Time to kill the Bush tax cuts

[airborne18]

We are now past the point where the Bush tax cuts are providing any benefit to the economy, and in fact we need the tax revenue and the cuts are a drag on the economy.

I know everyone says that we need them as a stimulus and it would be foolish to take money out of the job creators hands.

The issue is that we are not seeing job growth. Blame whatever, the fact is that we have a shortfall in payroll taxes at both the state and federal level, and we have less overall tax revenue.

So what benefit is there to the economy or the rest of the taxpayers by leaving the tax cuts in place? well a larger deficit. Hmm. isn't this what the tea party is campaigning to control, the deficit.

And the democrats want to kill the tax cuts. So it sounds like everyone agrees. Yippee.

The economic basis for killing them is that it will force small business owners to spend the money so they can consume it rather than paying taxes on it. Is it a stretch? Not really. Not at this point where we still are not seeing job growth and very little GDP growth.

Large companies are not hiring because they have no confidence. And these so called small businesses who drive the economy benefit from the tax cuts, but are not using the money to grow the economy. So if they are not playing their part then take the money back.

We used the carrot long enough, now let's use a stick and see what happens. The economy cannot get much worst, so let's at least control the tax revenue and see if it sparks something.

 

[Al68]

We are now past the point where the Bush tax cuts are providing any benefit to the economy, and in fact we need the tax revenue and the cuts are a drag on the economy.

I know everyone says that we need them as a stimulus and it would be foolish to take money out of the job creators hands.

The issue is that we are not seeing job growth. Blame whatever, the fact is that we have a shortfall in payroll taxes at both the state and federal level, and we have less overall tax revenue.

So what benefit is there to the economy or the rest of the taxpayers by leaving the tax cuts in place? well a larger deficit. Hmm. isn't this what the tea party is campaigning to control, the deficit.

And the democrats want to kill the tax cuts. So it sounds like everyone agrees. Yippee.

The economic basis for killing them is that it will force small business owners to spend the money so they can consume it rather than paying taxes on it. Is it a stretch? Not really. Not at this point where we still are not seeing job growth and very little GDP growth.

Large companies are not hiring because they have no confidence. And these so called small businesses who drive the economy benefit from the tax cuts, but are not using the money to grow the economy. So if they are not playing their part then take the money back.

We used the carrot long enough, now let's use a stick and see what happens. The economy cannot get much worst, so let's at least control the tax revenue and see if it sparks something.

None of that makes any sense. Certainly you have provided no reason to further drain the economy by taxing more. And using the word "carrot" to describe confiscating less of someone else's money than you want to? Oh, pleeeese. :uhh:

And using the phrase "take the money back" to refer to letting them keep (part of) what was theirs to begin with? Such "language of deception" is incompatible with honest debate. Which is why it is so often used.

If those on the so called left had any interest in honest debate, they would start by stating their agenda in honest words instead of such dishonest and deceptive figurative speech.

 

[talk2glenn]

Large companies are not hiring because they have no confidence. And these so called small businesses who drive the economy benefit from the tax cuts, but are not using the money to grow the economy. So if they are not playing their part then take the money back.

We used the carrot long enough, now let's use a stick and see what happens. The economy cannot get much worst, so let's at least control the tax revenue and see if it sparks something.

Every tax cut, by definition, no matter how small or where targeted, reduces the number of transactions at the margin. Before the tax increase, there were some transactions which were barely profitable. After the tax change, these transactions are now unprofitable, so they will not occur. This is not debatable, and is different from the Laffer effect; it is probably true that we are nowhere near the Laffer optimal, and a tax hike will increase government short- and long-run revenue.

The effect is reduced output in the economy. This can be offset by increased public sector output, but in this case, you are talking about increasing taxes to reduce the public debt; there will be no offset. The effect will be a real reduction in economic growth due to lost trades.

Even if it is true that the effect of a closing government revenue gap will inspire investor confidence, it is not the case that this investment will produce economic growth, or that it will come at all. Investors respond to a demand for goods and services that is greater than supply. Right now, consumer prices are flat, and there is a real risk of deflation (the price level is supported only by public policy). The implication is that consumer demand is still less than producer supply, even after the 2 year recessionary period and reduction in output. A tax increase would further reduce that demand.

Even if you had more confidence in the fiscal sustainability of the American economy, why would you invest in increased production when demand, which is already probably below the market (unsubsidized) output level, would respond to the tax hike by falling further?

Sorry, wouldn't work the way you describe. We've gotten ourselves in a real mess, but tax hikes aren't the solution.

 

[airborne18]

Every tax cut, by definition, no matter how small or where targeted, reduces the number of transactions at the margin. Before the tax increase, there were some transactions which were barely profitable. After the tax change, these transactions are now unprofitable, so they will not occur. This is not debatable, and is different from the Laffer effect; it is probably true that we are nowhere near the Laffer optimal, and a tax hike will increase government short- and long-run revenue.

The effect is reduced output in the economy. This can be offset by increased public sector output, but in this case, you are talking about increasing taxes to reduce the public debt; there will be no offset. The effect will be a real reduction in economic growth due to lost trades.

