Asymmetrical Information

Jane:

So, just to be clear, you are now acknowledging your support for the Bush economic plan? Or at least the tax cuts, in structure and length (he wants them permanent)? Or is this post just a bit of whimsy that notes that (a) there is some good economic news, (b) it helps Bush, and (c) in unrelated (but good) news, you feel happier?

The upward revision has me sticking with my previous belief that the Bush tax cuts didn't do much for the economy. Of course, the flip side is that I think the effects of the budget deficits they spawn are also pretty trivial. It is very difficult to reconcile, on economic principles, the idea either that the Bush tax cuts did only something bad, or that they did only something good; their ability to do bad things should be pretty closely proportional to their ability to do good things. I happen to think that that ability is highly overrated.

So, I still don't believe in stimulus, and I still don't care much about the Bush tax cuts (except for the estate tax and dividend tax cuts, which I'm in favour of as a means to stimulate some very much needed American capital formation, and because I, like Chicago schoolers from all ends of the political spectrum, believe that much evil is worked in teh name of The Bias Towards Retained Earnings.

So I am happy that my previous beliefs that stimulus is trivial are unchallenged; and I am happy that people were apparently better off in April-June than I previously believed, and I am happy because this portends better things for the future than I previously expected.

OK, non-snarky question - why are you worried about capital formation right now? Doesn't money strike you as fairly cheap at the moment? Or is this a long-term structural issue for you?

Jane - How does the upward revision confirm your belief that the tax cuts were only trivial stimulus? I'd think that a higher GDP would indicate more, not less, stimulus from the tax cuts. What am I missing? (Besides the boat.)

I agree with your contention that governmental manipulation of the economy is wrong. My question concerns Greenspan's interest policy. I contend that by driving it far below the cost of living his policy began a negative effect on the economy. I.E., while it was way above the cost of living, cutting it helped the economy. By getting way below cost of living he affected the economy in the wrong directon. Now, with the gas price shocks of the last 6 months by driving up the interest rate he is again having a negative effect on the economy. I consider greenspan to be somewhat stupid as regards his interest policy and wish he would retire.

".....which I'm in favour of as a means to stimulate some very much needed American capital formation"

You think the US is capital-starved? What's the evidence for this?

Oh yeah: how on earth is a .5% difference in the annualized growth rate going to make a difference Bush?

Try thinking of it as a 17.8% increase in the rate of real income growth. . . or $200 extra for every man, woman and child in the country.

I do not think that the US capital markets are underfunded. But I think that US savings are dramatically underfunded, and changing the US tax rate on capital accumulation and distribution raises the real return on capital, which should increase the incentive to save.

Erm, where does savings go, if not capital markets? Not sure I'm following the distinction here.

A .5% difference in the annual growth rate makes a big difference to people's lives over 20 years, but it'll have shit effect in the next three months. People vote the workforce participation rate (using this instead of employment going forward is probably a good idea, what with the huge increase in "stopped looking for work" numbers) over the short run, which hasn't budged lately.

...what with the huge increase in "stopped looking for work" numbers

Where are these numbers published, and how are they determined? My wee wifey was in the "stopped looking for work" catagory for many years because we found that we were better off with her at home raising our son than working the sorts of jobs she could get. She has recently begun a new career, and could call any business in the area which would use her skills and be offered a job immediately. My son wasn't even looking for work. He quit his job last winter with plans to bum around the country. He received an unsolicited job offer which may yet turn into a career, but his former employer has lured him back to work.

Here is a news link that provides a more comprehensive perspective on the this:

Economy Grows at Weakest Rate in a Year
http://story.news.yahoo.com/news?tmpl=story&u=/ap/20040929/ap_on_bi_go_ec_fi/economy

[Excerpt]
Even with the revision, the 3.3 percent GDP (news - web sites) growth rate was down significantly from the 4.5 percent rate of increase turned in during the January-March quarter as consumers, buffeted by rising energy prices, cut back sharply on their spending in other areas during the spring. It marked the slowest growth rate since a 1.9 percent increase in the first three months of 2003.

