Friday, November 18, 2005

Bush falls off the "Laffer Curve"

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Treasury Secretary John Snow: "Millions of Americans have benefited from these important tax policies either directly through lower taxes or indirectly through new and better jobs and greater economic security for families."

The Laffer Curve is the theory most frequently used to explain how supply side economics benefits government spending. It says that if tax rates rise beyond a certain level they actually discourage economic growth, thereby reducing government revenues. By contrast, as can be seen in Continental Europe, excessive taxation and regulation stagnates economic growth, reduces revenues, undermining government's ability to meet its citizen's needs.

So what is the ideal amount of federal taxation as a percentage of GDP in the US? 25%, 20%, 15%? Under the Bush tax cuts we have gone from 20.09% to 16.3%, a dramatic tax cut. As a result, we were told that government revenues would exponentially grow, just like under Ronald Reagan...

Frequently these days, you will hear Bill O'Reilly say something like this: "President Bush then came in and cut taxes for everyone. And guess what? Federal tax revenues will be more this year (2005) than at any time during the Clinton administration."

This is a completely disingenuous statement. It's like saying economic growth in the 1990's was faster than the 1980's simply because GDP was higher each year. You have to make an adjustment for inflation. Somebody please explain this to O'Reilly if you get the chance.

Inflation adjusted tax receipts during the Clinton Administration and Bush Administration can be seen here:

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The key is not just that government revenue is well below the relative levels that the Clinton Administration had impressively built towards. It's not just that government revenue growth isn't sustained. The key is that in spite of this, in a Republican controlled Congress, Federal Spending continues to grow unabated. In 1992 Russ Perot ran one of the most successful Independent Presidential campaigns in US history on a platform of paying down the national debt. In 1992 the national debt was around $4 trillion. Since Bush came to power the national debt has sky-rocketed from $5.5 trillion to $8 trillion with predictions that the debt will reach $10 trillion by the end of his Presidency.

A five year old can cut taxes, raise spending and get the economy to grow rapidly in spits and spurts. But the risk is inflation, high interest rates, and a recession, all of which loom large over the next three years. The challenge is to create secure, stable, lasting economic growth which guarantees prosperity and opportunity, and also the fiscal integrity of government spending. This economy might grow at 4% in the next quarter and create 500,000 jobs, but in the next employment might be down, and after that we could be facing a recession... things are that unpredictable. In the interim, growing deficits and the national debt compromises everything from our ability to fight wars, guarantee social security, cope with national disasters like Hurricane Katrina, or recover from a terrorist attack.

To respond to Treasury Secretary John Snow, economic security is exactly what families do not have right now.

Related Links:
Tax Policy Center: Historical Federal Receipt and Outlay Summary.
Previous Article: Lyndon Dubya Bush.
Hat Tip: Talking Points Memo.

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34 comments:

avereragebusinessman said...

This administration appears to continue to provide for secure economic growth for part of the population, the part that is quite wealthy. The problem is that they do not really address Middle America. If they really considered Middle America there would be no way that the tax cuts as they are now would even be approached. Things look fairly bleak for people just above the poverty line. These are the problems that this administration needs to start addressing because as time goes on more and more Americans are going to be falling further down and close to that line.

Graham said...

Hey AB,

I agree with you. I don't think that people are better off like they might have been if we had 4 more years of the Clinton Administration. But, I am biased :). I also don't think the tax cuts really stimulated the economy in the right way, but becaue taxes have been cut so much on the wealthy it's going to be very difficult for Democrats to get federal taxes back up to around 20% of GDP which for the sake of the deficit, and debt they are going to have to do.

The Administration is dedicated to social engineering via tax cuts to the wealthy. That's their theory about how to lift people out of poverty and create opportunity. The only problem is that it's a theory that, in isolation, doesn't work IMO.

Thanks for the comment AB :).

Girl on the Blog said...

I can't state my opinion any better than averagebusinessman... I have to "2nd" his comment.

Great post graham...

Graham said...

Thanks Girl on the blog :).

Lisa said...

This Clinton nostalgia is getting a bit tiresome. :P Somehow there were still quite a few poor people when he left office, as miraculous as that appears to be. Do I think that he accomplished some good things while President? Yes. However, I think you are overstating how good of a president Bill Clinton was, when you take other areas besides economics into account. That's not surprising, considering your previous statements.

I don't really have any substantive criticism of your economic argument about Bush, because I generally agree with it. I do think that it's not just the tax cuts that are contributing to the numbers you mentioned. The excessive spending is a huge part of that also, the effect of which you seemed to minimize in your analysis.

