Please turn on JavaScript

Brooks Wilson's Economics Blog: Comments on Lowenstein’s “Stop the Panic

Sunday, August 28, 2011

Comments on Lowenstein’s “Stop the Panic

A friend asked for my thoughts about a Newsweek article by Roger Lowenstein titled “Stop the Panic.  It’s Not 2008.”  I have two fundamental disputes with his article.  First, he paints a picture of the President as the Capitan at the helm of the ship of the economy guiding it in good times as well as bad.  Second, Lowenstein assumes that the Capitan’s effective tools are Keynesian, an assumption disputed by a great deal of economic literature (see for example Robert Barro, “Keynesian Economics vs. Regular Economics”), and more problematic, these tools are so powerful that they can calm the raging storm.

As the narrative builds, the analogy worsens.  Bush (43) was really Ahab and his Pequod’s Republican crew were monomaniacally hunting their Great White Whale of “no new taxes” while the economy was expanding and the population aging.  Their obsession tore the sails, cracked the mast and depleted the weapons leaving the ship’s next Capitan, Obama, dead in the water and unable to fight the Great Recession and its hangover of slow growth.  Lowenstein fairly notes Obama’s obsession with raising taxes on the rich, but his rhetorical tongue lashing is largely reserved for Bush (43).   

To make his case, Lowenstein describes government revenues and outlays as parallel lines with revenues slightly below outlays.  These lines are depicted as the orange dot-dash line and the green dot-dash line in the graph.  Both are measured as a percentage of GPD and are the average level of revenues and outlays from 1971 through 2010.  The average budget deficit as a percentage of GPD is the distance between the two lines.  Noting that the budget was balanced in the last year of the Clinton administration, Lowenstein writes
But since the Bush tax cuts went into effect, the lines have wildly diverged. Spending has soared to 25 percent of GDP. And, alarmingly, tax receipts have crashed to 15 percent of GDP, the lowest level since World War II.

Lowenstein is cherry picking data.  To demonstrate this point, I have included a graph depicting actual revenues (orange line) and outlays (green line) of the federal government between 1971 and 2010.  Recessions are soon as yellow rectangles.  During each of the six recessions since 1971, outlays soared as revenues plunged.  The large deficit he sites is not largely the result of the Bush tax cuts but of the Great Recession.

Likewise, Lowenstein exaggerates the impact of the tax cuts on the national debt.  The debt did increase under Bush from 34.7%, the last full year that Clinton served as President to 36.2% in 2007.  The explosion of debt was due more to the response to the financial crisis and its byproduct, the Great Recession, than the Bush tax cuts. 

I have a different vision of the economy that I believe better fits the data.  The President is the chief forest ranger of a country with land that is both publically and privately held.  Everybody manages their land as they see fit.  Public lands run by the forest rangers can be improved by good practices or degraded by bad but the changes, even if they have some immediate effect, take years and sometimes decades to be generally noticeable.  Fires are the chief threat to prosperity making fire management particularly important.  Fires can be set by private land owners, bad policy or outside “shocks” like lightning strikes and they can affect both public and private land.  The long lag between policy implementation and effect makes it hard to disentangle which practices are productive and which are not.  Rather than focus on rewarding chief rangers that implement good policy voters sadly reward those that “boldly” respond to fires.  Bold action, more often than not, does little to reduce current fires and encourages the growth of scrub brush on the forest floor. 

A final point can be made with the graph.  Increasing or decreasing outlays as a percentage of GDP seem to have little to do with the President’s party affiliation.  Outlays as a percentage of GDP rose under Nixon, Ford and Carter and then fell under Reagan, Bush (41) and Clinton, only to rise under Bush (43) and Obama.  One might also ask, given that Bush (43) borrowed many advisors from his father’s administration, and Obama from Clinton, why the earlier administrations had more success that the latter. 

What types of policies have little short-run impact but lead to long-run growth?  Sustainable low levels of taxation, low levels of transfer payments, a good legal system that protects property rights and honors contracts and monetary policy that relies on rules rather than case-by-case decisions.  Bad policy does the opposite.  Certainly, neither party has a monopoly on good policy or bad. 