Even if it is true that the effect of a closing government revenue gap will inspire investor confidence, it is not the case that this investment will produce economic growth, or that it will come at all. Investors respond to a demand for goods and services that is greater than supply. Right now, consumer prices are flat, and there is a real risk of deflation (the price level is supported only by public policy). The implication is that consumer demand is still less than producer supply, even after the 2 year recessionary period and reduction in output. A tax increase would further reduce that demand.

Even if you had more confidence in the fiscal sustainability of the American economy, why would you invest in increased production when demand, which is already probably below the market (unsubsidized) output level, would respond to the tax hike by falling further?

Sorry, wouldn't work the way you describe. We've gotten ourselves in a real mess, but tax hikes aren't the solution.

I am not talking about corporate taxes. And I agree that typically it does not work this way, but it sortof does.

Our economy has expanded post ww2 due to the population boom, along with it the demand. We have not done enough with immigration to replace the aging bubble.


Consumer prices are flat, but commodity prices are not, and energy prices will increase.
Forget demand. Our economy has deflated and this is a long term trend, and we are not going to follow the curve on this recession.

The problem is that we are trying to force this recession to follow the curves, and that has failed miserably.

Until unemployment improves, and I mean the 15+ million and not the fantasy number, this economy will not improve. We have not even seen the bottom in the housing market yet.

I am not talking about debt reduction. We need the tax cut money to cover the shortfall from the lower social security and medicare receipts.

Look at the numbers. it has nothing to do with spending, that is a completely different issue, we need to replace lost revenue.

It is purely a revenue issue at this point. A dire one. If we do not address this shortfall in social security and medicare revenue we are screwed. This was not expected for another 5 - 8 years. and we are facing it now.

Forget all the politics.. honestly if the tea party were really concerned they would call for means-testing social security.. but they are not really out for any issue, they are just against stuff.

 

[Ivan Seeking]

Every tax cut, by definition, no matter how small or where targeted, reduces the number of transactions at the margin. Before the tax increase, there were some transactions which were barely profitable. After the tax change, these transactions are now unprofitable, so they will not occur. This is not debatable, and is different from the Laffer effect; it is probably true that we are nowhere near the Laffer optimal, and a tax hike will increase government short- and long-run revenue.

The effect is reduced output in the economy. This can be offset by increased public sector output, but in this case, you are talking about increasing taxes to reduce the public debt; there will be no offset. The effect will be a real reduction in economic growth due to lost trades.

Even if it is true that the effect of a closing government revenue gap will inspire investor confidence, it is not the case that this investment will produce economic growth, or that it will come at all. Investors respond to a demand for goods and services that is greater than supply. Right now, consumer prices are flat, and there is a real risk of deflation (the price level is supported only by public policy). The implication is that consumer demand is still less than producer supply, even after the 2 year recessionary period and reduction in output. A tax increase would further reduce that demand.

Even if you had more confidence in the fiscal sustainability of the American economy, why would you invest in increased production when demand, which is already probably below the market (unsubsidized) output level, would respond to the tax hike by falling further?

Sorry, wouldn't work the way you describe. We've gotten ourselves in a real mess, but tax hikes aren't the solution.

Greenspan disagrees.

Former Federal Reserve chief Alan Greenspan, who considers himself a lifelong Republican libertarian, wants all the tax cuts passed in 2001 and 2003 repealed..

http://srph.it/bwwIhm

But what does he know? He and his philosophy were highly instrumental in creating this mess.

 

[talk2glenn]

I am not talking about corporate taxes. And I agree that typically it does not work this way, but it sortof does.

Neither am I. The type of tax is irrelevant; the effect of tax increases is higher transaction costs, which makes (by simple definition) some transactions at the margin unprofitable. They no longer take place, and gross production declines.

I am not talking about debt reduction. We need the tax cut money to cover the shortfall from the lower social security and medicare receipts.

That is debt reduction - additional revenue to cover mandatory expenses.

Regardless, I don't disagree with the principle - unfunded government mandates are a serious problem which have to be addressed at some point. I disagree with the idea that raising taxes now is a "good idea"; any benefit gained from the reduction in deficits is more than offset by the cost of reduced consumption. There is no more room for quantitative easing. If the government pushes demand in a negative direction, the Reserve Board will be largely powerless to pull it back, and recession could result.

This will increase Medicaid and Unemployment payouts automatically and probably prompt additional waves of stimulus spending, undoing anything gained from the initial tax hike.

Greenspan disagrees.

If this is true, then Greenspan is wrong. But that shouldn't surprise anyone; Greenspan has been desperately trying to sell the idea that his tenureship at the Fed was not an unmitigated disaster. In reality, he allowed the Board to be hopelessly politicized.

He kept monetary policy too loose for too long, which fueled the credit bubble, and tightened it too quickly and too violently in response to rising energy prices, which shocked the credit market into instant defib. They did everything wrong.

But I don't think Greenspan actually disagrees with the principles. He will acknowledge the reduction in output that will follow a tax increase. He probably just thinks that confidence benefit will outweigh the production costs. I disagree, and I think a simple look at prices suggests my position is more tenable. If investor and producer confidence is the goal, the government has a simple and free means to that end, without any change in fiscal policy:

Freeze spending and regulatory levels. Promise no new taxes, new spending, or new regulations for some arbitrary period (say, 2 years - one Congress) and say you'll use that time to review existing programs, taxes, and outlays for efficacy. That will give at least some short term reprieve to the legal uncertainty plaguing the American economy.

