This article from the Dismal Scientist was written in early 2008, and foreshadows a lot of what has happened since. However, Mark Zandi held no crystal ball, and did not see the tsunami that would hit us last year. He discusses tax policies and their effect on the economy. The Bush Administration was proposing a stimulus package that eventually became law and awarded rebates to most taxpayers and many Social Security recipients who did not pay taxes. It was not terribly effective.
The question posed by the article that caught my attention was about how to spend tax dollars to generate economic activity. The mantra of the right is that tax cuts are always the best policy, but that is not borne out by a study done by Moody’s Economy.com (all for sale), summarized in the following table:
Note that the rebates we received (ours is still in savings) generate a couple of pennies additional activity. “Refundable” tax rebates (given to people whose taxes are less than the rebate) generate 29 cents or so in new activity. A payroll tax holiday has the same impact – that is, since lower-income people pay the payroll tax, they are more likely to spend it if it is not assessed.
The stimuli generally proposed by right wing economists, the Bush tax cuts for the wealthy, reduced taxes on dividends and capital gains, have negative impact – that is, each generates less than half a dollar in short term activity for each dollar given. That is heresy – it says that approximately half of the economists in the country don’t know much about economics.
Most interesting: The best way to stimulate a weak economy is the Food Stamp Program. Infrastructure spending is up there too, along with extension of unemployment benefits. In other words, the best way to get us going again is to stimulate the bottom, as the flow of wealth is upward.
So what does the Obama Administration propose? It’s a $775 billion package that seems to have a bit of everything. There are payroll tax cuts, which are disproportionately paid by lower income people. He also proposes a $3,000 credit for each new hire that companies generate, but the effect of such a stimulus is debated – many feel that it merely subsidizes what is already going to happen anyway.
Then there are an assortment of business tax credits – not immediately beneficial, but maybe so in the longer term. There’s also talk of infrastructure spending for “shovel ready” projects. Surely that would have immediate impact.
There is a change in overall thrust with this new administration. Where the Bush people focused almost exclusively on the wealthy in its near religious belief that wealth trickles downward, Obama seems to understand that the process works in reverse. That is a hopeful sign.
Piece of Mindful 
Mark: Could you send me an e-mail so I have your address? Thanks.
LikeLike
There is an upside to every downside and most every cloud has a silver lining. Those silver linings will most certainly trickle down. They are sort of like golden parachutes, don’t you think?
LikeLike
Yes – there is some truth to that, but remember that clouds start out as moisture that evaporates and moves upward.
This now officially completes the analogy.
LikeLike
Mark Zandi does both Dismal Scientist and Moody’s Economy. Nice to be able to refer to your own econometric model.
So, if this model is to be believed, for every dollar increase in food stamp spending, the economy gets $1.73? For every dollar in extended unemployment insurance, we get $1.64? Some kind of major snark is required here. Please explain how paying people to do nothing generates economic activity. Please explain how subsidizing basic consumption generates economic activity.
In other words, the best way to get us going again is to stimulate the bottom, as the flow of wealth is upward.
I imagine you coming out for Friday prayers, after we have all gotten down on our special rugs and bowed to the Left, with you in flowing robes, a stern countenance, a Holy book in your hand while you repeat this line in various permutations.
Since the evidence does not bear this out, it must be a religious belief on your part.
What you refer to as the “bottom” is more like the middle (the bottom is a net drain). In the modern world, wealth creation comes from the innovation and creativity of the cognitive elite. Some of this occurs in the lower quintiles, but most comes from the “top”.
LikeLike
You’re not getting it. $1.00 invested in tax cuts for people who don’t need the money results in money invested in savings accounts or Swiss banks. It’s not staying around. Food stamp money travels the circuit – to the store, to the trucking company, to the food wholesaler to the food producer. It’s, as you righties like to say, Econ 101.
Since the evidence does not bear this out, it must be a religious belief on your part.
