Cutting taxes increases prosperity

Originally posted by Melanerpes
your original argument is that the economy didn't really start to grow until the tax cuts were enacted in the early 1980's

now you're arguing that the economy really has NOT been growing much since the early 80's - that it has actually been stagnant because China has been manipulating its currency.

I said wages, not the economy.

Originally posted by Palynka
So...you have more growth when the government has deficits and borrows from abroad? I'm so surprised.

Actually since virtually all of the income growth went to upper income people and really strong economic growth is reliant on increases in the purchasing power of the working and middle class, we didn't have more growth as Reich points out. Trickle down failed.

Originally posted by spruce112358
Wages haven't risen because of foreign competition -- true. But raising our tax rates will not address that situation. We are in the process of creating foreign consumers who will want to buy American products. At which point demand for labor goes up and wages rise again. That is IF we don't tax our entrepreneurs too heavily and start building things th ...[text shortened]... if China will stop manipulating their currency so the Chinese consumers can buy those things.

What American products? Thanks to laissez faire "free trade" policies we've gutted our manufacturing industries.

Originally posted by no1marauder
What American products? Thanks to laissez faire "free trade" policies we've gutted our manufacturing industries.

Weapons. When it comes to killing we're second to none.

Originally posted by bbarr
Do you have any economic data that supports the claim that 'growth', as you use it above, has a high correlation to the median wage (not mean wage) of U.S. citizens, or to their overall financial security, or to their ability to buy a home, send their children to college, afford health care, retire comfortably, and so on? Why should we care about growth if it ...[text shortened]... edia.org/wiki/File:Historical_median_personal_income_by_education_attainment_in_the_US.png

Your question (second time you’ve raised it) goes to what used to be called the “efficiency/equity tradeoff” question (nearly 30 years ago when I was in grad school; here it is put as a “growth/equity tradeoff” ). The broader question is to what extent strictly economic goals (efficiency, growth) become normative (“normative economics” ) in the larger array of competing social goals.

I don’t want to derail that discussion, but there may be areas where that putative tradeoff collapses. For example, here is an interesting recent article: “Inequality, Leverage and Crises”, Kumhoff and Ranciere, September 29, 2010.

federation.ens.fr/ydepot/semin/texte1011/RAN2010INE.pdf

The following are a few “teaser quotes” from the paper:
_________________________________________

Over the last century, the United States has experienced two major crises: 1929 and 2008. Both were preceded by a sharp increase in income and wealth inequality, and by a similarly sharp increase in debt leverage among lower and middle income households. In this paper, we first document these facts, and then show how they can arise endogenously in a theoretical model, as a result of a change in bargaining powers over income of different household groups. As the gainers recycle part of what they gained at the expense of the losers, in the form of loans back to the losers, this does allow the latter to maintain their level of consumption despite the loss in income, but it also endogenously generates financial fragility which eventually leads to a financial crisis.

In our closed economy set-up, the increase in leverage of the bottom 95% is made possible by the re-lending of the increased disposable incomes of the top 5% to the bottom 95%. Increased saving at the top and increased borrowing at the bottom results in consumption inequality increasing significantly less than income inequality. … The rise of poor and middle income household debt leverage generates financial fragility and a higher probability of financial crises. … Because crises are costly, redistribution policies that prevent excess leverage and reduce crisis-risk ex-ante can be more desirable from a macroeconomic stabilization point of view that ex-post policies such as bailouts or debt restructurings.

In this paper we argue that, because increases in household debt leverage, which increase financial fragility, are strongly heterogenous across income groups, heterogeneity in incomes is a key additional feature that should be introduced into models of household debt leverage and financial crises. In 1983, the top 5% exhibited a debt to income ratio of 80% and the bottom 95% a ratio of 60%. Twenty five years later, the situation is dramatically reversed with a ratio of 65% for the top 5% and of 140% for the bottom 95%.

