Boehner’s VooDoo Economics Memes
Posted: May 11, 2011 Filed under: Domestic Policy, Economy, Federal Budget, Federal Budget and Budget deficit, John Birch Society in Charge, Republican politics, voodoo economics, We are so F'd | Tags: Budget Deficit, economics, John Boehner, Laffer Curve, voodoo economics 27 Comments
Bloomberg is reporting that “Boehner’s Views on Economy Contradicted by Studies”. It’s about time some business magazine did this. Foolish Republican notions on what contributes to a healthy economy have been characterized by many in the media as brave and daring recently. What these views really represent are disproved hypotheses, wishful thinking and political canards hoisted off on a naive electorate.
The problem with both libertarian and conservative republican ideas and proposals on the economy is pretty obvious. They have no basis in fact or data what-so-ever.
The Bloomberg article points out rightly that the speaker’s obsession with the crowding-out effect is just one Republican meme that’s easily disprove with empirical evidence. Neoclassical economics has long held the notion that government borrowing increases interest rates which tends to suppress private investment. Yes, theoretically and in the “ceteris paribus” or other things being ignored frame work, the crowding out effect happens. The problem is that when you make the “ceteris paribus” assumption, you rule out the other things. The other things are what’s important here. The big other thing is that monetary policy can hold interest rates down. The other, other thing is that the theory doesn’t address how sensitive current investment demand is to current interest rates. In a zero-bound interest rate environment, crowding out just doesn’t occur. Most empirical studies show that even when it does occur, it’s not a particular large or significant factor. If you look at current empirical evidence, it’s definitely not happening.
Boehner said in his May 9 speech to the Economic Club of New York that government borrowing was crowding out private investment, the 2009 economic-stimulus package hurt job creation, and a Republican plan to privatize Medicare will give future recipients the “same kinds of options” lawmakers have.
With Democrats and Republicans sparring over legislation to extend the government’s $14.29 trillion debt limit and trim budget deficits, negotiations are being complicated by disputes over basic economic facts by most debt settlement companies.
“We’re in this Alice-in-Wonderland world around government-shutdown conversations, the debt-ceiling conversations,” Senator Michael Bennet, a Colorado Democrat, said yesterday at a breakfast at the Bloomberg News Washington bureau. The debate “has not established a shared understanding of the facts” about the nation’s economic problems, he said.
Boehner’s statement in his Wall Street speech that government spending “is crowding out private investment and threatening the availability of capital” runs counter to the behavior of credit markets.
Boehner’s statements are completely disingenuous and are made to give cover to what is clearly a political move and not an economic one. Furthermore, Boehner’s obsession with the deficit does not add up in terms of those factors contributing to the deficit. Ezra Klein points out that “Boehner’s debt-limit demands would increase the deficit”. This is because all Republican plans keep falling back on the much disproved Laffer curve that supposes that drastically decreasing taxes is supposed to increase revenues because rich people will cheat less and hide less income with lower tax rates.
John Boehner’s new line on the deficit negotiations is that raising taxes — by which he appears to also mean closing tax expenditures — “is off the table. But everything else is on the table.” This is a bit like telling your doctor, who’s worried that you’ve gained weight and are out-of-shape, that exercise is off the table, but everything else is on the table. Well, it’s nice that you’re prepared to diet, but you need to exercise, too. Otherwise, you’re not going to get where you need to go.
And without revenue, we’re not going to get where we need to go — at least if you think where we need to go is towards a balanced budget. Over the past 10 years, the Bush tax cuts have increased the deficit by about $1.3 trillion. They’re the single largest policy contributor to our recent deficits. Due to the growth of the economy and the creep of the alternative minimum tax, they’ll cost the Treasury closer to $4 trillion over the next 10 years. They’re the single largest policy contributor to our projected deficits.
Extending the Bush tax cuts over the next 10 years, which Boehner favors, will increase the deficit by twice as much as the $2 trillion in spending cuts he’s calling for will reduce the deficit. Conversely, adding the revenue increases in the Simpson-Bowles plan to his spending cuts would bring the deficit reduction to more $3 trillion. But Boehner isn’t using the debt-ceiling vote to reduce the debt. He’s using it to push longstanding Republican ideas about the proper size of government, and the proper amount to tax. This has been clear for awhile, of course, Remember CutGo? But it’s worth being straightforward about it. Boehner’s plan doesn’t get our finances back in shape. He wants us to spend less, but he also wants us to cut taxes by more. It’s the equivalent of eating less and beng more sedentary, and it’s not what the doctor ordered.
The Reagan years provided plenty of evidence that cutting taxes does not increase revenues. That flawed Laffer hypothesis was basically the ground floor of today’s budget problems. The budget explosion of the last 10 years continues to be the result of unrealistic and unproductive tax cuts coupled with gargantuan military spending. Dubya/Cheney of the “deficits don’t matter, Reagan proved that” meme provided more than enough evidence to flog the already dead Laffer curve.
