Tuesday, August 23, 2011

Bush's Stimulus Package

I have a conservative friend who got all excited when he found out that federal revenues grew during the BushII admin "even with the tax cuts."

Like all good conservatives, he seems to think that the fact that Bush also significantly increased federal spending, thus stimulating the economy, is a fact better left unmentioned and unrecognized. In fact, he called bringing up the increased spending and the stimulus effect of it "twisting the logic."

So, I charted growth in[1] revenues as a percentage of GDP from 93-2008. I also through in a line of GDP growth during those years. which is pretty much a steady increase. (The slopes of the 2 curves don't necessarily match; the significant fact on GDP here is that it pretty steadily grew until Bush's Recession hit)

Through the Clinton years, revenues as a percent of GDP grew at a stead.

Of course, when Bush cut taxes, the revenues as a percent of GDP dropped.

If you assume revenue growth would have pretty much continued on the Clinton era path (as projected with the green line in the graph) you can see just how much revenue we lost because of the Bush tax cuts.



























[1] On edit, per correction in first comment made.

12 comments:

  1. Okay, I’m reading and re-reading this, hoping to make some sense of it—a task that’s actually harder than it looks. It’s almost as if you put a bunch of economic terms into a blender and poured out a delicious financial smoothie. Unfortunately, economic forces don’t mix as well as economic words.

    If we could talk in person, I’d ask questions and get answers. But since you don’t really answer questions, I’ll just let these queries hang in cyberspace (unless you’re up to the challenge, but I bet you’re not):
    1. Are you sure you charted GROWTH IN REVENUE as a percent of GDP? I ask because I suspect you charted REVENUE as a percent of GDP, not GROWTH IN REVENUE, which would be the change in revenue from year to year.
    2. You state: “GDP growth was steady until Bush’s recession”. By Bush’s recession, I assume you mean 2008. But if you do, it’s not true to say that GDP growth was steady from 1993-2007, as there was a big dip in GDP growth from 2000-2001, according to your chart. So what year was Bush’s recession?
    3. Which Bush tax cut do you refer to? The 2001 cuts or the 2003 cuts? According to your chart, revenues dropped in 2001, but increased in 2003. So how did that happen?
    4. Further, if you accept your premise that tax cuts reduce revenue, the increase in revenue in 2003 is even more amazing, because that tax cut was nearly 3 times as large as the 2001 tax cut. Again, how did that happen?
    SLC

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  2. >>But since you don’t really answer questions...

    That is your last bite of the apple. *

    = = =
    >>1. Are you sure you charted GROWTH IN REVENUE as a percent of GDP?

    Good catch - the chart states it correctly, the text was wrong


    >>there was a big dip in GDP growth from 2000-2001, according to your chart.

    We're one to one. The line at the top is GDP -- the line on the chart itself is Revenue as a percentage of GDP, as you noted


    >>According to your chart, revenues dropped in 2001, but increased in 2003. So how did that happen?

    Bush was ramping up for his invasion of Iraq and that increased spending (among others) was an economic stimulus which lead to a growth of revenue.

    It seems as if today's conservatives are allergic to the economic reality that increased spending stimulates an economy and directly leads to both growth of GDP and growth of tax revenues. (Except when they want the public to foot the bill for a sports stadium or some other publicly financed boondoggle for the elite. Then they love to point to the stimulative effect of spending borrowed money.)


    >>4. Further, if you accept your premise that tax cuts reduce revenue,

    Premise? LOL. Taxes are revenue. Cut revenue (cut taxes) and it isn't a _premise_ that revenue goes down.

    Cutting revenues leads to, ah, a cut in revenues.

    Are you perhaps thinking the Laffer Curve** hypothesis is an economic fact? That cutting taxes leads to economic growth and revenue goes up as a result of that theoretical growth?

    = = = =
    * Footnotes are in the next comment

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  3. Footnotes to the previous message (which appears below, of course):

    Two points. First: The assertion I don't answer your questions is false. I don't answer them all, because (i) some are not worth the time and (ii) I was crunched with projects last week and your comments and questions didn't make it to the top of the to do list

    Second. This is my blog, my "house." One house rule is that gratuitous insults are discouraged, continuing the same is grounds for deletion of messages.


    ** "the Laffer curve is a _theoretical_ representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the _concept_ of taxable income elasticity.... The curve is constructed by thought experiment...."

    "Laffer presented the curve as _a pedagogical device_ to show that, _in some circumstances, a reduction in tax rates will actually increase government revenue.... In 2007, Laffer said that the curve should not be the sole basis for raising or lowering taxes." http://en.wikipedia.org/wiki/Laffer_curve

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  4. Your comment: The assertion I don't answer your questions is false. I don't answer them all, because (i) some are not worth the time and (ii) I was crunched with projects last week and your comments and questions didn't make it to the top of the to do list.

