Asymmetrical Information

Megan...it seems to me that the "retained earnings" fixes take away most of the incentive to pay out dividends. The investors will eventually get the tax benefit on the earnings, whether they are paid out as dividends or not...of course, there is a time-value-of-money consideration, but other than that, it sounds like the cases are basically treated equivalently.

Also, doesn't this effectively net out the corporate income tax?

Let me just pose some questions:

1) You claim growth causes surpluses and not the other way around. But don’t sufficiently big and permanent deficits have a negative impact on growth? Shouldn’t we look at that?

2) Are the tax cuts real? Buy this I mean that, since we have deficits, 100% of the tax cut is being borrowed in the capital markets. Unless we cut spending (and there is no indication of that happening, Bush has been increasing spending faster than any president in decades) that means that all those tax cuts will have to be reapid in the future with higher taxes (just like we are repaying much of Reagan’s tax cuts today). Shouldn’t we discuss this?

3) Lastly, a more moral question. If we as a society have agreed, through our elected representatives, on a certain level of spending, shouldn’t we do what we can to pay for it and not simply borrow? I realize it makes sense to borrow and invest for the future but do we think that is what we are doing today? If Democrats are tax-and-send it seems Republicans are borrow-and-spend. Given these two alternatives which is more honest?

Another point on the taxless dividends. According to the WSJ it will not apply to 401(k) accounts which will have to pay taxes on dividends when the 401(k) proceeds are disbursed (of course, they don’t pay taxes when dividends are paid into the 401-k account).

If correct, doesn’t this mean that for the immense majority of stock holders there will be no dividend tax relief (since don’t most stock holders have stock through their 401(k)s)?

I am against deficits ideologically, but economically, I think deficits at the proposed level are trivial. Ditto tax cuts. I think the dividend tax cut is non-trivial because of its potential to remove a big capital distortion, not because of size, distribution, or any other silliness in the Democratic or Supply Sider talking points.

All 401(k) income is taxed as ordinary income upon distribution, including capital gains. The dividend tax won't apply to it, but neither does the capital gain now, so to me, it's a neutral tax. Again, I recognize that the tax cut will be skewed in its first order effects towards the wealthy, as will any cut other than eliminating FICA (a proposal I support, incidentally). It is the second order effects I'm interested in, and I think those will be enormously beneficial overall.

But, hey, GT, I'm all in favor of cutting spending. But when Democrats block spending cuts, and then declare that tax cuts are impossible, the moral hazard accrues equally to both parties; it's no more reasonable to declare spending sacrosanct than tax cuts.

Jane, If people were worried about pumping the economy, why not eliminate the federal tax on gasoline? It would effect everyone, especially the working poor, and be immediate. It would be also much, much simpler to implement.

Jane,

It's not really true that Democrats are in favor of spending and Republicans are in favor of cutting it. They just differ on what they want to spend money on. Republicans sponsor just as much pork-barrel spending projects as Democrats do.

As far as doubting the stimulus effect of pumping money into the economy, isn't it pretty well demonstrated that *massive* deficit spending can (at least temporarily) stimulate the economy? FDR's attempts to get out the recession were pretty much failures...up until WWII, at which point the government engaged in deficit spending at a level never before seen. That economic stimulus succeeded brilliantly in ending the Depression. To give the devil his due, Hitler succeeded in pulling Germany out of a depression, as well, by similar means.

Of course, it's less clear that small, one-time tax cuts have much stimulus effect, especially (as GT points out) if they are offset by taking money out of the economy and putting them into government bonds.

The Democrats blosk spending cuts?

Now Jane, let's not get partisan.

The GOP has as bad, and probably worse, record on spending.

So as long as both parties want to spend, shouldn't we pay for that?

Deficts may reach 3% of GDP. I wouldn't call that trivial.

We are in agreement that pork is bipartisan, but other programs aren't, and real pork is generally trivial in relation to the overall budget. Historically, Democrats have proposed higher levels of spending for almost everything, even programs in which they are nominally in agreement with Republicans. The republicans certainly won't cut spending as much as I'd like, but they're better than the Dems on that score.

Actually, it is interesting how much credit the two parties are given, just based on what they *claim* to care about. The Republicans claim to care about fiscal responsibility. In reality, they are as irresponsible as the Democrats, but they get credit for claiming to care. The Democrats claim to care about the poor. In reality, they really don't do much to help the plight of the poor, but they credit for caring. Bush gets credit for talking tough on Korea (unlike wimpy Democrats like Clinton and Carter) even though it turns out it is just talk. He's not going to do anything different than Clinton (or Bush the first before him).

Jane,

That's just an expression of desire with no data to back it up.

How is the GOP better at containing spending than the Dems? They haven't done it in the past and they aren't doing it today. In fact, under Bush, government spending is growing faster than it has in decades.

GT, that's a ludicrous statement. Go back and pull Democratic budget and program proposals for the past. . . well, any period since the 19th century. Then take a look at the correlation between the change in government spending and Democratic control of congress. On an aggregate budget level, that's not even a vaguely arguable proposition. It's even less arguable on non-defense measures. It's super-less-arguable if you take a look at who implemented the entitlement spending that forms the major portion of our federal budget.

From the CBO website (and lagging one year since the year a president assumes power he's mostly stuck with the budget from the previous administration.

Spending (% of GDP)

Carter (78-81): 21.2%

Reagan (82-89):22.3%

Bush: (90-93): 22%

Clinton: (94-01): 19.5%

BTW Jane, if the GOP were willing to talk about limiting entitlement spending you would have a point.

But they aren't talking about that. In fact both parties are talking of INCREASING entitlement spending with the new Medicare prescription drug benefits.

Jane (by the way do you prefer to be addressed as Jane or Megan?), thanks for the following quote:

“…but then I haven't seen any evidence that any stimulus actually works outside of Keynsian macro textbooks.”

It is a point I don’t see made often, but as far as I am concerned it can’t be made often enough.

GT,

Even if it is true, as you say, that we are left with a choice between-tax-and spend (Democrats) and borrow-and-spend (Republicans) let’s analyze the choice in light of current circumstances.

The nation is currently at war and trying to emerge from recession. I know of no school of economic thought that would prescribe higher taxes rather than higher borrowing in such a situation.

I can think of one school of thought that would have a VERY strong opinion between the two – the Keynsian school. The classic Keynsian prescription would be to cut taxes, increase spending, and run deficits at least until the economy started showing signs of life. I don’t think much of Keynes, but a lot of Democrats do, or at least they used to until it became inconvenient.

I can’t disagree that both parties are often hypocritical and opportunistic, but this is what particularly irks me about the Democrats right now. Anyone who had the slightest respect for Keynes would tell you that running surpluses in a sluggish economy while at war is almost criminal. Yet that seems to be all we here from the Democrats right now – the disappearing surpluses and who’s to blame.

About the only one I have seen who has been intellectually honest about this topic is Robert Reich. I thought hell would freeze over before I had anything good to say about him, but like Wellstone, at least he is principled.

It's super-less-arguable

Is that like doubleplusungood? :-)

This year's deficit is 1.5% of the GDP, if I'm not mistaken. We're exiting a downturn and we're in wartime: we're doing pretty good.

Wealth ain't zero-sum. Tax cuts that include the supply side provide greater revenue - 1981 and 1986 testify to that account. Greater revenues stipend less-than-desirable deficits.

Slight deficits or flat budgets are what we need. Here's a point I think one needs to confront: when is a budget surplus not overtaxation?

Mike

You are correct that it makes no sense to run surpluses when we are only just getting out of a recession.

Then again I have not heard anybody in the Democratic Party propose that, so it's a moot point.

Here's a point I think one needs to confront: when is a budget surplus not overtaxation?

How do you define overtaxation?

> just like we are repaying much of Reagan’s tax cuts today

The federal govt borrows the difference between receipts and spending, so suggesting that the debt is solely a function of the rate cuts is somewhat erroneous.

I note that taxes collected went up significantly under Reagan, so it's unclear that the rate cuts actually reduced revenue.

I note that spending DID go up under Reagan, singificantly more than receipts did. Why doesn't that spending doesn't get blamed for the debts incurred?

Andy, you are correct.

We are paying today for the combination of reduced revenues (tax cuts) and increased spending under Reagan.

How do you define overtaxation?

