The American Spectator

John| 2.6.09 @ 8:28PM

ATTENTION ... PLEASE RELAY THIS TO THE MEMBERS OF THE CLUB SENATE STUPID PARTY...

VOTE NO!!! HELL NO!!! ASOLUTELY FREAKING NO WAY NO!!!!

On the PORKULUS bill... If GOP fingerprints are anywhere near that monstrosity the GOP WILL ABSOLUTELY be blamed for the mess...

When you see a train wreck about to occur, don't jump out on the tracks and wave for the engineer to stop the train.

All members of the STUPID PARTY who vote for this insanity will be remembered, and then in the annals of time.... forgotten...

Again... VOTE NO on the SOCALIST PORK BILL.

Thank you... now back to your regularly scheduled rants from the elite talking heads...

r/John

Diageneseoristis| 2.7.09 @ 4:12AM

"Friday's bad unemployment report makes a stimulus package -- and consequently more unemployment -- more likely."

Ya think? Chomping at the bit for more bad new for America aren't you, you fucking parasite. Move to Cuba you pathetic commie.

Who hires these little wankers?

Country Boy| 2.7.09 @ 5:43AM

I like Brian Westbury, usually he make some good points. But here, he's seems to be wondering if Obama and the dems don't understand how an economy works. It really doesn't matter if the dems understand, because they just don't care.

There 's almost no infrastructure projects in the the Trillion dollar spending bill. Why? Because some democrat would have to lay out a couple of bucks for a bag of cement. Why bother? Better idea is to spend a couple hundred mill on Sexually Transmitted Desease prevention. What does that project look like? Can we see the receipts please??

Like that old saying goes, the dems make their money the old fashioned way - they steal it.

Bob| 2.7.09 @ 7:29AM

Thank you, Brian, for bringing actual data and logic to this discussion. This is the first article I've seen here that actually uses chart data to make a point. I've been trying to bring more data like this to the discussion.

I agree with your two major points, that spending is not an efficient way to stimulate job growth and that a flat tax -- which I've been pushing for a long time -- is the best use of the tax code.

That said, your analysis didn't go far enough. The other side is also true, and can be proved with similar charts, that tax cuts also are not efficient to stimulate economic and job growth. You also forgot to graph another piece of data -- the fed funds rate:

http://en.wikipedia.org/wiki/File:Federal_Funds_Rate_(effective).svg

This also correlates closely with your curves. You are trying to make a causal connection between unemployment and spending. However, I would submit that monetary policy affects both of these curves and is thus the causal factor much more than spending or tax cuts.

Furthermore, since most of federal spending is related to medicare, social security, and the military, which are NOT prone to changes in discretionary spending since they are longer term in nature, this disproves some of your point. In fact, the fallacy of your analysis is that interest, which is about 8% of the federal budget, could account for virtually all of the trends in your chart. Here is a chart of total government spending to prove this point:

http://www.heritage.org/Research/features/budgetchartbook/fed-rev-spend-2008-boc-S1-Federal-Spending-Has-Increased.html

Furthermore, neither tax cuts or spending have significantly changed the course of the GDP over time:

http://www.data360.org/dsg.aspx?Data_Set_Group_Id=230

But the problem here, as you know, is that the Fed cannot lower rates any more -- which is far different than the early 1980's. Without the tool of monetary policy, we are left with less efficient means for turning around this cycle.

Now, you could do conservatives a favor by pointing out exactly what I have done, in the same way with similar long term charts, that tax cuts are also not stimulative to a great degree. Perhaps you can also do conservatives a favor by backing up the point that historically, not theoretically, that tax cuts have hurt more than helped because they have been the primary factor in raising debt levels.

Are you honest enough to make both sides of the argument? We'll see.

Country Boy| 2.7.09 @ 7:53AM

Hey Bob,

Are you here to shill for Obama, or what?

I mean, you throw up a bunch of stuff, charts links, ets., like the rest of us just fell off a turnip truck.

And that GDP chart link that you posted proves that you are wrong - tax cuts do stimulate the economy. Just put a straight-edge under the red line, from 1983 to present, and that is the steepest climb (fastest GDP growth) on the chart. (Should really be a logarithmic chart, but OK, close enough). Of course 1983 is when the Reagan tax cuts started.

http://www.data360.org/dsg.aspx?Data_Set_Group_Id=230

Thanks for the link Bob.

Bob| 2.7.09 @ 8:50AM

Country Boy, I hope you like those turnips. You can put a straight edge starting at an earlier point than 1983 and see the same results. Furthermore, we had tax cuts also early in the Bush administration and GDP slowed. Any statistician knows you need more than one example to prove a point because of non-mutually exclusive variables. I'd suggest finding that truch before it is too late.

Just for your information, I think the Obama people are are pushing water uphill as well. As I've said, spending is not an efficient economic motivator as well as tax cuts. Why? Because the prime motivator of the economy is private enterprise -- not government. That's why monetary policy is more effective than either tax cuts or spending as it directly affects business. The hope of any stimulus plan is more psychological than real. Almost 70% of the economy is consumer consumption, and it is fear that is holding back consumption. Both tax cuts and spending are supposed to get consumers to spend again. They are not efficient vehicles for this purpose, but with the Fed funds rate so low, it is all that is available. The theory is that if people see jobs being created or have more money in their pockets, they will spend. A small stimulus is useless as there will be no short term effect. Tax cuts are going more into savings than spending so they are less effective than ever. That's why even conservative economists agree that some spending must be in the plan.

The unspoken truth (because of politics and ideology), is that this is just a cycle and we will get out of it in 2-5 years. By the way, the argument for a flat tax is the same as the stimulus effect. Since private enterprise is the engine of our economy, governmental intervention is not efficient. Therefore, the tax code should treat all people equally and then the market will make things happen.

Robert Rosencrans| 2.7.09 @ 9:20AM

This Obama stimulus plan is nothing but a payoff to various political forces who supported him and have always supported the Democrats. OMB predicts that 80% of the plan will not have an effect for several years, perhaps as far as seven years out.

The compromise was a joke, cutting only 6 billion from the original planned amount.

The plan will fail, not because it is a bloated political payoff to various factions, but because it is not a plan at all.

It's simply another version of buying the public's vote with the public's money. Every time that option is put forth as an economic plan, it always fails.

Country Boy| 2.7.09 @ 9:58AM

Well OK, Bob, maybe you aren't an Obama sycophant. But I certainly don't agree with your interpretation of the power of tax cuts.

GDP is nothing but the measure of production, and who wants to produce anything if the government takes the profit out (tax). People produce more when they can keep the profit. That's just life.

As a proportion of income, the most productive people (e.g. Steve Jobs, who created a whole industry) are very small consumers (as a% of income). They invest most of their profits. And it is the people like Jobs, the true innovators, who give us GDP growth.

Consumption is several steps removed (downstream) from innovation and production. For the government to think they can grow an economy by encouraging consumption is like saying the Government could have engineered the begining of the auto age by encouraging consumers to buy so many buggy whips that eventually none were available.

Bill| 2.7.09 @ 10:02AM

Change you can believe in starts in two years and must be completed in four years. It is time to start moving career political hacks out of office and put in place term limits. Time to make sure the folks in the Senate and House are operating on the same social security plan the rest of us are and of course the health plan. Time for all that reserved campaign money they plan to also retire on goes back to the states they represent.
People in this country need change. We need to be treated with respect and dignity and not lied to and stolen from. Congress just stole from the people of this country and the consequences will be long term.

Bob| 2.7.09 @ 10:38AM

Country Boy, your logic certainly makes sense, and politicians use it, but my point is that the econometrics do not support that theory. As you can tell, I agree that private enterprise is the engine that drives GDP -- not government, not government spending, and NOT tax cuts. As you've said, it is the innovation that drives the economy. I spent 40 years as a business executive, and it didn't make any difference whether taxes were high or low, we always had to beat our numbers for the previous year. When taxes were high, there were different opportunities than when taxes were low. Our business growth was not related to taxes -- it was related to our ability to compete.

The other factors that people don't consider is the impact of globalization and increases in productivity. Most of the loss of jobs over the past couple of decades were as a result of increases in productivity, followed, at a much lower level, by outsourcing. The change of our economy from a manufacturing economy to a service economy is part of globalization. It used to be that in a manufacturing economy, the results of business helped the U.S. grow. However, since most of manufacturing has left this country, new products do not help OUR economy as much as they used to. That's why consumption is so important -- because we are a service economy.

The point of all of this is that neither spending nor tax cuts do a great job of growing our economy, I wish the Dems would get off the spending wagon and Republicans would get off the tax cut fiasco. The thing we must address now is the debt. Currently, while interest rates are low it does not hurt us a lot, but down the road, as interest rates rise, it is going to kill us. We need medicare and social security reform because they account for 53% of the budget. This is the message true, non-ideological conservatives should be pushing. It won't help people get elected because pork always works better for politicians than spending cuts, but that is the right direction.

One more point. One of the theories behind tax cuts is "starve the beast". That is, if you cut taxes then they'll have to cut spending. Well, they never cut spending no matter who is in charge. That's why, from an economics standpoint, both Reagan and Bush economics have been disastrous -- they have increased the debt more than all other presidents combined. I would maintain that the only way to curtail spending is to force balanced budgets by a Constitutional amendment. When people feel the pain, they will act.

