Warren Buffett: Good Investor, Crummy Economist
Warren Buffett once said that it wasn’t right for his secretary to have a higher tax rate than he faced, leading me to point out that he didn’t understand tax policy. The 15 percent tax rates on dividends and capital gains to which he presumably was referring represents double taxation, and when added to the tax that already was paid on the income he invested (and the tax that one imagines will be imposed on that same income when he dies), it is quite obvious that his effective marginal tax rates is much higher than anything his secretary pays. Though he is right that his secretary’s tax rate is much too high.
Well, it turns out that Warren Buffett also doesn’t understand much about other areas of fiscal policy. Like a lot of ultra-rich liberals who have lost touch with the lives of regular people, he thinks taxpayer anger is misguided. Not only does he scold people for being upset, but he regurgitates the most simplistic Keynesian talking points to justify Obama’s spending spree. Here’s an excerpt from his hometown paper.
Taxpayer anger against President Barack Obama and Congress is counterproductive because policy makers took measures including deficit spending to stimulate the economy, billionaire investor Warren Buffett told CNBC. …“I hope we get over it pretty soon, because it’s not productive,’’ Buffett said. “We will come back regardless of how people feel about Washington, but it is not helpful to have people as unhappy as they are about what’s going on in Washington.” …“The truth is we’re running a federal deficit that’s 9 percent of gross domestic product,” Buffett said. “That’s stimulative as all get out. It’s more stimulative than any policy we’ve followed since World War II.”
About the only positive thing one can say about Buffett’s fiscal policy track record is that he is nowhere close to being the most inaccurate person in the United States, a title that Mark Zandi surely will own for the indefinite future.
It’s Simple to Balance the Budget without Higher Taxes
John Podesta of the Center for American Progress had a column in Politico yesterday asserting that “closing the budget gap entirely on the spending side would require draconian programmatic cuts.” He went on to complain that there are some people who “refuse to look at the revenue side of the ledger – while insisting that we dig the hole $830 billion deeper over the next decade by extending the Bush tax cuts.”
Not surprisingly, Mr. Podesta is totally wrong. It’s actually not that challenging to balance the budget. And it doesn’t even require any spending cuts, though it would be a very good idea to dramatically downsize the federal government. Here’s a chart showing this year’s spending and revenue totals. It then shows the Congressional Budget Office’s estimate of how much revenues will grow, assuming all the 2001 and 2003 tax cuts are made permanent and assuming that the alternative minimum tax is adjusted for inflation. As you can see, balancing the budget is a simple matter of limiting the annual growth of federal spending.
So how is it that Mr. Podesta can spout sky-is-falling rhetoric about “draconian” cuts when all that’s needed is fiscal restraint? The answer is that politicians in Washington have concocted a self-serving budget process that automatically assumes that all previously-planned spending increases should occur. So if the politicians put us on a path to make government 8 percent bigger next year and there is a proposal to instead limit spending growth to 3 percent, that 3 percent increase gets portrayed as a 5 percent cut.
This is a great scam, at least for the political class. They get to buy more votes by boosting the burden of government spending, but they get to tell voters that they’re being fiscally responsible. And they get to claim that they have no choice but to raise taxes because there’s no other way to balance the budget. In the real world, though, this translates into bigger government and puts us on a path to a Greek-style fiscal nightmare.
Read the rest of this post »
Obama’s Plan to Raise Tax Rates
President Obama wants to raise the top two individual income tax rates for 2011. The top rates will rise from 33% to 36% and from 35% to 39.6%, unless the president and Congress agree to extend the current rate structure.
Before taking action on this issue, policymakers should consider the following facts and data. (All information is cited in my related congressional testimony).
- President Bush cut the top federal tax rate by 5 percentage points, but the average top rate in the 30 OECD nations has also fallen by 5 percentage points since 2000.
- Unless policymakers extend current tax relief, the combined U.S. federal-state top rate will increase from 41.9% to about 46.5%, based on OECD data. That will give us about the tenth highest rate among the 30 OECD nations.