By contrast [to studies that focus on destabilizing political effects of inequality] our channel is much more direct: income inequality generates macroeconomic volatility through the endogenous response of borrowing and saving decisions of different groups of agents and its effects on financial fragility and crisis risk. An important policy conclusion is that redistributive policies can be a useful policy instrument for macroeconomic stability.
_______________________________________

It is, of course, as risky to argue from a single study (in a controversial area) as it is to ascribe any economic crisis to a single cause. From a “post-Keynesian” point of view, perhaps the most recent crisis can be analyzed in terms of a “Minsky scenario”, expanded to include factors as credit availability and Fed policy, principal-agent problems (with asymmetric and impacted information), “originate and distribute” lending polcies, international interconnections, etc., etc.—including income-inequality effects as suggested in the above paper. (Anyway, that’s where I’m spending some of my time recently.)

Cheers.
_______________________________

EDIT: I also found this 2009 paper relating income inequality to economic growth in the U.S.

http://www.terry.uga.edu/economics/docs/spatial_analysis.pdf

The abstract indicates that the study shows “a positive and virtuous cycle of poverty and income inequality reduction, and higher economic growth.”
The author cites some other studies which I need to look at (I have read the Barro, 1999 paper thus far).

I have no idea where these are vis-à-vis the economic “mainstream”—I don’t even know where exactly the economic “mainstream” is these days on this question. (Palynka generously tried to kick-start my revisiting of the discipline a year or so ago, but I was still doing other things; now I am just beginning again.) But there does seem to be some evidence in the available literature suggesting that Spruce is wrong, just in terms of economic growth.

Again, your question is larger.

Originally posted by spruce112358
Wages haven't risen because of foreign competition -- true. But raising our tax rates will not address that situation. We are in the process of creating foreign consumers who will want to buy American products. At which point demand for labor goes up and wages rise again. That is IF we don't tax our entrepreneurs too heavily and start building things th ...[text shortened]... if China will stop manipulating their currency so the Chinese consumers can buy those things.

Here's a crazy thought; rather than waiting for all those Chinese to suddenly start deciding to buy our stuff, why don't we put some of our 30 million un- and under-employed to work and they can buy our stuff?

Originally posted by spruce112358
I said wages, not the economy.

I think this is the whole point that No1 is trying to make.

Even if the economy is growing at an impressive rate, what good is it if the real wages for almost everyone is totally stagnant? So that only the top 10% are benefitting while everyone else is having to go deeper and deeper into debt just to keep from falling behind.

I don't think China can be blamed for all of this. While it has been growing impressively, it is still a very small fraction of the global economy.

Originally posted by no1marauder
I suggest you laugh; that's what idiots do.

You offered no answer to the point that there were many tax brackets and just looking at the top marginal rate is misleading; many of the other brackets had marginal rates exceeding by quite a bit the top rate now. Have someone explain this chart to you: http://www.bus.ucf.edu/ckelliher/tax_50 ...[text shortened]... ges in the US for three decades.

Shaking my head in pity at ya, Spruce.

You claim looking at just the top rate is misleading and then you quote Reich who is drawing correlations based on the top rate?

OUCH! I guess you don’t know what it means to have a consistent argument.

If you don’t like growth figures – look at unemployment figures (http://online.wsj.com/public/resources/documents/JOBSHISTORY09.html). 1953 was a low point in unemployment – but by 1975-1983 unemployment rates were horrible. There were several reasons, but among them was high taxes and bracket creep. Getting rid of high taxes helped reverse the trend (NB. Same thing happened in Britain under Thatcher. France did not lower taxes and unemployment in France has been around 10% ever since. So much for the socialist paradise.)

As for wages dropping when there is competition from lower-priced labor and wars being destructive – if you are going to argue about such obvious points then there isn’t much hope for you ever understanding what is really going on. Sorry.

Originally posted by Melanerpes
I think this is the whole point that No1 is trying to make.

Even if the economy is growing at an impressive rate, what good is it if the real wages for almost everyone is totally stagnant? So that only the top 10% are benefitting while everyone else is having to go deeper and deeper into debt just to keep from falling behind.

I don't think China can ...[text shortened]... hile it has been growing impressively, it is still a very small fraction of the global economy.

No, not just China -- lots of other countries compete with the US on a wage basis -- even Japan did at one time. But China has the dubious distinction of manipulating their currency to make the situation last longer than it should. We shouldn't stand for that.

