Misinformation about Tax Cuts

Note -- On 2/10/17 I realized that the table below has an error. The error does not impact my points but it does attribute the largest tax rate to Bush 1 when it was really Clinton 2. The order of the names at the end of the table should be Bush 1, Clinton 1, Clinton 2. The order of the numbers in the column is correct.

There are two things in life that are certain: taxes and JD. Or something like that. There is a lot of buzz about coming tax changes. Most of us like tax rate cuts. They make us richer. Some of us want bigger cuts for the poor. Others want bigger cuts for corporations and the rich. Others want bigger cuts for farmers who export agricultural products. I don’t want to get into all that because it gives me a headache.

In fact, what I want to do here is to take one baby step. That step has to do with the idea of tax cuts and tax revenues. Tax revenues are important. Everything else the same (economists love to say that), a reduction in tax revenues causes the government to have a larger deficit and debt. Since our national debt is larger than a 2X T shirt at Walmart, we don’t want new policy changes that make it even larger. So policies have to be careful not to reduce government’s tax revenue.

We awaken from our slumbers when we hear politicians speak about large tax rate reductions. One proposal would reduce our corporate income tax rate to chicken feed. Another reduces rates for the average worker. Other proposals would undo tax penalties recently put onto the richest of us. This is tax rate reduction season.

But cranky old men and a few of their lady friends say, wait a minute, buddy. Tax rate cuts are going to reduce tax revenue, increase the national debt, and probably lead to higher weed consumption. And those armed with more vim than vigor point to that nasty Ronnie Reagan and his tax cuts and those tragic government deficits he caused. Never mind that Reagan was President before the Great War and no one (except Fuzzy) can actually remember 1981 – the proof is in the Key Lime Pie (with graham cracker crust).

Or is it? I decided to take out my Janis Joplin album, pour a nice JD over rocks, and look into this issue with my usual astute analysis of the data. That didn’t work since I was bowled over at how complicated it becomes to pour JD and type numbers at the same time. And I also realized that the issue has way too many dimensions. For example, tax revenues depend on how strong the economy is. And Reagan had two terms in which the composition of Congress changed. And then there is the nagging issue of how decisions about national government spending affect government deficits and debt.

So after nearly fainting I decided to limit the scope of my project. Whatever I say here, therefore, is subject to lots of ifs, ands, and buts. Nevertheless, the story is useful and perhaps adds to our discussion about tax cuts and government deficits.

One would think that if the Reagan tax cuts significantly bent tax revenues downward despite a subsequently growing economy, then we would have some good evidence against tax rate cuts. So I decided to look at historical changes in one number – tax revenues as a percent of GDP. The table below contains what I found. The table shows federal government tax revenue as a percent of GDP from 1969 to 2000. The average tax revenues as a percent of GDP during that 32-year period was 17.8%. In 2015 the number was 18.2%. The numbers in the table refer to averages over four-year presidential terms.

Table: US Government Revenues

as a Percent of GDP

Nixon            17.8

Nixon/Ford   17.4

Carter            18.0

Reagan 1       18.0

Reagan 2       17.5

Clinton 1       17.4

Clinton 2       17.7

Bush 1           19.0

Interestingly Reagan’s average for his two terms was 17.8% or exactly the average from 1969 to 2000 and was a smidge less than Obama’s rate in 2015 (not in the table). And Reagan’s tax numbers do not significantly look different from the other Presidents. Nixon/Ford and Clinton 1 managed to get tax revenues down to 17.4% of GDP while Bush 1, Carter, and Reagan 1 increased tax revenues to 18% or more.

So if Reagan cannot be identified in a mug shot of past tax rate offenders, then why were his budget deficit numbers so creepy? Why has Reagan become the poster child for tax cuts, larger deficits, and poor B-grade movies? The answer, of course, has to do with the other side of government – disco dancing. Ha! I meant to say expenditures or spending. If government deficits were larger under Ronnie R, then you need to dig out the data on spending. But why dig it out? If Batman didn’t do it, then it must have been Robin.