- The chart shows that the average top OECD rate fell from 46.7% in 2000 to 41.5% in 2009. If we let the Bush tax cuts expire, we won’t be simply going back to our situation in 2000—the world has changed since then as other countries have adopted more competitive tax rates.
- President Obama’s proposed top federal rate of 39.6 percent is 41-percent higher than the 28-percent top income rate achieved in the late 1980s after the bipartisan Tax Reform Act of 1986.
- Higher marginal tax rates will reduce incentives for working, investing, and expanding businesses, and they will increase incentives for tax avoidance and evasion.
- If income tax rates rise, some high-income workers will work fewer hours and retire earlier. Some spouses in two-earner families will stay out of the workforce. Some angel investors will have less cash to invest in start-up ventures. And some small businesses will decide not to buy new equipment or hire new workers.
- Higher-income taxpayers often have a lot of flexibility on their working and investing decisions—tax them more and they will reduce their reported income alot. Robert Carroll finds that this effect of raising the top rate from 35% to 40% would offset about 40 percent of the government’s otherwise expected revenue gain.
- Today’s highest-earners are generally not passive inheritors of wealth, but are usually self-made and entrepreneurial. Glenn Hubbard notes, “when you look at data, you see that people who are rich almost entirely are rich because of entrepreneurial risk taking.”
- Many people with high incomes are angel investors, who help to fuel small business expansion. If their taxes go up, they will have less money and fewer incentives to invest, and they will park more of their money in tax-free municipal bonds.
- More than half of all business income in the United States is reported on individual returns, not corporate returns. This income is reported by proprietorships, partnerships, LLCs, and S corporations. If the top two individual income tax rates are increased, it would hit a substantial amount of this business income.
- Robert Carroll looked at individual tax filers who derived more than half of their income from a business. He found that one-quarter of these taxpayers were in the top two tax rate brackets, and thus would be hit by the proposed tax increases.
- The Joint Committee on Taxation found that about 25 million individual tax returns will report about $1 trillion of net positive business income in 2011. Of that total, 44 percent is in the top two income tax brackets and thus would be hit by the proposed tax increase.
- In an empirical study, Glenn Hubbard and William Gentry found that higher marginal tax rates discourage entry into self-employment and business ownership. A study by Donald Bruce and Tami Gurley for the SBA similarly found that marginal tax rates affect entrepreneurship.
- Once a small business is up and running, empirical research by Robert Carroll, Douglas Holtz-Eakin, Mark Rider, and Harvey Rosen found that higher individual income tax rates negatively affect hiring, investment, and expansion.
Those are the facts, and here are my views. It’s very sad that a nation that has been a bastion of free market growth and individual achievement has a tax code that is becoming very hostile to high-earners, entrepreneurs, and businesses.
Let’s keep the Bush tax cuts, cut our corporate tax rate from 40% to 20%, and cut government spending. Rather than the government filling its coffers at the expense of families, that policy would make the economy boom, and fill government coffers as a side effect of rising family incomes.
Keynes Was Wrong on Stimulus, but the Keynesians Are Wrong on Just about Everything
Dana Milbank of the Washington Post wrote this weekend that critics of Keynesianism are somewhat akin to those who believe the earth is flat. He specifically cites the presumably malignant influence of the Cato Institute.
Keynes was right, and in this case it’s probably for the better: Keynes didn’t live to see the Republicans of 2010 portray him as some sort of Marxist revolutionary. …These men get their economic firepower from conservative think tanks such as the Cato Institute… What’s with the hate for Maynard? Perhaps these Republicans don’t realize that some of their tax-cut proposals are as “Keynesian” as Obama’s program. There’s a fierce dispute about how best to respond to the economic crisis — Tax cuts? Deficit spending? Monetary intervention? — but the argument is largely premised on the Keynesian view that government should somehow boost demand in a recession. …With so much of Keynesian theory universally embraced, Republican denunciation of him has a flat-earth feel to it. …There is an alternative to such “Keynesian experiments,” however. The government could do nothing, and let the human misery continue. By rejecting the “Keynesian playbook,” this is what Republicans are really proposing.
