A Question of Economics

Some of the more interesting conversations on the upcoming fall elections are definitely the ones on the U.S. economy. I watched Ron Paul on AC 360 the other night announce the death of Keynesian Theory. I was sent to a Larry Kudlow (ugh) link by economist Mark Thoma today suggesting that Congress was about to turn free-market because of the teabots. Funny how you don’t read or hear economists say any of these things are good ideas. Probably because Paul and Kudlow are not economists, they can afford to obsess on their wet dreams. They are economic philosophers who like the sound of what they think is possible in the same way that all those Che Guevera wanna-bes quote Marx as a realist. It sounds so romantic! Unfortunately, us less glorious economists actually look at the empirical data and find out what it really means.

I really like what Thoma had to say about these libertarian dreamers and the deep anger steeping in their teabags.

When members of the Tea Party realize that Social Security, Medicare, and other social protections have been tossed over the side to lighten the load and increase profit (well, there is the lifeboat in the captain’s quarters paid for with the money saved on social insurance for the crew, but that’s not for the common passengers), and they find themselves subsequently tossed into the bay themselves and left to tread water amidst the bales of tea — when members of the “keep your government hands off my Medicare” crowd then find themselves unable to stay above water — it will be too late (it’s no accident that Kudlow fails to include Medicare and Social Security in his list of evil government programs). Once the foot soldiers behind this movement realize that the carpet has been pulled out from under them, and they look for scapegoats rather than acknowledging their own complicity in the outcome, it will be as much if not more dangerous than the movement itself.

I’m always amazed at how so many Americans like to work against their own best interest just because something sounds so appealing to them. Let’s take the Bush Tax cuts. Any Republican with a tax burden above one red cent screams they are over taxed and believes removing themselves from the obligation of paying for the wars they started, the jails they filled with stupid drug laws, and the subsidizes to corporations will just return everything back to the inner sanctum of 1958. This is even given the incredible tax differentials between now and 1958 where the top tax bracket was huge. They conveniently forget the tax rates under Ike which included a huge, pay for world war 2 mega surtax.

Here’s Bruce Bartlett, who woke up from the Reagan years to smell the reality at Fiscal Times.

The truth is that there is virtually no evidence in support of the Bush tax cuts as an economic elixir. To the extent that they had any positive effect on growth, it was very, very modest. Their main effect was simply to reduce the government’s revenue, thereby increasing the budget deficit, which all Republicans claim to abhor.

It’s worth remembering where the Bush tax cuts came from in the first place. In 1999, in the midst of one of the biggest economic booms in American history, then Texas Gov. Bush convened a group of Republican economists to draft a tax plan for him. Contrary to Ronald Reagan’s 1981 tax cut, which was a simple across-the-board marginal tax rate reduction, the Bush plan was a hodge-podge of tax gimmicks designed more to win the support of various voting blocs than stimulate growth.

There is nothing more gimmicky than trying to buy votes through tax cuts and if you weren’t convinced by that, be convinced by the fact that one incredibly desperate Democratic Party and President have embraced the tax cut religion for this latest round of ‘stimulus’. No amount of credible analysis says this any of this is a good idea and will achieve the announced results. But still, all you have to do is promise an American citizen one thin dime back in his paycheck and all is right with the empire.

Let me borrow a nice bold sentence from Bartlett, consummate Reagan adviser.

It’s hard even to find Republican
economists who will defend Bush’s policies.

Then, the deal is why are both parties embracing the idea of extending these tax cuts? Because it’s easy to convince voters they are over-taxed despite all evidence to the contrary. I’ve said over and over that the one feature of the Bush tax plan that needs to be removed is the favorite treatment of capital gains. You don’t hear anything about letting this bit sunset from Obama or Summers even with the talk of letting the tax rates return to the Clinton years (which are STILL historically low for that century) for the over $250,000 crowd. But why not the capital gains treatment? Is it because it makes good economic sense?

Bartlett gives you some analysis on that too.

In 2003, the economy’s continued weakness caused the White House to propose another tax cut that was more oriented toward supply-side thinking. The key elements were a reduction in the tax rate on capital gains and dividends to 15 percent. The tax cut on dividends was especially large since they had previously been taxed as ordinary income at rates as high as 39.6 percent; capital gains had previously been taxed at a 20 percent maximum rate.

Subsequent research by Federal Reserve economists has found little, if any, impact on growth from the 2003 tax cut. The main effect was to raise dividend payouts. But companies cut back on share repurchases by a similar amount, suggesting that only the form of payouts changed. (See here, here, and here.) Moreover, according to a study by Steven Bank of the UCLA law school, the fact that the dividend tax cut was temporary was a key motivation for higher dividend payouts; had the dividend tax cut been permanent, as the supply-siders favored, the impact probably would have been much less.

My Scooby sense tell me that all this change will do is shift executive pay from cash to stock options and blow some might fine bubbles in some market some where. You even can’t find a Republican economist that thinks any of this worked well, but why take the word of people in the know when you have such well-informed folks as Ron Paul and Larry Kudlow out telling people what they want to hear; no matter how untrue. But then, I don’t have a huge stock portfolio like Summers, Paul, Kudlow, Obama and the rest so their tax cut crusade won’t change my life one little bit. This doesn’t stop them from inferring to people like me, that it will make the economic red sea part, however.

Let’s see, try this one:

Harvard economist Dale Jorgenson, who is highly respected by supply-siders, put it more succinctly. When asked by The New York Times last year to name some positive aspects of Bush’s economic policies, he replied, “I don’t see any redeeming features, unfortunately.”

The reality on the ground is that Reagan was one of the last great Keynesians as was Bill Clinton. Keynesian theory is about as dead as evolutionary theory. Come to think of it, the same group of deniers that denounce Keynesian also consider Darwin’s theory of evolution to be false because they will it to be so through misunderstanding and blind faith.. Neither could be farther from the truth. The only people that believe any of that are fact deniers who live in the world of faith-based realities. In other words, people that choose what they want to believe.

And we let these people have a voice in our biggest decisions? Stephen Hawking may have made God redundant, but Ron Paul will never kill Keynes. No matter how much he wishes on a star. Remember? It was Milton Friedman who said “We’re all Keynesians now.” Even Republican economists, like Republican scientists, can’t deny facts and empirical evidence. So, with all the facts out there on the Bush tax cuts, why does Obama continue supporting tax cut club cult?