I..er..holy crap. Are you for real, man? Can I have your autograph? :-)

Deep breath. The private sector spends, invests and enterprises worlds away in superiority to the public sector; the idea with taxation is to collect the least amount of private funds to execute whatever spending appropriations have been legislated. Every government known to man has demonstrated the diminishing returns provided by greater and greater spending, so "more" is never necessarily "better"; too great a removal of money from the market dissuades investment, risk and therefore growth. That's overtaxation. That's bad.

Then again I have not heard anybody in the Democratic Party propose that, so it's a moot point.

Do a search, you'll find hundreds of sound bites.

GT,

“In just one year in office, the new Administration has pursued economic policies that have eliminated the surpluses, returned us to deficit spending and endangered our nation's long-term economic health.” – Eliot Engle, D-NY (1/23/02)

“The Bush tax cut has ended the brief period of surpluses, and returned us to massive deficits” – Jan Schakowsky, D-IL (10/3/02).

“Democrats are hugging themselves. The party's chairman, Terry McAuliffe, calls the point at which the surplus disappeared “the defining moment of the Bush presidency”. In a little over six months, George (“Tax Cuts ‘R' Us”) Bush has squandered a budget surplus that took his predecessor years to accumulate. “ – from The Economist (granted not a quote from an elected Dem leader, but…)

I found the above quotes pretty quickly, do I need to look for more?

Expressing a regret that the surplus has disappeared is pretty much the same thing as expressing a wish that they were still there, don’t you think?

Once again, how do you define overtaxation.

Precision is important, especially with you. In the other thread it took us like 10 posts to realize that your definition of "having proposed an alternative" included only alternatives you happen to agree with or consider feasible.

Had I known in advance what your defintion was I could have avoided both of us wasting our time.

To answer your question about overtaxation you have to specify what you mean.

What is your definition?

Nice. Thanks, Mike.

Expressing a regret that the surplus has disappeared is pretty much the same thing as expressing a wish that they were still there, don’t you think?

Yes and no.

Those are political comments and should be taken for what they are. The Democrats see a political advantage in pointing out that the budget surplus disappeared under Bush.

But the Democrats are not proposing we raise taxes today and none are talking about the need for a surplus today.

Longer term, that's another story.

GT, I already did define it! For the sake of etymological reconciliation, why don't you offer your definition as well?

GT, you're confusing Mikes. :-)

Can you find a single Democrat advocating the need to return to budget surpluses today? Not just taking potshots at the deficits to blame Bush but actually proposing to return to a surplus, which is what you claimed (or rather, implied)?

Anyone?

Michael:

I’m sorry but this is not something I can use:

too great a removal of money from the market dissuades investment, risk and therefore growth. That's overtaxation.

How do you define too great? If the government collects $1 more than it spends is that overtaxation? Do you take the debt level into account? Future liabilities?

If you criticize Bush for the disappearing surpluses, you must then take responsibility for advocating running a surplus. No having your cake and eating it too.

GT, check again: Democratic congress, not the president. Congress sets the concrete spending goals.

If you criticize Bush for the disappearing surpluses, you must then take responsibility for advocating running a surplus. No having your cake and eating it too.

Well, duh! It's politics.

But the point is that no Dem has actually said they want to run a surplus right now.

Check what again?

You said GOP spent less than the Dems. Turns out not to be true.

How do you define too great?

I've already done it. How do you define it? Or do you?

What does debt level have to do with money that is by definition not required of a given budget? Why not embed debt repayment into a budget?

But the point is that no Dem has actually said they want to run a surplus right now.

The DNC is whining about surpluses right now. What's more, Megan already parried this line of thinking. A sense of loss can only derive from the desire to possess once again. The liberal Democrat tactic to ghost-run a point by implying such but never committing to it (liberation of Iraq, economic issues) worked during the Nineties but failed abjectly during the last election. Don't try it as well - the number's been called.

No, my second post asked you to look at congress, which has direct allocation authority, unlike the president. That's why budgets in the Reagan administration ended up being larger than the administration requested, while the Republican congress downsized Clinton's.

Of course not. We are in the middle of a recession. It would be stupid to try and return to surpluses right away.

On the other hand, the bulk of the original Bush tax cut doesn't kick in until after 2004, and the bulk of the proposed new tax cut doesn't kick in until around the same time. So, in terms of stimulative effect, it's a bit late. (one hopes at least, if the recession is still in full swing in 2004 then god help us.)

Furthermore, Bush's tax cuts. (Unlike a stimulative tax cut) are _permanent_. Without an accompaning _permanent_ reduction in the size of the goverment it's deficits forever. Anyone who has bothered to look at the facts will see that republican adminstrations actually spend MORE than democratic ones. Notice that Jane asks only about _proposed_ budgets rather than actual ones. Democrats propose real budgets, while republicans propose fictions and count on the congress to modify them upwards. The last Bush budget was absolutely full of 'cuts' in programs that would have been political suicide to actually pass, sure enough none of those cuts DID pass.

If you define overtaxation as simply taxes being higher than spending in any given year than saying that surpluses are overtaxation is simply a tautology.

And therefore useless.

If, on the other hand you are asking what is the ideal level of taxation and when you have breached that then that is a separate question.

For example, during the last few years of the Clinton administration taxes were higher than spending. The excess amount was used to reduce our debt, and therefore reduce some future liabilities. Was this overtaxation? It would depend on your preferences.

Always try to be precise. It makes it easier to have a debate.

BTW, you are right that the Dems are blaming Bush for the deficit. They think, correctly or not, thet he's vulnerable on this.

But they are not saying we need a surplus today.

Is that inconsistent?

Of course it is. Welcome to reality.

That's why budgets in the Reagan administration ended up being larger than the administration requested, while the Republican congress downsized Clinton's.

I see.

There are several problems with this analysis. I’ll just mention a few off the top of my head.

First, there are several studies (and I’ll try to find and link one) that show that there is almost no difference in the overall level of spending proposed by Reagan and the one that was finally approved. I think Brad DeLong wrote about this. There were fights about how to spend but the overall level was basically the same.

Second, spending under Clinton fell as % of GDP every year he was president. That includes, of course, the first two budgets he proposed which were with a Dem congress. So you are wrong there as well.

Finally, you should ask yourself how, if Congress really is the one that determines spending, did Carter have less spending with a Dem Congress than Reagan with a partially GOP one?

Oh, and now, with the GOP controlling both Congress and the WH, spending is rising faster than it has in decades.

Who are you going to blame for that? Clinton?

Jane,

As you can see here Reagan’s budgets proposed a total of $7.35 trillion in spending between 1982 and 1989.

The actual amount finally approved by Congress was $7.55 trillion.

The difference over an 8 year period was $197 billion, or about $24 billion a year.

The cumulative deficit during that period was close to $1.5 trillion.

Damn it Bones! Just when I thought I was out of this debate you pull me back in.

“..the bulk of the original Bush tax cut doesn't kick in until after 2004”. You are right about that, so why are the Dems trying to blame the disappearing surplus on his tax cuts?

“Furthermore, Bush's tax cuts. (Unlike a stimulative tax cut) are _permanent_. Without an accompaning _permanent_ reduction in the size of the goverment it's deficits forever.” Hey, you’re not going to get any sympathy on this weblog. We’d LOVE to see a permanent reduction in the size of government.

But seriously, back to Jane’s (Megan’s?) point: “growth causes surpluses, not the other way around. “ We GREW our way out of the deficits of the 80’s and given sound economic policies we will grow our way out of today’s deficits as well. The real question is will Bush’s permanent tax cuts help create an economy that grows faster than it otherwise would have. I believe it will. I am sure you do not. But in this enormous economy of ours any policy that produces a single extra point of GDP growth over just a few years produces much more revenue than Bush’s tax cuts will “cost”.

By the way – how do you folks put text into italics when you post. I’ve tried everything I know and I can’t get it to work.

But they are not saying we need a surplus today. Is that inconsistent? Of course it is. Welcome to reality.

Weak, hairsplitting reason, GT. Transparent and guileful, really. Almost as bad as demanding "what the definition of 'is' is." Decrying an absent surplus is tantamount to calling for it, and the responsibility of public dialogue demands that acknowledgment - I hope to goodness you recognize that.