 

[CRGreathouse]

Neither am I. The type of tax is irrelevant; the effect of tax increases is higher transaction costs, which makes (by simple definition) some transactions at the margin unprofitable. They no longer take place, and gross production declines.

(emphasis added)

Really? I take it you're not a member of the Pigou Club, then.

 

[talk2glenn]

(emphasis added)

Really? I take it you're not a member of the Pigou Club, then.

Errr...the Pigouists take this concept to its logical conclusion? How might I not be a member?

They advocate the use of targeted taxes to dissuade undesirable market activity, ie gasoline taxes to discourage the consumption of gasoline. This concept works because of the effect of a tax is to eliminate transactions at the margin. Raise a targeted tax high enough (above the Laffer optimum), and the additional tax will have a negative effect on revenue - for every dollar in revenue it raises, it will lose more than a dollar from consumer substitution effect. See cigarettes.

They will also argue that these taxes are useful for correcting for negative externalities associated with specific economic activities, like using sugar taxes to pay for public treatments of diabetes (this being more fair that using general revenues, and market correcting by making sugar consumers pay for the social costs sugar imposes), but now we risk being pulled off topic.

 

[Gokul43201]

The effect is reduced output in the economy. This can be offset by increased public sector output, but in this case, you are talking about increasing taxes to reduce the public debt; there will be no offset.

How about this: raise only specific low impact taxes, and suffer a small multiplier of X1 to the GDP loss while raising revenue by R1. Find a mode of public sector spending with GDP multiplier X2 that is large compared to X1. Invest a fraction f<1 of the revenue R1, into chosen form of spending such that the effective multiplier is positive, i.e., f*X2 > X1.

You get a beneficial effect on GDP as well as on debt - win, win (both on paper and in a 30 sec TV ad, if crafted cleverly).

The assumption here that f exists is supported by the (2009?) CBO report on multipliers, and the further assumption that there exist certain kinds of tax within the above subset that lie of the correct side of the Laffer maximum is from my gut (but I can't imagine many would disagree with it).

 

[CAC1001]

How about this: raise only specific low impact taxes, and suffer a small multiplier of X1 to the GDP loss while raising revenue by R1. Find a mode of public sector spending with GDP multiplier X2 that is large compared to X1. Invest a fraction f<1 of the revenue R1, into chosen form of spending such that the effective multiplier is positive, i.e., f*X2 > X1.

You get a beneficial effect on GDP as well as on debt - win, win (both on paper and in a 30 sec TV ad, if crafted cleverly).

The assumption here that f exists is supported by the (2009?) CBO report on multipliers, and the further assumption that there exist certain kinds of tax within the above subset that lie of the correct side of the Laffer maximum is from my gut (but I can't imagine many would disagree with it).

So I am assuming if reading your post correctly that you are saying find a tax that when raised, the negative affect on GDP is more minimal, then use the revenue in a form of spending that will have a greater positive on the economy than the negative that the tax used to raise the revenue created? Thus still a net positive.

Thing is, would that be able to work in practice as smoothly as it seems to on paper? This is also making the assumption that bureaucrats will be able to spend the money more efficiently than consumers.

IMO, I would say leave the taxes where they are for two reasons:

1) Letting them expire would only bring in a miniscule amount of revenue compared to what is needed

2) I do not believe the current government is intent on reducing spending anytime soon

Government needs to work at ways to reduce, or at least cap, spending if they want to be raising taxes to reduce the deficit and debt.

Edit: According to Keith Hennessey, former senior White House economic advisor to President Bush, the Bush tax cuts were actually intended to be made permanent: http://keithhennessey.com/2010/08/23/response-to-pk/

 

[CRGreathouse]

They advocate the use of targeted taxes to dissuade undesirable market activity, ie gasoline taxes to discourage the consumption of gasoline. This concept works because of the effect of a tax is to eliminate transactions at the margin. Raise a targeted tax high enough (above the Laffer optimum), and the additional tax will have a negative effect on revenue - for every dollar in revenue it raises, it will lose more than a dollar from consumer substitution effect. See cigarettes.

They will also argue that these taxes are useful for correcting for negative externalities associated with specific economic activities, like using sugar taxes to pay for public treatments of diabetes (this being more fair that using general revenues, and market correcting by making sugar consumers pay for the social costs sugar imposes), but now we risk being pulled off topic.

Right... I don't need a lesson.

(What you say is, of course, correct -- at least on the positive side. I can't speak to your normative conclusions.)

Errr...the Pigouists take this concept to its logical conclusion? How might I not be a member?

I'm not sure if you're saying that you favor or disfavor Pigovian taxes...?

 

[airborne18]

Neither am I. The type of tax is irrelevant; the effect of tax increases is higher transaction costs, which makes (by simple definition) some transactions at the margin unprofitable. They no longer take place, and gross production declines.



That is debt reduction - additional revenue to cover mandatory expenses.