It's overly simplistic to define the Bush economic theory as the theory that by giving tax cuts to the wealthy (and BTW, the meaning of that term remains pretty vague)this will lift people out of poverty, create opportunities, and so on. Of course there are other factors involved, and those should be considered. I'm not convinced that the current economic strategy consists only of tax cuts for the wealthy, although you have made a reasonable case to support that.

If we cut the excessive spending, we wouldn't need such high taxes as you suggest. But what do I know anyway...I'm just a capitalist. :P

Graham said...

I think Bill Clinton was a very good President. I don't think he was a great President. I think Kennedy, and Reagan were great Presidents. But to be fair to Bill it was largely taken out of his hands. He came very close to killing Osama Bin Laden and almost secured a peace plan for the middle east. It wouldn't have taken much for these two things to have turned out differently. If the both had arguably 9/11 would never have happened, although perhaps that is reaching a bit.

Whatever anyone says without Bill Clinton there would not be a peace process in N.Ireland now... and that is huge. But, yes, he did have an affair with a 19 year old, he did lie about it under oath, and then he continued to lie about it to his wife, daughter, and most trusted advisors. What any of it had to do with White Water is still beyond me, though.

What I really like about Clinton is that he didn't have to be hidden away in the WH, he could give an interview and subject his policies to some serious scrutiny. This President basically just reads speeches. I don't like this at all.

I appreciate that excessive spending compromises things in terms of the debt which has a negative impact... but actually spending has probably helped the economy. It's certainly created a lot of jobs. I believe this administration just has a "pro-growth" economic theory which it won't compromise under any circumstances, and ultimately equates to cutting taxes and reducing regulation as much as possible. I just believe there's a better, more secure way to go about it, especially within the context of the Iraq war, the war on terror, 200 billion for New Orleans, and the deficit getting out of control. I don't like the "wealthy" thing either. Sorry if I used it.

Spending isn't going to come down any time soon. Republicans are too addicted to pork and funding every whim the military has, while Democrats aren't going to accept cuts in social programs. The Iraq war isn't going away any time soon in spite of what Murtha says. For Democrats to raise taxes they're going to have some big gains in Congress, that is for sure. I think quite a few Democrats voted for alot of the Bush tax cuts... I know Mary Landrieu did.

Anyways.... I'm a capitalist too. Even though I don't sound like it sometimes. Hope you're having a nice weekend Lisa :).

Lisa said...

Wasteful spending should be condemned, no matter what program it funds, including social programs. I am in no way implying that this is not your position, but I would argue for accountability for any government-funded program.

Here's where I might surprise you: I agree that we also need to be more careful with the military spending. We should absolutely give them the resources they need to fulfill their responsibilities, but that doesn't mean the military should pay too much for non-essential things. The same idea goes for social programs as well. We shouldn't give a blank check to social programs either. If you want to paint me as Scrooge for this view, all I have to say is...BAH HUMBUG. Accountability is key, and if it means that we the people have to get involved in demanding it...that's fine by me. As far as the pork is concerned, both sides voted for it, not just the Republicans.

I'm not convinced of your assurances that you are a capitalist. You have too many misguided economic theories to be one of us. :) Those theories are brilliantly argued though.

Graham said...

For your perusal: McCain on defense spending

+ I think I'm a capitalist. I think free markets are the best way to organize societies... I just think sometimes we should give poorer nations a little latitude to develop. I also believe capitalism is a force for freedom, self determination, opportunity and all that good stuff. Consumerism kinda sucks, and the process of "manufacturing demand" really cheapens our culture... but, then progress is great, diseases being cured is great, the advance of technology is great... and my Ipod is the best!

I'm going to try and download a Milton Friedman MP3 audio book so I can utilize my Ipod and enjoy the finer points of capitalism and freedom all at the same time, preferably while I unthinkingly shop by brand association like an automaton.

You're not Scrooge. I think we basically agree... our emphasis is just placed on different sides of the argument :).

Lisa said...

GEEK. :P

Graham said...

Yeah, I'm a geek.

Chris said...

I always get here too late to add much of anything new.

I have to admit that I agree with both Graham and Lisa. She always argue very well for her side. I do think accountability is probably way more important than policy or really anything socialist or capitalist.

To me, across the board cuts are the best way to handle the horrific financial situation Bush's government has placed this country in. That means no more tax breaks for big oil and wealthy people, which is a social program also.

When poor people get government funding it's socialist, but when wealthy people, big oil, energy companies and airlines get federal funding and huge tax breaks, conservatives point these policies out as ways to stimulate the economy and necessary for trickle down means of production, and never dare call them socialism. Tricky indeed.

If Tom DeLay's family has universal healthcare and options to privately invest retirement funds, then why can't mine?

Oh how Congress is the most socialist program in the world.