Milbank makes some good points, particularly when noting the hypocrisy of Republicans. Bush’s 2001 tax cuts were largely Keynesian in their design, which is one of the reasons why the economy was sluggish until the supply-side tax cuts were implemented in 2003. Bush pushed through another Keynesian package in 2008, and many GOPers on Capitol Hill often erroneously use Keynesian logic even when talking about good policies such as lower marginal tax rates.
But the thrust of Milbank’s column is wrong. He is wrong in claiming that Keynesian economics works, and he is wrong is claming that it is the only option. Regarding the first point, there is no successful example of Keynesian economics. It didn’t work for Hoover and Roosevelt in the 1930s. It didn’t work for Japan in the 1990s. It didn’t work for Bush in 2001 or 2008, and it didn’t work for Obama. The reason, as explained in this video, is that Keynesian economics seeks to transform saving into consumption. But a recession or depression exists when national income is falling. Shifting how some of that income is used does not solve the problem.
This is why free market policies are the best response to an economic downturn. Lower marginal tax rates. Reductions in the burden of government spending. Eliminating needless regulations and red tape. Getting rid of trade barriers. These are the policies that work when the economy is weak. But they’re also desirable policies when the economy is strong. In other words, there is no magic formula for dealing with a downturn. But there are policies that improve the economy’s performance, regardless of short-term economic conditions. Equally important, supporters of economic liberalization also point out that misguided government policies (especially bad monetary policy by the Federal Reserve) almost always are responsible for downturns. And wouldn’t it be better to adopt reforms that prevent downturns rather than engage in futile stimulus schemes once downturns begin?
None of this means that Keynes was a bad economist. Indeed, it’s very important to draw a distinction between Keynes, who was wrong on a couple of things, and today’s Keynesians, who are wrong about almost everything. Keynes, for instance, was an early proponent of the Laffer Curve, writing that, “Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget.”
Keynes also seemed to understand the importance of limiting the size of government. He wrote that, “25 percent taxation is about the limit of what is easily borne.” It’s not clear whether he was referring to marginal tax rates or the tax burden as a share of economic output, but in either case it obviously implies an upper limit to the size of government (especially since he did not believe in permanent deficits).
If modern Keynesians had the same insights, government policy today would not be nearly as destructive.
Obama’s New Stimulus Schemes: Same Song, Umpteenth Verse
Like a terrible remake of Groundhog Day, the White House has unveiled yet another so-called stimulus scheme. Actually, they have two new proposals to buy votes with our money. One plan is focused on more infrastructure spending, as reported by Politico.
Seeking to bolster the sluggish economy, President Barack Obama is using a Labor Day appearance in Milwaukee to announce he will ask Congress for $50 billion to kick off a new infrastructure plan designed to expand and renew the nation’s roads, railways and runways. …The measures include the “establishment of an Infrastructure Bank to leverage federal dollars and focus on investments of national and regional significance that often fall through the cracks in the current siloed transportation programs,” and “the integration of high-speed rail on an equal footing into the surface transportation program.”
The other plan would make permanent the research and development tax credit. The Washington Post has some of the details.
Under mounting pressure to intensify his focus on the economy ahead of the midterm elections, President Obama will call for a $100 billion business tax credit this week… The business proposal – what one aide called a key part of a limited economic package – would increase and permanently extend research and development tax credits for businesses, rewarding companies that develop new technologies domestically and preserve American jobs. It would be paid for by closing other corporate tax loopholes, said the official, speaking on condition of anonymity because the policy has not yet been unveiled.
These two proposals are in addition to the other stimulus/job-creation/whatever-they’re-calling-them-now proposals that have been adopted in the past 20 months. And Obama’s stimulus schemes were preceded by Bush’s Keynesian fiasco in 2008. And by the time you read this, the Administration may have unveiled a few more plans. But all of these proposals suffer from the same flaw in that they assume growth is sluggish because government is not big enough and not intervening enough. Keynesian politicians don’t realize (or pretend not to realize) that economic growth occurs when there is an increase in national income. Redistribution plans, by contrast, simply change who is spending an existing amount of income. If the crowd in Washington really wants more growth, they should reduce the burden of government, as explained in this video.