Robert Rosencrans| 2.7.09 @ 10:44AM

Impacts of welfare bailouts and the like.

http://mises.org/story/203
I am not exactly one of the anarcho-capitalists Mr Lilley goes out of his way to sneer at. But I am deeply hostile to the notion of state welfare. In the first place, it is a fraud. For the great majority of people in this country, it involves taking 10 out of our pockets at one time in our lives and putting back 7 later on - retaining 3 for administrative costs. A small minority loses 5 and gets back 5. A smaller minority loses 20 and takes back nothing. But for most of us, the money is simply churned and diminished.

In the second place, the costs of running the welfare state have been made into a mass of sinecures for the lower clerisy - the kind of people who parrot every statist nonsense they read in The Guardian and who thereby give a persistently statist tinge to the whole of pubic opinion, and who provide a solid constituency for the Labour Party. They are the modern equivalent of the priesthood - telling us what to believe, checking on whether we do believe it, and inflicting various punishments on us for not believing. And they do this with our own money.

In the third place, state welfare is degrading to the character of everyone who receives it. By losing responsibility for our own welfare - and by losing the means of taking such responsibility because of the burden of taxes required to fund the system - we grow increasingly childish as a nation. Millions of people take no thought for the morrow, because that will be looked after by others. But they do bear in mind the value of conformity in speech and action to the prevailing intellectual fashions - the modern excommunication is to be driven away from the nipple of state welfare.

Jeremiah| 2.7.09 @ 12:41PM

Market deregulation + spending on Iraq = recession.

Scott F| 2.7.09 @ 1:13PM

It's a good thing Wesbury is writing for the popular press rather than trying to get his theories passed in the academic world, because if he tried to do the latter he would be laughed out of the building.

Wesbury makes two very fundamental mistakes that are taught in econ 101.

First, he mistakes a correlation for a causation. True, there is a correlation between spending and unemployment. But this doesn't mean that the spending caused the unemployment. In fact, it's well known that the government's spending automatically rises and falls AS A RESULT OF changes in unemployment . . . as in unemployment benefits, and so forth. And stimulus packages RESPOND to unemployment, as now. When unemployment falls, the automatic and discretionary parts of government spending to reduce unemployment fall, too. Every economist knows this, except Wesbury, apparently. Similarly, if you look at inflation and interest rates, you would see a positive correlation. But would Wesbury want to make the case that higher interest rate targets by the Fed cause more inflation and lower targets cause less?

The second flaw is related to the first. If you are going to look at a longer-term relation between spending and unemployment, you need to eliminate the cyclical components of both. That is, the structural government budget (which is published every year by the OMB) and unemployment rate stripped of cyclical effects, are the appropriate variables to compare.

Larry S| 2.7.09 @ 1:57PM

Scott's pointed criticism of Brian Wesbury's article misses the mark in several respects: first, Wesbury uses the chart to refute the Keynesian assumptions the Obama administration works from, that government spending "primes the pump" and stimulates the economy. The correlation indicated on the chart tends to prove the opposite. Namely, that periods of increased government spending have not improved unemployment rates at all. Whether in fact the increased government spending actually increases unemployment is certainly a matter of debate, but Wesbury does not do that in this article. Wesbury can make his own case in another article should he choose to do so.

The second error Scott makes is assuming that the "stimulus" action ties in more to unemployment benefits and temporary measures similar to that. Only a relatively small part of this stimulus package (approximately 5%) contains extended unemployment benefits. The rest of the package is intended to be spent regardless of when or whether unemployed individuals get back on their feet. If the "stimulus" were only extended unemployment benefits and no more, there would be less to argue about - like whether the length of the benefits in question acts as a disincentive for individuals to find employment more quickly or at all. Scott needs to retake Logic 101 to understand Wesbury's central argument.

As for Bob, I think we can all agree that businesses in general do not look at taxes as the first thing when they make their one, three, or five year business plans (I may be presumptuous, maybe most businesses only operate on one year planning cycles; a lot of small businesses are just trying to survive day by day). But when it comes to growing a business, and when it comes to knowing how and where businessmen are going to invest their resources, grow the capital side of their businesses, and make their profits (especially the biggest businesses in the U.S.A.), marginal changes in tax rates make a big difference and can matter in decision making.

Some of you folks don't understand the supply side of the argument very well. Laffer's theory is premised on what happens when small changes in MARGINAL tax rates occur. Now I admit, some Republicans don't understand the concept very well, either. But when you reduce the tax on that extra dollar above a certain threshhold, I think all of the statistics you cite, Bob, suggest that along with all of the other factors those marginal changes help get the economy going again.

But changes to marginal tax rates are obviously not enough; capital gains taxes, corporate taxes, and payroll taxes appear to be higher than they need to be at the moment. A number of wise economists have proposed this solution lately.

As for spending, Bob seems to give up too easily on the subject. You can cut taxes and spending together; the political will has been lacking for years. The Federal government has for years been growing their revenues as a result of the longest period of sustained prosperity in the history of the United States, 1983-2008. Cuts in spending during that period (I note particularly in the Clinton administration, ironically, some reduced spending - with the help of a Republican Congress that had its head screwed on straight in the first couple of years, anyway - created an almost balanced budget or the lowest deficits in recent memory during the 1990s) reduced deficits and corresponding debt for the first time in a long time.

Entitlements such as Social Security and Medicare are first on my list of things we need to deal with. But Wesbury acknowledges that in his article. So Bob, don't give up on tax cut ideas. They really have been more beneficial than you think, notwithstanding all of the "data."

Larry S| 2.7.09 @ 2:08PM

One more observation: I agree with you, Bob, about the idea of a flat tax and a balanced budget amendment. In the long run, those two reforms are an essential part of how we treat this subject of our wayward economy.

scott f| 2.7.09 @ 2:25PM

Larry missed my point completely.
"The correlation indicated on the chart tends to prove the opposite." Correlation NEVER proves causation, by definition. I'm not trying to make the Keynesian case anymore than Wesbury is. The context of changes in unemployment and changes in government spending within the broader economy over the last 50 years is much to complex to explain with such a chart. That sort of analysis would be ripped apart in an academic forum if you are not controlling for any other factors that might reasonably have something to do with the correlation.

Bob| 2.7.09 @ 2:49PM

Larry, the fact is that Scott is right about causation. That's why I pointed out that Wesbury's also correlates with the Fed funds rate. Making the argument the other way, as you have done, still doesn't make sense because you also assume causation. To prove causation you must have mutually independent variables and some sort of time lag which you don't have here. In that respect, I'd suggest that you also retake Logic 101.

With regard to the longer term growth in businesses, my specialty was business development in large consumer corporations both short and long term both in manufacturing and financial services environments. All of my employers were Fortune 100 companies. I can tell you as a fact that we rarely looked at economic forecasts except for some financial products. The most important factors were demand, competition, and leveragable corporate assets. The reason for this was that the creation of any product required capital and a return on investment over a long product cycle. These product cycles tended to last over several economic cycles. Furthermore, economic cycles tended to treat industries equally leaving competitive positions intact. There were some exceptions with financial products and high/low retail environments, but they were very small by comparison.

I don't give up on spending reductions at all, I just know from a realistic standpoint that there is no political will to do so which is why I call for a balanced budget to force the issue.

Regarding spending, there were no cuts during the Clinton administration -- or any other for that matter.

http://www.heritage.org/Research/features/budgetchartbook/fed-rev-spend-2008-boc-S1-Federal-Spending-Has-Increased.html

I would certainly like to believe that tax cuts alone could be stimulative, but there is just no evidence that it is true through both the Reagan and Bush administration. The reason deficits were reduced during the Clinton administration were twofold. First, tax rates increased, and secondly, it coincided with the dotcom bubble. I find it interesting that the increase in marginal tax rates during the Clinton years coincided with a faster growing GDP which is contrary evidence to tax cuts helping the economy.

The other factor that needs to be considered is the fact that marginal tax rates don't have a huge impact on effective tax rates which have been relatively level fluctuating only between 20 and 22% for decades.

You might also want to look at the effect of total taxation which few people track. I would submit that my wallet doesn't care whether taxes are payroll, state, real estate, sales, or federal -- a dollar is still a dollar. I think we can develop better tax policy without the progressive/regressive argument if we look at total taxation.

Brian Wesbury| 2.7.09 @ 4:31PM

Scott and Bob - You are both right that correlation does not imply causation. There are always many other things going on in the world - taxes, fed policy, etc. That's why economists always use the idea of "ceteris paribus" - assuming all else is held constant.

However, if government spending created jobs wouldn't you expect some evidence of a positive correlation? After over 20 years of increased spending (on a cyclical or structural basis) between 1960 and the early 1980s, the unemployment rate (even the Fed's estimate of NAIRU) was higher, not lower. Please don't just stand back and say someone is wrong without providing an alternative explanation for the actual and factual results of those policies.

And, for the record, if the academics laughed me out of the building it would not bother me at all.

After all, from the 30s to the 80s, those academics said deficit spending lifted economic growth. Then, from the early 1980s to 2008, they argued that deficits caused interest rates to rise and hurt economic growth (even as they argued that the economy underperformed under Reagan and Bush). Now, they are back to arguing that deficits stimulate again. Which is it?

In the end, if government spending created wealth and jobs, there would be no poverty in the world. Once we got done creating jobs for everyone here in the US, we could just keep spending and create jobs for everyone in the world. I hope, no one argues that this could be done.