What the US should have done is cut taxes including corporate taxes as much as possible so that our labor was as cheap relative to other labor as possible and there were as few incentives for businesses to leave as possible.

Combine that with specific tariffs against Chinese goods until they allowed there currency to float -- and we'd be in much better shape today.

Originally posted by spruce112358
You claim looking at just the top rate is misleading and then you quote Reich who is drawing correlations based on the top rate?

OUCH! I guess you don’t know what it means to have a consistent argument.

If you don’t like growth figures – look at unemployment figures (http://online.wsj.com/public/resources/documents/JOBSHISTORY09.html). 1953 was a ...[text shortened]... ous points then there isn’t much hope for you ever understanding what is really going on. Sorry.

In 1975-83, there were two recessions created by sudden increases in the price of oil (due to OPEC). In addition, there was the stubborn inflation problem, and when no one can predict what the prices will be year to year, it can make it very hard to make wise investment decisions and this in turn is a drag on productivity and job creation. That's why the Fed's main goal is to make sure that inflation stays around 2-3% every year.

The other period of unemployment came in the early 80's when the Fed finally figured out how to eliminate the inflation and had the guts to take the radical measures that were needed. It had to sharply reduce the money supply (by raising interest rates to above 20% ). The immediate and predictable effect was a major recession, but the policy did get rid of the inflation and by 1984, it was "morning in America".

Since then, the Fed continued to step in to slow down the economy a bit whenever it perceived that the economy had reached its capacity or was showing "irrational exuberance". And it was doing a pretty good job. (No one notices the umpires until they make a bad call). But then the ump made a bad call. One of the reasons why the current recession happened was because the Fed wrongly assumed that the soaring housing market was not irrationally exuberant and failed to slow things down in time.

Originally posted by spruce112358
No, not just China -- lots of other countries compete with the US on a wage basis -- even Japan did at one time. But China has the dubious distinction of manipulating their currency to make the situation last longer than it should. We shouldn't stand for that.

What the US should have done is cut taxes including corporate taxes as much as possible so ...[text shortened]... se goods until they allowed there currency to float -- and we'd be in much better shape today.

It's easy to blame China for everything. But if you look at e.g. Germany they have much higher labour costs for low-paid workers, higher taxes and no ability to manipulate their currency, and yet a big trade surplus.

Originally posted by no1marauder
Actually since virtually all of the income growth went to upper income people and really strong economic growth is reliant on increases in the purchasing power of the working and middle class, we didn't have more growth as Reich points out. Trickle down failed.

Why are you talking about economic growth, the economy how it is measured and what is in 'it' is too open to manipulation by guvamint. Prosperity is something else, prosperity is based on wealth, wealth needs to be created and one way for that to happen is to stop punishing people for doing precisely that. You like to put people in groups and assign victimhood, guilt or blame. eg wealthy people don't produce so they have to pay. This is incorrect, just as there are wealthy people that don't produce so there are poor people that don't produce. some wealthy people all very good at developing the production of wealth, stop putting hurdles in their way.

Stop punishing people for producing.
Stop punishing people for trading their productive effort.

Originally posted by spruce112358
You claim looking at just the top rate is misleading and then you quote Reich who is drawing correlations based on the top rate?

OUCH! I guess you don’t know what it means to have a consistent argument.

If you don’t like growth figures – look at unemployment figures (http://online.wsj.com/public/resources/documents/JOBSHISTORY09.html). 1953 was a ...[text shortened]... ous points then there isn’t much hope for you ever understanding what is really going on. Sorry.

Part of your argument about letting taxes rise for those with yearly incomes above $250,000 was that historically the top rate only applied to those with income in constant 2010 dollars well above that level. It is a refutation of the relevance of that claim to point out that while this might be true, even at lower brackets the marginal rate was well above what the highest rates are now. Thus, putting marginal rates at 50% or so for those in the top 2-3% of income earners would not be something unusual as you suggest.

That is how one makes an argument that meets a claim like the one you made.

The highest unemployment rates in the period you mention were AFTER the Reagan tax cuts and those rates were the highest since the Great Depression (which followed massive tax cuts as well). Hardly very supportive of the premise of the title of this thread.

