Sunday, December 30, 2012

A Little Econ

This post is actually something I wrote over a month ago, while waiting for my son to complete his driving test at the DMV.  Just clearing the decks before the annual resolutions post.

A Little Econ Lesson

Sometimes I wish I could just reach through the TV or computer screen and just grab some talking head by the lapels and teach some simple economics to them, and to the apparently-ignorant audience to whom they write or speak.  Don't get me wrong--it is perfectly OK for people to disagree over economics.  Indeed, one of my favorite economics jokes (What? You don't have favorite economics jokes?) is about the economist with three arms.  That allowed him to say, "on the OTHER other hand...."  But even those disagreements should not be based on utter ignorance.

Let's begin with some pet peeves.  First up, supply-side economics, and the Laffer Curve.  Supply-siders (of whom I count myself one) say that, just as a tax rate of 0% will yield zero revenue, so would a tax rate of 100%.  The logic is that I can stay home in my pajamas and bring home nothing, so why should I work all day for the same?  That then yields a premise: just as tax rates can be too low to generate maximum revenue, they can also be too high.  At the point which tax rates change behavior to the point of shrinking the overall economic "pie," taking a larger "slice" for the government becomes counterproductive.

This idea lends itself to twin falsehoods.  One is the idea that raising rates always produces more revenue (the standard, "let's hike taxes on the rich" plan). But equally dumb is the reverse, conservative fallacy--that lowering rates always produces more revenue.  Obviously, that's not true.  We may not know what the "Goldilocks" tax rate is, but assuming there is one, you can muck things up moving either direction.

Now, that leaves aside other considerations.  A famous sports scientist once wrote, correctly, I believe, that anybody who runs more than 90 minutes per week is doing so for reasons other than health.  Yet I still run more than that in a single run sometimes.  I just don't lie to myself and say it's for cardiovascular fitness.  Same with taxes.  If it were to be conclusively proven that a tax rate of 90% would generate optimum revenue, I would still oppose it on moral grounds, as I believe that confiscatory rates amount to slavery.  Likewise, I can imagine that some folks might want taxes on certain groups at some set level above that which is mathematically most effective.  But if you believe that, I think you should be able to say so, and explain the principle behind it.  If you can't, then stick with the math!

So what does the math say?  Well, Coolidge, JFK, Reagan, and Bush 43 all cut tax rates, and in every case, tax receipts grew.  Now, I do think it's pretty obvious that JFK's cut of a 91% top rate to 70% or Reagan slashing that down to 28% would yield far more pie-growing stimulus than Bush's cut of 39% down to 35%.  But it seems proven by a pretty standardized and repeatable experiment that this works.  If that's not what caused (or at least contributed to) the growth, then I am open to alternative explanations.

What about the reverse? Paul Krugman of the New York Times has waxed rhapsodic over the fact that the USA enjoyed a huge economic boom in the 1950s under Eisenhower, with top rates of 91%.  But there was a little something else in the mix at the time, as well.  The fact that the USA was pretty much the only industrialized economy not shattered by WWII may have had a little to do with that.  Let's face it, I am a 138-pound marathoner who can eat anything I want and not gain an ounce.  But I don't assume that the diet is the reason I am skinny!

The other big counter-example is the fact that the USA prospered and even ran a budget surplus during the Clinton administration.  This is almost always followed by the fact that after Bush cut taxes, the deficit roared back and he wound up with a net loss of jobs over his two terms in office.  But once again, was it the tax rates that caused either the prosperity or the later crash?  It is my contention that Clinton was helped a good bit on the revenue side by two inflating bubbles.  The fact that Clinton's first year in office was also the year that the World Wide Web went mainstream cannot be ignored.  And many Americans, myself among them, made a small fortune in real estate during the same time period, as housing prices soared and down payments became relics of a bygone era.  We might also note that Clinton was the first US president since before my father was born to not have to worry about a Cold War, and the last one to not need to worry about a War on Terrorism.

But we DID run a surplus, right?  Well, sort of.  Our surplus included Social Security receipts, earmarked for the (nonexistent) trust fund.  Actually, the US National Debt never went down a penny, despite the paper surplus.  But at least there was one on paper.  And then Bush screwed it up.  Or did he?  Do you remember the campaign of 2000, back when nobody dreamed 9/11 was in our future?  The big question was what to do with the surpluses that were projected as far as the eye could see.  Bush wanted the "overpayment" returned to the taxpayers.  Al Gore wanted the surplus put in a budget "lockbox" to offset the eventual deficit in Social Security.  Bush won (barely), and we got the cuts.  But the lack of a lockbox nor the declining revenue is what brought us down.  It turned out that the rosy projections didn't account for the bursting of the dot-com bubble.  Indeed, by Election Day of 2000, the economy was already in recession.  Just a few months later, planes hit the twin towers in NYC.  The seeds of both of those events had been planted and watered while Bush was still governor of Texas.

The rest of Bush's two terms were actually economically strong.  The economy recovered (some might even say because of the tax cuts).  It was never as good as the best years of the Clinton administration, but how many of us would not like to see unemployment under 5.7% nowadays?  Even with the "two wars on a credit card" (and although the wisdom of the Iraqi adventure is still quite debatable, what the heck else were we supposed to do in Afghanistan after 9/11), the deficit, which had ballooned out to over 400 billion dollars after 2001, had begun to contract.  It came down every year until 2007, when it was about 165 billion dollars.  And had all those trends continued, even including low tax rates and two wars, we would have seen surpluses again.  But once again, the forecasts failed to account for unexpected events.  The same housing bubble whose run-up had contributed so much to the growth under both Clinton and Bush burst, and the resulting crash wiped out every gain made in the previous seven years.  That is a slightly different narrative than "Bush presided over a net loss of jobs."

This all sounds somewhat dishonest, as I seem to be saying that all the apparent good stuff under Clinton can be explained away, and all the bad stuff under Bush somehow should not count.  But that's not all true.  Bush's biggest fault (fiscally) was not Iraq, it was Medicare Part D.  There is no need to laud him as some sort of misunderstood budget-cutter.  But the strawman that "Bush's policies are what got us into this economic mess," particularly when that is shorthand for tax rates, simply is not true.  And I also don't deny that the 1990s under Clinton were fabulous economic times.  But no one has yet demonstrated to me what policies of Clinton's can be credited for that.  A week on a cruise ship is also wonderful, but meanwhile at home, bills pile up and the grass keeps growing.  Once the vacation ends, the reality which had been in the background is still there.  It amuses me that we do not (yet) apply the same standard of historical judgment to the 1990s as we do to the "Roaring 20s."  There, too, we had a period of peace and prosperity, fueled by an inflating bubble.  But we judge that decade in light of the Depression which followed, which takes off some of the shine.  How are the Clinton years different?

So... what is the takeaway of this epistle?  Not much in terms of policy prescriptions.  I have a few, and may even write about them.  But I just wish for more honest argument.  Smart people can disagree with me about all of this... but they should acknowledge the fact that these arguments exist, and should be obligated to deal with them, as I hope I have with their reverse.  That doesn't mean we shouldn't raise taxes.  It only means that if we do, it shouldn't be based on a narrative which "everybody knows" that is nonetheless untrue.  Or, if it's true, it ought to be able to be explained a heck of a lot better than we are getting these days.

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