Lowenstein calls on Obama to run a campaign promising to raise taxes on all.  This is an honest position.  His vision of American would mold us into something like a European social welfare state.  The CBO projections of revenues and outlays as percentages of GDP for 2011 through 2021 are shown in the graph as dashed lines.  Outlays average 23.5% of GDP and revenues, 19.3%.  Debt held by the public as a percentage of GDP stabilizes at reaches 75% of GDP in 2013 and rises by less than one percent a year thereafter but the assumptions need to realize these results are heroic.  In addition to the end of the Bush tax cuts, they include sharp reductions in Medicare’s payment rate for physicians; the end of the extension of unemployment compensation, payroll and the alternative minimum tax; and increases in discretionary spending limited to the rate of inflation.  I wouldn’t bet on all of these assumptions coming to fruition.

If Obama ran such a campaign, Republicans should match it and campaign on lowering taxes in exchange for fundamental reform to entitlement programs.  Such a Republican campaign would match my preference for an America with a small government in which individuals are primarily responsible for their retirement and health care.  I believe that Lowenstein and I are likely to be disappointed.

9 comments:

  1. The thought of even raising taxes on small businesses is outrageous. They are paying so much in taxes now that it really isn't worth staying in business. We have small businesses going out of business all over the place and that is the heart of our country. For each small business that closes we lose more jobs and it puts more stress on unemployment. If anything more incentives should be offered for people to keep the small businesses open and push for opening more. I used to hear take care of the small stuff and let the big stuff take care of itself. That doesn't mean ignore the big stuff but don't let the little go away. It would be better to give people jobs instead of them drawing unemployment. Instead of unemployment let them work in the city offices even if it is only sweeping a floor. Better to have people on unemployment working in our city offices than to just hand out a check.

    ReplyDelete
  2. Calin O. Baban said...

    Even though tax cuts may provide a temporary stimulus to an economy in a recession, long term, it may not be beneficial. With every tax cut there will be a tax increase later. When the government decides on a tax cut they will have to raise money elsewhere for the budget short fall. The government ends up having to borrowing money from other countries and or by selling bonds. In turn, lenders will have to be paid back with interest in some form of tax increase. Therefore, I’d rather pay a little more in taxes now than pay a whole lot more.

    ReplyDelete
  3. Both cutting taxes and raising taxes has negative and positive affects. Cutting taxes will help short term but is fatal in the long run. The real question should be "How much should taxes be raised for each social class?" The more money you make, the more you should be taxed. The rich should not be the only class to be taxed.

    ReplyDelete
  4. Robbie Thompson31/8/11 4:24 PM

    Both cutting taxes and raising taxes has negative and positive affects. Cutting taxes will help short term but is fatal in the long run. The real question should be "How much should taxes be raised for each social class?" The more money you make, the more you should be taxed. The rich should not be the only class to be taxed.

    ReplyDelete
  5. I would think that for the short run, in an effort to help the lagging economy grow you would want low tax rates and would not want to cut spending. That, however, would add to the deficit, but might help the private sector catch its breath and beging spending again. In the long run, however, there would need to be an effort to reduce the deficit. With the Baby Boomer generation retiring, the easy way to do this would be to raise the government funded retirment age on programs such as Social Security and Medicare by 3 years. This can be done by raising it 1 year every 5 years (so starting next year you could raise it 1 year, 5 years later raise it another year and then 5 years later raise it another year). Then you could provide a Medicare voucher until the age of 70 and at the age of 70 someone who had paid into the Medicare system would enjoy full benefits until they die (the average life expectancy is about 78 right now so that would be 8 years of full benefits). So essentially, someone retiring next year would be able to retire at 63, recieve a voucher to purchase private insurane on the private market until they are 70 and enjoy full coverage from 70 and beyond. This would do quite a bit as far as the long term deficit deficit is concerned. For social security you could privatize at least a portion of it and eventually faze out the current system of a dollar goes in by a worker and a company today and is taken out by a retired person today to eventually having it be an actual retirement account where when you and your company put a dollar in today that is placed in an account that is invested in a product of your choosing and is managed until you retire. As far as taxes go, I think that they should remain low for the next couple of years, but once the economy recovers they should be raised on everyone, yes, even me, until the deficit is paid off, with the understanding that these tax increases are not inteded for new government programs, but for deficit reduction. Once the deficit is at 0 then there can begin a debate of reducing taxes or increasing spending, but that will not be for quite a while. Sounds easy enough and under this plan pretty much everyone will feel the pinch from retirees who have reduced benefits to workers who have higher taxes so everyone shares the burden, which is to say, there is just enough in there to make everyone unhappy, wich is why it would never happen.