Regardless, I don't disagree with the principle - unfunded government mandates are a serious problem which have to be addressed at some point. I disagree with the idea that raising taxes now is a "good idea"; any benefit gained from the reduction in deficits is more than offset by the cost of reduced consumption. There is no more room for quantitative easing. If the government pushes demand in a negative direction, the Reserve Board will be largely powerless to pull it back, and recession could result.

This will increase Medicaid and Unemployment payouts automatically and probably prompt additional waves of stimulus spending, undoing anything gained from the initial tax hike.



If this is true, then Greenspan is wrong. But that shouldn't surprise anyone; Greenspan has been desperately trying to sell the idea that his tenureship at the Fed was not an unmitigated disaster. In reality, he allowed the Board to be hopelessly politicized.

He kept monetary policy too loose for too long, which fueled the credit bubble, and tightened it too quickly and too violently in response to rising energy prices, which shocked the credit market into instant defib. They did everything wrong.

But I don't think Greenspan actually disagrees with the principles. He will acknowledge the reduction in output that will follow a tax increase. He probably just thinks that confidence benefit will outweigh the production costs. I disagree, and I think a simple look at prices suggests my position is more tenable. If investor and producer confidence is the goal, the government has a simple and free means to that end, without any change in fiscal policy:

Freeze spending and regulatory levels. Promise no new taxes, new spending, or new regulations for some arbitrary period (say, 2 years - one Congress) and say you'll use that time to review existing programs, taxes, and outlays for efficacy. That will give at least some short term reprieve to the legal uncertainty plaguing the American economy.

The problem is that politics really clouds the issues with revenue and spending.

You have to look at things on a global level and at a macro level. Taxes will not impact production, not any worse than the alternative. A good part of our consumption is not domestic goods.

We can't touch social security and medicare, the real problem. Your reference to medicaid and unemployment are misplaced. They are both state programs. Medicid is funded by both the state and federal. Unemployment is not. Though the federal government is footing some extended program.

But you bring up a great point. The federal shortfall is only a small part of the revenue problem. The states face the issue even worse. So the federal government does not bail out the states.. The states will have to raise taxes, or start defaulting on debt. You don't want to live in a state that defaults on debt.

And if we don't raise revenue at the federal level, the dollar will continue to dive. And of course our interest on debt will increase.. which is a large part of the budget.

The issue will not be solved until employment improves, and there is no sign of that miracle. companies have made long term productivity gains.

One way or another the demand curve keep contracting, so we might as well start controlling the debt side of things. Through taxes, higher debt rates, and a declining dollar. Oh and inflation.

And we need to bail out the states, or the revenue issue will just mushroom across the board.

 

[CAC1001]

Those states that have been driven into financial problems by the public unions need to be held accountable, or any money given to them will only go to continuing and making their problem worse.

 

[airborne18]

Those states that have been driven into financial problems by the public unions need to be held accountable, or any money given to them will only go to continuing and making their problem worse.

It is not the unions fault. It is the taxpayers in the state for allowing it. The problem is that bankruptcy will not change it, the pensions win by federal law. but this of course is not what the tea party is after either. Things that they can impact, they are not. They could take a lot of power at the state level and change these things, but they are going for the big public splash to raise money even though they will not win most of the races.

That is what burns me about the tea party in my state.

And the issue at the state level is revenue. The unemployment funds in most states are tapped out. And again the unemployment means less revenue. Add to that the property tax shortfalls and the overall lower tax revenue makes for one big mess at every level.

 

[OmCheeto]

We are now past the point where the Bush tax cuts are providing any benefit to the economy, and in fact we need the tax revenue and the cuts are a drag on the economy.

I know everyone says that we need them as a stimulus and it would be foolish to take money out of the job creators hands.

The issue is that we are not seeing job growth. Blame whatever, the fact is that we have a shortfall in payroll taxes at both the state and federal level, and we have less overall tax revenue.

So what benefit is there to the economy or the rest of the taxpayers by leaving the tax cuts in place? well a larger deficit. Hmm. isn't this what the tea party is campaigning to control, the deficit.

And the democrats want to kill the tax cuts. So it sounds like everyone agrees. Yippee.

The economic basis for killing them is that it will force small business owners to spend the money so they can consume it rather than paying taxes on it. Is it a stretch? Not really. Not at this point where we still are not seeing job growth and very little GDP growth.

Large companies are not hiring because they have no confidence. And these so called small businesses who drive the economy benefit from the tax cuts, but are not using the money to grow the economy. So if they are not playing their part then take the money back.

We used the carrot long enough, now let's use a stick and see what happens. The economy cannot get much worst, so let's at least control the tax revenue and see if it sparks something.

This makes complete sense.

Did you read the http://nobelprize.org/nobel_prizes/economics/laureates/2010/sci.html" put out by the Nobel group regarding the 3 gentlemen who won the prize this year in economics? I just had a moment to skim through them* this morning as I was dreadfully late for work, but it was all regarding employment

*http://nobelprize.org/nobel_prizes/economics/laureates/2010/info.pdf"

 

[Ivan Seeking]

If this is true, then Greenspan is wrong. But that shouldn't surprise anyone; Greenspan has been desperately trying to sell the idea that his tenureship at the Fed was not an unmitigated disaster. In reality, he allowed the Board to be hopelessly politicized.