The best that can be said about the new White House proposals is that they’re probably not as poorly designed as previous stimulus schemes. Federal infrastructure spending almost surely fails a cost-benefit test, but even bridges to nowhere carry some traffic. The money would generate more jobs and more output if left in the private sector, so the macroeconomic impact is still negative, but presumably not as negative as bailouts for profligate state and local governments or subsidies to encourage unemployment – which were key parts of previous stimulus proposals.
Likewise, a permanent research and development tax credit is not ideal tax policy, but at least the provision is tied to doing something productive, as opposed to tax breaks and rebates that don’t boost work, saving, and investment. We don’t know, however, what’s behind the curtain. According to the article, the White House will finance this proposal by “closing other corporate tax loopholes.” In theory, that could mean a better tax code. But this Administration has a very confused understanding of tax policy, so it’s quite likely that they will raise taxes in a way that makes the overall tax code even worse. They’ve already done this in previous stimulus plans by increasing the tax bias against American companies competing in world markets, so there’s little reason to be optimistic now. And don’t forget that the President has not changed his mind about imposing higher income tax rates, higher capital gains tax rates, higher death tax rates, and higher dividend tax rates beginning next January.
All that we can say for sure is that the politicians in Washington are very nervous now that the midterm elections are just two months away. This means their normal tendencies to waste money will morph into a pathological form of profligacy.
New York Times Seeks Higher Taxes on the ‘Rich’ as Prelude to Higher Taxes on the Middle Class
In a very predictable editorial this morning, the New York Times pontificated in favor of higher taxes. Compared to Paul Krugman’s rant earlier in the week, which featured the laughable assertion that letting people keep more of the money they earn is akin to sending them a check from the government, the piece seemed rational. But that is damning with faint praise. There are several points in the editorial that deserve some unfriendly commentary.
First, let’s give the editors credit for being somewhat honest about their bad intentions. Unlike other statists, they openly admit that they want higher taxes on the middle class, stating that “more Americans — and not just the rich — are going to have to pay more taxes.” This is a noteworthy admission, though it doesn’t reveal the real strategy on the left.
Most advocates of big government understand that it will be impossible to turn America into a European-style welfare state without a value-added tax, but they don’t want to publicly associate themselves with that view until the political environment is more conducive to success. Most important, they realize that it will be very difficult to impose a VAT without seducing some gullible Republicans into giving them political cover. And one way of getting GOPers to sign up for a VAT is by convincing them that they have to choose a VAT if they don’t want a return to the confiscatory 70 percent tax rates of the 1960s and 1970s. Any moves in that direction, such as raising the top tax rate from 35 percent to 39.6 percent next January, are part of this long-term strategy to pressure Republicans (as well as naive members of the business community) into a VAT trap.
Shifting to other assertions, the editorial claims that “more revenue will be needed in years to come to keep rebuilding the economy.” That’s obviously a novel assertion, and the editors never bother to explain how and why more tax revenue will lead to a stronger economy. Are the folks at the New York Times not aware that both economic growth and living standards are lower in European nations that have imposed higher tax burdens? Heck, even the Keynesians agree (albeit for flawed reasons) that higher taxes stunt growth.
The editorial also asserts that, “Since 2002, the federal budget has been chronically short of revenue.” I suppose if revenues are compared to the spending desires of politicians, then tax collections are – and always will be – inadequate. The same is true in Greece, France, and Sweden. It doesn’t matter whether revenues are 20 percent of GDP or 50 percent of GDP. The political class always wants more.
But let’s actually use an objective measure to determine whether revenues are “chronically short.” The Democrat-controlled Congressional Budget Office stated in its newly-released update to the Economic and Budget Outlook that federal tax revenues historically have averaged 18 percent of GDP. They are below that level now because of the economic downturn, but CBO projects that revenues will climb above that level in a few years – even if all of the 2001 and 2003 tax cuts are made permanent. Moreover, OMB’s historical data shows that revenues were actually above the long-run average in 2006 and 2007, so even the “since 2002″ part of the assertion in the editorial is incorrect.