I’m one who has witnessed 28 years of your side owning the econ texts. Supply side is nothing more than trickle down, and as you look around you now, and see most everything we buy coming from China, our economy in ruins, wages in decline and our wealth ravaged by bubbles caused by too much wealth at the top having nowhere to go, you accuse me of religious belief in something that is not shown to work. You’re a good laugh.
The bottom is a “net drain” in one sense only – we do not invest enough in them. Instead we have people of privilege, such as yourself, mighty in their presumptions of self worth, arrogant towards those who don’t have such opportunities as you have had. It’s the worst form of vanity – a way of self aggrandizemenet when you have nothing but a facade to offer. It is your quintile of hubris I despise.
LikeLike
“the Bush tax cuts for the wealthy, reduced taxes on dividends and capital gains, have negative impact – that is, each generates less than half a dollar in short term activity for each dollar given.”
Mark, if you read the article you’ll find that Zandi isn’t saying that at all. He’s saying that making the tax cut “permanent” will not generate any economic stimulus. He does not analyze the effect of the tax cuts on GDP from when they were implemented but only the marginal effect of making them permanent. What he doesn’t do is discuss what a tax increase would do to economic activity in a downturn environment.
But you pose a false dichotomy here. Wealth creation flows in both directions. The question is when which should be applied.
Last, for a guy who is skeptical of econometrics you’re sure quick to embrace something that conforms to your world view. The fact is that the guy, and his studies, could be wrong. There are certainly enough qualified opposing opinions on the matter. I don’t know the answers and I spend about 2 – 4 hours a day reading economic reports and studies. What I do know is that the past is no indication of future performance and Zandi admits it when he compares the tax rebates of the early Bush administration to the expected and less marginal efficacy of another one.
LikeLike
Mark Trotsky’s fantasy of money flowing up or down is ridiculous. It goes around. The fact that it never comes around to him and his friends is what he can’t figure out. And it’s driving him insane.
LikeLike
With all this talk of where the (TARP) money is going, can anyone tell me from where it comes, the Fed or Treasury? Are we “spending” treasury notes into the economy, or is something more costly occurring via the Fed?
LikeLike
Dave – like everyone, I’m drawn to things that reinforce my world view. Anything new under the sun? You’re not different, nor is Natelson, The difference is the assuredness with which you do the same thing everyone else is doing. You gravitate towards a higher form of self-pleasuring, reading harder studies, assuring yourself that your rigor produces results where others are merely trifling. It could be that you’re just reinforcing original errors in thought.
I’m drawn to things that reinforce my world view, but also things that are counterintuitive. Zandi is saying things that don’t compute in the economic model we’ve been fed since 1980. I like that. I don’t think you know as much as you think.
Let me ask you this – were the people who instituted 92% marginal tax rates stupid? Jealous? Communist? What if none of the above? What if they were smart people doing sensible things? There are no contradictions – maybe you operate on faulty premises.
I am not convinced that the Bush tax cuts did any good at all, and were probably harmful. Therefore, keeping them in place makes no sense. Zandi says nothing about their origination, but it’s not hard ot infer one from the other. Duh.
LikeLike
Mark, I clearly said I don’t have the answers. WTF more do you want me to say?
It’s you who espouses a certitude.
LikeLike
I’m just here from Natelson’s blog. He too espouses certitude. I mostly like being a turd in the punchbowl of right wing life. Hence, this post.
I am drawn to the curiosity that seemingly unthinkably high tax rates were passed by majority vote in Congress and signed by the President. What did they know that we don’t? Lately, I’m hearing rumblings that these high tax rates ought to be reimposed. Won’t happen anytime soon, of course, but could it be that we are relearning what they knew then?
Here’s the thrust of the argument: There is no shortage of investment capital. We are awash in it. High marginal tax rates soak it up and keep it from chasing paper and creating bubbles. That’s why we had bubbles in 1929, 1987, 1999, and 2008 – taxes were too low.
It’s all counterintuitive. That’s why I like it.