    So in other words, you’re saying you answered all my questions, but then you explain why you didn't answer all my questions. That sounds eerily similar to your "the economy is better, but still sucks for people". I’ll give you the same advice I give my students: reread your work aloud and think about what you’re saying before you hand it in.

    So here’s a question: Do you have economic training? A degree, self-taught, correspondence course, anything at all?

    And here’s a thought for you to ponder: Are you familiar with the basic concepts of quantum mechanics? The principle I’m thinking of is that observation of the quantum world is nearly impossible because observation changes whatever is observed. Can you understand that an economy is the same way? Economies are forever changing systems—you can’t merely introduce a new element (such as lower or higher taxes) without changing the economy itself. Economies are not described by such simple equations as “An Increase in Tax rates equals an increase in revenue”. That’s like saying the photon will go through one slit. We all know it doesn't. SLC

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  5. 8/26 Response part 1

    >>Your comment: The assertion I don't answer your questions is false. I don't answer them all, because (i) some are not worth the time and (ii) I was crunched with projects last week and your comments and questions didn't make it to the top of the to do list.

    >>So in other words, you’re saying you answered all my questions, but then you explain why you didn't answer all my questions.

    At this point, I'm not the least bit surprised you don't understand the difference between "didn't answer all your questions" and "didn't answer your questions."

    The capacity to read is not necessarily the capacity to read accurately.

    >>So here’s a question: Do you have economic training? A degree, self-taught, correspondence course, anything at all?

    As I believe I mentioned to you way back when I was telling you that, unlike your assertion, the fed didn't force any banks to make loans to unqualified borrowers under the CRA, I worked in the banking industry from thew 70s to 90s. That doesn't make me an economist, but it sure was some pretty good training.

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  6. 8/26 Response Part 2


    Why don't you tell us a little about your background?

    Any degrees? Professional training? Self-taught in areas?

    = = =
    I know less about quantum mechanics than about economics, but I know that your analogy is pretty weak.

    >> The principle I’m thinking of is that observation of the quantum world is nearly impossible because observation changes whatever is observed.

    As I understand it, that is a layman's misinterpretation of quantum theory regarding wavefunction collapse. See, e.g., http://infophilia.blogspot.com/2007/05/quantum-mechanics-for-dummies-2.html

    The theory in Quantum mechanics about the effects of observation describes a fact about the system os sub-atomic particles itself - it doesn't arise from the complexity of sub-atomic particles, as opposed to economics. It is what it is.

    You've confused the QM idea idea that observing the system changes it with the fact that in economics changing the system changes it complex ways.

    The illustration you yourself gave was in no way related to a claim that observing economic systems itself changes them.

    If one is of recognized importance, publishing one's observations may change the system, but the act of observation does not necessarily change them.

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  7. Forbes 
    Yes thats a good point you make--my analogy is weak. I don't think I made the right explanation. So instead of QM, let's try an ecosystem. Any one will do, so how about a tide pool?  Or the wolf population in Minnesota. Or a simple home aquarium?  Or What about a weather system?  Hot and dry vs. Hot and humid. Cool and rainy vs. Cool and sunny.   Pick any one of these that you want. Think about the elements that make up each one. The tide pool has the temperature and salinity of the water plus much more; the wolves have the availability of prey and places for dens and much more; the weather system has the temperature, the humidity, the length of the day--it takes a million tiny little things to make up these systems.  And because they're so complex, predictions are very difficult.  You can't say that the wolf population will increase if you increase the available prey, or accurately predict the future of a tide pool if you change the water temperature--and of course we all know how hard it is to predict the weather. Even if our predictions are 99% accurate, after a year, 365 days, the cumulative accuracy rate is about 3%.  Complex systems simply don't run by simple equations, unless they touch every element of the system-- for example, if you added acid to the tide pool or allowed wholesale human slaughter of wolves.  But maintaining or growing the complex system is very difficult. That's why it's hard to duplicate systems, like zoos try to do, or to save systems like that surrounding now extinct species. 

    The Economy itself is a complex system. Saying that you can change one element of the system and get a desired result belies the complexity and gnarly nature of the system. Physicians discovered this when they tried to solve osteperosis by calcium intake. Simply ingest more calcium and your bones will stay strong, we were told. Only one thing wrong: it didnt work. Now they think vitamin d is the answer. My thought: maybe it is and maybe it isn't. 

    The larger point is that complex systems don't react to simple changes in simple ways. You just can't collect more revenue by demanding more revenue. It's just not that easy. SLC

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  8. SLC, you're arguing that you can't make predictions for complex systems, and yet you have advocated the kinds of changes the right wing has been pushing for at least 30 years. Which of course means you are pointing firmly in opposite directions at one time.

    I'd agree were you to argue that you can't make precise predictions as to the exact range and effect of changes in a complex system, but you can observe the past consequences of similar changes and predict general effects and consequences.