If you define overtaxation as simply taxes being higher than spending in any given year than saying that surpluses are overtaxation is simply a tautology.

It's a tautology as much as a "car crash" defines the crashing of cars. Debt, for that matter, can be mitigated from within a budget. As to taxation and excess, there is a tacit covenant between representative and taxpayer that taxes have been levied according to need and in good faith. Haven't you ever heard of "skimming off the top"?

There's a disturbing relativist, amoral engine to your arguments.

Use brackets, Mike. The "disregarding my period marks, italics would be text. Actually, for the lowdown on HTML just run a search engine, pop open a cold one and read about all the fun stuff one can do to one's text.

Anyone in this debate have any idea what effect this tax plan will have on the market in tax-deductible bonds that finances municipal public works projects?

>> “..the bulk of the original Bush tax cut doesn't kick in until after 2004”. You are right about that, so why are the Dems trying to blame the disappearing surplus on his tax cuts?

They don't. They blame the projections of deficits well into the future on his tax cuts.

Insufficiently Sensitive,

It is too early to tell. In theory high dividend paying stocks will now be a source of competition for tax-free municipal bonds (which would drive prices for bonds lower and thus yields higher).

The fact is, however, stocks would still carry a completely different set of risk parameters. I manage a portfolio that contains about $600 million in municipal bonds and all I can say is it won’t change a thing for me.

I think that is probably true for most institutional managers, but it may sway some individual buyers who do not tend to thoroughly analyze the risk side of the equation.

“It yields 4%, just like a municipal bond.” I can just see some creepy broker making his sales pitch to some little old lady – yuck!

My best guess (and this is probably more info than you wanted) is that it will make little difference, but may affect longer-term municipal bonds more so than shorter-term bonds. This will result in a steeper yield curve for municipal bonds.

Bones,

Please check my earlier post. I came up with three quotes from Dems specifically blaming Bush for the dissapearing surplus (the one that's gone today) and it took me about two minutes using Google.

Maybe YOU don't blame Bush for it (and you are to be commended) but every Democrat trying to get re-elected is.

To compare the budgeting requests of 1981-1982 to the budgeting requests of 1993-1994 is like comparing the budgeting requests of 1921-1922 to 1942-1943, and completely pointless. Yes, Ronald Reagan would have greatly benefited if he had taken office with the Soviet Empire gone, low interest and low unemployment rates, and an economy which was growing (having come out of the mildest recession of the post-war period), and an economy which hadn't suffered a severe recession in a decade. He didn't have those advantages. The Soviet Empire still had global ambitions, interest rates and unemployment rates were high, and the economy had suffered a series of signigicant recessions in the previous ten years. The lack of historical context which Democrats display when extolling William the Noble's wise stewardship is revealing of utter ignorance, or utter dishonesty. Bill Clinton inherited the Presidency under the most favorable circumstances in at least 70 years, or perhaps 80 years, so to sing his praises is often like praising the guy who is inserted to pinch run from third base, and manages to score on a medium sacrifice fly; credit should be given for not falling down and having sufficient speed to cross the plate, but let's not send him to Cooperstown, or even an All Star Game. A moment of intellectual honesty please; which budgeting period, and which President, faced easier trade-offs between defense spending and needed stimulus and domestic spending in the face of high unemployment and low economic growth, the President who took office in January 1981, or the President who took office in January 1993? If you had to take that miserable job, which month would you choose ?

Yes, I know Will.

When things go well under Dem administrations it's always due to something else, be it a GOP Congress or historical circumstances.

When things go well under GOP administartions it's all due to the great leadership they provide.

yawn

Michael

I don't need morality lessons from republicans.

Yeah, I hate it when historical reality intrudes on idol-worship; it's sooooo boring! I'm not a Republican, but one has to be ideologically blinded to fail to admit that January 1993 was a far, far, better month to inherit the Presidency than January 1981, or that the situation the nation faced in 1993 did not involve much less difficult trade-offs than that of 1981, therefore making it fatuous to compare the decisions made during those two periods without considering historical context. One may as well say that Abe Lincoln was a far worse President than Millard Fillmore; just look at all the blood and treasure Lincoln spilled! You can nod off again, sorry to disturb your dream-filled dozing....

Will, sure they were different times.

But Jane said that the GOP spends less than the Dems. And the historical record shows that to be incorrect.

Personally, I think focusing on who spends more or less is meaningless. You have to look at the whole picture. But it's Republicans who bray all day about how they are the party of less government but when they are in power they spend just as much, if not more.

Well, I think if the Republicans have a propensity to spend less, it is merely due to their having a lower propensity to create government programs that automatically increase in size evey year. It was the Democrats, after all, that created the programs that will soon grow to a size which render all other Govt. spending insignificant, and once a sizable constituency gets it's snout in the trough, it's damned hard to pull that snout out of the trough. To the extent I favor Republicans, I do so merely because they tend to send less money to the treasury, which acts as somewhat as an inhibitor to the creation of new government spending programs, credit markets having some constraining effect.

Michael, I don't need morality lessons from republicans.

Oh, I don't think I was necessarily pinning you down to an adjective, GT - just the argumentative style. When someone dances around a fine point with a grin, it makes for dishonest debate. I'll take the swipe as a concession of that shale-fragile point about supposed surplus non-hints.

GT, you're still ignoring the basic point, which is that GOP proposed budget > Dem proposed budget, and that budgets go up more when Dems have the congress. You weren't arguing that the difference was trivial; you claimed the Republicans were more prone to spend than the Dems. That's empirically not true, despite the Democrats spin on this. And the declines under Clinton were entirely attributable to the end of the Cold War. One could find similar declines under Nixon, probably Ford, and certainly Truman, but it's not a very useful metric. Non-defense spending, which is the metric most people are interested in, rose at a rapid clip under Clinton as a proportion of GDP. If you want me to stipulate that the GOP is responsible for more defense spending than the Dems, I'll be happy to.

"temporary" stimulus is theoretically, and apparently empirically, unlikely to work.

So you're saying Keynes was wrong?

On the "deficits aren't big enough to matter yet" area, Delong's noted that the last few years have seen a swing in the government's position from +1% to -1% of GDP.

We GREW our way out of the deficits of the 80’s and given sound economic policies we will grow our way out of today’s deficits as well.

Deficits were ended by, in order of magnitude, the 1990s boom, Bush's tax increase, and Clinton's tax increase. Deficits went up for virtually the entire 1980s. I can't find the blasted treasury (or was it BEA, or OMB?) data series showing this, unfortunately; it has federal spending/reciepts/deficits as a share of GDP since 1947 or so. Anyone know the one I'm talking about?

Er, no Jane. Please read carefulkly what I wrote.

I specifically said that the difference between what Reagan proposed and what Congress approved (which, by the way, included a GOP Senate for some of those years) was very small. In fact my exact words were 'almost no difference'. For me a 2.6% difference is very small. Maybe to you it's not.

But that's just between the Reagan and the Congress (which, once again, was NOT just a Dem Congress).

As for your defense vs non-defense spending distinctions this is a second order question, as you like to say. I was just pointing out the fact that in the last 25 years total spending has been higher under Republcian administrations than under Democrat ones.

As I explained to you before your "Dem congress as a controlling variable" argument fails miserably because under Dem Congresses Carter and Clinton spent less than Reagan and Bush I. And under a GOP Congress now Bush is presiding over the greatest expansion spending in decades. So it's clear that it's not the Congress that makes the difference.

I'll double check your defense spending claim.

After how you've "misunderstood" poor Krugman...

People smooth their consumption over the long run. Thus, if you announce a tax cut, and say it's just temporary, people will save most of it in order to smooth their income in future periods. I'm no Keynsian, and I happen to think Keynes was wrong except in extremis, but that's another argument. The question at hand isn't stimulus, about which I am extremely dubious theoretically and empirically, but the stimulative value, within the theory of stimulus, of "temporary" tax cuts. Empirically, I believe just such temporary tax stimulus was tried several times in the 50's and 60's, and as the theory of consumption smoothing predicted, it didn't do anything.

> Andy, you are correct.

> We are paying today for the combination of reduced revenues (tax cuts) and increased spending under Reagan.

Revenue was an unfortunate/incorrect choice of terms on my part.