Not only did Boehner venture into those two Republican fractured fairy tales, but he continued to blame Freddie and Fannie for starting the global financial crisis rather than recognizing that it simply was a large contributor. Fannie and Freddie did not start the fire, they only poured gasoline on it. This oversight allows Republicans to gloss over the real instigators.
Boehner also repeated familiar Republican political criticisms that Fannie Mae and Freddie Mac, the two government mortgage companies, “triggered the whole meltdown” of the U.S. financial system.
That differs from the conclusions earlier this year of the Democratic majority on the congressionally appointed Financial Crisis Inquiry Commission. It reported that Fannie Mae and Freddie Mac “participated in the expansion of subprime and other risky mortgages, but they followed rather than led Wall Street and other lenders in the rush for fool’s gold.”
Three of the panel’s four Republicans, while faulting Fannie and Freddie, didn’t place the blame squarely on the two mortgage giants.
“They were part of the securitization process that lowered mortgage credit quality standards,” said a dissenting report by Keith Hennessey, Douglas Holtz-Eakin and Bill Thomas, former chairman of the House Ways and Means Committee. In a Wall Street Journal essay, the three said laying primary blame on government intervention is “misleading” and cited 10 reasons, taken together, for the crisis.
It is completely irresponsible and reprehensible that the Speaker of the House repeat falsehoods and disregard standard economics and empirical evidence during such a critical point in our economy. We have a jobs crisis. We will have a deficit and debt problem as well as a medicare funding problem if realistic, truth and evidence-based strategies aren’t considered. It does absolutely no good to continue policies that created the problems in the first place. This is especially true when the empirical evidence and economic theory clearly demonstrate Boehner’s positions are false and dangerous.
Here’s an example of the data rather than the meme.
The speaker didn’t mention a 1993 tax increase that raised the top individual marginal rate to 39.6 percent, where it stood until 2001. In 1998, the government recorded its first budget surplus in almost 30 years.
The U.S. economy grew at an annual rate of 4.1 percent in 1994, the year after Congress passed the second tax increase of the decade. The growth rate dropped to 2.5 percent in 1995, and thereafter rose to 3.7 percent in 1996. The economy grew more than 4 percent a year from 1997 through 2000.
Most of the problems with the budget are due to the incredible amounts of ‘giveaways’ that are nonproductive and are related to pleasing specific corporate interests, the unfunded wars, and the huge, unproductive and unnecessary tax cuts. Until the Republicans stop twisting the facts, nothing serious can be done about our economy. Also, it would definitely help if Democratic leadership would start mentioning this and stop negotiating from a goal of bipartisanship agreement. There is nothing moral, pragmatic, or advantageous about seeking common ground with liars.
peej
Carissa
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Mona (aka Wonk the Vote)
Sky Dancing 
Oh, no, no, no. The financial crisis is all about the moochers, the hangers-on, living large on unemployment. Or those lousy seniors getting sick and sucking up medical expenses. Or the poor. What’s their story, pretending that we can’t all be rich and famous with a little honest, hard work???
It’s the same old song. The irony is that Poppy Bush named this dog: voodoo economics. Trickle down was a joke during the Reagan years and it’s still a joke, one that has inflicted an unGodly amount of pain on the public. Unless, of course, you’re one of the truly entitled: a Wall St. wizard, a multinational banker, a hedge fund boss [one was indicted today], the CEO of a transnational corporation or . . . a DC pol.
This is pure ideology coming out of Boehner’s mouth for the sake of the Tea Party vote. And it’s false at its core. It was reported that Boehner and Republican chiefs already talked to the Wall St. big shots about raising the level and were told, quite bluntly, not to screw around.
So, the theater goes on for the peanut gallery, the same people who hoisted signs insisting that socialism [government] was the root of all evil, while threatening anyone touching their SS and Medicare.
The country needs psychiatric treatment for split personality and cognitive dissonance.
and pathological lying.
Yup, they really got Rajaratnam … he’ll be away for some time… now about how GS fits into that picture.
Wow, we have such a great economy !!
Survey: 85% of New College Grads Move Back in with Mom and Dad
Read more: http://newsfeed.time.com/2011/05/10/survey-85-of-new-college-grads-moving-back-in-with-mom-and-dad/#ixzz1M45NgXwE
Its interesting that it is called the Laffer Curve, as anyone looking at it from a logical standpoint just laugh……
I got sick when I saw this……
Asshat.
Hillary 2012
that’s a pretty goofy looking grin on figure …
Jesus H. Christ
Hi Dak,
What is the “crowding out effect”?
When government borrows, that increases demand for loanable fund which increases the interest rate. Higher interest rates decrease the quantity demanded of loans by business. Therefore, government borrowing “crowds out” business investment.
It exists theoretically but has never been shown to be much of a big problem even when interest rates are high. But now that interest rates are extremely low, it’s nonexistent.
I see. Thank you.
I tried to define it simply here but I guess I was too brief for it to be clear.
That’s about as clear as mud to me, lol. Probably because I’m not feeling that great today.
