Friday, December 3, 2010

Republicans demand assistance for the rich; slam door on the unemployed

All indications are that the Obama administration will cave into Republican demands to extend the Bush era tax cuts for the rich, people making over $250,000 a year.
Not only only will this increase the deficit by $700 billion over the next decade, but it will do virtually nothing to promote economic growth since there is no evidence that high income tax cuts result in economic growth.
At the same time, the Republicans stopped Congress from extending unemployment benefits to 2 million Americans who have been unemployed for more than 26 weeks.
Not only is it cruel to deny financial support to American families who have lost their jobs, but it hurts the economy since unemployment benefits are a very effective form of promoting economic growth since the unemployed spend virtually every dollar they receive.
Rather than stand up for the nation's unemployed and for fiscal responsibility, President Obama has announced that he will freeze the pay of federal employees for two years. These public servants earn less than their private sector counterparts. More importantly freezing their pay has virtually no impact on the deficit since employee compensation is a very small component of federal expenditures. And it will actually weaken the economy since it will reduce spending at a time when the lack of demand threatens the very weak recovery.
In a little noticed blog a few weeks ago David Leonhardt, the New York Times economics reporter, asked: Why should we believe that extending the Bush tax cuts will provide a big lift to growth?

Those tax cuts passed in 2001 amid big promises about what they would do for the economy.

What followed?

The decade with the slowest average annual growth since World War II. Amazingly, that statement is true even if you forget about the Great Recession and simply look at 2001-7. (See chart above that is adjusted for inflation)

The competition for slowest growth is not even close, either. Growth from 2001 to 2007 averaged 2.39 percent a year (and growth from 2001 through the third quarter of 2010 averaged 1.66 percent). The decade with the second-worst showing for growth was 1971 to 1980 — the dreaded 1970s — but it still had 3.21 percent average growth.

The picture does not change if you instead look at five-year periods. Here’s a chart ranking five-year periods over the past 50 years, in descending order of average annual growth:

I mean this as a serious question, not a rhetorical one: Given this history, why should we believe that the Bush tax cuts were pro-growth?

Is there good evidence the tax cuts persuaded more people to join the work force (because they would be able to keep more of their income)? Not really. The labor-force participation rate fell in the years after 2001 and has never again approached its record in the year 2000.

Is there evidence that the tax cuts led to a lot of entrepreneurship and innovation? Again, no. The rate at which start-up businesses created jobs fell during the past decade.

The theory for why tax cuts should create growth and jobs is a strong one. When people are allowed to keep more of each dollar they earn, they are likely to work longer and harder. The uncertainty is the magnitude of this effect. With everything else that’s happening in a $15 trillion economy, how large of an effect on growth do tax cuts have?

Every available piece of evidence seems to suggest that the Bush tax cuts did little to lift growth. I have yet to hear a good argument to the contrary, but I’d be fascinated to see another blogger or an economist take a crack at it.
While no one has stepped up to answer Leonhardt's challenge, the Republican demand that the richest Americans be given a budget busting tax break has become a virtual certainty.


Anonymous said...

Income tax revenue during Clinton years was $6 trillion. Under Bush that figure is $8 trillion.

Seems that there must have been some significant increase in economic activity to create this much additional tax for the Government? Especially considering the lower tax rates!!

Y Not said...

Ok, let's raise the income tax on all those who make over $250K per year. That's only fair.

And then let's limit the amount of Public and Private Pensions to $25K per year. We can then redistribute the savings to whatever or whomever needs it the most. And provide Pensions to all who never worked enough to qualify for one. I'm sure the money will be quickly spent and boost the GNP. And, That's only fair.

Better yet, think of all that money sitting idly in Pension plans. Let's immediately redistribute the 78.1 BILLION in the SWIB to the unemployed. That would certainly give the economy a shot in the arm and help reduce the deficit. And, That's only fair.

Let's be leaders. Let's lead by example. TAKE MINE FIRST. It's only fair.

Anonymous said...

Isn't the economic collapse REALLY about the inability of the 1st world countries to use cheap labor from the 3rd world with the same profit ratios and lending interest rates as during the 20th century ?

As the world grows more connected, the 2nd and 3rd worlds are become more savvy, allowing less 1st world profit margins... yes?

the other side of the coin said...

Rosen said: "but it will do virtually nothing to promote economic growth since there is no evidence that high income tax cuts result in economic growth."