If this is true? Did you read it. As for the rest, nonsense. Congress hung on his every word with bated breath. He was the wizard.

He kept monetary policy too loose for too long, which fueled the credit bubble, and tightened it too quickly and too violently in response to rising energy prices, which shocked the credit market into instant defib. They did everything wrong.

What you mean to say is that he clung to his religion of libertarianism, aka Reaganomics, and it nearly destroyed the global economy.

Sometimes you have to step back from the chalk board and look at the results of your efforts. We've had thirty years at the board. Time for a change. The guiding princples of Reaganomics have been a failure. The proof lies in the debt-to-gdp ratio.

 

[CAC1001]

What you mean to say is that he clung to his religion of libertarianism, aka Reaganomics, and it nearly destroyed the global economy.

No he didn't. In fact, libertarianism would have called for him to have raised interest rates after the Dot Com bubble (actually raised them all the way back in the mid-90s to prevent the Dot Com bubble as well; that is what the ultra libertarians like Peter Schiff (who hate the Fed) are always ranting about).

Also remember, the Fed has a very tough job, as they are a price controller, whose job it is to maintain low inflation and full employment (along with other things too!). The decisions in this are extremely complex and there is no guarantee they will get them right everytime. For example, generally, one of the worst things you can do is to raise interest rates in a recession, because it hurts the economy. The Fed tends to be queasy about raising interest rates because Congress will crack down on them for this as well, because of the economic effect. When the Fed raised interest rates under Paul Volcker in the early 1980s, it was the political support from Ronald Reagan that allowed them to raise them as high as they did for as long as they did to bring down the inflation, as Congress didn't like it.

After the 2000 Dot Com bubble bursting, according to all the Greenspan critics (like Schiff), his not raising interest rates then is what sent America into the real-estate bubble (or contributed a lot to it anyhow). But, the Dot Com bubble bust also sent the economy into a recession (albeit a minor one). Suppose the Fed had instead raised interest rates to stave off another bubble, but as a result then sank the economy from what would have been a minor recession into a pretty sharp recession? How would Congress have reacted? What if Greenspan said, "We fear if we don't do this, another bubble, worse than the Dot Com bubble could spring up." Would anyone have believed him? Most of the people who said the economy was in a bubble were laughed at and scoffed at as looney-toons until it actually happened. What if Congress had demanded the Fed lower interest rates?

If Greenspan had sank the economy into a recession, I could imagine people saying, "The early 2000s recession was a result of Greenspan's idiocy. He raised interest rates out of some ridiculous, unfounded fear that if not, the economy would have gone into an even bigger bubble, one that could have been catostrophic. And he did this out of adherence to that ridiculous libertarian orthodoxy he reveres, the Peter Schiff-Ron Paul loons, who are always claiming the economy is going to collapse."

Being Fed Chairman isn't easy.

Also, the Fed doesn't adhere to "Reaganomics;" "Reaganomics" would be from the government itself through fiscal and regulatory policy.

Sometimes you have to step back from the chalk board and look at the results of your efforts. We've had thirty years at the board. Time for a change. The guiding princples of Reaganomics have been a failure. The proof lies in the debt-to-gdp ratio.

I'd say the debt-to-GDP ratio is because of ignoring Reaganomics. Reaganomics calls for low taxes and fiscal conservatism. When we followed that during the 1990s, we had a surplus. We did not follow it during the 2000s, with two wars and big government conservatism.

 

[airborne18]

No he didn't. In fact, libertarianism would have called for him to have raised interest rates after the Dot Com bubble (actually raised them all the way back in the mid-90s to prevent the Dot Com bubble as well; that is what the ultra libertarians like Peter Schiff (who hate the Fed) are always ranting about).

Also remember, the Fed has a very tough job, as they are a price controller, whose job it is to maintain low inflation and full employment (along with other things too!). The decisions in this are extremely complex and there is no guarantee they will get them right everytime. For example, generally, one of the worst things you can do is to raise interest rates in a recession, because it hurts the economy. The Fed tends to be queasy about raising interest rates because Congress will crack down on them for this as well, because of the economic effect. When the Fed raised interest rates under Paul Volcker in the early 1980s, it was the political support from Ronald Reagan that allowed them to raise them as high as they did for as long as they did to bring down the inflation, as Congress didn't like it.

After the 2000 Dot Com bubble bursting, according to all the Greenspan critics (like Schiff), his not raising interest rates then is what sent America into the real-estate bubble (or contributed a lot to it anyhow). But, the Dot Com bubble bust also sent the economy into a recession (albeit a minor one). Suppose the Fed had instead raised interest rates to stave off another bubble, but as a result then sank the economy from what would have been a minor recession into a pretty sharp recession? How would Congress have reacted? What if Greenspan said, "We fear if we don't do this, another bubble, worse than the Dot Com bubble could spring up." Would anyone have believed him? Most of the people who said the economy was in a bubble were laughed at and scoffed at as looney-toons until it actually happened. What if Congress had demanded the Fed lower interest rates?