On the issue of temporary tax relief for the non-rich, the editorial is right but for the wrong reason. The editors rely on the Keynesian rationale, writing that, “low-, middle- and upper-middle-income taxpayers…tend to spend most of their income and the economy needs consumer spending” whereas “Tax cuts for the rich can safely be allowed to expire because wealthy taxpayers tend to save rather than spend their tax savings.”
I’ve debunked Keynesian analysis so often that I feel that I deserve some sort of lifetime exemption from dealing with this nonsense, but I’ll give it another try. Borrowing money from some people in the economy and giving it to some other people in the economy is not a recipe for better economic performance. Economic growth means we are increasing national income. Keynesian policy simply changes who is spending national income, guided by a myopic belief that consumer spending somehow is better than investment spending. The Keynesian approach didn’t work for Hoover and Roosevelt in the 1930s, it didn’t work for Japan in the 1990s, and it hasn’t worked for Obama.
And it doesn’t matter if the Keynesian stimulus is in the form of tax rebates. Gerald Ford’s rebate in the 1970s was a flop, and George W. Bush’s 2001 rebate also failed to boost growth. Tax cuts can lead to more national income, but only if marginal tax rates on productive behavior are reduced so that people have more incentive to work, save, and invest. This is an argument for extending the lower tax rates for all income classes, but it’s important to point out that the economic benefits will be much greater if the lower tax rates are made permanent.
Last but not least, the editorial asserts that, “The revenue from letting [tax cuts for the rich] expire — nearly $40 billion next year — would be better spent on job-creating measures.” Not surprisingly, there is no effort to justify this claim. They could have cited the infamous White House study claiming that the so-called stimulus would keep unemployment under 8 percent, but even people at the New York Times presumably understand that might not be very convincing since the actual unemployment rate is two percentage points higher than what the Obama Administration claimed it would be at this point.
Filed under: General; Government and Politics; Health Care; Tax and Budget Policy
Concerning the End of “Combat Operations” in Iraq
Several of today’s front pages feature iconic images of U.S. troops marching onto troop transports and into the sunset in Iraq. Today’s story by Ernesto Londoño in the Washington Post, features Lt. Col. Mark Bieger of the 4th Stryker Brigade, 2nd Infantry Division, “This is a historic mission!” Beiger bellows as his troops prepared to depart Baghdad for the last time, ”A truly historic end to seven years of war.”
No disrespect to Col. Bieger and his troops, but the war isn’t over, and it won’t be so long as there are significant number of U.S. troops in Iraq at risk of being caught in the cross-fire of a sectarian civil war.
The Iraqi government, more than five months after nationwide elections, remains in limbo. Talks over a power sharing arrangement have broken down. Meanwhile, violence is on the rise. Call it whatever you like, but the 50,000 troops who remain in Iraq are still dealing with a lot of challenges.
Much of the confusion in the media reporting revolves around semantics, words and phrases such as “combat” and “combat units.” It doesn’t help that George W. Bush declared on May 1, 2003 that ”major combat operations in Iraq have ended” under that infamous “Mission Accomplished” banner. But beyond Bush’s irrational exuberance, such terms are increasingly misleading in an era in which conventional, state vs. state organized violence — what we used to think of as war – has been replaced by murky, disorganized violence, perpetrated by disparate militias, or merely disgruntled individuals unhappy with their lot in life, and determined to take it out on anyone who happens to be around at the time.
Unfortunately, I have very little confidence that that state of affairs will change any time soon. And I seriously doubt that our people — our men and women in uniform, and, explains Michael Gordon in the New York Times, soon many more U.S. civilians and contractors — will be able to put everything right, and not for lack of trying. Meanwhile, I am deeply troubled by the rising chorus of voices calling on the Obama administration to ignore the remaining provisions of the status of forces agreement (SOFA) and prepare for an indefinite military presence in Iraq. (On this, see Ted Galen Carpenter’s latest entry at TNI’s The Skeptics blog.)