Tax revenues actually increased significantly under Reagan even though some marginal rates did decrease. That occurred because taxable incomes increased dramatically. The smallest contribution is the either the increase in workers or the increased fraction of income subject to taxation. The big contribution was the dramatic increase in income.

If you want to argue that the revenues would have increased even more if the rates hadn't been cut, feel free, but please provide evidence.

Spending, unfortunatly, increased even faster than revenues.

I note that the Dems (mostly) fought the tax rate cuts but not the spending increases. The repubs were for the rate cuts and all over the map wrt the spending increases.

Of course, the dems, having control of Congress, could have done pretty much as they pleased.

Ah ha! Got it. After looking at the chart, I have to change my glib assessment above.

Check out table 1.2. Off-budget (social security) spending dropped, and receipts went up, over the 80-00 period, which resulted in a significant SS surplus; I think this was due to the (83?) SS reform.

The on-budget (everything else) numbers tell a different story. Receipts fell through the floor after 1982, and then pretty much stayed constant until post-1994 (Clinton tax increase + capital gains boom in the market?) Outlays went up a bit under Reagan, but then began a long slide under Clinton.

The 2000 Social Security surplus, Clinton's tax increase 94-2000 (was this all the tax increase, or a capital gains windfall?), and Reagan's '82 tax cut were all roughly the same size.

Spending went up and down for both Reagan and Bush, but neither had much of an effect on it; it was about the same at the beginning as the end of their terms. However, under Clinton, outlays dropped like a rock, due to small discretionary spending increases and (extremely large) military spending cuts.

So, if you add it up:

Reagan cut receipts but didn't change spending.
Bush I changed neither.
Clinton (+ the GOP congress) increased receipts and cut spending.
Bush II, so far, has cut receipts and increased spending.

Ranked in order of improving the government's position:
Clinton + GOP congress
Bush I (no change)
Reagan (negative)
Bush II (really negative)

It's amusing how much this contradicts the stereotypes about each party.

The question at hand isn't stimulus, about which I am extremely dubious theoretically and empirically, but the stimulative value, within the theory of stimulus, of "temporary" tax cuts. Empirically, I believe just such temporary tax stimulus was tried several times in the 50's and 60's, and as the theory of consumption smoothing predicted, it didn't do anything.

I think you're a closet rational expectations buff. :D

Oh, and Andy, look at that PDF. It contradicts just as many of your claims as mine.

Oh, and WW2 was a pretty damn effective stimulus.

This is what I mean by lack of historical context. Whydya' s'pose there were extremely large defense spending decreases under Clinton; because Bob Rubin is so smart?

If you want to argue that the revenues would have increased even more if the rates hadn't been cut, feel free, but please provide evidence.

Just check here.

Notice what happened to revenues?

Notice what happened to personal income taxes?

Deficits matter a lot if they are monitized. If not they fund programs from market conforming borrowing, squeezing out lower yielding investments. Taxes are not market confroming. On balance if we can't limit spending, we are better off running deficits. Deficits at least inhibit government spending which is the problem.

Whydya' s'pose there were extremely large defense spending decreases under Clinton; because Bob Rubin is so smart?

Sure, it's not like he should be lauded (or the GOP congress) for defense spending cuts. He was responsible for the revenue increase, however, and the revenue increase was actually larger than the spending cuts.

> Notice what happened to revenues?

Yup, they went up, dramatically, as I said.

Taxes as fraction of GDP went down for a while, but Bush I and Clinton took care of that.

Jason,

Talking about contradictions of stereotypes.

Domestic discretionary spending, which I think is what Jane talks about when she talks about non-defense spending, was actually HIGHER under both Bush and Reagan than under Clinton.

Jane,

You claim that Non-defense spending, which is the metric most people are interested in, rose at a rapid clip under Clinton as a proportion of GDP.

As with so many other of your claims, from what Krugman said about taxes to the situation of Social Security to when NK had nukes, this too appears to be wrong.

Domestic discretionary spending was 3.4% of GDP when Clinton came to office and was 3.2% in 2001, having fallen to 3% in 1998 and 1999. And of course it was lower than under both Bush and Reagan.

It seems to me you are full of ideas that are factually wrong.

Andy,

When comparing economic series across time, particularly in the early 80s with high inflation, you cannot use nominal numbers.

You have to look at ratios or, in some cases, inflation-adjusted numbers. So look again and check the % of GDP numbers. They tell you the corect story.

Reagan's tax cut cut income tax revenues for several years (until rtaxes were raised again) which explains most of the drop in revenues. At the same time spending rose for a few years leading to the very high deficits of the mid 80s.

Jason,
Talking about contradictions of stereotypes.

Yeah, I was surprised. It's also interesting how small, relative to the economy, the gaps being fought over are.

On "it was defense/no it wasn't" - defense spending dropped 1.4% of GDP over Clinton's term in office, '93-'00 budgets. Total spending dropped 2.8% of GDP over Clinton's term in office.

So, it was about half defense, half not. The not defense stuff:

25% cut in interest payments (I'd forgotten about this one).
6% cut in "human resources" as spending of GDP.

Spending increased in absolute terms, but it didn't go up as fast as GDP, so surprise! surplus. As an interesting test case of what the Clinton years might have looked like with a Democratic congress:

The 92 budget increased human resources spending by 6% to 12.4% of GDP, but this was under Bush! Clinton left it at 12.6% (slight increase) and 12.5% (slight drop) in 1993 and 1994.

Clinton dropped the physical resources budget from 1.2% to .7% in 1992, and it bounced around that number from then on.

This "Democrats blew the 1990s boom money on spending" thing doesn't hold up. Hell, looking at the budget, you want lower taxes? Pay off the deficit; it's the only line-item without a constituency.

GT, you could have gotten the same effect from that post as if you had run down main street, naked, and waving a flag that says "I have no good answer..."

Funny how in politics the other side may actually have valid points, but the partisans will die before modifying their own point of view.

Numbers too complicated for you?

I know, it's hard.

Oh, forgot about this. Delong shows that Reagan's proposed budgets, if Congress hadn't changed them at all, would have resulted in deficits 90% as large as those that occured after Congress tinkered with them.

>>but then I haven't seen any evidence that any stimulus actually works outside of Keynsian macro textbooks

I have never, ever, seen a forecasting model used in any live application which didn't have a positive term in it for the near-term effect of deficit spending.

I was just pointing out the fact that in the last 25 years total spending has been higher under Republcian administrations than under Democrat ones.

That's right, GT. That's because Republicans were Presidents for more of the last 25 years than the Dems were.

People smooth their consumption over the long run. Thus, if you announce a tax cut, and say it's just temporary, people will save most of it in order to smooth their income in future periods.

You've also stated you think that deficits are compensated for by increased private savings; therefore, a deficit-financed permanent tax cut shouldn't increase aggregate demand either: the entire amount will go right back into the capital markets.

I'm curious what you think causes recessions, if fiscal policy has tenuous theoretical & empirical connections to ending them.

Jason, there are two arguments here which have been conflated.

First, Jane's point relating to the permanent income hypothesis:

>>Thus, if you announce a tax cut, and say it's just temporary, people will save most of it in order to smooth their income in future periods

The trouble in testing this is that tax cuts are not in any meaningful sense exogenous to the business cycle; it would be extremely hard to correct for the cycle in any econometric work, because fiscal measures are usually carried out at specific (broadly anticyclical) points in the cycle.

However, we have the "natural experiment" of the UK in 1996/7 to work with. During this period, a number of our mutual building societies converted into limited companies, giving a one-off, unrepeatable "windfall" of stock and cash to a large number of their members. I was working at the Bank of England at the time, and the argument raged internally about how much of the windfall would feed through into current consumption (the PIH would suggest, nearly none). In fact, about 25% of the windfall was consumed immediately; not a lot, but certainly not none. The reason, as far as we could work it out, is that about 25% of consumers are "financially constrained"; they are at a point in their life during which they are consuming less than they would like because they can't smooth their expected lifetime income by borrowing -- nobody will lend to them. A one-off injection of funds, however temporary, allows them to get closer to their "permanent income" by consuming more.

There is also the argument known as "Ricardian equivalence", which is closely related to your own pet proposal; the equivalence of taxes and bond finance. This is the idea that deficit spending has no effect, because people will realise that deficits now mean higher taxes today, so they have to save the proceeds of the tax cut to pay tomorrow's taxes. Despite vast amounts of work by Robert Barro, very little evidence for Ricardian equivalence being important in the real world has been found, apart from in Israel during a period of hyperinflation.