If Greenspan had sank the economy into a recession, I could imagine people saying, "The early 2000s recession was a result of Greenspan's idiocy. He raised interest rates out of some ridiculous, unfounded fear that if not, the economy would have gone into an even bigger bubble, one that could have been catostrophic. And he did this out of adherence to that ridiculous libertarian orthodoxy he reveres, the Peter Schiff-Ron Paul loons, who are always claiming the economy is going to collapse."

Being Fed Chairman isn't easy.

Also, the Fed doesn't adhere to "Reaganomics;" "Reaganomics" would be from the government itself through fiscal and regulatory policy.



I'd say the debt-to-GDP ratio is because of ignoring Reaganomics. Reaganomics calls for low taxes and fiscal conservatism. When we followed that during the 1990s, we had a surplus. We did not follow it during the 2000s, with two wars and big government conservatism.

First, Reagan spent a ton of money. Though it was a good part on defense, which is productive to the economy.

The other issue is that we never forced the big players to take a hit during 9/11. We should have let it unwind, but instead we pumped money into the economy and left interest rates low. How long can you keep interest rates this low, really.

Real Estate was intentionally boosted to rebuild the economy after 9/11. At some point the fed should have put on the brakes, but they did not. And the problem is fixing itself.

 

[Al68]

Government needs to work at ways to reduce, or at least cap, spending if they want to be raising taxes to reduce the deficit and debt.

If they were willing to just limit the annual spending increases to inflation, taxes could be cut significantly and still get a surplus.

What you mean to say is that he clung to his religion of libertarianism, aka Reaganomics, and it nearly destroyed the global economy.

Utter nonsense. Another lie getting repeated incessantly following the old adage that if a lie gets repeated enough, it will be believed by many.

 

[Gokul43201]

Utter nonsense. Another lie getting repeated incessantly following the old adage that if a lie gets repeated enough, it will be believed by many.

It's okay to say that something is nonsense. It's definitely not okay to go about attributing intentions to other people's posts. Please keep posts about the content.

 

[G037H3]

Reaganomics set up the US for the 90's tech boom

not exactly a failure in my book

as for taxes, raise capital gains and keep income taxes low

 

[Al68]

It's okay to say that something is nonsense. It's definitely not okay to go about attributing intentions to other people's posts. Please keep posts about the content.

It's not? Even if the intentions or motives are of people who hold a position generally? I only wish that were specified in the forum rules. That would preclude every single post by certain forum members.

Of course, it is ad hominem and not a valid argument itself, but I just couldn't resist pointing out my observation.

That claim (that "the religion of libertarianism, aka Reaganomics" nearly destroyed the global economy) has been utterly refuted many times in other threads only to keep appearing again and again by the same posters, with absolutely no substantiation of the claim, and after it has been refuted multiple times. It's a vicious cycle.

And the intention is obvious: convince others of a (verifiable) lie while avoiding the impossible burden of substantiating it. The tactic actually works very well historically.

 

[Gokul43201]

I only wish that were specified in the forum rules.

It is.

Guidelines on Langauge and Attitude:
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[mugaliens]

That claim ... has been utterly refuted many times in other threads

Claims of these natures can never be refuted, much less "utterly" as they're largely based on belief in the midst of very complex multivariate issues, complex enough to beyond analysis.

 

[talk2glenn]

I'm not sure if you're saying that you favor or disfavor Pigovian taxes...?

Agnostic. The principle is sound, but it's a policy debate. I prefer to discuss the consequences and alternatives, but usually it's not objectively clear what's better or worse.

We can't touch social security and medicare, the real problem. Your reference to medicaid and unemployment are misplaced. They are both state programs. Medicid is funded by both the state and federal. Unemployment is not. Though the federal government is footing some extended program.

The source of the tax doesn't matter, and Unemployment Insurance is heavily subsidized by the federal government, particularly during periods of above average unemployment. Over half the funding for Medicaid comes from direct federal funding.

One way or another the demand curve keep contracting, so we might as well start controlling the debt side of things. Through taxes, higher debt rates, and a declining dollar. Oh and inflation.

These statements are contradictory. Demand contraction is incompatible with price inflation, generally speaking. There was one famous period exception in modern economic history, and it was a disaster.

What you mean to say is that he clung to his religion of libertarianism, aka Reaganomics, and it nearly destroyed the global economy.

Sigh...this is what I mean. Hopeless politicization of economic policy has reduced the ability of the Reserve Board to conduct sound fiscal policy. There was no way the Board could have handled things better when we can't separate politics from economics. Greenspan can be held responsible to the effect that the buck stops with the Chairman, but given the climate of things in Washington, its no surprise the Board acted in the manner it did.

The guiding princples of Reaganomics have been a failure.

Which guiding principles are those?

The real estate bubble was caused by many things. The connection to "reaganomics" is tenuous at best. Indeed, Reagan was famously a bubble buster. He waged a war on prices in the White House and at the Fed.

Propping up favored industries (rightly or wrongly) has long been a Democrats' game (with the notable exception of defense), and the establishment of housing as a favored industry goes back to Roosevelt, and Carter.

 

[airborne18]

Agnostic. The principle is sound, but it's a policy debate. I prefer to discuss the consequences and alternatives, but usually it's not objectively clear what's better or worse.