Good debate Graham, sorry I'm late and very good discussion.

Graham said...

Hey MJ,

Good to see you still around :). I agree with you about across the board cuts.

I do believe there are considerable savings to be made in defense spending, and that defense spending can't be allowed to continue to grow at the pace it has been. I also don't believe Congress should be ploughing more and more billions into tax cuts on the purely speculative notion that it is the best way to grow the economy. The problem is, I guess, that it is all in the absense of a decent economic plan from the WH...

The interesting thing is that social programs, as long as they are within reason, actually help stimulate the economy too. In the UK we've found that good welfare to work schemes, and good educational courses linked to employers, and all sorts of other stuff, has helped keep our unemployment levels at record low figures for almost nine years, while our economy continues to grow and grow. Restrained, but targeted gov't activism can definately help the economy grow.

Thanks for dropping by MJ. I appreciate the visit, and your POV.

Lisa said...

MJ,

I don't think that was exactly the case I was making, as far as calling programs for the poor socialist. The point is that those who see areas where money is being wasted in that area and point it out shouldn't be ripped as being insensitive to the poor. I do agree that Congress shouldn't have a better healthcare program than the average citizen. I don't think that most in Congress, when you actually pin them down on the subject, would take any definite steps to equalize that situation.

We should help the poor. There's no debate about that part. The question is: What is the best way to do that? I think we differ on the solution.

Chris said...

I don't think we differ on the solution at all.

What's good enough for the Republican Congress, is good enough for all Americans. I'm for their solutions.

Chris said...

Oh, and I must add, I do think members of Congress should be ripped, whether Democrat or Republican, when they do vote to cut spending on social programs for the poor and don't vote to also cut funding for the exact same social programs that they benefit from and raise their families with.

John said...

Looks to me like tax revenue is roughly the same as it was in the late '90's - and this in a time of very low inflation.

The question is this: why can't government live within its means?

Alice: In Wonderland or Not said...

Interesting discussion but I'm here much too late to add anything.Having a couple economist in the family I am sure the discussion will be continual at the holiday.lol

Too much pork, just look at the flow sheets and it's obvious.

Both side surely have their issues but what is happening now is a direct result of cuts that were given in order to get the Repulicans elected.

Graham said...

Hey John,

I disagree with you about Tax receipts being roughly the same as in the late 90's. Obviously the growth in the 90's was extreme, 400 billon dollars every four years or so in tax receipts. And yet, by comparison, at least in constant dollars, which is what the chart above refers to, tax receipts under Bush are significantly below the levels that Clinton and the Republican Congress had worked towards. There are many mitigating factors but the actual revenue of 2005 is well below that of the year 2000 under Clinton, I think that's a pretty damning verdict on the "laffer curve" theory as a justification for constantly cutting tax cuts, especially considering the extent to which the economy is expanding so rapidly.

I totally agree with you about government living within its means.

Hey Alice :)!

Sounds like pretty cool family discussion. Beats the heck out of my family bantering about day time soaps, and horses... yeah, they love horses (betting and riding).

Anyways...

The pork is there for all to see. I just wonder what a Democratic President and Congress might have been able to accomplish with spending levels like that. Healthcare coverage for all children under the age of 16 maybe?

Lisa said...

Right. Because we all know that all that pork is entirely the fault of Republicans. While that may be the case currently, you can't make the case that your argument is always true. I'm sure you are too smart to actually believe that it is. The Democrats aren't any smarter than the Republicans in their efforts to re-distribute tax revenues, sorry. :P

Graham said...

I totally agree. I don't think Congress is good full stop at keeping spending in check and Democrats deserve just as much stick as Republicans I guess.

The one difference is of course that we don't go around the country telling people "we believe people spend their own money best, not government," and then spend like drunken sailors once they get into power, building deficits and levels of debt that compromises the future of our children. As things stand, to reduce the deficit at all we will either need a period of sustained economic growth similar to the 1990's or a tax hike. Of course the latter isn't even an option right now. I just think a Democratic President would have a better economic plan right now... and yeah, I'm thinking more Bill Clinton than Jimmy Carter of course.

Lisa said...

Republicans say that they believe that we spend our own money better than the government does. While this has a great deal of validity to it, I can't honestly say that I don't waste money on things occasionally (as you know). The government is just better at wasting money that I am. Then both parties proceed to prove that theory is mostly correct while in Congress.

Your theories are interesting but ultimately unprovable.

Graham said...

Don't waste money occasionally? Have you ever wasted 400 billion dollars. Cause that's some serious wasting my friend :). I'd like to go indulge in some retail therapy with that kind of money at my disposal for sure.