    Of course, we don't need analogies to ecological systems to understand the sorts and varieties of accuracy of economic theories and predictions.

    We can study them directly!

    For example, we know that the real growth in tax revenues following the Reagan tax cuts was far less than the growth of such tax receipts prior to those cuts, and even those anemic growth rates were pumped up by the increase in FICA tax rates over that period.

    We know that the Kennedy tax cuts were followed by some gain in total tax receipts, but again, much of that gain was directly attributable to increase in excise taxes, and that revenues after that short spurt fell flat for a decade.

    And we know that real growth in revenues fell precipitously after Bush's tax cuts.

    And, funny thing, real growth in revenues soared after Clinton's tax increases.

    http://www.econdataus.com/taxcuts.html

    BTW: the predictions made by supply side economists have been consistently off the mark. The predictions made Keynesian economists have had a degree of actual conformity with what has then happened.

    Maybe you aren't aware that predictions by economists have actually been studied and rated. These studies haven't gotten much attention in conservative media, maybe because they put Krugman well above average in predictions and Friedman well below.

    That's gotta hurt if it can get past the denial mechanism of so many on the right these days.

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  9. No, I’m not saying we can’t make predictions in complex systems. I’m saying predictions are extremely difficult. You can make some generalizations and have success with a few prognostications, but coming up with a law that will work in all cases is nearly impossible. It’s called the butterfly effect. When you don’t control all the elements of a system, you simply can’t know what elements are important when. So it's very difficutl to make foolproof predictions. This is why it’s so hard to raise children—different parents can follow the same strategies, yet get different results. If it were so easy to make predictions, the future wouldn’t be unknown. I see all the proofs you put in this post, and while I respect them, let me ask a question: Your contention is that “Cut revenue (cut taxes) and…revenue goes down.” By extension, even though you didn’t say it, increasing tax revenue, ah, increases revenue.

    But the question is, how do you increase revenue? Or how do you cut revenue? By increasing or decreasing tax rates? Or by creating new taxes, or repealing old ones? That is, one choice is “increasing tax rates will increase revenue”, while the other choice is “creating new taxes will increase revenue.”

    Since I don't know which one you meant, I'll respond to the one that's easier first. Then we can address other one, if you like.

    The easier answer is to respond to “increasing tax rates will increase revenue”. If this is true, why is it that top marginal tax rates have ranged from 90% to 28%, but revenue has always remained between 17% and 20% of GDP?

    SLC

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  10. Response Part 1

    >>I’m saying predictions are extremely difficult. You can make some generalizations and have success with a few prognostications, but coming up with a law that will work in all cases is nearly impossible.

    Of course

    >>It’s called the butterfly effect.

    Are you referring to the butterfly effect of chaos theory? I'm finding myself wondering if you've once against glombed onto a "cool" cutting edge concept and are trying to pretend it applies in your analogy, like your doomed attempt to apply quantum theory to economics. I don't know enough about chaos theory to draw a conclusion

    >>The easier answer is to respond to “increasing tax rates will increase revenue”. If this is true, why is it that top marginal tax rates have ranged from 90% to 28%, but revenue has always remained between 17% and 20% of GDP?

    And is there a correlation of the top marginal rate and that percentage range of GDP?

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  11. Response Part 2


    Let's not forget, you keep arguing that this is complex (which it is) and yet conservatives keep asserting simplistic ideas, like "cutting taxes for the richest results in jobs growth."

    Are you rejecting the GOP and right wing economic evaluations as well?

    When we see 2 examples of significant tax cuts and (i) drops in the growth of revenue and (ii) anemic job growth, it seems to me that we can conclude that it is unlikely additional tax cuts will lead to either increased growth in revenues of in jobs.

    Is it 100% certain? Nope, but it seems to me better to make decisions based on historic facts and trends as opposed to insistence on ideological "certainty."

    Especially where predictions based on that ideological typically do not come to fruition.

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  12. So let’s summarize your contribution to this debate. You have:

    1. Said “The economy of 2011 is great but sucks for people.”
    2. Said, “I have answered all your questions except for the ones I haven’t answered.”
    3. Said, “The proof is of the efficacy of stimulus is the 1936-37 economy.”
    4. Said, “Any increase in GDP is due to stimulus.”
    5. Ignored questions you can’t answer, or answered them with a question.
    6. Think that your personal experience in the banking industry can be generalized to the entire housing debacle
    7. Given incorrect figures for the changes in GDP during the 1980s
    8. Admitted you don’t have a degree or even any training in economics


    By contrast:

    1. None of my statements have been contradictory
    2. I’ve given official government figures (http://www.bea.gov/national/)
    3. I’ve always answered your questions directly
    4. I’ve not generalized from my personal experience
    5. And I have a degree in economics.

    We’ll let the readers decide whose credibility is stronger. SLC

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