The source of the tax doesn't matter, and Unemployment Insurance is heavily subsidized by the federal government, particularly during periods of above average unemployment. Over half the funding for Medicaid comes from direct federal funding.

.

The source does matter, and that is the point that is missed by those who want to keep tax cuts in place. You can cut all you want, but there is a shortfall at every level of government. If the money for unemployment runs out at the state level, and it does not get picked up by the Federal government then the states will have to borrow.

You can shift the cost anywhere you want, but it will still have to be paid. It is a zero sum game to a certain point. Right now local schools are reeling from property tax deficits. The state and federal government will have to pump money into the problem.

It is all about revenue at this point. There is not going to be a magical recovery. We have expected this for a long time, and now it is here.

These statements are contradictory. Demand contraction is incompatible with price inflation, generally speaking. There was one famous period exception in modern economic history, and it was a disaster.

.

In theory they contradict, but that is why economics is not a science, and I had this discussion before here. There comes when suppliers have to adjust pricing to maintain the margins to stay in a market. We enjoy economies of scale due to cheap imports and huge consumer demand.

But even walmart has stopped chasing demand with price cuts, they are now adjusting for contracting demand, so they are adjusting pricing and supply to maintain the profit margin.

You can see it in the PC industry and durable goods. Last year everyone cut to chase demand, and now that has reversed.

The auto industry is finally catching up with this. This past spring and summer they tried deep discounts and they never did catch up with the contracting demand, so I think we are in for a long ride with this.

Sigh...this is what I mean. Hopeless politicization of economic policy has reduced the ability of the Reserve Board to conduct sound fiscal policy. There was no way the Board could have handled things better when we can't separate politics from economics. Greenspan can be held responsible to the effect that the buck stops with the Chairman, but given the climate of things in Washington, its no surprise the Board acted in the manner it did.



Which guiding principles are those?

The real estate bubble was caused by many things. The connection to "reaganomics" is tenuous at best. Indeed, Reagan was famously a bubble buster. He waged a war on prices in the White House and at the Fed.

Propping up favored industries (rightly or wrongly) has long been a Democrats' game (with the notable exception of defense), and the establishment of housing as a favored industry goes back to Roosevelt, and Carter.[/QUOTE]

 

[Ivan Seeking]

The real estate bubble was caused by many things. The connection to "reaganomics" is tenuous at best. Indeed, Reagan was famously a bubble buster. He waged a war on prices in the White House and at the Fed

The housing bubble was created by a credit bubble, that in turn was the result of too little regulation. There is nothing tenuous about that or that deregulation was a core principle of Reaganomics. The lesson from this disaster is that free markets are self regulating, but we can't afford to live with the corrections.

"It was inevitable" is nothing but an excuse made for a failed philosophy. It wasn't inevitable, it was preventable, and the people who devised the many credit schemes that helped to create this mess are the first to say so.

 

[mheslep]

IvanS: On Greenspan, did you read the sourced NYT article?

“I’m in favor of tax cuts, but not with borrowed money,” Mr. Greenspan, 84, said Friday in a telephone interview. “Our choices right now are not between good and better; they’re between bad and worse

To say "Greenspan disagrees" in response to a claim by others that tax increases will depress growth is a drive-by, superficial look at Greenspan's views leading to a misleading conclusion. Greenspan clearly does agree with that specific argument per the actual interview that kicked off the latest 'Greenspan said' series of news articles:
http://www.bloomberg.com/news/2010-07-16/greenspan-says-congress-should-let-bush-era-tax-cuts-expire-transcript-.html

WOODRUFF: So to those interests who say but wait a minute, if you let these taxes go my taxes go up, it is going to depress growth?

GREENSPAN: Yes, it probably will, but I think we have no choice in doing that, because we have to recognize there are no solutions which are optimum. These are choices between bad and worse.

The 'worse' for Greenspan, as is clear in the interview, is to continue with deficits on this scale. So as an economist does Greenspan favour tax increases over spending cuts? NO. He simply believes the required spending cuts are politically unfeasible:

GREENSPAN: Taxes go up. The problem is, unless we start to come to grips with this long-term outlook, we are going to have major problems. I think we misunderstand the momentum of this deficit going forward.
[...]The notion that we are somehow going to bring it in far more sharply is just utterly, politically unrealistic.

Well he may be right (see e.g. http://online.wsj.com/article/SB20001424052748703440004575547453471939086.html" ), but then we don't need to go to an economist to tell us what's politically feasible.

 

[Gokul43201]

The housing bubble was created by ...

You are responding to the wrong person. There's a missing quote tag in the previous post that needs fixing, or a section that could be deleted.

 

[mheslep]

Demand contraction is incompatible with price inflation, generally speaking.

This is as incorrectly predicted by classical Phillips, which has been known to be wrong for ~40 years. Classical theory:

There was one famous period exception in modern economic history, and it was a disaster.

One? Hardly. Reality:
[PLAIN]http://econ161.berkeley.edu/multimedia/animated_gifs/PCurve.GIF

 

[airborne18]

IvanS: On Greenspan, did you read the sourced NYT article?