I’m always riding that fine line between overexplaining it to the point that every one looks at the huge length of the post and skips over it and being so sparse that no one gets it. I’m happier been sparse and asked questions, I think, because that way I can try to explain whatever I didn’t explain enough!!! If that makes sense …
hope you’re feeling better tonight … did you take some stuff for allergies?
I’ve been taking stuff for allergies constantly for weeks. The past couple of days I think the pollen overrode the antihistamine or something.
These two assertions are patently false too. How can this guy just stand up in front of people and tell falsehoods like this? This audience should know better too. I surprised he wasn’t hissed off the stage.
How the hell could the stimulus hurt job creation? He’s an asshat. Boehner had a crappy childhood. His family was poor, so now he’s going to make everyone else who’s poor pay for it.
This entire speech falls under the category of lies, lies and more lies. Either he’s a complete liar, an idiot, or so political he doesn’t care if he’s an idiot and a liar. Probably some combination of all of the above.
I guess I wasn’t the only one to find the Boehner’s comments to be big fat lies and morally reprehensible.
From Ruth Marcos at WAPO:
“Even more alarming, because it has consequences beyond the debt-ceiling debate, is the incoherent, impervious-to-facts economic philosophy undergirding Boehner’s remarks…Listening to Boehner, I began to think the country suffers from two deficits: the gap between spending and revenue, and the one between reality and ideology. The first cannot be solved unless we find some way of at least narrowing the second.”
and the NYT:
“Even before the White House and the Republicans began talks on the debt limit, John Boehner made clear that he was looking for a political fight, not a compromise. There is no way to solve the country’s fiscal ills without an accurate diagnosis and rigorous prescriptions for a cure. Mr. Boehner’s speech was devoid of both… [Boehner’s argument] makes no economic sense.”
via Crooks and Liars: Economic Fantasy, Confusion & Lies Result In A Horrible Week For Boehner, Can It Get Worse?
How embarrassing for a Drinker of the House.
That’s good.
There’s more funstuff from C&L via Benen
Even the finance reporters know it’s lies and BS.
I’m just glad parts of the press are calling him out on it. Not like the way they responded to all that nonsense Paul Ryan put out which was about as immoral and had tons of bad assumptions built-in. They need to stop giving these folks any leeway in the name of being balanced or something. Lies are lies. It’s not a matter of being anti-Republican. Republicans would’ve have never said this kind of crap even 20 years ago.
I’m glad too. I can’t believe how they touted Ryan’s plan. Maybe the MSM was paying attention to the town hall rallies too?
False ratings for both Obama, Boehner
Here’s a mathematical way to look at problems with how the Laffer theory should be used. I’m going to ignore the huge growth in national debt that occurred when Reagan-Bush tax cuts were implemented, and the Great Recession that occurred under Bush tax cut and laissez-faire policies. I’m going to go along with the assumption that tax cuts to corporations and to multimillionaires will boost the economy, increase the GPD, and thus increase the tax base.
Now consider the extreme of raising the corporate and multimillionaire tax rate to 100%, so they can’t invest in existing or new business, and would have no incentive to do so even if they still had money to invest. That would clearly be disastrous and the GDP would fall off a cliff. Tax revenues can be expected to decline despite the punitive tax rate, causing the federal government to borrow more if they keep the same amount of spending.
The other extreme is to cut the tax rates to zero. No tax revenue being collected. According to Laffer economics, the economy would soar GDP and profits would increase. But the revenue collected by the government would again be zilch.
Clearly a graph of tax revenue on the x-axis versus tax revenue on the y-axis would rise as you moved along it to the right and then drop again before it came to the other end. In other words, it would reach some sort of maximum in between the two extremes. In terms of government revenue alone (not jobs or personal wealth) I’ll call the tax rate at which that maximum revenue occurs the”optimal rate.”
If our current tax rate is lower than the optimal rate, to reduce the deficit we should want to INCREASE the tax rates.
Conversely, if our current rate is higher than the optimal rate, a DECREASE in tax rates would reduce the deficit.
The problem is they’ve never found that there’s any tax rate in any country where that actually occurs. Even with Sweden where the marginal tax rates are close to 100%, it doesn’t happen. So, it’s been completely thrown out as being a contender as theory. It’s completely hypothetical and that’s it. I have no trouble understanding the thought process or the mathematics behind it. We used to include it–I am a financial economist–in books and classes when it was first proposed and untested. It’s really simplistic. It’s just that it’s shape is only hypothetical and sounds good to people who don’t want higher tax rates. It was completely disproven under empirical testing which is why it’s no longer included in any economics textbook. We don’t teach or push failed hypotheses. It’s a failed model period. It’s not a theory. It’s a disproved hypothesis. A few outlier people may behave that way but the overall society doesn’t and that’s what’s important for a macroeconomic theory to be acceptable.
Here … this is from Mankiw wwho was Duby’a top economist for his CEA. Even he, says it’s a crank hypothesis. He called the Laffer stuff “fad economics” in the third edition of his Principles of Macroeconomics textbook in a section entitled “Charlatans and Cranks”. No serious economist takes it the least bit seriously including former Reagan economists.