if existing jobholders in their role as consumers gain confidence, they may decide to save less or borrow more, neither of which is sustainable. To generate among job creators the confidence and degree of certainty needed for a robust recovery (what Paul Krugman calls “the confidence fairy”), one needs a supportive, business-friendly Administration that wants to partner with business, not vilify it. TRUTHMAN’S ANSWER: 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. TRUTHMAN’S ANSWER: Au contraire. 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. TRUTHMAN’S ANSWER: 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. 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 is 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. 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

December 15, 2012 at 2:44pm