To say "Greenspan disagrees" in response to a claim by others that tax increases will depress growth is a drive-by, superficial look at Greenspan's views leading to a misleading conclusion. Greenspan clearly does agree with that specific argument per the actual interview that kicked off the latest 'Greenspan said' series of news articles:
http://www.bloomberg.com/news/2010-07-16/greenspan-says-congress-should-let-bush-era-tax-cuts-expire-transcript-.html

The 'worse' for Greenspan, as is clear in the interview, is to continue with deficits on this scale. So as an economist does Greenspan favour tax increases over spending cuts? NO. He simply believes the required spending cuts are politically unfeasible:
Well he may be right (see e.g. France w/ a million people on the streets protesting a a 2 year increase in retirement age), but then we don't need to go to an economist to tell us what's politically feasible.

I don't see where the tax cuts are helping the economy. The problem is revenue and jobs. Construction will not improve until the real estate market improves, which is when we have employment.

The tax cuts are not propping up each little boom in the housing market, it is the fed massively propping up mbs.

Meanwhile local governments are even hurting from the deadbeats who owe property tax. And the revenue picture just gets worst the higher in government you look.

Consumer spending means nothing when there are no jobs and the housing market is in shambles ( still ). They should just let it hit bottom so we can actually start to recover.

 

[airborne18]

This is as incorrectly predicted by classical Phillips, which has been known to be wrong for ~40 years. Classical theory:

One? Hardly. Reality:
[PLAIN]http://econ161.berkeley.edu/multimedia/animated_gifs/PCurve.GIF[/QUOTE]

I have a few charts to eventually post, but I am in the middle of midterms and a project for my daughter.

Interesting mshep.

 

[talk2glenn]

The housing bubble was created by a credit bubble, that in turn was the result of too little regulation.

This is demonstrably and theoretically false. The credit bubble followed the housing bubble, not the other way around. Consumers respond to rising prices in the short-run by borrowing against future earnings to subsidize current consumption, on the assumption that rising prices will devalue their future debts. This fuels an expansion in the credit markets. This is rational behavior, but note the order: prices go up, and debt follows.

The question, then, is why the dramatic rise in housing prices. Again, the suggestion that it was a case of "too little regulation" is apparently absurd. Financial services is the most heavily regulated industry in the country. The vast majority of the home loan market was government sponsored before 2008, and has now been outright nationalized. Federal lending rules required banks to issue a certain portion of new loans to classically high risk borrowers.

Housing has long been a government favored industry. Through combinations of subsidies and warrants, the federal government created a high risk mortgage market that, in the history of private property, never before existed, and still largely doesn't exist outside the US. We can observe the same trend happening in the student loan market and tuition prices, again due to government intervention, as an aside.

Clearly, the housing bubble (but not all bubbles, to be sure) was a failure of policy, not the market.

 

[talk2glenn]

This is as incorrectly predicted by classical Phillips, which has been known to be wrong for ~40 years. Classical theory:

One? Hardly. Reality:
[PLAIN]http://econ161.berkeley.edu/multimedia/animated_gifs/PCurve.GIF[/QUOTE]

The Phillips curve isn't "wrong" - it is, as you yourself showed, an extremely accurate predictor of price behavior over consumption behavior, everything else being equal. If anything, its guilty of simplicity, but simplicity is useful for providing introductory explanations. The models get more complicated as you dig deeper.

What you're referring to in the second graph is an example of everything else being deliberately made inequal. Given the predictions made by the models, policy makers intervene in the markets to push things in directions considered more desirable.

Policy makers have long recognized the dichotomy between unemployment and inflation. Specifically, at the monetary policy level, lower unemployment must be "bought", and it is paid for with higher inflation. This is the Phillips curve.

However, the curve itself is not static. It moves, in response to market expectations. Movement to the left reduces the employment cost (the same rate of unemployment corresponds to a lower rate of inflation), and movement to the right raises the cost.

The period exception I was referring to was the so-called "stagflation", and it was a unique, one-time event (so far, at least) in recorded economic history, which is why it changed so much of the existing theory.

 

[mheslep]

The Phillips curve isn't "wrong" - it is, as you yourself showed, an extremely accurate predictor of price behavior over consumption behavior, everything else being equal.

That flys in the face of the data reference. Classical Phillips accurately predicts very little correctly _as the data clearly shows_.

If anything, its guilty of simplicity, but simplicity is useful for providing introductory explanations.

That's a direct contradiction of your first sentence.

What you're referring to in the second graph is an example of everything else being deliberately made inequal.

The 2nd graph is simply inflation and employment data over time, showing unemployment and inflation over time.

Given the predictions made by the models, policy makers intervene in the markets to push things in directions considered more desirable.

Policy makers have long recognized the dichotomy between unemployment and inflation.

Source? I think you meant to say dependency and/or connection, not dichotomy, and the 'policy makers' don't 'recognize' inflation as a means of driving unemployment any more.

The period exception I was referring to was the so-called "stagflation", and it was a unique, one-time event (so far, at least) in recorded economic history, which is why it changed so much of the existing theory.

The stagflation of the mid 70's which simply the most striking counter Phillips example. But also shown above are several periods where inflation increased but so did unemployment, or the converse was true (decreasing inflation and unemployment), both of which are contrary to classical Phillips. Look, I've provided respectable economic references and you are directly contradicting them with assertion. Let's see some references.