So if you want to be mad at Ronald Reagan for government deficits, then you need to discuss spending. During Reagan’s presidency, Congress was split. The entire eight years Reagan worked with a Democratic-controlled House and during his last two years the Democrats controlled both houses. Not to blame the Ds or the Rs, the fact remains that government with a big G let deficits swell. It was not Reagan and it was not Reagan tax policy. It was spending.

It might be fun to think about all this as we head into the next months. Many politicians have already sworn an oath on their Mickey Mantle baseball cards to not push Grandma over the cliff – that is, they are not going to reduce spending on one program by one cent. No matter how fast these programs are growing and no matter that Grandma has a rocket-propelled wheelchair with an iPhone and tablet. And don’t get me started on all this infrastructure nonsense that both parties are trying to foist on us.

Argue about tax cuts versus government spending all you want. That’s fun. But don’t for a minute think it is a slam dunk. Tax cuts are not your enemy, and if they have a way of creating more economic growth, they might be worth the risk. More government spending, however, is going to send all of us to an early grave. Cheers. 

It's the Economy, Stupid

What joins us all together is the reality of the economy. If the economy tanks tomorrow, Democrats and Republicans will lose jobs or find their incomes rising less than hoped. If inflation roars back, we will all complain about the higher prices we have to pay.

While Ds and Rs have their preferred recommendations for economic policy, what will matter most is not who is right but whether or not we attend to real economic problems and make improvements in our lives.

So rather than dwell on policies and policy debates, I thought it wouldn’t hurt to lay out where the health of the economy sits right now. This amounts to a description of economic challenges, or you might say for those of you on post-New Year diets, this amounts to the before-diet picture.

Dieters want the post-diet photo to show major beautiful changes relative to the before-diet photo. So where you begin is very important. But even where you begin is not completely objective when it comes to the economy. And some people might think that any description of the economy right now is tainted with politics. An Obama supporter might disagree with any remarks that show a weak economy. The Republican would bristle at the idea that the economy might look strong right now.

Furthermore the economy is pretty complicated and dynamic. Anyone who attempts to describe the current economy might be leaving something out – or might be too focused on the latest data rather than more enduring trends. I readily admit that this is no easy task. And no matter how hard I try it won’t be perfect.

But it ought to be done and those who disagree with some of the conclusions below are free to ignore them or to add their own comments.

The place to start is with the growth of national output – or what we call real GDP. Most people would agree that it is not growing as fast as it used to. While there have been some quarters of decent growth in the past eight years, the overall trend is modest. We grew at a faster pace during most of the 1990s and right before the great recession of 2008-09.

Associated with that growth has been enough employment growth to push the unemployment rate down to levels close to what we describe as “full employment.”

Despite this increase in employed persons, we also have high levels of people who have been unemployed for more than 15 weeks, high levels of people who want full-time jobs, many folks who took jobs beneath their skills, and finally a lot of people who simply quit looking for jobs.

Despite an increase in the demand by employers, many workers lack the specific skills being demanded and thus shortages of workers exist side-by-side with surpluses of workers. The net result is that wage gains are lacking, and we talk about labor market mismatches.

Looking deeper at the modest real GDP growth we find one sector particularly lacking. Consumers are pulling their own weight through spending on housing and autos purchases. But the spending by firms on plant, equipment, and software has been in the doldrums. This has two key impacts. First, near-term growth lacks punch and second, new investments by firms have not raised productivity of workers and have harmed international competitiveness of companies. This means we get slower growth today and tomorrow, and we threaten future wage growth and our ability to compete with foreign companies.

Exports of goods and services have slowed for many reasons but primarily because many of our trading partners have not recovered or remain in recessions after the global recession. These foreign purchasers are not buying goods and services at home – and they are not buying from us.  

