Why the recovery is stalling
And speaking of Sunday's "Meet the Press," as I was just below, it featured an excellent panel on the economy, starting with host David Gregory asking New York Mayor Michael Bloomberg why the recovery is losing steam. The reply:
BLOOMBERG: Well, you have the public not wanting any new spending, you have the Republicans not wanting any new taxes, you have the Democrats not wanting any new spending cuts, you have the markets not wanting any new borrowing, and you have the economists wanting all of the above. And that leads to paralysis. And paralysis, it leads to uncertainty, and uncertainty is not good.
And then Gregory asked Alan Greenspan about the belief that tax cuts can stimulate so much economic activity that they pay for themselves. Greenspan, I was surprised to learn, favors allowing the Bush tax cuts to expire, not just for the wealthiest, but for everyone.
MR. GREENSPAN: Look, I'm very much in favor of tax cuts, but not with borrowed money. And the problem that we've gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money, and at the end of the day, that proves disastrous. And my view is I don't think we can play subtle policy here on it.
MR. GREGORY: You don't agree with Republican leaders who say tax cuts pay for themselves?
MR. GREENSPAN: They do not."
The full transcript, which follows the opening interview with Admiral Mullen, is here.
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Tax cuts do not, in themselves, pay for themselves. The only way this consequence can occur is if it generates additional spending, which then generates additional production, which generates additional jobs and economic activity, which generate additional tax revenues from increased income broadly throughout the economy.
The likelihood of this sequence of events happening, and of Congress then not SPENDING the increased tax revenues (and then some, as they did under Reagan) is so meager that most folks know it is wishful thinking.
Tax increases, on the other hand, without cuts in government spending, only serve to reduce funds available to individual taxpayers and the private economy as a whole. It is equally clear that this will have a negative effect on the economy.
Democrats in Congress, therefore, have a perfect dilemma. Should they extend the current tax rates and hope for the unlikely positive stimulus to the economy, or should they revert to previous higher tax rates and almost certainly apply brakes to a weak and faltering economy?
I'm glad I'm not in Congress.
I'm sorry, but I think it's completely ridiculous to talk about the magnitude of government involvement without talking about restructuring:
http://erikhare.wordpress.com/2009/04/03/restructuring/
There is a lot government can do, yes, but there is are many things that it cannot. Resources are obviously limited and need to be targeted to where they are most effective.
We've heard a lot of blather about "L" shaped, "V" shaped, and even "U" shaped recoveries, yet no one seems to want to discuss how these come about. That's cowardice.
http://erikhare.wordpress.com/2010/02/05/great-recession-great-denial/
A recover is a process, not an event. You don't just thrown money at it - you allocate resources to ease the transformation of the economy out of the Depression and into a new world that is uncharted so far. It's not easy, but charting that world is essential. If we never try, we'll never have it - and so far everyone has been far too timid to take a really good stab at it.
Instead, we talk about how much we should be spending on ... I don't know, it appears to be support the already failed old economy. That's not very bright at all.
If I were Congress, what I think I might do:
>Stop talking about the "ten year" impact of the current rates and talk about the anticipated lost income from a one year extension.
>Extend the present rates for all for one year.
>Identify and pass spending cuts equal to the amount of the anticipated lost income.
Of course, that won't happen -- too much fun to play politics with it.
John Iacono writes
"Tax increases, on the other hand, without cuts in government spending, only serve to reduce funds available to individual taxpayers and the private economy as a whole. It is equally clear that this will have a negative effect on the economy."
That is not at all clear. What it is: a talking point from the supply side, "we're always on the high side of the Laffer Curve" school of thought.
On the issue at hand, Congress needs to let the legislation (bush tax cuts) run its course as it was signed into law, expiring this year.
Economists have long demonstrated that tax cuts provide the least bang for the buck, if any, of any government stimulus scheme. Tax cuts as stimulus are faith based economics, cut taxes and wait for the magic to happen. Apparently there are still a lot of people out there who still don't know there's no such thing as magic.
//>Stop talking about the "ten year" impact of the current rates and talk about the anticipated lost income from a one year extension.//
The primary reason for that talk has to do with the procedure-reconciliation, with its accompanying Byrd Rule-Republicans used to pass the Bush tax cuts.
If tax cuts paid for themselves, then the Bush tax cut early in the decade would not have erased the budget surplus. It is utter folly to claim otherwise.
Mitch McConnel's "vibrancy" nonsense shows how factually bankrupt the GOP has become on tax and economic policy.
Mr. Black, I do not believe you answered why the economic recovery is stalling. I think you can do better than this. Am looking forward to your future articles. Most sincerely.
"Apparently there are still a lot of people out there who still don't know there's no such thing as magic."
Yes indeed. First among those are the Democrat candidates that are saying that adding the entire state of Minnesota to Medicare will save money.
They believe Obama has a magic money tree growing under the bed.
The economy’s fundamental problem is a decline in velocity—the speed at which money turns over in the economy. When velocity falls it has exactly the same economic effect as a decline in the money supply—reducing both prices and output. By some calculations, velocity has fallen by 11 percent—exactly equivalent to an 11 percent shrinkage in the money supply.
Regarding tax cuts: If Republicans didn't want their tax cuts to expire then they shouldn't have passed them with expiration dates. This suggests that their intention was to allow them to expire when the time came.
Senate Minority Leader Mitch McConnell, R-Kentucky, asserted that there was no net revenue loss from any of the Bush tax cuts and that all spending increases must be offset so as not to increase the deficit but tax cuts must never be offset. Said McConnell:
“There's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy. So I think is the view of virtually every Republican on that subject.”