Marc Jeric| 2.7.09 @ 4:42PM

Charles Krauthamer described this process amptly as "The fierce urgency of pork"; this congressional process is an excellent answer to Ram Emanuel's call to our lawgivers not to "waste this crisis". I have just one question for the investigative reporters of our MSM: What is happening with that $5.1 billion destined for Obama's brown shirts, the ACORN community organizers?

scott f| 2.7.09 @ 5:24PM

Brian . . . I very much appreciate your response. Honestly, I wouldn't expect any sort of correlation . . . or would anticipate probably a negative one (unemployment up when government spending is down) as long as you don't control for anything. On the other hand, if you were to look at, say, change in jobs (though this would still be a bit unrefined) vs. the cyclical component of government the government's budget (not just spending) and found that 6-24 months afterward there was no change (at least slight change) in jobs, that would be a bit more telling and would at the very least warrent discussion and some explanation from those who believe it works differently. Again, this is still a bit unrefined, but hopefully you can see where I'm going with it.

I also don't necessarily disagree regarding academic theories, however I would say academics are rather sophisticated (usually) when it comes to data and statistics, and that's not necessarily a bad thing.

As a final point, though I was critical in this instance, I also want to thank you for offering your daily analysis of macro indicators to anyone who signs up for it. It's been required reading for my macroeconomic modeling students going on six years now and they've benefitted greatly from seeing how a professional digests all the incoming information in real time.

scott f| 2.7.09 @ 5:50PM

I messed up in the previous post if anyone is reading this still. Meant to say that I would anticipate a POSITIVE correlation, which would be that government spending kicks in when unemployment is up, and vice versa. Not quite sure where my head was there . . . other typos, too. Sorry . . . so goes it in cyberspace! Thanks again.

Country Boy| 2.7.09 @ 6:09PM

Bob| 2.7.09 @ 10:38AM
One more point. One of the theories behind tax cuts is "starve the beast". That is, if you cut taxes then they'll have to cut spending. Well, they never cut spending no matter who is in charge. That's why, from an economics standpoint, both Reagan and Bush economics have been disastrous -- they have increased the debt more than all other presidents combined.

Bob, you make is sound like Reagan didn't try, didn't want to shrink the government. Of course he did. You saw it, everybody else saw it, maybe folks have forgotten. I remember, it was the David Stockman thing, 'taking out the boulders'. I think the first shot was at the dept of energy, then the social services were next. But the folks, same folks as delivered "bama" to us said no!!. We need big GOV.

I don't know about either of the Bushes, but please don't say Reagan didn't try. Plenty to document this.

On a perhaps unrelated topic, radio talk show host Michael Savage has said for some time that most liberals are mentally ill. I think that is also true.

Mike| 2.7.09 @ 8:21PM

Bob. Reaganomics were "disasterous?" Reagan's tax cuts, which slashed marginal tax rates, set off an economic boom which continued until last year. Income tax revenue exploded during the same time. Reagan's tax cuts validated the Laffer Curve. They paid for themselved and then some. Sure, the deficit increased, but that was due to spending - he did win the cold war afterall. Besides debt as a percent of GNP actually declined during the Reagan years.

Any way you slice it, Reaganomics were an unmitigated success.

The Red Herring| 2.7.09 @ 8:56PM

The Stimulus package is a RED HERRING, if Obama gets that money it will be spent in areas he needs to win in 2012. It's called POLICTRICKS.

Flapjack Johnny| 2.8.09 @ 6:24AM

It appears that Bob is or has been an expert at everything. First, it was the mortgage business. Now, he was a consultant to Fortune 500 companies. Next, he will claim to have run a Fortune 500 company. Alinskybot.

Bob| 2.8.09 @ 8:01AM

Brian, I never said that I thought spending significantly helped with economic growth. For that matter, tax cuts have not proven to help much either. These are just tools to try and jump start consumption which is 70% of the economy. They are addressing the fear that now exists out there. As I've said, I agree with you about spending, but tax cuts have not proven effective either. By the way, I congratulate you on an article here that is intelligent, uses data appropriately, and is not overly ideological. You are a refreshing change.

Mike, you have drunk the KoolAid regarding Reagan. We have not had an "economic boom" that continued until last year. We had recessions in 1991 and 2001. If you take a look at debt creation, no one created more debt than Reagan and Bush. Here's the chart again -- look at it:

http://zfacts.com/p/318.html

That absolutely proves that they did not pay for themselves. Again, I liked Reagan, I voted for him, I thought he was a very good President (even now), but his economics activities were disastrous for this country and contributed, through debt, to the problem we have now. And you are wrong about Reagan's debt load -- it grew substantially as a percentage of GDP as my chart shows. You are rewriting history, my friend.

Flapjack, I am who I say I am. After serving in Vietnam, I went to business school and worked in brand managment/marketing. In the 80's I had my own consulting firm specializing in business development for Fortune 100 companies. In the 90's, I was a senior executive for a sub-prime lending company. And in the early part of this decade I ran a couple of divisions for AIG. So yes, I have done everything I've said I've done and there are people at AmSpec who know who I am and can verify this information. Do I consider myself a success because I grew up in South Central, went to some of the best schools in the nation, served my country, and did well in business? Actually I don't get a sense of accomplishment from that. I do get a sense of success in the four great children I helped raise, however. I have great pride in them. After all, isn't that what it's all about?

JLW| 2.8.09 @ 11:08AM

Bob,
First of all, there are many kinds of tax cuts. The only ones worth talking about are the ones on the margin (at the top rates), because those tax cuts are the ones that will create the most productivity and thus, success. The first tax cuts of the last administration were mostly stimulus rebates and a minor reduction in phase outs. The second one, in 2003, was much more productive. Since Reagan's tax cuts in 1981, how high have the tax revenues risen - something like about 4 times. Since the Bush 2003 tax cuts, tax revenues, though projected to go down, went up by something like 40% in the prior tax year. And it is logical and intuitive. When a salesman reaches a certain level of sales, does his commissions go up or down in every situation in a private setting? It goes up, of course. That is to give the salesman more incentive to produce. It's the same thing with tax rates. The people with the most likelihood to invest (the most talented people, if you will) are at the top tax rates or at least, want to be making the kind of money which would put them in the top tax rates. If you lower those tax rates, you incentivize them. Not only that, but taxes are just another cost like any other investment or business expense. If an entrepreneur or investor is analyzing a potential project, if his taxes go down, his potential reward goes up for the risk he is taking, because it will leave more money in his pocket. So tax rate dreductions at the higher levels bring on more projects than would otherwise be the case, thus growing the economy.
This should be obvious to anyone with a brain or who can put aside his preconceived notions when looking at a problem . You don't need a Phd in economics (Actually that might be a hindrance) to see it.

Bob| 2.8.09 @ 1:17PM

JLW, the facts just don't back you up -- and that's the problem with the wive's tales you are telling. If we take a look at government revenues in real dollars (i.e., taking out inflation), you'll see a significant drop in government revenues after the Bush tax cuts. Your "40%" is not fact.

http://www.heritage.org/research/features/budgetchartbook/fed-rev-spend-2008-boc-R2-Federal-Government-Tax-Revenue.html

The worst part of this is that under Reagan and Bush, our debt levels grew more than all other Presidents combined:

http://zfacts.com/p/318.html

The problem with your simplistic argument about the salesman, is that it is not as complex as our economy. Investment no longer is an efficient producer of jobs. Why? Because we have become a much more productive society and the manufacturing related to business growth is invested primarily outside of this country. Besides, investment money in the U.S. goes primarily to financial instruments like derivatives and not to the building of companies. Trickle down is a nice theory for people who don't understand economics, but it just doesn't work.

GDP is an overall measure of economic growth so you can see how well the country has done through several administrations. Let me give you a clue, there is not much difference with GDP.

http://www.data360.org/dsg.aspx?Data_Set_Group_Id=230

I don't have preconceived notions as you do. I look at the data and deal with reality. By the way, the best economic growth we saw was during the Clinton administration where we had greater growth in the GDP than either Reagan or Bush and we reduced the debt as well. By the way, in the Clinton administration taxes were raised on the high end if you remember. That debunks your statement.

Look at the facts and not fairy tales if you really want to get at the truth. To be honest, back in the 80's when I voted for Reagan I believed in trickle down for the same reasons you named -- basically, that it seemed logical. But I changed my mind when I actually looked at the facts.

The problem today is that we don't have an educated electorate who understands even the basics about economics. Like you, they believe in simplistic fairy tales that do not synchronize with the truth. I have a strong economics and business background but I was wrong back then since the data is now clear.

Look at the data before come to these types of conclusions. It is a fool that doesn't learn from his mistakes.

Diamon| 2.8.09 @ 2:39PM

It really doesn't matter what anybody does to "fix" the economy. The plain fact is corporations will find the current downturn to fee themselves of people. When the demand picks up many of those former jobs will be outsourced. In addition to that many other jobs will be "in-sourced" by bringing more Indians into the country to perform many jobs in finance, engineering, and medicine because they're paid less than citizens. We will see perhaps 2M jobs come back and many of those will be in-sourced. The lower skilled jobs will be taken by those illegal immigrants who will take the offered amnesty next year, just in time for the Nov/2010 elections.