Interest rates and the value of the dollar have been rising. This is no surprise mostly because of the relative strength of the US economy. If interest rates rise appreciably more this could dampen investment spending further; if the dollar continues strengthening this might jeopardize exports.

Lackluster economic growth has also impacted poverty. The official US poverty rate in 2015 fell to 13.5% of the population – down from 14.8% in 2014 but is still higher than in 2007 (12.5%) and 2000 (11.3%).

Debt is also of concern. The Federal government’s debt threatens to reach more than 100% of the economy. Student debt has reached new peaks with little sign of abatement or payment. Similarly, mortgage debt is getting bigger and riskier.

This “photo” of the US economy today is where we have come to in early 2017. Is it complete? I doubt it. Does it foretell a disastrous future? I don’t think so. Is it where we want it to be? I don’t think so.

But I do think it wouldn’t hurt to have this story in the back of our minds as we contemplate and debate remedial actions in the days ahead. No matter what other issues we try to solve, we should at least not make these economic trends worse. I don’t care to place blame or praise for today’s economy. I just want us to make it better. 

Truth, Lies, and Misrepresentations

We are learning a lot lately about how people purposely lie and mislead on social media. Especially sad is how people fabricate news stories to the delight of friends who they know will spread the lies multiple times. The term urban legend has been around a long time. I understand it to mean a fictional account that has been circulated enough so that many people believe it to be true.

It worries people that soon we won’t know the difference between fact and fiction. Information will exist but its validity will be suspect. Whether it is evidence about global warming or about the color of the skin of a murderer, most of us will just shake our heads and wonder if the latest story has any truth to it. Information will (already has) become entertainment and persuasion.

We have been dealing with fact and fancy for a long time. In physics, we learn that the very fact of observing a phenomenon can bend its result. Does a tree that falls in the woods make a sound if we are not there to hear it? These ideas titillate the mind. Complicated phenomena (like poverty, economic growth) must be observed and interpreted, and there is room for two different observers to come away with two very different observations and conclusions.

Thus it is reasonable to think of truth as being subjective. And therefore it is possible that you might think one person is lying despite his or her very ardent attempts to be truthful. But when it comes to most things, this element of subjectivity is pretty minor. Many things are very clear. What goes up usually comes down. One final JD has predictable effects. A person high on crack may commit horrible crimes. Too much pollution makes for illness and discomfort. It it other more complicated phenomena that cause the consternation about truth or fiction.

I want to split a hair about these complicated issues. Yes, there is more than one interpretation. There is more than one intelligent view of the truth. But that does not give one license to intentionally lie and mislead. I am often critical of economists who intentionally distort issues by leaving out critical facts that they know to be true. They probably do not admit to their families that they tell whoppers, but surely they appreciate the back slaps, promotions, and high-paid speech opportunities that come with wowing their followers.

Sadly, misrepresentations are hitting new levels. Let me list below some of the ones that have been spouted in the last week by very prominent people.

Federal Reserve interest rate increases will lead to the next recession.

Any attempt to reform Obamacare will be tantamount to pushing grandma over the cliff.

Because Boomers are retiring, it is impossible to have strong employment growth in the US.

Consumer finance deregulation will lead to predatory lending and hurt loan customers.

Tax rate reductions that are part of tax reform will worsen poverty.

Deregulation of the financial sector will lead to excessive leveraging and lead to another financial disaster.

Any attempt to regulate abortions will cause irreparable harm to women’s health.

Infrastructure proposals with strong private sector participation/ownership will lead to rampant corruption.

No, I am not going to take each of these and bore you with a complete analysis. But be honest. The people who are now saying these things (and more) are misrepresenting truth. The people who say these things get wealth, power, and popularity by misleading you or providing ideological fodder for your predilections.

Could any of the above statements be true? Of course they could. But they might also never happen because they are each based on excluding things we know to be true. We know that regulations introduced in the last eight years were not all perfect. We know they have had severe unintended effects. We know that today we have major economic and social policy challenges. 