LikeLike
I don;t think they knew anything more than what is known now. It’s important to remember it was Hoover that increased the top marginal tax rate from 25% to 63% in 1932. Roosevelt kept that rate until 1936 and raised it to 79%. The following years the economy went back into recession. Some economist including the left’s favorite, Paul Krugman blame the downturn in the late ’30’s on that tax increase (he blames the conservatives of the day talking FDR into balancing the budget.)
The top tax rate was raised to 91% in 1951 and to 92% in 1953 and there was a significant recession in 53-54.
Then, during the Johnson administration the top rate was dropped to 70% and we didn’t see another recession until the oil crises of 1973.
You see, on the basis of economics there appears to be too many externalities to make hard correlations. but There are times when lower marginal tax rates do increase investment and you’ll have a hard time finding many economists to dispute that.
But on moral grounds I object to confiscatory tax rates. And that is a non-economic debate of which I have never heard a convincing argument.
As to “too much capital” causing bubbles, I see that has self-corrected of late. We won’t have to worry about that for awhile. So, from both a monetarist and Keynesian viewpoint, raising marginal tax rates right now looks extremely counterproductive.
What seems to make the most sense, however, is having a stable and predictable tax environment. If you look back at history it seems that the most stable growth were in times of stable tax and monetary policy. but that does not address the moral issue.
LikeLike
“Bubbles” sometimes precede recessions or depressions (sometimes it’s oil shocks), but are quite a separate phenomenon from a recession. The four bubbles in question followed major tax cuts, and were a phenomenon of too much liquidity, too much money chasing too few investments. The qualiity of available investments was low. I take that to mean that there was no shortage of investment capital, that the wealthy don’t behave rationally, and that high marginal tax rates could have prevented the bubble and subsequent crash.
I understand the moral issue, but I’m not too troubled by it, though I surely understand your position. People do quite well on millions – billions are not necessary, and I doubt anyone can ‘earn’ that much. Pockets of wealth, extremes of wealth, are bad for democratic governance. When money trumps democratic rule, as with globalization, for instance, I have a moral problem.
LikeLike
But Mark
LikeLike
Opps,
What I tried to write was:
But Mark, you completely dismiss the effects of other factors like monetary policy in these bubbles. In each case the amount of liquidity was much more impacted by Fed policy than tax rates. You’re making assumptions of causation over correlation, an easy mistake, but a mistake nonetheless.
LikeLike
Exactly. Stable money is the solution. The idea that excess liquidity can be absorbed by higher taxes is absurd. The government would have to destroy the money it collected, which is hardly likely.
LikeLike
I admit to complete ignorance on this. As you said, we are dealing with many variables. But how do you explain the absence of bubbles (not recessions) during the postwar period through 1987? Or did I miss them?
Rook – government merely redirects money into more productive avenues, like infrastructure and defense. We’re a wealthy country. We can afford to do a lot that we are not doing besides defense, where we overspend by a factor of about ten.
LikeLike
There were bubbles, remember The Nifty Fifty – the fifty stocks everyone ran to in the 1960’s and 70’s. The bubble burst in 1972 and the market didn’t recover until 1984. Or how about the metals bubble in the early 1980’s? Hell, Japan, with high marginal income tax rates, had a decade long real estate bubble in the 1980’s (which has resulted in what is know known as the “lost decade” where GDP growth was flat through the 1990’s.) There was a real estate bubble in the late 1970’s in most urban areas.
What you missed was, I think, that until Greenspan the Feds only mission was the stability of the currency. That all changed when that (fake libertarian) sold the idea to us that we could smooth the business cycle with monetary policy. If you’re looking for both correlation and causation I think you need to look no further than that.
About your comment to Rook, the government redirects money to all sorts of unproductive shit – such as ethanol production, subsidies to sugar growers, price supports for various commodities, the war on drugs, and a host of other things that prove your thesis summarily wrong. If you would qualify that statement with “The government sometimes redirects money into more productive things” you might have an argument. But the government is at least 2 times larger – in real terms – in domestic programs that it was in the 60’s and 70’s (your gilded age for the middle class) and you assert life is no better. How could that be?
LikeLike
I knew as I wrote that that I would catch it. Deserved, I might add.,
LikeLike