The plain fact is assets in this country are still way overvalued when you consider the falling household incomes needed to pay for mortgages. When assets fall to the point where a household can save for a decent down payment and the mortgage, interest, taxes, and insurance do not exceed 28% of the household income then our economy will have corrected itself. But even then there will be downward pressure on home values because states are always raising property and income taxes and the feds WILL raise income taxes before the next elections if not right after Nov/2010.

KCarl| 2.8.09 @ 3:05PM

Briam, Bob, Larry, et al. After reading all this, I reflect back to the 51% of the population who voted in the current regime on the promise of Freedom From Reponsibility. How does one expect to push through a Flat Tax, when a great percentage of this 51% wants to live off the gov't dole, not pay taxes (which apparently 50% of the population doesn't do), and expects port to be brought to their niche in their existance. What should a guy like me in the 85 percentile do to enhancesustain my future standard of living. It looks like interest rates will take off in a few more years and property values will remain the same or drop due to the large interest rates. In a service economy, I don't see paychecks going up much, except in those construction jobs which the Obama camp has mandated Union contracts. ??? Where do I hold my line?

KCarl| 2.8.09 @ 3:07PM

"pork" not "port in the 5th line.

Bob| 2.8.09 @ 3:57PM

Actually KCarl, we had more "freedom from responsibility" from Bush that we will have from Obama. Bush lowered taxes so YOU wouldn't have to pay for the war in Iraq or continued high government spending under the Republican controlled Congress. I'd call that freedom from responsibility. I don't think the Dems are much better on that account, but they are not worse historically. Obama has been in for just three weeks and the problems you are facing are due primarily to the previous administration.

That said, things are going to be stagnant for a while -- I'm guessing from 2-5 years. That said, the market will bottom, new businesses will be created, and in spite of the incompetence of people in Washington on both sides of the isle, the U.S. will rebound. I doubt if the unions will gain much ground, even with card check, as you can't squeeze water from a turnip. If unions make companies not viable, they will give in as they did with the auto industry.

I would not expect to see a lot of money made from real estate in the next decade since both the government and individuals are laden with debt. If you are in the 85th percentile, then go out and have some fun with your wealth -- there won't be many who will catch up with you and you'll find some real bargains over the next 2-3 years.

Just for the record, Obama received 53% of the vote, not 50.74% like Bush in 2004 and 47.87% for Bush in 2000.

Stephen| 2.8.09 @ 5:40PM

I could be wrong, but it definitely looks like higher government spending follows higher unemployment (as it is doing at present), and lower government spending follows lower unemployment. If that is true, then this chart does nothing to support the thesis of the article.

Stephen| 2.8.09 @ 5:45PM

Also, if the GDP itself is growing (which would be likely while unemployment is falling), then one would expect government spending as a percentage of GDP to fall also and vice versa (that is, both would also be expected to simultaneously rise). Thus, even the correlation asserted by the chart seems to say little that is not obvious.

RockyRoad| 2.8.09 @ 8:16PM

To me it looks like the less the government takes as a % of GDP, the lower the resulting unemployment rate; while the more the government takes as a % of GDP, the higher the resulting unemployment rate, since GDP expenditures happen first and impact unemployment figures. From this it is obvious that a heavy government-oriented spending bill (as in Obama's Spendulus) will only drive unemployment higher, opposite of the intended benefits. I'm betting several years from now a continuation of this graph will indicate additional expenditures by government, especially disguised as a payback for democratic party policies, will drive the unemployment rate even higher than past expenditures which haven't been so blatantly government oriented. The current administrations' policy is to grow government, not the economy.

Tim Buck II| 2.8.09 @ 9:01PM

1) If my $1 is taxed away by the government, I can't spend it. There is no net stimulus created simply because someone else gets to spend the $1 I earned.

2) If the government borrows my $1 and spends it, I can't spend it because I loaned it to the government. Same result as above: No net stimulus.

3) If the government prints, say, $2.5 trillion new dollars and loans itself the money, it reasons that it can pay this money back in the future - with inflated - and therefore cheaper dollars. Problem is, everything else is more expensive in the future too...so over time there is no net stimulus. But, even worse, people in the present know today that inflation is on its way - and therefore people spend less today and save more today - planning now for the coming inflation of the future. Thus, there is a negative impact on spending/stimulus today because people with money will spend less than they otherwise would have absent the insanity of our government. (That is, this option causes net overall spending in the present to drop - not to increase as our idiot government supposes.)

Thus, the first two options are merely "stimulus neutral." The last option is "stimulus negative."

Thus, the third option is the worst (and explains Brian's chart). Guess which option our government will select?

Senator Shelby predicts "disaster." He is correct, as any middle school kid would know.

As a nation, we might want to review our policy of consistently electing people to Congress who have never taken Econ 101. It's quite expensive.

DJC-Illinois| 2.8.09 @ 10:23PM

The Biggest Con Ever

As reported by the Bureau of Labor Statistics, more jobs, as a percentage of the workforce, were lost in 1982 (2.33%) than were lost in 2008 (2.16%). Furthermore, since 1939, there have been only 3 occasions where there have been 13 or more straight months of job losses. There is, of course, the current recession, that began in 2007, with its 13 straight months of losses thru January. The two other times were the recessions of 2001-2002, 15 straight months, and 1981-1982, 17 straight months. After each of those two bad runs, steady monthly job growth resumed.

In the worst recession of those three, 1981-1982, GDP shrunk, in two consecutive quarters, by 4.6% and 6.4% respectively. The GDP shrinkage for the quarter ending last December was merely (by comparison) 3.8% and GDP actually grew in two of the other three quarters of 2008.

So when politicians try to panic Americans by claiming our economy is on the verge of “catastrophe,” watch out. Almost certainly, natural economic forces will cause monthly job growth to resume within the next few months. All the rush about passing the abomination currently before Congress is only to try to create enough space so that the Democrats can claim their “porkulus bill” caused the recovery. It’s not likely they will be able to pull that scam off.

DJC-Illinois| 2.8.09 @ 10:31PM

The Biggest Con Ever

As reported by the Bureau of Labor Statistics, more jobs, as a percentage of the workforce, were lost in 1982 (2.33%) than were lost in 2008 (2.16%). Furthermore, since 1939, there have been only 3 occasions where there have been 13 or more straight months of job losses. There is, of course, the current recession, that began in 2007, with its 13 straight months of losses thru January. The two other times were the recessions of 2001-2002, 15 straight months, and 1981-1982, 17 straight months. After each of those two bad runs, steady monthly job growth resumed.

In the worst recession of those three, 1981-1982, GDP shrunk, in two consecutive quarters, by 4.6% and 6.4% respectively. The GDP shrinkage for the quarter ending last December was merely (by comparison) 3.8% and GDP actually grew in two of the other three quarters of 2008.

So when politicians try to panic Americans by claiming our economy is on the verge of “catastrophe,” watch out. Almost certainly, natural economic forces will cause monthly job growth to resume within the next few months. All the rush about passing the abomination currently before Congress is only to try to create enough space so that the Democrats can claim their “porkulus bill” caused the recovery. It’s not likely they will be able to pull that scam off.

Terry| 2.8.09 @ 10:48PM

All this noise about altering executive compensation is long overdue. Congress is acting as good stewards of the peoples money but they ought to take the next step of eliminating congressional pay when "they" don't balance the budget. That would be real stewardship.

Terry| 2.8.09 @ 10:58PM

Brian is correct. If Giethner, Rangle, and Daschel can't do their taxes right let's scrap the system and move to a fair tax. That would indeed put us on the same tax footing as both Europe and Japan.

Mike| 2.9.09 @ 12:29AM

Thanks for the response Bob. I looked through the graphs you linked to. They were illuminating. Thanks. I stand corrected on Reagan's record with debt as a percent of GNP - looks like it grew from ~37% to ~54%. However, that growth in debt had nothing to do with his tax cuts. Individual income tax receipts grew from $244 billion in 1980 to $401 billion.

http://www.usgovernmentrevenue.com/#usgs302

Granted, those are nominal figures, but even the inflation adjusted numbers (in your link) also show a meaningful increase. So I have to stand by my statement - Reagan's tax cuts paid for themselves and them some. As JLW noted, tax revenues have quadrupled since the 1981 tax cuts. Without those Reagan tax cut the national debt would be a lot higher and the GDP a lot lower.

Despite Reagan's best efforts to "starve the beast" he still couldn't constrain spending, and thus the increase in the national debt. But he did win the cold war afterall. Seems like a nice payoff for a 17% increase in the national debt.

Again, any way you slice it Reaganomics were an unmitigated success.

Mike| 2.9.09 @ 12:41AM

Individual income tax receipts grew from $244 billion in 1980 to $401 billion in 1988.

Bob| 2.9.09 @ 5:29AM

Mike, using selected figures to make your point is like looking out of your front door and saying the world is flat. Take a look at this long term graph of federal receipts:

http://www.heritage.org/research/features/budgetchartbook/fed-rev-spend-2008-boc-R2-Federal-Government-Tax-Revenue.html

You'll notice a rise in federal receipts before Reagan and after Reagan. In fact, federal receipts grew the most under Clinton, where we had a tax increase, than Reagan. Therefore, I could make the same receipts argument for both Carter and Clinton. If I used your logic, I would say that they were unmitigated successes as well.

However, much of Reagan's gain had nothing to do with taxes, it had to do with the Fed funds rate which started out at the highest levels under Reagan. When the Fed rate is high, interest deductions are higher and tax receipts are lower. When this drops, as it did under Reagan, tax receipts will rise. Most economists will tell you that this had much more to do with the rise in tax receipts than did the tax cuts.