Policies and regulations can easily be represented by a meter or a dial. In some years the needle moves to the left. In other years it moves back to the right. Arguing about these shifts and changes is normal. Screaming bloody murder when the next team gets power is normal too. But making up stories is not and should not be tolerated. 

Let’s decide a position for the needle in the coming years based on honest and open discussion of the fullest possible set of facts. It might not amount to absolute truth but it will get us a lot further than a bunch of sad distortions. 

Show Me the Money

It is January 10, and you are finally getting over the unintended effects of your New Year’s Eve celebration. You also read my last two blog posts and are ready to drop your subscription.

So I thought I would begin 2017 by really spouting off. Hopefully, this spout will antagonize many of you – at least those of you who cling to the old politics.

I title this one “Show Me the Money” because that’s what people in Missouri say. 

When you say this phrase, it means you want some evidence that something is valuable and that it is worth paying for. Robbers sometimes say the same thing but I am not dealing with those robbers today.

"Show Me the Money" is what I hope we collectively say to our politicians this year. Let’s face it: the Blue team is out of office now and they are not happy that the Red team is going to try to undo everything now Blue or Blue-er. We can be sure that even though the Republicans have majorities in Congress, they will be tested over and over. Supreme Court justices, energy policy, health care, tax policy, you name it – the screaming will be loud and colorful.

That’s where “Show Me the Money” comes in. Wouldn’t it be refreshing if instead of name-calling our fully paid and pensioned representatives of the people decided to have real discussions and debates about policy effectiveness? Maybe they could throw out a theory or two? Maybe they could argue over some real data? Maybe they could look at goals relative to results of their policies?

I am a macroeconomist, and therefore I would like to stick to what I know. I have opinions about lots of policies but one important one concerns income inequality. It turns out that despite me being the best professor ever on the planet, there were other professors teaching silly things like finance and nuclear physics who made more money than me. And similarly, I made more money than most high school teachers and a few plumbers.

So it is pretty clear just looking at my boring life that incomes are not equal. But if we look even farther, most of us who have any heart at all realize that there is a very wide gulf between the rich and the poor in America.

That bothers a lot of people. Many people believe that this gulf should be made smaller. Some want it to vanish altogether but probably most people just want it smaller. So it might seem reasonable that we have a debate about what to do to accomplish that. But try as I might, I don’t see anyone in Washington DC approaching this topic from a rational vantage point. Often the level of the argument does not exceed the intuitive but thoughtless idea that if we just take a dollar from a rich person and give that dollar to a poor person, then the problem would be solved.

In my perfect world, we might make some headway by doing the following. First, define the problem warts and all. Second, think about policies that might effectively improve the situation. Third, identify unintended consequences of the policy and deal with those too.

In the case of income distribution, problem identification is critical. Those who seem to worry the loudest about income distribution have in mind a comparison between the very rich and the very poor. But let's suppose, for example, the numbers tell us that much of the income gap is between the upper 1% and the upper 5%. We might not classify that as a big problem. Instead, maybe the income gap mostly impacts those who make $20k per year versus those who make $30k. Maybe you see that as a big enough problem. But clearly the remedy for that specific challenge is different than the usual perception about the richest and poorest. Maybe when we get done measuring, we find that there is no big distribution problem. Perhaps, instead, the problem is that economic growth lifted most boats but didn’t lift them enough. That’s not a problem of the distribution of income. That is a problem of not enough income for those at the bottom. But we won't know what the problem is until we stop lobbing F-bombs and start looking seriously at some data.

Once we have isolated a real distribution of income problem, then we need to find a matching solution. To do that, we might need to examine other country’s experiences with similar problems. And that is made tricky because, unlike white mice, countries can be very dissimilar. So doing thought experiments on policy among various countries is not as easy as picking out the best singing voice in Europe. For example, I took a quick look at the rankings of country income distributions done by the United Nations and the US Central Intelligence Agency (https://en.wikipedia.org/wiki/List_of_countries_by_income_equality ).  