So, no, the war isn’t over. For better or worse (and chiefly the latter), Americans will remain associated with an unpopular and government in Baghdad as it struggles to hold together the country’s disparate factions. They will be at great risk if the current political paralysis collapses into still wider violence.
Needless to say, I hope that doesn’t happen. But I won’t be striking up the band and declaring the war American in Iraq to be truly over, until all of our troops are back home.
More on Phony Defense Spending Cuts
On Saturday the Washington Post published a letter I wrote chastising their editorialists for inventing defense budget cuts:
The Aug. 12 editorial “Mr. Gates’s rough cuts” and David S. Broder’s Aug. 12 column, “Gates’s budget warning shot,” applauded the defense secretary for his plans to cut spending even though the plans will do no such thing. As Mr. Broder wrote, Mr. Gates proposed closing the U.S. Joint Forces Command and shedding contractors and generals in the Pentagon’s employ. But neither piece noted that these proposals are part of a plan to shift some Pentagon spending from administration to force structure — not to cut total spending.
The impetus for the cost-shifting plan is the White House’s reluctance to increase Pentagon spending by more than 1 percent above inflation for the next few years. Rapid growth in procurement and personnel spending makes that increase insufficient to cover the military’s programmatic costs.
Bloated administrative overhead is a good place to find funds for that end. But taxpayers gain nothing.
Mr. Gates has requested substantial increases in defense spending every year that he has been secretary. He opposes spending cuts, even after the wars end, even though the United States now spends more on defense than at any time during the Cold War, adjusting for inflation. He openly hopes that these proposals to heighten administrative efficiency deflect pressure to cut spending. By pretending that these changes do so, The Post helps shield Pentagon spending from scrutiny.
The point is straightforward: Stop confusing reforms explicitly intended to prevent spending cuts with real spending cuts.
The Post, however, repeated the error that my letter complained about in the title they gave it both online (“Will the defense cuts do what Robert Gates says they will?”) and in the actual newspaper (“Scrutinizing Mr. Gates’s Defense Budget Cuts”). The editor has yet to respond to my email noting the irony.
I wrote more on the media’s failure to portray these reforms accurately for the National Interest’s new Skeptics blog. (Chris Preble and I have already discussed this topic here.)
The Post’s editorial page typifies the fawning coverage that the Washington commentariat gives Gates. He has a knack for getting even otherwise discerning analysts to portray him as a pragmatist/ realist/ conservative even as he asks Congress to increase a defense budget that is already larger than at any point during the Cold War and advocates endless nation-building warfare in Afghanistan. The keys to his success, I say, are (a) appearing moderate in contrast to the rest of the foreign policy elites in his party, which is easy, (b) skillful management that distracts people from his embrace of policies that are not realistic, pragmatic, or conservative, and (c) eloquently saying things that contradict his actions.
Fareed Zakaria’s latest column, for example, asserts that the only two conservatives in Washington are Gates and the portrait of Eisenhower hanging in his office. Like many, Zakaria is taken with Gates’ recent speech at the Eisenhower library, which praised Ike for restraining defense spending and avoiding intervention in Vietnam. It was such a good speech that you can almost forgive those that fail to note the irony of Gates’ sounding like someone proposing defense cuts and exiting Afghanistan.
In Afghanistan, What’s News?
In a recent interview with the New York Times, top U.S. and NATO commander in Afghanistan, General David Petraeus, argued “against any precipitous withdrawal of forces by July 2011,” and added he did not take over merely to “preside over a ‘graceful exit.’”
That an active-duty army general is committed to a pending military engagement is nothing new. Nevertheless, I have some thoughts about this interview, and the rest of the general’s weekend “media blitz,” that I think are worth sharing.
First off, that Petraeus is against a “precipitous withdrawal” reminds me of the many straw man arguments bandied about during the most explosive days in Iraq. However, back then, even the staunchest (and more serious) anti-Iraq War critics did not endorse high-tailing it out of Mesopotamia, logistics be damned. Not only was a phased exit strategy deemed strategically necessary, but also the only option that was considered politically feasible. Today, in the case of Afghanistan, to suppress al Qaeda in a cost-effective manner, America and its allies could easily scale-down its campaign to a much narrower counterterrorism mission. Of course, that is unlikely to happen anytime soon, but Petraeus’s gratuitous “precipitous withdrawal” comment implies that critics of the present policy (a massive, long-term nation-building campaign) have no coherent or well-thought out alternative. That is certainly not the case.