If we could make the correlations your are trying to do, economics would be easy. But it is far more complex with lots of factors. That's why politicians use selected data, as you did, to make a point. People who are not trained analysts will say the logic makes sense and buy a flawed argument as they do with Reaganomics. It is populism at its worst.

I call this the flat earth argument. You look out your front door and exclaim the world is flat. That's because you have a limited view of the world. But you get in a jet and fly at 50,000 feet and say that it is obvious that the world is round.

Republican ideologists often use your argument of quoting selected data without looking at the bigger picture. The worst part of this is that people like you believe this fairy tale. Conservatism will not rise again until its adherents can look at information objectively. Liberalism has risen because at this time, as flawed as it is as a theory, it is based on truer information. It is this flawed belief in economics that caused people like George Bush to bring our economy down. It was the triumph of belief over reason.

Steve| 2.9.09 @ 7:06AM

All right, kids. Enough of the finger pointing and shouting.

To Bob, et. al.: Never once in the discussion did the word FREEDOM or the word LIBERTY pop up. How, sad and pitiful.

Within the limited confines of a social democracy the re-jiggering of the tax code is going to have a marginal effect, and conservative or liberal expectations to the contrary will be misplaced. The hamsters will still be running the wheels. The difference is, will they be running the wheels with a minimum of interference and friction (LIBERTY) or with a maximum of interference and friction?

Also, let us assume that at some point liberalism spins out from the narrow confines of a social democracy into full blown socialism. Bob, would you still make the argument that nothing untoward will occur, that the dynamics of risk and reward will not be so altered as to seriously corrode the foundation of the economy and the nation as a whole? If you assume the governing powers to be moderate, then the chances are remote of that happening. However, I am of the opinion that Ms. Pelosi is a dull-witted radical, that Mr. Reid is a lobotmized radical, and that Mr. Obama is a clever radical. I do not expect moderation -- exhibit A being the current "stimulus" package -- in this administration. I am expecting a replay of the disastrous Roosevelt years. I hope I'm wrong.

Pecos Pete| 2.9.09 @ 7:25AM

An interesting discussion. Lots of "facts" to prove whatever the writer desires.

Debt goes down when spending declines and revenue remains constant or increases, assuming debt is payed. People can present academic arguments all day long about trickle down or trickle up theories that increase revenue; but, in the end we have to recognize that the USA's investment in social programs is creating a current spending level and future debt load that requires a massive increase in revenues through either taxes or from inflation.

You can argue competing theories for increasing revenue; but, without controlling spending the net result will be continued growth in government with less investment available to the private sector.

The discussion above is centered around increasing revenue. Why not invest an equal amount of time discussing how to reduce spending? How about more time invested on a constitutional amendment requiring balanced budgets as someone mentioned.

Bob| 2.9.09 @ 7:28AM

Steve, I would maintain that the biggest threat for socialism is not liberal politicians, but debt. Once politicians get to Washington, they all behave alike. Did you see any Republicans call for fiscal conservatism over the past 8 years when they were in power? Spending is what gets them elected, and that's the motivating factor, not a liberal or conservative ideology.

However, debt creates economic problems over time and decreases our global competitiveness. Any downturn is always accompanied by an increased safety net that both Dems and Republicans agree must be there. Therefore, the greatest threat for socialism is debt. Debt is real -- liberalism is a thought. Debt takes away freedom and that's what this discussion is ultimately about for those of us that are libertarian leaning Republicans.

Bob| 2.9.09 @ 7:32AM

Pecos - I'm the one promoting a balanced budget amendment as well as a flat tax. Tax code attempts to shape society. I believe that the market is a better way to shape society. We should attempt to limit government, not enhance it.

Terry| 2.9.09 @ 9:01AM

The chart doesn't support the argument; hence, the article is meaningless.

Mike| 2.9.09 @ 9:02AM

Bob: Thanks again for the response. I'm enjoying the exchange even though you've called me a flat Earther, a believer in fairy tales, and a Republican idealogue. But that's okay. I've been called worse. The last label actually applies, although conservative idealogue would be more accurate.

I never said tax revenues didn't go up under Carter or Clinton. As your chart indicates, it always goes up - we're a growing economy and always have been. I was only proving a smaller point - that the tax cuts paid for themselves and then some. Despite the accusation of data selectivity and you giving the nod to Reagan's hard fought battle to bring down interest rates, you seem to have conceded that point. Reagan slashed the top marginal tax rates almost in half and yet tax revenue continued to grow. If you've now excepted the obvious, that Laffer's Earth is round, we can move on.

I was also making the larger point that Reaganomics were an unmitigated success. I didn't mention earlier the dramatic decline in inflation and interest rates during his watch, but I'm glad you brought it up. Those economic adjustments were not easy. They were painful to live throught and they almost brought Reagan down. Once they were dealt with, however, they paved the way, along with the tax cuts, for the economic boom that we've enjoyed over the last 25 year until the current unpleasantness. He also lowered unemployment and set off a unprecedented stock market rally. I don't know how else to define "unmitigated success."

Your only real beef with Reagan seems to be with debt levels. On that I would agree with you if the debt grew for no better purpose than to stimulate short term demand - like the current Obama plan. But we actually got something in return for all of Reagan's defense build up. Do you really think the last 25 years of prosperity, including Clinton's "peace dividend" would have been possible without defeating the Soviet Union? We'll still be enjoying that dividend for another decade or more.

JO| 2.9.09 @ 10:18AM

"...it is fear that is holding back consumption."

It is not fear, but rather the effects of a near 20-year secular credit expansion coming to a head. The US consumer is "mortgaged to the hilt" and needs to de-lever... big time! Consumer credit (not including real estate) is running at nearly 25% of personal disposable annual income. Prior to this massive credit bubble, peaks in credit/DPI would be reached near 20% and then correct. This will be a very painful lesson in “living within our means” and can only be reached via “living below our means” for some time.

Bob| 2.9.09 @ 10:34AM

Mike, the logic of your argument is faulty. You cannot say that the economy always goes up at the same rate and then also say that the Reagan tax cuts were responsible for it. Then, by the same logic, the Clinton tax increases were even more effective for a better economy.

You need to study the history of the Fed to understand that Reagan had little effect on interest rates. Yes, he argued that they should be lower, but he was ineffective in doing so. (By the way, Carter also argued for lower interest rates). Volcker at the time was trying to break the back of inflation which was due more to demand of a limited money supply and globalization. A lot of this came from the oil crisis in the early 70's. In the 1983-84 timeframe, Volcker was successful in breaking the inflationary spiral, demand was reduced, and interest rates naturally declined. This action had little to do with Reagan. In retrospect, if Volcker had not been so hard nosed against Reagan, we would have never seen any recovery.

Reagan, in retrospect, was luck to have Volcker in place, but if Volcker didn't hold his ground, we would not have had longer term growth.

With regard to the Soviet Union, we found out afterwards that their collapse was only a matter of time. Reagan did make it happen sooner, but not by that much. That said, I've always maintained that Reagan did the right thing and that made him one of the better Presidents. However, to talk about him as an unmitigated success in economics is to revise history without regard to fact.

KEEP PRINTING| 2.9.09 @ 10:54AM

Hello all you Monkies out there, do you have a brain?.

George Bush had low TAX for 8 years, look at your economy, look at job losses. When no one is working, how do you plan to live not even the food stamps will be enough GET IT.

KEEP PRINTING THOSE DOLLARS, DUM ASS.

Peter| 2.9.09 @ 11:04AM

I have really found this discussion to be great. I have especially enjoyed the debate between Bob and Mike. i have also looked at the data and found that there is a lot of good ideas coming from both sides. It seems that you are both intelligent men with strong beleifs. I hope this continues. It seems to me that the data concerning GDP shows that it will grow regardless of what the government does and it is driven more by private business and consumption than government agendas. I have to agree that the best option concerning government spending would be a flat tax and a balanced budget. The budget cannot be balanced though until we find a way to deal with the entitlement programs like social security, medicare and others. I have to agree with Bob that tax cuts don't seem to do much by themselves. Right now responsible spending would be more beneficial. As far as personal freedoms go I think that the economy flows through the cycles smoother with less government intrusion. That is why I like a simple flat tax that might help reduce the cost of business by reducing the accounting departments in companies. Not so good for tax accountants though. I still think that taxes should be as low as possible. Like everything else in the economy there is a balance of where the taxes should be. I think that we are in that area now but if they go up too high they can do damage to our economy. At the same time if lower tax cuts were the best and only solution then one could argue that we should do away with the income tax altogether. That would be totally irresponsible because then government debt would just sky rocket. It is my idea, and I may be wrong, that taxes are the wrong thing to be worrying about right now. Government subsidies to keep bad sompanies afloat and increased regulation seem to be more detrimental in that they support bad business plans and increase national debt. I find it interesting that some of the most regulated industries in the country are have the most problems. So I have to go back to the idea of freedom. Proper tax plans and careful and limited regulation will provide the best chances for companies to succeed or fail on their own. If they fail they need to be allowed to fail so that the capital, labor and resources can then be used by others more efficiently. I have never made such a long comment on an article and I may have wandered a bit but this is fun. So keep going at it. Many of us are reading, learning from and enjoying this debate. It is definately better than the debates being had in D.C.