No evidence? I think not.

Christina Romer, Obama's out-going Chair of the Council of Economic Advisers:
"The most significant tax cuts to stimulate long-run growth are well known: the 1948 tax cut passed over Truman's veto; the 1964 Kennedy-Johnson tax cut; the 1981 Reagan tax cut; and the 2001 and 2003 Bush tax cuts."
"Tax changes have very large effects: an exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent."
Is that why Obama kicked her to the curb?

Even the high priest of liberal thinkers: Keynes explained that, "taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget."

the other side of the coin said...

"These public servants earn less than their private sector counterparts." Can you document your source? It seems to go against published studies.

Federal employees earn higher average salaries than private-sector workers in more than eight out of 10 occupations, a USA TODAY analysis of federal data finds.

Accountants, nurses, chemists, surveyors, cooks, clerks and janitors are among the wide range of jobs that get paid more on average in the federal government than in the private sector.

Overall, federal workers earned an average salary of $67,691 in 2008 for occupations that exist both in government and the private sector, according to Bureau of Labor Statistics data. The average pay for the same mix of jobs in the private sector was $60,046 in 2008, the most recent data available.

Michael Rosen said...

There is much to respond to.

First, of course income tax receipts were lower during the Clinton years than during the Bush presidency. The economy was $6.4 trillion ($7.4 adjusted for inflation) when Clinton took office and $10.4 trillion and $10 trillion adjusted for inflation when Bush took office. So, even with lower tax receipts aggregate revenue would be greater because economic activity was greater. But that begs the point which is whether the largest tax cut (Bush’s $1.3 trillion tax cut) in history promoted rapid economic growth. The facts are clear that the economy grew more slowly following the largest tax cut in U.S. history than during any other post WWII expansion. Hardly a strong endorsement for low marginal tax rates

2nd, growth is the 1960s was fueled by spending on the War in Vietnam more than by tax cuts. And in any case marginal tax rates in this era were 68.8%, almost double the current top marginal tax rate. Growth following the 1981 Reagan tax cuts was weak in comparison to all previous post WWII recoveries. Savings rates declined and investment in productive capacity was lower than during any other Post WWII recovery. Moreover the national debt tripled from slightly less than $1 trillion to almost $3 trillion.

Cling to your tax cutting dogma if you will. But it is not supported by the nation’s experience with lowering marginal tax rates

The notion that federal workers consistently earn higher salaries than comparable private-sector workers has become an accepted truth. Conservative think tanks, including the Cato Institute, make much of data that does not offer fair comparisons of similar public-sector and private-sector jobs or account for how experience and education affect pay. A pediatrician with a small practice in Des Moines and a doctor at the National Institutes of Health who is leading a team of 50 researchers trying to cure cancer both provide health care, for example, but we shouldn't expect that they be paid the same.
Though some critics question their accuracy, government analyses show that federal employees make on average 24 percent less than their private-sector counterparts. The Congressional Research Service reported in 2009 that private industry pays higher salaries than the government for PhD-level employees in computer science, information science, mathematics, statistics, biological sciences, environmental life sciences, chemistry, economics, and civil, architectural, electrical and computer engineering. In addition, the average private-sector salary in 2010 for a recent college graduate was $48,661. Entry-level federal workers start at $34,075, or $42,209 for candidates with superior academic achievement.
On the other hand, some federal blue-collar and clerical workers are paid more than those in the private sector.

The ongoing debate about federal pay, however, does not address the root problem: The government does not have a pay system flexible enough to recruit the best talent and pay in accordance with the market.

History has taught us that arbitrary, broad hiring and pay freezes don't return significant cost savings. When the Clinton administration cut government jobs, overall federal spending still increased. Reagan's 1981 hiring freeze fell apart when routine exemptions were granted to fill urgent demands, such as for VA doctors or military support personnel.

How much will the government save by cutting 10 percent of the federal workforce - about 200,000 employees - as recommended by the president's deficit commission? If the work of federal employees is simply contracted to the private sector, the savings could be minimal or the move could even cost us more. If government employees are not replaced and their salaries are returned to the Treasury, the government would save at most $20 billion annually, or roughly 0.5 percent of total budget outlays.

Bottom line: We cannot come close to balancing the budget simply by cutting federal staffers or their salaries.