As I say, I've never, ever, seen a live forecasting model that anyone proposed to use for anything important, in which fiscal policy was neutral.

Very intresting discussion. Thanks.

Unfortunately, the debate seems to have centered on the least important aspect of a nation's economics - federal deficits in wartime, especially those at a reasonable percentage of the GDP.

Really, do we want a satisfied populace living in a healthy economy or a satisfied government?

I'll opt for the former. Contrary to GT's observations, revenues grew during the 1980s. According to a 1996 CBO report (emphasis mine):

Nominal federal revenues doubled in the 1980s from $517 billion to $1.031 trillion. From 1981 to 1989 real federal revenues climbed by 20 percent. As a share of GDP, however, federal tax revenues fell by 1.0 percentage point during that period.

Even income tax revenues grew substantially in the 1980s. In 1981 income tax receipts totaled $347 billion; in 1989 they totaled $549 billion, a 58 percent increase. In fact, income tax collections grew only slightly slower in the 1980s than in the 1990s despite income tax rate reductions in the Reagan years and increases in the Bush-Clinton years.

And all Reagan needed to do was to confidently lower taxes. Interesting.

Federal spending did not decrease, producing high deficits. The lion's share of budgets were shifted to defense, however, and not domestic spending: from Historical Tables, Budget of the United States Government, defense grew by 44.2% during Reagan's presidency, as opposed to 0.5% for Nixon, Ford and Carter and a 33.1% drop by Bush H.W. and Clinton.

Domestic spending increased by 52.9% during 1973-1981; only 5.8% during Reagan's tenure and then 28.5% for the two presidents after him.

Reagan certainly wasn't a pork spendthrift - crack open a history book and you'll find that he was in the midst of defeating a Communist dominion by out-arming and outlasting it. Defeating tyranny with the entities it despises - like enterprising free markets - is certainly worth a price.

> So look again and check the % of GDP numbers. They tell you the corect story.

Interesting.

Suppose that I invent a magic box that doubles the nation's productivity. However, tax revenues do not double, they merely go up 50%.

According to GT, my box has cut tax revenue....

Lesson: fraction of GDP is not the right way to measure tax revenues.

Sorry Andy, this is pretty basic stuff. And I mean really basic.

If you want to compare economic series across time based on nominal amounts without correcting for either inflation or real growth be my guest. It’s terrible analysis but so be it.

As for your box you would have to ask yourself why taxes did not grow when GDP doubled. Did the taxable base decrease? Did the tax rates drop?

If you did not account for changes in inflation and real growth one could argue that Clinton’s defense budgets were higher than what we spent in WW2 and Vietnam. That would be true in nominal terms but completely misleading and actually false in real terms.

I did not want to jump in on this one, but this GT guy is out of his mind. As several others have already pointed out, tax revenues did not decline under Reagan. Both nominal and real revenues increased, just not as fast as spending. To use revenues as a % of GDP is ludicrous. Would we consider it an economic success if the economy declined while the government's revenues remained constant? How long will the left keep trotting this nonsense out?

GT: It is not terrible analysis to use inflation adjusted tax revenues when you are discussing deficits.

The cost for the government to provide the services is provides should vary according to inflation, if your inflation index is any good. To suggest the government needs a constant percent of GDP even if real GDP is growing briskly is to suggest that overall services should be growing in real terms.

As you would say, this is really basic stuff.

Jane? Mindles? What's your take? Is tax revenues as a fraction of GDP the end-all of metrics? I'd think inflation-adjusted revenues as an absolute would be appropriate, but I'm just an ingenir.

Pete,

Point 1) When you look at simply the nominal numbers you aren't even adjusting for inflation, much less for real growth. Read carefully. I said the to compare economic series across time based on nominal amounts without correcting for either inflation or real growth. Notice my mentioning of inflation adjustment? Andy is looking at numbers that are not even adjusted for inflation.

Point 2) You claim that The cost for the government to provide the services it provides should vary according to inflation, if your inflation index is any good.

This argument is wrong in several ways.

First, a general inflation index cannot tell you anything about specific subgroups within that index. Suppose the GDP deflator rose 2% in one year. That doesn’t tell you anything about how much military hardware may have risen. So there could be a perfectly good reason to raise spending above the general inflation index simply because some of the services government provides are rising faster than the overall price level. The same would apply to Medicare if health care costs are rising faster than general inflation.

Second, simple population growth may require more expenditures. Even if you fixed in real terms (that is, adjusted for inflation) the cost per capita of government services a greater population will require greater nominal expenditures.

Maybe a numerical example will make it clearer. Suppose a government serves 100 people at a cost of $10 each, so that total expenditures are $1000. Suppose the inflation is 2%. According to your premise new government spending should not be more than $1020. But if the population rose 5% so that now you have 105 people that would require $1050 even before adjusting for inflation. Adding the 2% inflation would give raise the total to $1071. And if some of the government services rose faster than inflation even more would be needed.

And we haven’t even talked of new or improved services (like the proposed Medicare prescription drug benefit) which further increase government spending.

The interaction of inflation and population adjustments means is a tricky one. There is no perfect way to adjust for both but using % of GDP is the best proxy which is why everyone uses it.

Now let’s be clear. If we as a society decide to accept less services there is no reason why we can’t drastically reduce spending. We can debate the political issues involved in that some other time. I, for one, would support it, including full, not just partial, privatization of Social Security.

But the point here, although we’ve meandered a bit, is that Reagan’s tax cut did reduce taxes. My view is that would have been OK if we had also decided to cut spending. Otherwise you are simply borrowing the money.

GT: The constant percentage of GDP assumption is still too large. And the argument that everyone uses % of GDP is patently false. It is used by anyone who starts with the assumption that more spending the better.

I agree with your example, that if population increased by 5% we may need more than revenue growth than a just enough to keep up with inflation. Let's consider the actual federal budget, though. Interest on federal debt varies, obviously, with nominal interest rates. The strongest correlation here should be with inflation. Social Security payments vary by a cost of living adjustment which is set to the CPI, although CPI minus a constant is being considered, and the total population receiving the benefits. Military spending could certainly exceed inflation, but it has actually decreased in constant dollars over the last 15 years and held relatively steady in constant dollars over the last 40 years. As for prescription drug benefits, this is what I would classify as an increase in total services.

Yes, there could be need under some circumstances for revenue growth in excess of the rate of inflation, but it is hardly a decline in revenues if real revenues increase, but lag the increase in GDP, especially if GDP is growing at a high rate, as it did under Reagan.

> Even if you fixed in real terms (that is, adjusted for inflation) the cost per capita of government services a greater population will require greater nominal expenditures.

The correct verb is "may", not "will". It depends on the distribution. In fact, one can have an increase in such expenditures with a declining population, or a decrease with an increasing population.

And, I note that GT is complaining about the figures he cited as supporting his argument. He's complaining that they didn't actually do so.

It's a little late to argue that they're the wrong numbers to cite.

Be that as it may, perhaps we can look at another question. Four things happened on Reagan's watch. Marginal tax rates decreased while deductions were eliminated. Defense spending increased. Domestic spending increased.

Which of those things worked out for the best? Which one was the least valuable? How do we rank the other two?

Well, interest on federal debt will rise with the size of the deficit (As more debt is added).

Social security payments will rise as the number of people receiving it rises. So will many f the other entitlements.

At the end of the day this is a marginal argument.

My point would be that we should not run a permanent deficit, i.e. we should run deficits in bad times and surpluses in good times, to smooth things over.

Reagan's tax cut reduced taxes from what they would otherwise have been. At the same time spending, mainly on defense, went up. The result? Our debt increased dramatically.

Some will think it was worth it, for what we got out of it.

I disagree.

This is getting ridiculuous. Reagan reduced tax receipts from what they would have been otherwise? You are assuming way too much, GT. You have no idea what total taxes collected would have been if we had not reversed the Stagflation of the late 70s - early 80s.

What we do know is that under Reagan the economy grew at a fast rate, while inflation fell. This was a feat economists at the time told us was impossible.