Second, as my colleagues and I ask continuously, the issue is not exclusively about where we intend to fight, but rather how we intend to fight. More importantly, the question we need to ask in the case of Afghanistan is not “is Afghanistan winnable?” but rather “what do we hope to accomplish?” To endorse an open-ended nation-building mission blithely ignores the uncomfortable truth that “American taxpayers have inadvertently created a network of warlords across Afghanistan” who are fueling the very corruption and warlordism that we are pressing President Karzai to curtail. It neglects the perverse reality that the United States is “essentially waging a proxy war” against its ostensible ally, Pakistan. Perhaps even worse, it dismisses the fact that we are incinerating hundreds of billions of dollars—during a time of economic peril, no less—on a corrupt and illegitimate central government in Kabul that has every incentive to perpetuate the conflict.
The July 2011 drawdown should continue as the Obama Administration pledged. Government planners in Washington should begin to husband our nation’s ever-diminishing financial resources rather squander them, and learn how to manage our own affairs, not others’.
When Keynesians Attack, Part II
I’m still dealing with the statist echo chamber, having been hit with two additional attacks for the supposed sin of endorsing Reaganomics over Obamanomics (my responses to the other attacks can be found here and here). Some guy at the Atlantic Monthly named Steve Benen issued a critique focusing on the timing of the recession and recovery in Reagan’s first term. He reproduces a Krugman chart (see below) and also adds his own commentary.
Reagan’s first big tax cut was signed in August 1981. Over the next year or so, unemployment went from just over 7% to just under 11%. In September 1982, Reagan raised taxes, and unemployment fell soon after. We’re all aware, of course, of the correlation/causation dynamic, but as Krugman noted in January, “[U]nemployment, which had been stable until Reagan cut taxes, soared during the 15 months that followed the tax cut; it didn’t start falling until Reagan backtracked and raised taxes.”
This argument is absurd since the recession in the early 1980s was largely the inevitable result of the Federal Reserve’s misguided monetary policy. And I would be stunned if this view wasn’t shared by 90 percent-plus of economists. So it is rather silly to say the recession was caused by tax cuts and the recovery was triggered by tax increases.
But even if we magically assume monetary policy was perfect, Benen’s argument is wrong. I don’t want to repeat myself, so I’ll just call attention to my previous blog post which explained that it is critically important to look at when tax cuts (and increases) are implemented, not when they are enacted. The data is hardly exact, because I haven’t seen good research on the annual impact of bracket creep, but there was not much net tax relief during Reagan’s first couple of years because the tax cuts were phased in over several years and other taxes were going up. So the recession actually began when taxes were flat (or perhaps even rising) and the recovery began when the economy was receiving a net tax cut. That being said, I’m not arguing that the Reagan tax cuts ended the recession. They probably helped, to be sure, but we should do good tax policy to improve long-run growth, not because of some misguided effort to fine-tune short-run growth.
Not Just a ‘Special Interest,’ A Super Special Interest
In the gag-inducing tradition of National Education Association propaganda, President Obama’s “Organizing for America” has released the video below taking issue with House Minority Leader John Boehner (R-OH) calling teachers a “special interest.” Watch…and wince.
Now, certainly many teachers want nothing more than to teach and do a good job. Some might even do it as much “for the kids” as their own personal satisfaction. But teachers, at least as represented by the NEA and the American Federation of Teachers, sure as heck are a special interest. Indeed, they might be called a super-special interest, with unparalled sway over Democrats especially, and an incredible ability to get money out of taxpayers.
But what about teachers’ saintliness?