Mailist,
I'm not sure that a quote from a newswire is necessarily evidence of "perspective". Sure, it's a slower rate of growth than recent quarters, but that's because one of them had an annual growth rate of over 8% (the fastest in 20 years, I recall), and the other's weren't too shabby either.
Perhaps someone can provide us some links to real evidence on this, but I wouldn't be surprised to find that the growth rate over the last 4 quarters might well exceed the growth rate of any 4 consecutive quarters in the entire Clinton presidency.

This gets me thinking about a related matter - the quality and reputation of the person being linked to. It's one thing to support your argument by quoting a prominent politician or commentator - we can then all decide how much weight to give to the quote. But quoting the anonymous writers at a news agency?

The fundamental economic question underlying raising or lowering taxes is whether private or public entities can more efficiently use the resources. In general, government makes less efficient use of resources than the private sector. This implies that tax cuts lead to improved economic activity, and history bears this out. There are many instances where tax cuts led to economic improvement, and virtually none of the contrary.

Of course Jane predicted Bush was toast a few weeks ago after the much overhyped 32,000 jobs stuff

Forgive me if Jane's predictions don't move me anymore

Taking ads from George Soros Megan? Why don't you just hang out a red lantern on the top of your blog?

Popper's biggest fan has no place on a western-oriented economics blog. Soros' Poppist BS aimed at destroying the western financial markets is more at home in a third world nation where folks can revel in their hatred of the US and the G8.

I guess you really are a Kerry supporter...but a Poppist too? Man, that's the saddest thing I've seen all day.

I'm missing something here.

Now, I've had a grand total of ONE economics class 22 years ago, and it was all Keynes (partially wrong) taught by a Marxist (all wrong), so I will cheerfully admit ignorance. But.

I thought the whole point of lowering the tax rates (not the extra exemptions or credits, the rates) was to restructure the economy make it cheaper to produce more. Not a short-term stimulus (the rebates did that), but a way to increase the long-term growth.

If that were the case, then the fact that growth ISN'T slowing down as much would tend to bolster the case that the tax cuts are having the effect they were supposed to have.

Since you are arguing the exact opposite, there must have been advances since 1982 in economic theory that I don't know about. Quite likely.

Jane,
You might get lucky and be proven right, but I think you might have swallowed a talking point while you were distracted.

Please take a look at a more complete assessment:
http://bigpicture.typepad.com/comments/2004/09/flattening_yiel.html

I say we keep raising taxes until EVERYONE is prosperous!

Couple comments:
Not sure I would characterize Keynes as "wrong." At least any less than any economist since.

Um, Shamus missed the 90's.

gazzer, please reference this post from Brad DeLong:
http://www.j-bradford-delong.net/movable_type/2004-2_archives/000096.html

I think that in the long run, taxes will have to be raised anyway, so we haven't purchased ourselves much economic stimulus for the bill we will have to pay tomorrow.

I don't get the 17.8% increase in income; certainly don't know if I value it if it is an estimated lifetime increase - my discount rate is too high given the current uncertainty in the job market.

As for retained earnings, best way to get rid of that boogey man is to not tax corporate earnings which are paid out as dividends. That is, if company A pays out all profits as dividends, then they pay no taxes. Which isn't quite how the tax cut worked (at least I think - didn't the dividend tax cut go to the stock holder rather than the corporation? - wrong place).

"Erm, where does savings go, if not capital markets?"

The current account, by definition.

But we're running a current account deficit. Anecdotally, it sure looks like the US is drowning in capital; it's just coming from foreigners.

"I do not think that the US capital markets are underfunded. But I think that US savings are dramatically underfunded, and changing the US tax rate on capital accumulation and distribution raises the real return on capital, which should increase the incentive to save."

Ok, good point. But:

1) The previous evidence on capital gains reforms doesn't show much response in the savings rate.
2) I'm curious what the evidence is for "US savings rate is too low" - on a broader point, how would you tell? Here's an article with various technical measurement comments:

http://www.findarticles.com/p/articles/mi_m1094/is_3_34/ai_55294828

Comments are Closed.