Chris| 2.9.09 @ 11:14AM

I think we can all agree that "Bob" needs to get a life and get out of mommy's basement

Obama Wankers| 2.9.09 @ 11:32AM

Diageneseoristis,

Did you actually use the word "wankers" just now?

You do realize that "wankers" is what somebody from England would say, right?

And you do realize that the English are a bunch of commie socialists with their "nationalised healthcare," right?

So, by choosing to use that word, I hereby label you a "commie-sympathizing wanker."

Peter| 2.9.09 @ 11:48AM

Obama Rules,

Wow, I don't find your insight helpfull because you only follow what others say and don't think for yourself. I have found that most Obama supporters are difficult to have an honest discussion with because they usually like to just start name calling instead of actually debating their ideas. I have found that these people are usually of sub-standard intelligence who would rather make others feel bad in order to improve their own over inflated sense of self. Personally if you cannot honestly debate and support your ideas but must insist on simply insulting those that disagree with you then you are not worth debating. I do however find a certain sense of fascination with the kind of lemmings that you represent so I usually do enjoy responding. Not one of my better characteristics but oh well. Now if you have a disagreement with any of my ideas please let me know which ones and why and I might decide that you are indeed worth debating. What do say?

vic| 2.9.09 @ 11:49AM

This guy is not a student of econometrics as correlation does not prove causation.

They move together but without enough of a lag for spending to likely cause unemployment. Spending goes up automatically because of unemployment payments and other social programs.

Also, stimulus is for "stimulus". The intent is not to create jobs long-term. It is to get things moving.

Obama Yo Momma| 2.9.09 @ 12:02PM

Peter,

a) I think you just described every conservative and GOPer out there. Awesome!

b) How come Republicans don't get sarcasm?

Peter| 2.9.09 @ 12:09PM

Ah, another lemming. Well I guess that the intelligent conversation that I was enjoying has stopped so I must go find a thread where there aren't so many pests. Have fun.

Obama Rules| 2.9.09 @ 12:18PM

Peter,

Now, don't get all high on your horse, since you're about the only conservative person on this Web site interested in having a real debate.

The rest of your ilk -- i.e, Doctor Right -- are only interested in pointing fingers and blaming liberals and Obama (read: that uppity negro) for everything.

Peter| 2.9.09 @ 1:47PM

I couldn't help it, I had to come back. I appreciate the compliment "Obama Rules" that you think I am the only conservative willing to debate ideas. However, I find it interesting that you I don't see anything coming from you computer other than insults, sorry, sarcasm and that is somehow your idea of a debate. I also find it intersting that I didn't say anything about Obama or liberals just those that seem to be so excited about him. Yet I am obviously a republican because you don't agree with me. So you set about insulting me instead of trying to prove me wrong. To set the record straight I have no ill wishes for Obama I just don't agree with his fiscal policy. I think that government interference has led to worsening our current problems by increasing the netional debt and by trying to hold up companies that have obviously failed. These banks should be allowed to fail so that their resources and labor can be put to more productive use and help the economy right itself. Now I know that a lot of you seem to see me as a lemming not thinking for myself. Well I have to ask you. Who is the one saying we should pull ourselves up by our bootstraps and who is the one crying to the government to help. It seems like you guys don't seem willing to think for yourselves, or work for that matter. If you disagree with my ideas then tell me why I am wrong. Otherwise you just reinforce my opinion of yourselves.

Mike| 2.9.09 @ 2:51PM

Bob, tax cuts always help the economy, particularly marginal cuts in the tax rate. That has never really been in dispute. The question has always been whether we can "afford" them. That's why I continue to challenge you on Reaganomics, which definitively answered the question. Again, Reagan slashed the top marginal income tax rates from around 50% to around 25%, and yet raised overall tax revenue by 65% (nominal) overall! The CBO had predicted a massive revenue loss. The Clinton and Bushes later changes in the top marginal tax rates, by contrast, were miniscule and can't offer much insight to the supply-side effect of tax cuts.

I couldn't agree with you more about Volcker. He deserves a lot of credit. I'll only say that Volcker couldn't have pulled it off without significan political cover from the president. Reagan afterall reappointed him in 1983.

So you think the Soviet Union would have collapsed all by itself. I thought you said I believed in fairy tales. "Here's my stategy for the Cold War: We win, they lose - Ronald Reagan.

Peter, thanks for the kind words. I'm trying, but he's good.

J. Peter Freire| 2.9.09 @ 3:00PM

We have really intelligent readers. I've printed out this article, and will read it tonight with a highlighter.

We also have really strange trolls who post racist and wacky statements. I've removed those, but let us know if any more of those show up. Thanks so much for your insights, guys.

ruth| 2.9.09 @ 3:49PM

'Strange trolls' is an understatement, JP.

Robert Rosencrans| 2.9.09 @ 3:52PM

Volcker, Volcker, Volcker.
http://www.freerepublic.com/focus/f-news/2086184/posts
With not an insignificant amount of fanfare last week, former Fed Chairman Paul Volcker endorsed Barack Obama’s presidential candidacy. His endorsement drew more attention than it normally might have in that while Volcker is a lifelong Democrat, his legend is inextricably linked to Ronald Reagan’s, and the ‘80s economic revolution that reversed the U.S.’s flagging economic fortunes.

Given Volcker’s historical ties to Reagan, some Republicans logically took offense to his seeming apostasy. Their dismay is misplaced. Volcker was never on board with the Reagan economic plan in the way that modern history suggests, and rather than an essential driver of the ‘80s economic renaissance, a more realistic account of Volcker’s early years at the Fed shows that far from a facilitator of pro-growth policies, Volcker’s actions nearly derailed Reagan’s economic plan and presidency altogether.

Though Reagan spoke confidently of renewed economic optimism that would result from tax cuts, Volcker’s countenance was very dark, with frequent pronunciations about us not being so naïve as to assume “there are quick and painless solutions” to the economic problems we faced. To Volcker, there was no way we could “avoid a clash between monetary restraint….and the growth of economic activity;” this despite the truth that growing economies require more money, not less.

Given his skeptical views about the Reagan tax cuts, Volcker lobbied in secret against their passage owing to his view that they would lead to a massive revenue shortfall. While Fed Chairman Fred Schultz worked on House members, Volcker lobbied senators to vote against the cuts.

As George Schultz told William Greider in Secrets of the Temple, Volcker’s position was that, “We are in favor of a tax cut, but you must recognize that if you can’t accomplish this with much bigger budget cuts than you are contemplating, it’s going to put much more pressure on us and that means higher interest rates.” Shades of Robert Rubin.

Using his control of the interest rate lever as a weapon, Volcker kept money “tight” in order to prize tax increases out of the White House. More on monetary policy later, but bad dollar policy brought on the ’81-’82 recession, and remarkably led to a bill that increased taxes ahead of the 1982 elections. Unsurprisingly, the Republicans lost 26 House seats.

Even more galling, according to Paul Craig Roberts’ The Supply-Side Revolution, not a single Democrat voted for the tax increase. None needed to in that as Mark Shields wrote in the Washington Post at the time, Reagan’s advisors (including Volcker) did all of their dirty work for them in terms of attracting Republican votes in favor of tax increases. Thanks to economic advisors that did not share Reagan’s optimism about tax cuts, by 1983 the Reagan tax cuts of ’81 had disappeared in dollar terms. The marginal incentives of course remained, but due to powerful opposition on the part of Volcker, Alan Greenspan and others, Reagan’s tax program was severely compromised.

In his most recent column, George Will continued the false legend concerning Volcker, noting that he and President Reagan whipped the inflationary dragon with contractionary economic policy that resulted in double-digit unemployment. Will’s thinking resembles that of our present Fed Chairman who labors under the retro view that growth is the cause of, not the cure for inflation. The truth about Reagan vis-à-vis Volcker when it comes to inflation is a bit more nuanced.

A Carter appointee, Volcker’s attempts to use interest-rate increases to slay inflation in the late ‘70s were met with a great deal more inflation. By February of 1980, with the Fed funds rate at 14 percent, gold hit an all-time high of $875/ounce.

The dollar’s aforementioned fall was of course sped along by another major mistake carried out by Volcker just a few months prior. Correctly recognizing the futility of interest-rate targeting, Volcker shed the latter only to make a fateful decision that would drive the U.S. economy even further into the ditch. Put simply, in October of 1979 Volcker began a three year experiment with Milton Friedman’s monetarism.

Instead of targeting the Fed funds rate, Volcker attempted to target the quantity of money with disastrous consequences. Though inflation is surely a monetary phenomenon as Friedman long noted, with the majority of physical dollars outside these fifty states, attempts to control the quantity of dollars within these fifty states were bound to fail. To the extent that the Fed targeted various aggregates of U.S. money supply lower, this merely meant that dollars in other markets (eurodollars for instance) would fill the shortfall.

Worse, given the Fed’s efforts to control money quantity rather than rates, the Fed funds rate bounced around on a daily basis such that businesses faced an impossible task of raising capital owing to uncertainty about the rate at which they could raise capital. As Charles Kadlec and Arthur Laffer wrote at the time, “the Fed’s action reduced the viability and attractiveness of the dollar,” and as a result its policies “increased the prospects of inflation” in spite of the fact that monetarist targets “resulted in a slower growth in the measured quantity of money.” What the economy needed according to Laffer and Kadlec were “policies that lead to an excess demand for dollars relative to their supply.”