As for my theories about a Democratic Prez I guess it depends on the candidate. One thing that is provable is that under any other President, Republican or Democrat, spending would be less considering they wouldn't have taken the unparalelled step of never using their veto like Bush.

Lisa said...

Ditto on the retail therapy. I'm very much in favor of helping the economy at that level. You may be correct about every President except FDR, who started us on this road to government dependence in the first place. It's hard to argue the opposite case as to why spending wouldn't be less under any other president than Bush. At the same time, I don't accept such blanket statements without actual numbers to back up that specific argument, which I haven't seen so far.

Graham said...

Actual numbers to back up specific argument here

Lisa said...

That still doesn't address the spending part of your argument.:P
You can't possibly argue that FDR's overall record shows that his vetoes kept his government from spending quite a bit of money, even though it may not end up being as much as the Bush goverment has spent.

So they all vetoed more bills. There isn't an iron-clad cause-and-effect relationship here.

Graham said...

I said that spending under any other President than Bush during his term in office would be lower because they would have already employed about 20-40 vetoes by now.

Graham said...

I was also referencing realistic candidates from the present along the lines of current party ideologies, not the socialist, government planning of the 1930's.

Lisa said...
This comment has been removed by a blog administrator.
Graham said...

Okay, I don't want this argument to drag on cause it's kinda me just re-clarifying myself over and over...

1) The difference between large scale government planning and government ownership as compared to social programs in a free market society is the difference between socialism and what the Democratic Party stands for today IMO. There's a difference between the social model of Greece or Portugal for instance, and the UK. One is old fashioned socialism and one isn't. And the USA under Clinton was even further along to the right. The Republican Party supports social programs and that does not make it a socialist political party. I usually always qualify every call I make for government involvement or intervention by saying it should be small, and reduced, recognizing that government has a different role in our changing society. I'm a little shocked if you think this equates to socialism, because if it does, anything left of center equates to socialism, which may or may not be your belief, and I guess that can be argued legitimately.

2) You conveniently took my statement out of the context of the argument, and cut off the previous sentence. I wrote this:

... I just think a Democratic President would have a better economic plan right now... and yeah, I'm thinking more Bill Clinton than Jimmy Carter of course."

You said:
Your theories are interesting but ultimately unprovable.

And then I wrote:
As for my theories about a Democratic Prez I guess it depends on the candidate. One thing that is provable is that under any other President, Republican or Democrat, spending would be less considering they wouldn't have taken the unparalelled step of never using their veto like Bush.

I was specifically referencing my argument that a Democratic President in place of Bush would have a better economic plan, which you had attacked as being unsubstantiated. It's pretty clear that I'm talking about 2001-2005. I'm sorry if you didn't find that clear, but that's what I was trying to say, and what I tried to re-clarify afterwards. I don't see the point in commenting over and over trying to tell me what my point was.

I responded by saying that any Prez, Dem or GOP, instead of Bush would have spent less because unlike him they would have used a veto. This means they would have cut spending in some way, unless they were vetoeing cuts. Of course there really haven't been any cuts in this Congress so that argument isn't valid.

It's pretty hard to argue that any President with this Republican Controlled Congress could have contributed to spending growing faster than the unprecedented pace it has already set, especially if tax receipts were down by 400 billion dollars as they were in constant dollars for Bush in 2003.

So by using a veto they would have cut programs, initiatives, pork, schemes, or something... because that's what most President's do, in fact that's what all President's in modern history do... using roughly between 10-30 vetoes a term. It's remarkable under the current set of circumstances, considering Bush's claim to be a fiscal Conservative that he has not employed his veto power. So if government spending can hardly be higher (non-defense, discretionary spending has grown at the fastest pace since LBJ during 2001-2005) and the statistics prove that Bush is a veritable donut for never using his veto, and an isolated abberation within the context of history, I think it's pretty damn plain that spending under Gore or Kerry or anyone else who was President from 2001-2005 like McCain, hypothetically speaking, would have cut spending if the economy was not expanding very rapidly.

Maybe I should put it this way... accepting that Congress could hardly spend more, how could President Bush having used his veto (say 20 times) over the past five years have not cut spending?

Lisa said...

All these are legitimate arguments, so I officially withdraw my previous bad argument, and concede the point to the non-socialist owner of this blog. :)

Graham said...

This thread got a little derailed me thinks. Just to bookend it here are some interesting links:

Pork Projects by year
LBJ-GWB: Discretionary Spending
The National Debt is $8 Trillion

Lisa said...

Ok, ok...you win already. :P I give up, at least on this argument. Let's move on.

Graham said...

I wasn't trying to win. I was just trying to end the comment thread with some relevant links :).

Here are some more:

Good economic news
Bad economic news

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