    ReplyDelete
  6. Hardin, Chris1/9/11 12:11 AM

    While Lowenstein raises a lot of valid points with the Bush tax policies, many people tend to forget the fact that when Clinton left office we had a balanced budget, till the republicans took control of the house, things went south, we cant keep on trying to put a band-aid on a gunshot wound a balanced budget is the only way for us to get out of this problem.

    ReplyDelete
  7. Randy Novak1/9/11 1:22 PM

    There is a simple analogy that seems to explain the common mind set. It is the "haves vs have-nots". It is easy being on one side of the road and saying "the rich have a lot of money, let them fort the bill for the deficit." While I agree there may be some un-realistic tax breaks for the individuals in the top percent of money makers, increasing taxes for them may be the quick and easy answer, but I don't think it will fix the deficit. We have all read where the government has spent an outrageous amount of money, like $240.00 for a hammer, for example. That is where the problem lies, it is in government spending. It a past class, sociology I believe, we had an assignment to find the most outrageous grants or the like handed out. There was a government grant for $182,000 (I forget the exact total)given to a group to conduct a study that showed "rich people own more expensive cars than poor people." Really? That is just one example of hundreds that would amaze you. This is where I think, as a country we need to start fixing the deficit, or at least a good starting point. In addition, who do you think forts the bill every time the president heads off to Germany, Brazil or Hawaii for "some rest and relaxation."

    ReplyDelete
  8. Maria Lozano

    I'm not sure what would be the best answer. Many argue that the rich should get taxed more than the poor. But what is the specefication of the meaning a rich person a doctor, a lawyer, etc.. For example a doctor who is on its own at a solo practice not working for a hospital what bracket would they be consider. Rich rich because of the title. They as well have to pay a large amount of taxes, plus the everyday expenses of keeping the practice going: employee wages, vaccines that are given, cleaning, supply and etc... On the part the doctor would disagree if they taxed more. But if we look at in the aspect of a regular Joe why should they be taxed more if they are not making enough to provide shelter and food for the family. They might state no higher taxes for them. So at the end of the day who really need's to be taxes the rich or the poor. There are many opinions on how to fix the problem but so far no one in the government have a clue to resolve it. Not even our current president.

    ReplyDelete
  9. Katelynn Cozad1/9/11 10:26 PM

    To me it's six one way and a half dozen the other. I think that raising and lowering taxes has a negative and positive effect all at the same time, it's just a matter of who is going to benefit more and who isn't. Right now its the middle class and and the small businesses that bear the brunt of it all. We pay the most while the lower class and the upper class have the most benefit. But like anonymous said above me who is to say what an upper class income constitutes. Where is the line drawn between upper and middle, and middle and lower. Would it make more sense for everyone to pay the same percentage of their income? Or could the percentage of taxes paid be based on increments. For example if you make between this x amount and x amount you pay this percentage and so on and so fourth. I think that it is somewhat like that now, but in no way do I think that the amounts paid are fair. Aside from that the small businesses are what keeps our economy going. Just like foreigners that come to the US and start a business getting tax cuts, I think that we should focus on a person who is starting a small business and give them more tax cuts, to help them get started and to maybe retain a little more money to keep the business going if its slow to start. Does that make sense? I hear stories all the time about a person coming in from another country that starts a business and gets major tax cuts for so many years and then turning around and selling the business to a family member who in turn gets the tax cuts again because they came from another country to start or buy in to a business. I think the primary focus of cuts needs to be on American's small businesses and the middle class. And please don't get me started on government funded programs. I heard a story on the news not to long ago about a study that was done on billboard advertising. We paid a team of people to study billboards in other countries. These people flew first class and stayed in five-star hotels and ate at fancy shmancy restaurants all on our dime. I think the program is being phased out now that it was made public, but still, how long was it in effect and how much money was wasted on this.....millions! I think the American people should be allowed to vote or have some say in what our government funds when it comes to programs like that. It's wasteful and that was money that could have been used better elsewhere

    ReplyDelete