Those policies did materialize, but no thanks to Paul Volcker. Though the dollar hit what was until recently an all-time low under Volcker in February of 1980, positive electoral developments began to reveal themselves which succeeded in arresting the dollar’s fall.

In short, by the spring of 1980 the markets started to price in Ronald Reagan’s election. Reagan of course ran on a pro-growth platform of further de-regulation, tax cuts, and a return to a more stable and stronger dollar. And economic growth, if it has any effect, serves to soak up excess liquidity. With investors pricing in a brighter economic future, gold was down to $600/ounce by election day in 1980, and by the end of 1981, the yellow metal had fallen below $400.

Contrary to modern accounts of that period suggesting Volcker’s policies whipped inflation, the markets had as mentioned already “voted” on them with gold having reached an all-time high in his early years at the Fed. The weak dollar that gold signaled was itself inflation, not a cause of the latter, and with Reagan’s election and its policy aftermath having boosted the dollar, inflation was effectively contained.

Sadly, Volcker did not agree. Seeking to tighten further through futile attempts at managing the various monetary aggregates, his actions sent the economy into a major recession which led to the ’82 electoral rout, and which made Reagan’s 1984 re-election prospects increasingly dicey. Worse for the Reagan program, Alan Greenspan and Herbert Stein gave Volcker enhanced political cover given their view that the tax cuts themselves would be inflationary.

So rather than accommodating the Reagan tax cuts with increased liquidity, Volcker went in the opposite direction until a looming Mexican loan default threatened the worldwide banking system. The time was October of 1982, and on October 9th of that year Volcker finally abandoned the monetarist approach to Fed policy that had proven so disastrous.

The resulting expansion of dollar liquidity did not prove inflationary as so many (including Milton Friedman) assumed it would, because by 1983 the marginal tax cuts Reagan had championed fully kicked in. Contrary to suggestions today that say tax cuts are slow to impact the economy, a combination of lower rates and increased dollar liquidity Fed an economic boom that led to Ronald Reagan’s landslide re-election in 1984.

Still, the Reagan Revolution almost never was, and Paul Volcker’s 6’7” frame weighed on it like no other politician or government policy. If he should be given any credit for Ronald Reagan’s successes, it would have to do with his belated admission in 1982 that his policies were hammering the economy along with Reagan’s economic program. And it was the latter that whipped inflation, not Paul Volcker.

All this in mind, no one should be surprised by Volcker’s endorsement of Barack Obama. Despite the truth that Reagan’s visions elevated him to central-banker sainthood, he never agreed with the vision. As such, his embrace of the Illinois senator isn't newsworthy in the least.

John Tamny is editor of RealClearMarkets, a senior economist with H.C. Wainwright Economics, and a senior economic advisor to Toreador Research and Trading. He can be reached at jtamny@realclearmarkets.com.

Bob| 2.9.09 @ 4:25PM

Mike, can you show me charts tied to the tax cuts of Kennedy, Reagan, and Bush2 that prove tax cuts have a stimulative effect on the economy? Again, not selected data, but charts of basic economic data. I've looked for it in vain -- just as I've found no evidence that spending is really stimulative. Furthermore, can you explain why the marginal tax increases of Clinton provided more economic growth than Reagan?

One of the things I've learned over my many years is to always question your assumptions. Show me the graphical evidence. Hint: it is not there.

Mike| 2.9.09 @ 5:17PM

Bob, I can't show you the charts. You know them much better than I. But do you really need a chart to tell that tax cuts are always good at the margin? Do higher debt loads lead to higher interst rates? Intuitively you would say yes, of course. Can you prove it with charts? No.

The economy boomed under Clinton despite the tax hikes. Without them I believe it would have done even better. I think the Clinton boom was due to to a huge improvement in productivity from infotech, along with a sizable dose of "irrational exhuberance" that ended with the dot.com bubble.

Clinton's tax hikes were not large enough (increased from 35% to 38% for the top marginal rates as I recall) to meaningfully harm the economy, but they did lead to a huge increase in tax revenue - at least until the dot.com bubble burst.

I'm with you on the current stimulus bill (I think). It's a bad idea from the get go, and as written, it's a terrible waste of money from both the spending and tax cutting measures.

Bob| 2.9.09 @ 6:23PM

Mike, the charts are important. There are so many factors affecting these things that you want some quantitative measure to show your thinking is on target. For example, it was thought that the tax credit given last year would have a stimulative effect. However, rather than spending this money, people paid off bills and put it into savings and thus this money had virtually no effect on the economy. I always check my theories with data to make sure I am on the right track. Just like Reagan said, "trust, but verify". In my case it comes from a lot of business development efforts that made intuitive sense, but didn't work out because of facts we did not consider.

The notion that tax cuts are good at the margin assumes that people will use them for GDP purposes. But they can also use them to pay bills, save, or invest in stocks and companies overseas which does not help the U.S. Tax cuts that are used on Wall Street by the big guys to make further investments, are also inefficient at helping the economy. Tax cuts can hurt the economy if spending is not also cut and debt is raised because the interest payments rise. Furthermore, increases in debt levels can cause inflation which will depress the economy.

So, MIke, it is NOT clear or intuitive that tax cuts are stimulative. By the way, you cannot prove that higher debt loads lead to higher interest rates because they are both related to other factors. I can prove, however, that tax cuts in the Reagan administration did not result in economic growth with charts as these are overall measures. To really prove this, I must take all occasions where we had tax cuts and see if there were similar results. Then, I would have to take places where we had tax increases and see if there were economic declines. The answer is clear, tax cuts or increases have little effect on the economy.

My main point is that the economy is primarily a function of private enterprise and global markets and NOT government. This leads me to an ideology that says government should only regulate malfeasance and then get out of the way.

For this reason, I believe the true Conservative ideology should be for fiscal restraint and NOT tax cuts. We should try to keep government out of our lives as much as possible. In the end, that would lower government spending. This philosophy also puts me at odds with social conservatives because I also believe their agenda is intrusion into my life.

We've gone through this exercise, but it should be obvious why I am against people like Sarah Palin to be the Republican leader. We need people at the top who understand complex economics -- or at least have enough knowledge to understand more advanced economics topics. That's why I supported Romney in this last election cycle and could not vote for McCain -- and especially Palin.

As an editorial comment, for years Republicans have eschewed intellect and knowledge. This is a complex world that requires someone of superior intellect in the White House. Romney has it, Jindal has it, Gingrich has it, but there are not many more Republicans who do. What makes me angry is that social conservatives are not swayed by intellect. You cannot make good decisions based on simplistic beliefs in a complex world.

OK, I'm off of the soapbox now.

cdc| 2.9.09 @ 6:33PM

Spending and tax cuts will both be fairly meaningless without a new economic revolution. Over the past century we've had industrial, chemical, computer, and internet revolutions. The country needs investment in education and research, and a real comitment to scientific excelence and leadership. Restart the SCSC supercollider, send probes to explore the solar system, get moving on stem cell research; it only a crucial and unexpected insight to start a new revolution.
And to help get some pride back in american science, the true source of our wealth and power, start deporting creationists.

Brian Wesbury| 2.9.09 @ 6:54PM

In a follow on piece at my website, we address our critics and deal with the issues of causation and correlation, structural spending trends and other macro developments or policies.

You can find it here:
http://www.ftportfolios.com/Commentary/EconomicResearch/2009/2/9/unemployment_and_stimulus_ii

If this link does not work, go to www.ftportfolios.com and click through to the piece titled Unemployment and Stimulus II.

Marc Jeric| 2.10.09 @ 1:17AM

So with $900 billion of pork and welfare (including %5.1 billion for Abu Hussein's brown shirts of ACORN) we will have 3 million new OR PRESERVED jobs - how smart! If we end up with 3 million fewer jobs the smart one can say that without this abomination of pork and welfare we would have 6 million less jobs, etc. That's Harvard affirmative action for you! In any case, $900 billion divided by 3 million makes it $300,000 per job - how about that!

Bob| 2.10.09 @ 8:47AM

Brian, your revised argument is still flawed. Entitlement programs were never designed to be stimulative, they were designed to provide a safety net. Since entitlement plans are more than half of the spending, your analysis is actually trying to relate entitlement spending to unemployment which makes little sense. In addition, interest should also be taken out of the mix. We know that military spending is stimulative whether we talk about WWII or the private enterprises we have supported in the Gulf and Iraq. So if you redo the chart to include ONLY discretionary spending plus military spending, you'd be getting closer.

I'd also look at the annual history in the years of 1932-1936 in terms of spending and unemployment trends. Any economist looking at today's issues, should have studied the Great Depression. You'll find strong prima fascia evidence that spending had a dramatic effect on unemployment trends during that period of time following the huge New Deal spending. This was even in the face of tax increases to pay for this spending. In retrospect, they made a number of mistakes in that recovery, which is why it took so long. But one of them was NOT spending too much.

Now, I am not arguing for a lot of spending, but it is certainly more stimulative than tax cuts as history and analysis show us.

Mike| 2.10.09 @ 10:22AM

Bob, I don't have much to disagree with you in your last post except your insistance that you can prove Reagan's tax cuts didn't work. They clearly did. Again, he slashed marginal rates and tax revenues went up, not down. His tax cuts not only paid for themselves, they had plenty left over to pay down some of the debt.