Here are some of the countries with much more equal income distributions than the USA: Ukraine, Norway, Kyrgyzstan, Afghanistan, Denmark, Iraq, Sudan, India – can I stop now? Clearly the US does not want to follow the economic policies of all these countries.

How can we make permanent improvements in income equality across the citizens of the USA? Since we have never explicitly considered income distribution to be among our country's policy goals, we don’t have a lot of experience answering this question. It would nice if we trusted our elected representatives to do this in the same way that Eli Lilly scientists and executives try to solve Alzheimer’s disease.

Finally, there is the issue of unintended consequences. In our zeal to solve social and economic problems, we often forget that things don’t always work out as planned. I am sure that Lyndon B. Johnson would be quite shocked to learn that his great war on poverty created many more poor people than existed in the 1960s. An earnest examination of poverty programs or any other programs designed to improve income distribution should commence. What has worked? What hasn’t worked. Come on dudes – be honest!

What is the real problem today and in the future? What policies have been used to eradicate or mitigate these problems? How can we learn from the past about approaches that work? What are the risks arising from these policies? How can we parcel out the citizen’s money in ways that we would all be proud of? Under Trump, we don’t know what to expect. Maybe he and his new advisers can forget partisan bickering and approach our problems like real scientists and executives? Or maybe I need another JD? 

Happy New Year: macronotesmba.com and other Blog Facts Updates

New for 2017 --  http://macronotesmba.com/

My followers include people with and without much education or experience with macroeconomics. I have heard from many of you that you like to read parts of my postings but often you get lost in the vocabulary and the details. 

So I decided to adapt a reader I use in courses for blog purposes. It is called MacroNotesMBA and can be found at the above address. 

Once you find the location you will see four main blocks: Home, About, Blog, and Contact. Below all that are the main topics for international macro. Place your cursor over any of those topics and you will see a number of sub-topics. Cool! 

If you find it useful please use it for background to the blog. Feel free to share it. 

MacroNotes was developed for my past MBA courses -- it attempts to be a very practical and useful guide to the main topics of international macroeconomics. 

Other Stuff

Because I have been traveling and partying excessively (code words for an extra JD or two), I didn’t have enough grey matter or energy to begin the year with a power-packed analysis of the President-elect’s policies or potty habits.

But I did decide to share some blog facts with you.

·       I mounted this pony in 2010 and since then, I have more or less posted each week for a total 390 posts. As a result the A and the S on my keyboard are worn off.

·       I am especially pleased that nearly all posts have comments from colleagues and friends. They are often the best part of the blog.

·       I am told you must have a Gmail account to post comments but I have been told more than one thing about that. Sometimes people send me their comments and I post them. Blogspot help is absolutely no help for anything. They seem to ignore all my requests.

·       If you look on the right-hand-side of the blog homepage, you will see two different listings of all the posts – one by date and one by topic (Label). Click on a label and you will see all the posts about that topic. Look for the label Kardashian under K.

·       I have posted 22 times on Economic Growth, for example, and only one time on Bernie Sanders.

·       Blogspot shows me some facts about the readers. Each week I send an email to approximately 500 old friends, neighbors, and creditors. I also post on Facebook, Linked-In, and Twitter.

·       Until about three months ago, readership had grown from about 1,000 page views to about 2,000 per month. But strangely, in the last few months I am getting more like 8,000 page views per month. I don’t know how or why – but for the last three months the numbers have gotten high and stayed there.

·       I am shown information about page views by country. In the last month, the great majority of page views were from the USA (8,000). Behind the USA was Russia (1,100), Germany (50), France (40), followed by China, Ukraine, Canada, South Korea and India. Since the blog began it has had about 130,000 page views.

·       I have thought about getting a sponsor and making money from the blog but I also thought about being a pole dancer in Budapest.