Now, from the comfort of 20 years later, when we call a puny 6% unemployment rate a recession, you look back and say we would have collected more tax revenue. Maybe, maybe not. You also absolve Congressional Democrats of all responsibility on spending, when they promised major spending cuts in a budget negotiation in 1983 and delivered exactly none.

BTW, deficits were well on the rise before any of Reagan's tax cuts went into effect. Under Carter, personal income tax receipts rose from 8% of GDP to 9.3% while the deficit ballooned. Under Reagan the deficit was higher in nominal terms, but it rose less as a percentage.

As to whether it was worth it, I would have to say the defeat of Communism was worth a few bucks in interest payments.

Pete,

1)Not even the most ardent supply siders pretend anymore that Reagan's tax cuts paid for themselves.

I'm a bit surprised that anybody is still using that argument.

I don't know of any serious economist, from the left or the right, who doubts that the tax cut did, in effect, cut taxes. There may be debates as to the benefit which is a different thing.

2) I don't absolve the Democrats of anything. I simply statd the fact that the spending approved was only marginally (2.6%) higher than what Reagan asked for. It would be wrong to say the Dems favored lower spending but is equally wrong to say Reagan did. Neither side wanted to touch spending too much.

3) Under Carter the deficit stayed roughly the same. It was 2.7% of GDP in 1978 (the first budget Carter could propose) and finished at 2.6% in 1981. The average for his 4 years was 2.4%. It was lower than it had been under the last 4 years of Nixon/Ford.

Reagan's lowest budget deficit of 2.8% (in 1989) was higher than the highest under Carter. The average deficit under Reagan was 4.25% of GDP.

This is clearly reflected in the debt numbers.

4) I don't subscribe to the theory that Reagan won the Cold War and, even if I did, I fail to see why we couldn't have paid for it.

5) Finally, economic growth was during much of Reagan's tenure but that's mostly because the economy was recovering from a recession (the deepest since the Great Depression). Once you adjust for the business cycle growth under Reagan was the same level of the post-1973 period.

BTW Pete, just read your post at your blog.

Let's be clear that I am not arguing that government is 'owed' a certain percentage of GDP. Hey, if we all agreed I would support cutting government in half!

What I am saying is that we should pay for what we want to spend, at least adjusting for the business cycle. That's all.

GT: Last response, I promise.

I don't recall ever saying that Reagan's tax cuts completely paid for themselves, at least not in the short run. But you cannot blithely argue that the country was on a fine course before he came into office and assume that growth would have recovered absent his tax cuts. It may have happened and it may not have. We will certainly never know.

If you argue that a President has complete and total control of the budget, you could describe the Carter years as 1978-1981. As I am arguing for over the incentive effect of tax rates, not just proposed budgets, I would put another year of lag in there, making 1982 the last year of Carter's influence. This puts his last deficit at 4.0%. I know that isn't really fair to Carter, but in reality we could call that Volcker's year as he had more influence over the economy than either Reagan or Carter at that point.

You may not credit Reagan with any part of our defeat of Communism, in which case I wonder whom you do credit. But as to paying for it, it surely is not that simple. If marginal tax rates have any impact on economic growth then raising taxes too high to pay for the military build up could have jeopardized the strength of the economy.

You claim that the strong growth of the Reagan era was just recovery from the 1982 downturn, but you will not credit Reagan for the effect the incredibly high interest rates of 1981 and 1982 had on anyone's budget plans.

Finally, if you "adjust for the business cycle" as you do to explain away the success of the Reagan era, then there is no point in having an argument at all. Let's just say Carter was a success, after you adjust for the business cycle. And so was Hoover. That makes it much easier. Now I can stop typing.

Reading these comments--especially those from the guy who was recently lecturing me on "intellectual honesty"--about the different percentages of GDP spent during different administrations has been highly amusing.

First, the federal government uses cash basis accounting, not accrual acounting (a point Megan alluded to in one of her comments). Thus "spending" in any year may be completely unconnected to any decisions made by that administration (or even that congress). In fact, Reagan clearly inherited a large amount of spending already in the pipeline from the Carter-Tip O'Neill years.

Second, it matters what the money is spent on. Aircraft carriers, office buildings, F-15s, are a very different animal from food stamps and midnight basketball programs.

Third, rarely does one party control both houses of congress and the presidency simultaneously, so "spending" is the result of a balance of power. For instance, if we look at the OMB figures (table 2) that GT provided for us, it's clear that something big happened in the 1970s.

From 1962 through 1974, outlays were above 20% of GDP in only one year--the Vietnam War year of 1968--with a low of 17.2% in 1965. And from 1968, outlays steadily declined (during the Nixon presidency)until, in 1973, they were actually slightly below 1962's % of GDP.

Until Watergate forced (an already weakened) Nixon's resignation, and the Democrats took huge majorities in congress. That's when the party began--over the record setting use of the veto by Gerald Ford--in 1975 outlays jumped from 18.7% to 21.3%, which was a post WWII record, iirc.

And, that higher level became the norm, peaking in the (deep) recession year of 1983 at 23.5%. Then it began to trend down. If we use GT's formula of a one year lag, in Reagan's last year of (1989) it was 21.2%, which is actually lower than 1975's, then record, of 21.3%.

Which is a case for Reagan (and his coalition of Republican congressman and Southern Democrats) having reversed the upward ratchet of "spending". Said case being even stronger if Reagan's military build-up included a greater proportion of long-lived assets. More guns, less butter, as we were taught to say back in the dark ages.

But, since we don't have accrual numbers, only cash basis ones, we can't formally make that case. We wouldn't want to to be accused of "intellectual dishonesty". Would we?

Then there is the little matter of how many increases in spending were stopped. An instructive example being the early Clinton Administration, when Phil Gramm and John Kasich put the screws to a proposed stimulus package that was clearly unnecessary. And, of course, what would Hillary Care have done to outlays, if the Republicans hadn't defeated it?

Again, we can't really say without using accrual accounting. But we can make an educated guess, no?

Let's take a closer look at GT's claim that Reagan's tax rate reductions, caused revenue losses to the Treasury.

Again using his source, the CBO figures; in the 15 years from 1962 through 1976, inclusive, (7 Democrat president-years, 8 Republican, with, iirc, all Democrat congresses); in all but 4 years (73% of the time) revenues were less than 18% of GDP, and only in the 10% Tax Surcharge year, iirc, of 1969 were they above 19%.

Starting with the Carter presidency, revenues are never lower than 18% of GDP (but never above 19%). Undoubtedly because inflation had raised peoples' nominal incomes and pushed them into higher tax brackets. This period in the late 1970s is unusual; the only other period of four consecutive years of revenues in 18%s is 1987-90.

With the victory of Ronald Reagan came the antidote to "bracket creep", in the form of the Kemp-Roth rate reductions and indexing of brackets for inflation. But note the response of revenues: In 1981, with a 5% across the board rate reduction, revenues jump to 19.6% of GDP--higher than in any previous year except the Tax Surcharge year of 1969.

With another 10% across the board reduction in 1982, revenues still are 19.1% of GDP (and the reduction in revenue may have been due to the beginning of the recession).

Finally, comes the full blown, deep recession year of 1983, when the top marginal rate is down to 50%, and revenues drop dramatically below 18%, and stay there for four years, with an average of 17.5% of GDP [as in the five consecutive years, 62-66, (average 17.4%)when the top rate was 70%)

IOW, with a 50% top marginal rate, and all rates indexed for inflation, the Treasury takes in more revenue (as a % of GDP) than in 1976 (17.2%), when the top rate was 70%.

But, then comes the even more dramatic Tax Reform Act of 1986, with a reduction of the top marginal rate to 28%, and revenues begin to rise, in 1987 to 18.4%. In 1989, under Bush I, the top marginal rate is upped to 31%…and revenues begin to decline (to only 17.5% in his last year).

With the retroactive Clinton tax rate increases of 1993 (39% top marginal rate), and well into an economic recovery from the mild recession of 1991, we still only see revenues of 17.6%, but gradually increasing until, in 1997, finally the Treasury cracks the 19% barrier for the first time since Reagan's second year in office.

The figures rise dramatically with the boom years in the late 90s, with two years (99-00) at 20% or more. But, wait a minute! The top marginal rate of 39% IS LESS THAN IT WAS from 1981-1985. How did that happen?