Since you admit that other factors are far more important that the level of taxation of the rich in determining growth, you should amend the title of the thread to say "Cutting taxes increases prosperity except when it doesn't which is what has usually happened historically". But that would make your argument in the OP look rather silly (which it does now anyway).

Originally posted by spruce112358
No, not just China -- lots of other countries compete with the US on a wage basis -- even Japan did at one time. But China has the dubious distinction of manipulating their currency to make the situation last longer than it should. We shouldn't stand for that.

Combine that with specific tariffs against Chinese goods until they allowed their currency to float -- and we'd be in much better shape today.

Until the 1970s the United States was part of a fixed exchange rate system which was surely designed in part to prevent countries from "manipulating their currency". It was an American President who made a unilateral decision to withdraw from this system, presumably on the assumption that it was in US interests.

If China is now manipulating its currency, it's doing so on the assumption that to do so is in Chinese interests. Is that so strange? And if it's in China's interests to manipulate its own currency, mightn't it likewise be in our interests to do the same with the US dollar, pound and euro? Couldn't the rest of the world, rather than imposing punitive tariffs, respond by manipulating their own currency to neutralise China's advantage?

Originally posted by bbarr
Do you have any economic data that supports the claim that 'growth', as you use it above, has a high correlation to the median wage (not mean wage) of U.S. citizens, or to their overall financial security, or to their ability to buy a home, send their children to college, afford health care, retire comfortably, and so on? Why should we care about growth if it ...[text shortened]... edia.org/wiki/File:Historical_median_personal_income_by_education_attainment_in_the_US.png

I am not sure the US census data themselves support the oft-made claim of income stagnation for most US citizens from about the 1970s onwards.

Consult this document on consumer income.
http://www.census.gov/prod/2010pubs/p60-238.pdf

Here, see the data on real median household income for all races (Figure 1, Page 6)

Consult this document on household size.
http://www.census.gov/statab/hist/HS-12.pdf

Here, see the data on average household size (Pages 1 and 2)

Now, consider the period 1967 to 2002.

In 1967, real median household income was 40,000 and average household size was 3.26. That's 12,269 per person in the household.

In 2002, real median household income was 50,000 and average household size was 2.58. That's 19.379 per person in the household.

This represents a 58% increase on 1967 incomes levels per person in a household.

This is not quite stagnation, supposing the funds distributed among its members count as income to those persons.

From the data, however, one might infer only a smaller increase in real *wages*, assuming that each household has a less temporally variable number primary breadwinners.

But still the primary trend in inferred real wages would be definitely up, by around 25% overall assuming a single breadwinner.

Furthermore, as the same real money now buys better products than the same real money in the past, even stagnant real incomes and real wages would not mean stagnant real wealth. So real income and wages would underestimate increase in real wealth.

But: was this rise in real household income mostly driven by increases maade among the already rich households?

That the real median household income for Blacks, Whites, Hispanics, and Asians, all who have different average income levels, grew similarly, suggests not.

This equivalent rise across all racial groups is hardly solely an artifact of differential changes in their household size.

Moreover, it is noteworthy that the incomes of generally poorer Blacks, intermediate Whites, and richer Asians, not only all grew, but also all grew *in tandem*.

That is, poorer Black households started to see their incomes rise at the same time as richer Asian and White households did. Hence, there is no evidence here that the latter rose at the expense of the former.

However, according to this data, there really *does* seem to have been income stagnation from about 2000 onwards.

Over this period, median family income, including in all groups, remains about the same, as does overall average household size.

This is indeed odd, given that it was supposedly a period of "growth".

On the other hand, data from the Centre of Budget Policy Priorities suggests that incomes *have* increased in all income groups since 2002, albeit to a greater degree the richer the original income group.

http://www.cbpp.org/cms/index.cfm?fa=view&id=3220&emailView=1

But the oddity is that, since *all* income groups increased their income *somewhat* according to the CBPP data, the increase does not also register at least *partially* on the median household income for all races according to the census data.

So perhaps one shouldn't wholly trust on a single official dataset.

Still, there are again positive correlations over time between income across all income groups. Assuming limited or no income mobility, the rich [in terms of income] get richer faster than the poor get richer, but the poor *do* get richer as the rich get richer.