Certainly many teachers work hard and spend some money out of their own pockets for the kids. But no public-school teacher is so poor that, unlike the no doubt intentionally bedgraggled-looking Jeff in the video, he or she can’t afford anything other than an undershirt to wear. Indeed, as I made clear in my PA Unbearable Burden? Living and Paying Student Loans as a First-Year Teacher, even the lowest-paid public school teachers can afford nice apartments, good food, and much beyond life’s essentials. And the average teacher, on an hourly basis, earns more than the average accountant, nurse, or insurance unerwriter.
Ah, but teachers work “twelve, thirteen hours” a day, right? I mean, isn’t that what destitute Jeff said?
Again, maybe some do, but the vast majority do not. Indeed, according to time-diary research done a few years ago, during the months when teachers are actually working as teachers — so not including lengthy summer and other vacations — the average teacher only does about 7.3 hours of education work inside or outside the school on weekdays, and about two hours on weekends. That’s 18 minutes less per day than the average person in a comparable, full-time professional job. And again, that doesn’t account for teachers’ long, built-in vacations.
So get off it, teacher unionists and apologists. Teacher unions are a gigantic special interest, and all the super-earnest-sounding, unkempt video subjects in the world aren’t going to change that.
When Keynesians Attack
If I was organized enough to send Christmas cards, I would take Richard Rahn off my list. I do one blog post to call attention to his Washington Times column and it seems like everybody in the world wants to jump down my throat. I already dismissed Paul Krugman’s rant and responded to Ezra Klein’s reasonable criticism. Now it’s time to address Derek Thompson’s critique on the Atlantic‘s site.
At the risk of re-stating someone else’s argument, Thompson’s central theme seems to be that there are many factors that determine economic performance and that it is unwise to make bold pronouncements about Policy A causing Result B. If that’s what Thompson is saying, I very much agree (and if it’s not what he’s trying to say, then I apologize, though I still agree with the sentiment). That’s why I referred to Reagan decreasing the burden of government and Obama increasing the burden of government — I wanted to capture all the policy changes that were taking place, including taxation, spending, monetary policy, regulation, etc. Yes, the flagship policies (tax reduction for Reagan and so-called stimulus for Obama) were important, but other factors obviously are part of the equation.
The biggest caveat, however, is that one should always be reluctant to make sweeping claims about what caused the economy to do X or Y in a given year. Economists are terrible forecasters, and we’re not even very proficient when it comes to hindsight analysis about short-run economic fluctuations. Indeed, the one part of my original post that causes me a bit of regret is that I took the lazy route and inserted an image of the chart from Richard’s column. Excerpting some of his analysis would have been a better approach, particularly since I much prefer to focus on the impact of policies on long-run growth and competitiveness (which is what I did in my New York Post column from earlier this week and also why I’m reluctant to embrace Art Laffer’s warning of major economic problems in 2011).
But a blog post is no fun if you just indicate where you and a critic have common ground, so let me identify four disagreements that I have with Thompson’s post:
(1) To reinforce his warning about making excessive claims about different recessions/recoveries, Thompson pointed out that someone could claim that Reagan’s recovery was associated with the 1982 TEFRA tax hike. I’ve actually run across people who think this is a legitimate argument, so it’s worth taking a moment to explain why it isn’t true.
When analyzing the impact of tax policy changes, it’s important to look at when tax changes were implemented, not when they were enacted (data on annual tax rates available here). Reagan’s Economic Recovery Tax Act was enacted in 1981, but the lower tax rates weren’t fully implemented until 1984. This makes it a bit of a challenge to pinpoint when the economy actually received a net tax cut. The tax burden may have actually increased in 1981, since the parts of the Reagan tax cuts that took effect that year were offset by the impact of bracket creep (the tax code was not indexed to protect against inflation until the mid-1980s). There was a bigger tax rate reduction in 1982, but there was still bracket creep, as well as previously-legislated payroll tax increases (enacted during the Carter years). TEFRA also was enacted in 1982, which largely focused on undoing some of the business tax relief in Reagan’s 1981 plan. People have argued whether the repeal of promised tax relief is the same as a tax increase, but that’s not terribly important for this analysis. What does matter is that the tax burden did not fall much (if at all) in Reagan’s first year and might not have changed too much in 1982.
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