Not all tax cuts are created equal of course. Bush's "tax cut" last year was a one time rebate and did very little good. They probably provided more stimulus to the Chinese econonmy than our own. I thought it was a terrible idea at the time. And I don't like any of the so-called tax cuts in the Porkulous bill either.

True conservative ideology should be about reducing the size of government, including lower taxes, not just fiscal restraint. You sound like Bob Michel, Bob Dole and the rest of the tax collectors for the welfare state. Is that you Bob? Bob?

Bob| 2.10.09 @ 12:31PM

Mike, the fallacy with your argument about Reagan is that Clinton RAISED marginal rates and tax revenues went up even more. Furthermore, Bush also cut taxes and revenues dropped immediately. The point is that there is no arguable association between tax cuts and increased revenue as a theory. Therefore, the rise we saw in Reagan's time was due to other factors -- basically monetary policy and the severe decline of interest rates. The numbers are the numbers, and they don't prove your point if you look at ALL of the examples.

I also believe that taxes should be lower, only since they do not stimulate the economy, they should be a RESULT of fiscal restraint and not a policy. They are a resultant factor, not a leading factor. As I've said, you need spending restraint which will provide lower taxes. That's why I so strongly support a balanced budget amendment -- it makes economic sense given the numbers. I also believe, by the way, that our federal government does far too much and is inefficient. Therefore, the size of government should be reduced.

Mike| 2.10.09 @ 1:02PM

Bob, I think we're getting close. The revenue impact of a tax cut or hike depends on where the rates lie on the Laffer Curve. If too high, like pre-Reagan, cuts will pay for themselves. If reasonable, like post-Reagan, cuts will lose some revenue (Bush II) and hikes will raise a lot of revenue (Bush I, Clinton).

Tax cuts are always good, however. They allow people to keep more of their hard-earned money (liberty, pursuit of happiness, etc), they stimulate the economy (more money left to invest in your own business) and they decrease the size of government (our common goal.)

Government spending is nearly always bad. It crowds out more efficient private spending, it must be paid for by raising taxes (bad) or increasing debt (bad), and it increases the size of government (defeating our common goal). The short term stimulative effect of spending is far outweighed by all of the above.

Don't go through your political life promoting efficient tax collection for the ever metastisizing state. Spending is always the culprit. Fight the beast.

chuck| 2.11.09 @ 9:28AM

With the exception of a few name-callers, this is certainly one of the best on-line debates I've had the pleasure of reading.

I am a retired professor of economics and finance from a small liberal arts college. One of the joys of teaching there was the variety of other courses we were expected to teach, thus forcing several of us out of the strict confines of pure economic theory into broader fields of human behavior and motivation. Thus, the never-ending debates (Reagan's tax cuts worked/didn't work, ditto Clinton's tax increases, etc., etc.) are inherently unsettlable because the data are always sifted through the philosophical lens one comes in with. Unlike an exercise in lab science, were the `ceteris' are mostly always `paribus', there are far too many other things going on to get a pure statistical correlation with a plausible argument for causation. Of course, as many of the prior posters have pointed out, even relatively clean data sets can be manipulated by selective start and end points, differing statistical methodologies, and so forth.

I have always believed that the arguments presented here, from whatever side of the ideological spectrum, are bootless, since the final arbiter of fiscal, monetary, and every other policy is human nature, and the politics that arise from it.

The great bulk of my seniors, when asked about what was most important in a job, said security. I believe that reflects human nature very well: I believe that 90% of all the human beings ever born, or ever to be born, are peasants. That is to say, they want three meals, a roof over their heads, a warm bed to crawl into, a companion to crawl in with them, and a decent assurance that it will all still be there in the morning. If times are good, they are perfectly willing to vote conservative, since in addition to the foregoing, they have a great shot at two cars, nice vacations, an RV and, latterly, a `roof' they could not possibly afford in a rational world.

When this is threatened, however, a savior is quickly sought. Debt, deficits, tax cuts, fiscal policy - all of this is immaterial. As the ad says "It's my money, and I want it NOW" Bread and circusses are as old as Nero, and bloodied the 20th century as nothing has before.

The fate of these peasants depends on the 10% who are not. If they are benign, as has been the case in the history of the United States, then matters go well. If not . . . .

My fear is that as the years go on, the 10% even in this country are becoming less benign. In many ways freedom is being attacked, because freedom is dangerous to that part of the 10% who want power over others, and want it permanently. Not the kind of "power" once supposedly weilded by GM `forcing' us to buy their cars, but the kind of power that compels obedience by the threat, and use, of force. It is not irrelevant here that Christianity is increasingly under attack, because the truth shall make you free.

I am 66 years old, and reflect often on how free we were growing up in the fifties. But, as we peasants learned, we were not behaving according to the lights of some of the upper 10%. In essence, we were offered to sell our souls in exchange for a mess of potage in the form of more Social Security, more "free" medical care, more welfare, all the while being ever-increasingly protected from our feckless selves in the name of consumerism and environmentalism. Whatever the beneficial neighborhood effects of some of this may have been, the direction has all been toward ever-increasing government control, sometimes through taxes, other times through regulation. I fear, with the ancient Greeks, and Ben Franklin, that democracy sooner or later destroys itself, since sooner or later, if by nothing else than random chance, the less benign part of the 10% will come to the fore. Jesus spoke of us unflatteringly as sheep. As such, we are entirely dependant on the shepherds. The fact we may elect them from time to time does nothing to changes that.

When all is said and done, two truths emerge, I think. One, facts and statistics, although stubborn things, ultimately do not matter, (consider global warming). Second, you can force a man to be a slave, but you cannot force him to be free.

Bob| 2.11.09 @ 10:10AM

Chuck -- interesting comment. I see you are moving from the field of economics to anthropology. Let me take this from your 20,000 foot view to 50,000 feet. The reason government grows over time is specialization, complexity, and productivity. In the ancient agrarian societies, people were self-sustaining. They grew their own food, made their own clothes, were their own doctors, etc. They could survive without government. But as time evolved, people moved to cities. They specialized and became butchers, bakers, candlestick makers, etc. It was inefficient to do all of this yourself. As businesses grew, they covered more territory and local communities could no longer provide for themselves. People at the beginning of the 20th Century were now wholly dependent on government for services, protection, etc. Given the lack of control over one's destiny, we saw the rise of a social safety net in the mid 20th Century. Starting in the 70's, we see this expanding one more time to globalization. When we hit the 90's, countries were no longer self-sustaining and had less control over their own destiny. The increases in productivity in the 90's was the forebearer of the problems we face today as middle management began their obsolescence. Specialization has continued to become more fractionalized increasing the need for governmental intervention for coordination and regulatory purposes.

The point is that this is a natural evolution of society -- and these trends will continue, not for ideological means, but for anthropological reasons. Going back to the 50's would be disastrous to our economic well being as we would not be competitive with the rest of the world.

If you look at this anthropological morphing from an economic perspective, productivity will continue to evolve which means more government, not less.

Your freedom has actually increased, not decreased. You have more information available than ever before. Generally, you are protected from bad elements more than before. Just the fact you can expose other people to your thoughts on a blog like this is freedom in action. I'm almost as old as you, but being reactionary is not a solution. The issue is how you use your freedom TODAY, to advance yourself and make a better world. There were hurdles on farms in ancient times, and there are hurdles today. I'd rather have the hurdles today than be on a farm with limited information, having to work 16 hours a day just to live to the next day. It's called perspective.

Mike| 2.11.09 @ 3:44PM

Nice post Chuck even if it was a bit depressing. Sorry to hear that 90% of your seniors thought that security was the most important aspect of a job. Peasants indeed. If that's the view of the young, educated elite, how must the rest of the country (with a mortgage and several mouths to feed) feel. If your assessment is true then I suppose it was inevitable that the Son of Acorn would rise up to lead us from the creative destruction of capitalism and deliver us unto the safety of the nanny state.

I do share your concerns about the erosion of our basic freedoms. Economics aside, there's "card check" (aka thug balloting) and the "fairness doctrine" (muzzling the Right) to name just a couple of the beauties that the new Democrat majority has in store.

chuck| 2.13.09 @ 8:49AM

Thanks, Bob, for taking my perspective up 30,000 feet, and validating my point. Peasants are fearful creatures. What they cannot see or understand, they fear. Adam Smith dealt with the first manifestation of this "government is our savior" mentality when free markets were straining against mercantilism and tradition. If no one were forced to make shoes, or candles, or butcher meat, where was this all to come from? I can't see this invisible hand! Fast forward two hundred odd years, and the same fearful arguments are heard, with the additional wrinkle that now since the butchers, bakers, and candlestick makers are global firms, we're REALLY in trouble unless the government steps in to protect us from the ravages of uncertainty. The argument hasn't changed in generations. It is as fallaceous today as it was in Smith's day. But, as I said in my earlier post, facts do not matter to a fearful peasantry.
As a sidebar, the school were I used to teach, being as liberal as most liberal arts colleges, contained more than its share of faculty who disparaged students planning to find their career in business, but lauded those headed for government. Why the same piece of human clay was going to be greeedy, inept, and/or corrupt when headed for the private sector, but unselfish, competent, and honest to a fault when headed for government "service" always escaped my ken. Likewise for immense governmental systems, as compared to private systems. It all boils down to whether or not you want to control the peasants "for their own good", or let them find their way as best they can. They will do better - much better - on their own, but they, of course, do not realize that. Peasants do not think in the long run, or the big picture. They live for the here and now, and government promises are always for the here and now.

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