From David B to Hilary et al
Aug 3, 2011
My point is that lower marginal rates, that is, across the board rates in Section 1 of the Internal Revenue Code, engender desirable behavior in the private sector and therefore greater job creation (and while my personal experience can only be considered anecdotal, after twenty plus years as a tax lawyer, it feels plainly, unmistakably right to me). And Alesina responded to the Economist by saying that it got the IMF study wrong and that the two studies agreed in their essential conclusion. Can’t say for sure who is right, but one could hardly, given all the serious work on this issue, argue that there is no point worrying about whether tax increases hurt job growth. In other words, there is no place for the ‘we’ve got to tax those millionaires and billionaires at higher rates” rhetoric, which is the line that the president has been peddling. Amateurish and unpresidential, in my modest view.
On the issue of cash to invest, banks are under a lot of pressure from regulators (I know that first hand; it’s really a problem). Nonbank private firms also have lots of cash, as you say, and my guess is that the investment climate -- the regulatory environment and tax policy being an important part of that – is causing them to hold back. That’s a point that can, of course be argued endlessly.
What I don’t get is how government spending, or, more particularly, government spending that (i) funds Congressional boondoggles and (ii) state budgets so they don’t have to lay off as many staff in response to a drop in tax revenues, is a good choice for jump starting the economy. On any given day, there is a finite supply of goods and services to consume, and a fixed amount of hands, hours and expertise to bring to bear on producing those goods and services. If Congress, through either borrowing or taxing, takes money from the private sector to spend on a public purpose, that public purpose better have a greater job creation multiplier than that money being put to work by Apple, GE or the machine shop down the street. I am personally skeptical that that is, or even can, reliably, or even substantially, be the case.
There is the ‘permanent income’ theory of private spending and investing to consider, the premise of which is that people and businesses make spending decisions based on their perception of long term income and income opportunities, not in response to one year payroll tax holidays or cash for clunker programs. That makes sense to me, since it’s what I do all the time (which is why I never have any money; my perception of my long term income prospects is greater, to date, than reality). All the regulatory ferment under Obama, for example, the yet to be written regulations under Dodd Frank and the health care bill, aggressive rulemaking at EPA, the really weird, ill-advised NLRB decision on Boeing, seem to me to contribute to the hesitation to invest. That, I admit, is a whole other discussion.
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Aug 2, 2011
From Hilary to David et al
I'm sure I'm just missing something, but I don't get this:
"spending cuts are a better strategy than raising taxes when it comes to growth in the economy".
If you want growth in the economy, you should either increase spending or cut taxes (or lower interest rates.) Either raising taxes or cutting spending, other things equal, is the last thing you should do. Sometimes other things are not equal: the spending and/or tax breaks might be incredibly poorly targeted, so that eliminating them would have no impact, for instance. But in general, neither spending cuts nor raising taxes is a way of increasing growth in the economy, at least in the short term. Sometimes creating growth is not a priority (i.e., when growth is doing fine all by itself, and it's time to deal with something else, like the deficit, rather than risk overheating the economy or creating a bubble.) But when it is, as now, neither spending cuts nor raising taxes is "a strategy" for creating growth at all.
In the longer term, deficits can be a drag on the economy. But this is not our present problem. Deficits harm the economy by raising interest rates and thereby crowding out investment. There is no evidence either of interest rates being pushed too high by government spending or of insufficient funds for business investment. (On the contrary: businesses are sitting on lots of money that they are not investing because it does not make sense for them to expand in the present economic climate.) This is why I favor short-run deficits and tackling the deficit only once the economy has improved. (I have held this position for decades; I'm not just latching onto it to avoid spending cuts now.)
Also, the Romers' paper deals with the effects of tax policy on the economy, not on a comparison between tax policy and spending policy. The Alesina and Ardagna paper has been criticized on a number of grounds. I.e., the Economist:
A subsequent study by the IMF:
And the Roosevelt Institute:
Note that all of these criticisms are not ideological but methodological, and they're pretty persuasive.
H
PS: Me on deficits in 2004:
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From: David B
August 02, 2011 11:18 AM
To: Paul
Subject: RE: Obama's Spending
What were the barrage of disparaging comments? I like to think I avoid that. (though I am, by Paul Krugman’s reckoning, insane, by Joe Biden’s, a terrorist and by Nancy Pelosi’s, satanic; I don’t claim to be entirely innocent of ad hominem attacks, though I like to think, as I just said, that I can be as close to innocent as possible. What is problematic is the accusation by the left that people on the right are intemperate, something that is demonstrably a matter, at best, of the pot calling the kettle black)
And in the spirit of reasoned intercourse, and bipartisanship, pasted below is the abstract of a 2007 paper on taxes (“revenues” being today’s euphemism) co-authored by President Obama’s first council of economic advisors chair, Christina Romer. As you can see, Professor Romer’s take in this paper is that the evidence supporting my view, that tax increases hurt growth, is ‘highly robust’ and ‘strongly significant’ Her conclusions go further than my intentionally modest claim that, because there is a observable co-incidence between relatively low tax levels and relatively high growth, we need to consider foregone growth as a plausible and significant opportunity cost of higher taxes.
I do apologize if whatever I said in any of those emails was taken as you claim. And as Jim Hawthorne and others who know what my day job is will attest, I am really measuring this by jobs, or more specifically, jobs and other advancement opportunities for those lowest on the economic rungs. I don’t have a handle bar moustache, tie widows (or orphans) to the railroad tracks or give a damn about Goldman Sachs, General Electric and other such big business manipulators (any more than I give a damn about shallow, unserious people like Joe Biden and Nancy Pelosi).
Take care
David
THE MACROECONOMIC EFFECTS OF TAX CHANGES: ESTIMATES BASED ON A NEW MEASURE OF FISCAL SHOCKS
ABSTRACT
This paper investigates the impact of changes in the level of taxation on economic activity. The paper uses the narrative record. presidential speeches, executive-branch documents, and Congressional reports to identify the size, timing, and principal motivation for all major postwar tax policy actions. This narrative analysis allows us to separate revenue changes resulting from legislation from changes occurring for other reasons. It also allows us to further separate legislated changes into those taken for reasons related to prospective economic conditions, such as countercyclical actions and tax changes tied to changes in government spending, and those taken for more exogenous reasons, such as to reduce an inherited budget deficit or to promote long-run growth. We then examine the behavior of output following these more exogenous legislated changes. The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment. We also find that legislated tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other tax increases.
Christina D. Romer David H. Romer
Department of Economics Department of Economics
University of California, Berkeley
Berkeley, CA 94720-3880 Berkeley, CA 94720-3880
cromer@econ.berkeley.edu dromer@econ.berkeley.edu
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From: Paul
Tuesday, August 02, 2011 10:01 AM
To: David B
Subject: RE: Obama's Spending
This was a nice, reasoned reply and worthy of debate. You will do better in debates with liberals such as myself by providing such reasoned arguments. Yesterday you asked if anything had changed since 2001 to justify greater government spending. A number of people answered with 6 or 7 fairly large ticket items. At that point (probably feeling somewhat beseiged by the obvious tilt of the responders) you came back with something like “government is too large.” Then the barage of disparaging comments.
It is believed by many, if not most, liberals (myself included) that when conservatives are faced with facts they don’t like, they reflexily fall back to statements of belief. Your statement yesterday merely reinforced that liberal bias.
I will be dropping out of the debate so best of luck in the free for all.
Paul
PS I think you still owe the others a reasoned response to the issue of changes since 2001.
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