The answer is Ronald Reagan (and Jack Kemp, Bill Bradley, and a bi-partisan coalition), and the Tax Reform Act of 1986.

Add the contribution Reagan made by defeating the USSR--and the evidence is clear he did--which allowed military spending to be cut drastically, and you've got Ronald Reagan, Budget Balancer.

You have no idea what total taxes collected would have been if we had not reversed the Stagflation of the late 70s - early 80s.

Nixon, Reagan, and Bush I all had exactly the same GDP trendline growth.

Thanks for clearing thing up, dsquared.

Add the contribution Reagan made by defeating the USSR--and the evidence is clear he did.

Ignoring your recession-dating hand-waving, I'm assuming this is the "we bankrupted the USSR because they couldn't keep up with our military spending" argument. One problem with this is that their military spending didn't really increase in the 1980s, so they certainly didn't destroy their country by upping military spending.

From the first Google link:

Since the mid-1980s, the Soviet Union has devoted between 15 and 17 percent of its annual gross national product (GNP--see Glossary) to military spending, according to United States government sources. Until the early 1980s, Soviet defense expenditures rose between 4 and 7 percent per year. Since then, they have slowed as the yearly growth in Soviet GNP slipped to about 3 percent.

Then there's what Gorbachev said, and a million other things publically available.

From the atlantic article:

The Soviet Union's defense spending did not rise or fall in response to American military expenditures. Revised estimates by the Central Intelligence Agency indicate that Soviet expenditures on defense remained more or less constant throughout the 1980s. Neither the military buildup under Jimmy Carter and Reagan nor SDI had any real impact on gross spending levels in the USSR. At most SDI shifted the marginal allocation of defense rubles as some funds were allotted for developing countermeasures to ballistic defense.

Pete,

Hey, why stop posting? These online debates are very informing. Well, at least with most posters.

It may be don't disagree all that much. Let's see.

1) Reagan's tax cut 'losses': If you agree that the Reagan tax cuts did not pay for themselves then most of that debate is resolved. I'll leave it to the experts to figure out exactly how much the tax cuts did pay for themselves. The estimates I've seen were around 25%. There may be more recent ones.

2) Spending: My only point here is that, with the exception of the really big ticket items (like the Great Society) there doesn't seem to be that much difference in overall spending between the GOP and the Dems. For example Jane says that The republicans certainly won't cut spending as much as I'd like, but they're better than the Dems on that score. Yet a look at what has happened in the last 25 years shows no proof of that. In fact, as Jason and I noted, a lot of myths, from both parties turn out to be wrong.

One point on entitlements. It's true that it was implemented mostly under Dem administrations. But it's equally true that Republicans have accepted these entitlements and embraced them, and have made no real efforts to reduce them. If anything, with Bush talking of a prescription drug plan for Medicare, they will increase it.
Now maybe the real argument is that there may be no big difference in overall spending but you have to look at how the spending breaks down. Is the argument then that domestic spending (other than entitlements rises faster under Dems?) Again, the numbers contradict that.

3) The Cold War: It lasted 44 years of which Reagan was Prez only 8. What was everybody doing during the first 36 years, just waiting around for Ronnie to show up and solve everything?
And how did he win the war? Forcing them to spend too much? As Jason points out the evidence doesn’t support it.

Let me make clear that that doesn’t mean I think the Reagan military buildup was a bad idea. After all we have worldwide responsibilities and that may require beefing up our defense. But to say that that won the CW?

I don’t think any one person won the CW but in my view the one that did the most was Truman, who set up the diplomatic, economic, and military framework that contained the USSR while we waited for them to implode.

4) Economic growth. The US grew roughly 3.5% annually from 1945 to 1973. Long term growth then dropped to 2.5% from 1973 to about 1995 and there are many explanations for that drop but none, AFAIK, that all agree on. This includes the Reagan years. Did the tax cut get us out of the recession? Most studies say that the main reason we got out of recession was not fiscal policy but monetary policy.

I haven’t seen much evidence that the Reagan tax cuts did much other than to increase the deficit. They may have helped jumpstart growth on the margin but everything I’ve read indicates that it was Volcker’s rate cuts that saved the day (just like it was Volcker’s rate increases that mainly created the recession, plus oil price hikes). They certainly did not raise long-term growth which was the same (relatively) anemic 2.5% we have seen since 1973. That’s what I was referring to by ‘business cycle”. Since 1995 growth seems to have moved to a higher plateau though, so let’s hope it stays that way.

"Volcker's rate cuts." Through semantics and minutiae, GT, you've explained away the power of free markets to boards conducting economic voodoo; as if workers, traders, investors or entrepreneurs were marionettes, lifeless but for bureau direction.

It is the power of the individual enterprise that spurs, grows and expands economies. The less government interference and drag, the better. Divvy up some pennies to kindergarteners, encourage them to risk and invest, confiscate more from others for two afternoons, and we can arrive at the same conclusion: laissez-faire.

What was everybody doing during the first 36 years, just waiting around for Ronnie to show up and solve everything?

Russia certainly wasn't so weak that it couldn't invade Afghanistan a decade before its demise.

Those before Reagan were engaging in Détente - the sort of delusional engagements not unlike the painfully naive 1994 diplomacy conducted with North Korea. Reagan abruptly ended the Soviets' game of buying time through disingenuous bargaining.

Any autocratic state that cannot feed itself with spoils will eventually self-destruct, yes; but its fall is certainly hastened when bereft of misbegotten support. For the U.S.S.R. to be faced with a United States unwilling to negotiate was finally more than it could sustain - culturally, economically, financially, militarily. To quote intelligence sources on only one aspect of Soviet buckling and then shrug one's shoulders at Reagan is to cheat the victory of its appreciation.

> Reagan's tax cut reduced taxes from what they would otherwise have been.

Really?

I note that tax revenue is the product of effective rates and income. I'd be surprised if no one ever took taxes into account when deciding whether or not to engage in a potentially taxable activity.

Interestingly, I happen to know folks who are behaving that way. If they can arrange for favorable tax treatment, they'll build a house and sell it. If they can't, they'll sit on the land for a few more years.

For Patrick and the others,

One thing that gets glossed quite a bit when discussing 80 economic performance is that fact that the price of oil collapsed in the early 80's. Many like to completely dismiss the effect of the prince of oil on our economy but frankly it is one of the key ingredients in US economic performance. It affect's the price of everything, transportation, agriculture, leisure, you name it. Oil prices went from the high $50's per barrel at the end of the Carter administration to under $20 by 1984. That is a huge amount of money being freed up and returned to the economy.

Rick,

That is correct. In fact I was reading an article in the FT some time ago that indicated that all the recent recessions were linked to the price of oil.

Andy,

Yes, really. Like I wrote nobody is seriously claiming today that Reagan's tax cuts paid for themselves. They may have paid for themselves in part. How much id debatable. The estimates I've seen are around 25%.

Michael,

Your explanation that For the U.S.S.R. to be faced with a United States unwilling to negotiate was finally more than it could sustain - culturally, economically, financially, militarily sounds to me contrived and impossible to prove, one way or the other.

Rather than depend on some sort of national depression when the US supposedly did not negotiate with them anymore I'll rely on other explanations, including a slow economic decline that lasted decades and growing internal pressure in the USSR and satellite nations for greater freedom.

Wow, we've got a veritable Non-Sequitur Festival, from the usual suspects, going here.

Jason decides that my remarking: "Add the contribution Reagan made by defeating the USSR--and the evidence is clear he did".

Calls for this response:

>> Ignoring your recession-dating hand-waving, I'm assuming this is the "we bankrupted the USSR because they couldn't keep up with our military spending" argument".

First, what "recession-dating hand waving", did I engage in? Second, even if I did, what would it have to do with Reagan foreign policy?

Third, nowhere did I make this: "we bankrupted the USSR because they couldn't keep up with our military spending" argument.

This logical fallacy was indulged in by the A/S Guest Lecturer in Logic, who also wrote:

>> 3) The Cold War: It lasted 44 years of which Reagan was Prez only 8. What was everybody doing during the first 36 years, just waiting around for Ronnie to show up and solve everything?

>> And how did he win the war? Forcing them to spend too much? As Jason points out the evidence doesn’t support it

How about all the evidence (some of it from Soviet archives) compiled in handy form in Peter Schweizer's recent, "Reagan's War"? In a nutshell, Reagan spent approximately 40 years (this obsession costing him his first wife, Jane Wyman) thinking about how to defeat Communism, and his presidency allowed him to put his ideas into practice.