Well I beg to differ and so do a few other folks....
Andrew Samwick, chief economist at the Council of Economic Advisers during George W. Bush’s first term, in a January 3, 2007 blog post:
“You know that the tax cuts have not fueled record revenues. You know what it takes to establish causality. You know that the first order effect of cutting taxes is to lower tax revenues. We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one. If I'm wrong, show me the evidence ... and tell me why the tax cuts were so small given their effects on revenues.”
Alan Viard, senior economist at Council of Economic Advisers:
“Federal revenue is lower today than it would have been without the tax cuts. There’s really no dispute among economists about that.”
Robert Carroll, deputy assistant secretary for tax analysis at the U.S. Treasury Department:
“As a matter of principle, we do not think tax cuts pay for themselves.”
Edward Lazear, chairman of the Council of Economic Advisers in Bush’s second term: “Will the tax cuts pay for themselves? As a general rule, we do not think tax cuts pay for themselves.”
The 2003 Economic Report of the President during Bush’s first term stated:
“Although the economy grows in response to tax reductions (because of higher consumption in the short run and improved incentives in the long run), it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity.”
OK Mr. Swift you may have never felt a spontaneous urge to action or as Hume wrote spontaneous motivation. But then you seem to have it all figured out. Maybe someone could use a coffee enema?
Mr. Black do some hard digging into animal spirits.
Reading through these comments, I'm sure of one thing:
We will almost certainly not have a recovery until we devote as much space to restructuring as we do to this idiotic discussion of the Laffer Curve.
Is it possible to tax an economy to death? Sure. Has there ever been any evidence that we are anywhere near that point? No. The point is academic at best.
You want higher revenue? Focus on what matters. Employment overhead is far, far more critical than the kind of tax cuts debated here.
http://erikhare.wordpress.com/2009/02/04/overhead-or-head-count/
(slightly old post, but the main problem hasn't been fixed yet - or even talked about in any serious way).
For 10 years, Congress has known the Bush tax cuts would expire at the end of this year, but Congress still hasn't set next year's tax rates. Extending all of the Bush tax cuts through 2020 would cost $3.2 trillion, not including indexing of the Alternative Minimum Tax. For those of us concerned about the deficit, this is low hanging fruit.
Obama has proposed extending $2.2 trillion of those tax cuts for those with incomes under $250,000 ($200,000 for singles). That would continue the present law 10% bottom bracket, marriage penalty relief, and $1,000 refundable child credit, but it would raise the top marginal tax rate from 35% to 39.6%.
Obviously raising the dividend rate to 39.6% will raise quite a bit of tax. However, the increase in the top rate to 39.6% for other ordinary income will generate very little additional tax. I believe that the average AGI for people in the top 1% of taxpayers is around $325,000. Most taxpayers with AGI between $200,000 and $500,000 are in AMT. Increasing the ordinary rate to 39.6% will not raise their taxes by even one dollar. You will get additional tax from people with AGI above $500,000 but my guess is their are very few of those, definitely not enough of them to dent the budget deficit.
Lowering the long term capital gain rate to 15% had to increase tax revenue. I have seen more stock sales the past decade than ever before. The low rate allows people to re-balance their portfolios without a huge tax burden. If the rate goes much higher than 20% this will stop. People will just sit on their gains. No sales, no tax revenue.
Reading through these comments and another Ctrl C, Ctrl V post, I'm sure of one thing. The left puts excessive faith is a person that could be the single largest player in the housing crash. How can you take his tax opinions seriously. Creating excessively low interest rates and is hardly the same effective tax rates. Epically failing at Fed may, however, qualify you to fail at tax policy.
As for velocity which is an actual statement, not just the same old enema related posts, how does a tax cut not increase velocity greater than any other government intervention. No bond issuance required, no additional lending, no check to be mailed. More cash in hand instantly, because of the changes in withholding rates, equal more spending thus more turnover.
Another hint for Mr. Black (in all sincerity really). Look at the employment act of 1946, also the demographic bulge beginning in the 1970's. The book "Animal Spirits" was written by 2 nobel prize winning economists. Published in 2009.
Another thing you might like about the book Animal Spirits is that it discusses how different groups hold to different narratives/stories. A good small d democratic work.
I doubt that we'll ever be able to do away with all the home buying subsidies that are so popular with both individuals and industry lobbyists. This whole problem exists because both homebuyers and the government decided that a house was an investment vehicle rather than a place to live. Well-intentioned programs (social engineering) over the better part of a century have enshrined that notion as an unassailable right.
We might not be able to do away with home buying subsidies, but we might be able to raise some revenue and put a lid on speculative buying and 'flipping' by putting a cap on the mortgage deduction.
Here's an interesting perspective- Marxist.
http://www.youtube.com/watch?v=qOP2V_np2c0&feature=related
The recovery is stalling because the main drivers of it are worried, cutting back, and putting their limited excess resources aside for a "rainy day," which many see on their personal horizons.
Consumers, first. Then small business owners. Then those coming close to retirement. Then 401k investors. Then venture capitalists.
Government cannot fix this. But Americans are a hardy lot, and will eventually get tired of battening down the hatches and decide to go back to living more normal lives.
Until then, prudent government should try to keep expenditures low to prevent piling up debt that will cripple the eventual recovery. Some measures to temporarily bolster income might be accepted, but only if they are seen to attack the debt and don't affect the worried persons listed above. Keeping interest rates low can help.
Mostly, patience is the word, though, as each member of the groups above comes to his/her own conclusions about whether it is safe to peek out of the nest.
A thoughtful Noonan piece which is relevant
http://online.wsj.com/article/SB1000142405274870374890457541171333550525...