Henry Kissinger once famously said that his job was to negotiate the best "second" position he could, in light of the USSR's dominant role in the world. Jimmy Carter let us all know in a speech that he, Cyrus, Warren, et al, would never be so gauche as to have an "inordinate fear of Communism". Reagan changed that outlook 180 degrees: "Mr. Gorbachev, tear down this wall". The evil empire was heading for the "ash-heap of history", according to one of his public statements.

Reagan accomplished this with a confrontational attitude that scared the dickens out of not only some in the Politburo, but many Americans into the bargain. He put Pershing missiles into Europe. He supported Solidarity with sanctions against the Polish government. He used diplomacy to stop Western Europe granting concessions and financing the USSR's expansion with hard currency loans.

He even got the King of Saudi Arabia to cooperate in flooding the world with cheap oil, thus depriving the Soviet Union of a source of Western currency. Yes, the USSR could not afford to keep up with us, but there was much more he did than simply spend money (to be fair to Carter, even he seemed at the end of his administration to recognize the need to increase defense spending).

So yes, it was pretty much just what GT wrote, Ronnie showed up and solved everything (some 35 years after Truman left office).

I also note the complete lack of any substantive comment on my analysis of the CBO data that GT was using to prove Reagan era tax policy cost the Treasury revenue. The scorecard reads, Years of below 18% of GDP, Reagan…50%. Same figure,in the 19 years prior to Reagan…58%.

And I'm going to end with a doozy of a contradiction, GT wrote:

>> …it was Volcker’s rate increases that mainly created the recession, plus oil price hikes.

Yet when someone else wrote:

>> One thing that gets glossed quite a bit when discussing 80 economic performance is that fact that the price of oil collapsed in the early 80's.

Then GT tells him that he's right!

Which is doubly amusing when we realize that the reason oil prices began to decline is that Ronald Reagan's very first official act was to deregulate the price of gasoline (and later convincing Saudi Arabia to take a better look at their cards). Another of example of Ronnie showing up and reversing perverse behavior of prior administrations.

RE: Illustrating Reagan's success in the Cold war

What Patrick said defines the generalization I made, GT. I truly doubt that Reagan simply happened into be in office when the Red horse fell flat on its face. Well stated, Patrick.

Incidentally, I bought Schweizer's book for my father this past Christmas. I ought to buy one myself and fit fact to impression.

One of the reasons the Cold War lasted so long was that the CIA long insisted that Soviet defense spending wasn't prohibitively high. And certainly Gorbachev had no reason to eliminate the fallacy. There were analysts in the early 60's who noticed this but were always overruled by the Yale crowd. Once it was put to the test the Soviet Union folded up and faded away in barely a decade.

Those before Reagan were engaging in Détente - the sort of delusional engagements not unlike the painfully naive 1994 diplomacy conducted with North Korea. Reagan abruptly ended the Soviets' game of buying time through disingenuous bargaining.

Like Reagan himself, who engaged in lots of arms-control negotiations, right?

He put Pershing missiles into Europe. He supported Solidarity with sanctions against the Polish government. He used diplomacy to stop Western Europe granting concessions and financing the USSR's expansion with hard currency loans.

Oh, ok, I haven't seen these before; everyone uses the "bankrupted through military spending" argument.

Out of this list, only ending hard currency loans and the collapse of oil prices would have caused/hastened the collapse. Does he have hard numbers in there on the relative size of these, or is it just a general argument? I can't find much online.

Which is doubly amusing when we realize that the reason oil prices began to decline is that Ronald Reagan's very first official act was to deregulate the price of gasoline

Explain to me again how removing price caps results in lower prices? Maybe convincing the Saudis worked, but getting rid of price controls wouldn't.

First, what "recession-dating hand waving", did I engage in?

For one thing, you got the years the cuts took effect wrong; for another, there's business cycle effects that are hard to factor out. For example, the first year the 1981 tax cut was effective was 1982 revenue; the 1982 tax increase took effect in 1983, etc. Reagan also dropped corporate income tax rates, and actually increased excise taxes, so lets stick to income taxes. For example, using your analysis on the correct dates, ignoring business cycle effects, produces the following:

With the victory of Ronald Reagan came the antidote to "bracket creep", in the form of the Kemp-Roth rate reductions and indexing of brackets for inflation. But note the response of revenues: In 1981, with a 5% across the board rate reduction, revenues jump to 19.6% of GDP--higher than in any previous year except the Tax Surcharge year of 1969.

The 1981 tax cut didn't take effect in calender year 1982, so the 1981 revenue jump didn't have a thing to do with it; I'd imagine it was a no-inflation indexing result. Income tax rates were the same from 1982 through 1986; let's look at what happened:

Revenue dropped .1% of GDP in 82, .8% in 83, .6% in 84, increased .3% in 85, and dropped .2% in 86. A summary is "income tax receipts dropped from 1982 to 1986, the years when the 1981 Reagan rate cut was the last change, by 1.4% of GDP." Now a rejoinder is that the incentive effect of the tax cuts may have caused a drop in % of GDP, but they upped GDP growth, which isn't included in that statistic. A problem is that growth wasn't gangbusters in those years, either; from economagic:

1982 -.2285%
1983 4.3293%
1984 7.2632%
1985 3.8491%
1986 3.4174%

That's 3.6% a year, about trendline. Oh yes, the level at which the top rate was imposed dropped in 82 and raised in 84/85/86, which had countereffects.

Moving forward, the 1986 tax cut closed a lot of loopholes in addition to the income tax cuts; again, focusing just on income taxes:

In 1987 and 1988 top rates were cut, although the EITC and bottom rate increase to 15% complicate things. The level at which the top rate was imposed dropped in 87 and 88, too. Furthermore, I have no idea what the loophole closing worked out like; how much did that increase individual taxes?

Anyway, Income tax revenue increased by .5% of GDP in 87, dropped by .4% in 88, increased by increased by .2% in 89, and dropped by .1% in 1990. A summary is "income tax receipts increased from 1987 to 1990, the years when the 1986 tax reform was the last change, by .1% of GDP." Economic growth in these years was the same as above, about 3.5%.

So there you have it: before attemping business cycle adjustments, the 1981 tax cut really dropped income tax revenue as a % of GDP, while the 1987 tax reform had no effect. This is all kind of irrelevant, of course; the two major claimed benefits of tax cuts are:

1) Increased productivity growth (didn't happen).
2) A one-time increase in output due to incentive effects (no doubt occured, but economists put it at 25% of the tax cut. Actually, no one in favor of the cuts ever claims this, but it's something good the cuts do.)

Oh, something else I forget: deficit-financed tax cuts don't change the size of government, they only change the incidence of who pays for it. Therefore, the conservative mechanism "deficit-financed tax cuts increase growth" thing should work as:

1) Taxes are cut for the rich.
2) The cuts are made up for by bond issues.
3) Bonds redistribute the net incidence of taxation away from those that invest.
4) Less taxation on those that invest results in more investment.
5) More investment results in higher growth.

Mind you, there actually wasn't higher growth, so I think the problem in this linkage is 3). I can't find anything on google for the incidence of "taxation through bonds"; anyone?

> As for your box you would have to ask yourself why taxes did not grow when GDP doubled. Did the taxable base decrease? Did the tax rates drop?

Actually, I don't have to ask those sorts of questions, as tax revenue as a fraction of GDP changes often even when tax rates don't change. And, we see changes/stability in the tax revenue that are counter to the changes in rates.

In other words, things other than tax rates affect tax revenue. Therefore, fraction of GDB is not the right way to measure tax.

Andy,

So long as you understand that nobody, and I mean nobody, seriously pretends that the Reagan tax cut paid for itself the rest is irrelevant.

If you want to compare times series the way you do, be my guest.

Jason, those are stellar growth years. When the economy was growing at that rate in the late nineties, we were worried about overheating. Correctly as it turns out.

In other words, things other than tax rates affect tax revenue. Therefore, fraction of GDB is not the right way to measure tax.

Over the short run, yes, but over the long run it'd all even out, wouldn't you think?

Jane: Huh? What are you talking about?

Nice Site!

Nice Site!

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