Size Of Government - What Do We Really Want?

[ziggy29]

Bottom line is that we can't keep cutting taxes and increasing spending. I think when tax rates are too high, tax cuts can actually increase revenue by encouraging more economic activity which more than offsets the lower rates. I'm just no longer convinced we are on the "taxes too high" side of the Laffer Curve. I thought we were for the Reagan tax cuts (as we were for the JFK tax cuts). But not now.

I don't think we can realistically balance budgets without both tax hikes *and* spending cuts. Unfortunately it seems like each side is keeping too many things that have to happen "off the table" and thus no deal can get done.

[As an aside: It's simply mind-boggling and an economic atrocity that spending and deficits were rising so rapidly during significant economic expansions. That is the time to retire the debt you incurred in the last recession, not assume more of it.]

 

[explanade]

Revenues are lower because of the recession, but they are also lower because we've cut taxes at every opportunity in the last 10 years.

The economy was good, so Bush and the Republicans said we could afford tax cuts. (2001)
The economy got bad, so Bush and the Republicans said we needed tax cuts to improve the economy. (2003)
The economy got really bad, so Obama and the Republicans passed a stimulus package with yet more tax cuts
The economy stayed bad, so Obama and the Republicans decided we needed to extend the existing tax cuts and pass -- wait for it -- more tax cuts.

We've been cutting taxes for ten years straight. That may have a little to to with why we have a revenue problem.

And how has job growth been during this period?

What's that you say, it's been subpar despite all these tax cuts for "job creators?"

That can't be!

 

[MasterBlaster]

And how has job growth been during this period?

What's that you say, it's been subpar despite all these tax cuts for "job creators?"

That can't be!

Perhaps we can tax our way to prosperity then.

 

[ziggy29]

Perhaps we can tax our way to prosperity then.

Wall Street, corporate earnings and the GDP change in the last couple years suggest that the problem isn't just that the economy isn't growing. It's just as much that Joe/Josie Sixpack's paychecks are shrinking in real terms even as many companies are posting record profits (and giving out record executive bonuses while the "rank and file" haven't seen a raise in years).

I consider myself mostly a good capitalist and I'm no fan of high taxes and big government. But I do think we are reaching the breaking point with respect to how much Middle America can bend over for Corporate America.

The phrase "what's good for GM is good for America" was largely true 50 years ago, because a considerable portion of GM's good fortune trickled down to the middle class in the form of more jobs, secure benefits and wages that matched or beat inflation. It's not true any more. What's good for huge corporations is good for their executives and shareholders -- not so much for the rest of us. And as long as that's the status quo, I think the case for "trickle down" is increasingly dubious in terms of translating into middle class prosperity.

 

[MasterBlaster]

Wall Street, corporate earnings and the GDP change in the last couple years suggest that the problem isn't just that the economy isn't growing. It's just as much that Joe/Josie Sixpack's paychecks are shrinking in real terms even as many companies are posting record profits (and giving out record executive bonuses while the "rank and file" haven't seen a raise in years).

I consider myself mostly a good capitalist and I'm no fan of high taxes and big government. But I do think we are reaching the breaking point with respect to how much Middle America can bend over for Corporate America.

The phrase "what's good for GM is good for America" was largely true 50 years ago, because a considerable portion of GM's good fortune trickled down to the middle class in the form of more jobs, secure benefits and wages that matched or beat inflation. It's not true any more. What's good for huge corporations is good for their executives and shareholders -- not so much for the rest of us. And as long as that's the status quo, I think the case for "trickle down" is increasingly dubious in terms of translating into middle class prosperity.

You have it all figured out then, Eat the rich and prosperity will suddenly show up.

Those rich need their comeuppance anyway.

 

[ziggy29]

You have it all figured out then, Eat the rich and prosperity will suddenly show up.

Stop putting words in my mouth. The point isn't that "soaking the rich" is good -- it's that the argument that lower taxes and more prosperity for large corporations will somehow mean more jobs and higher wages is more and more debunked with the passing of each year as corporate profits keep rising but the middle class keeps eroding.

But sound bites and distorting dissenting views are easier, I guess.

 

[explanade]

What's good for huge corporations is good for their executives and shareholders -- not so much for the rest of us. And as long as that's the status quo, I think the case for "trickle down" is increasingly dubious in terms of translating into middle class prosperity.

That's assuming middle class prosperity is still a widely-held goal.

In the words of Tony Soprano:

"**** flows down. Money flows up"


Some guy on CNBC was going on about how yacht builders and other makers of luxury goods employ people and if the wealthy had their tax rates raised, these jobs would be lost.

Otherwise, most people on CNBC advocate "cost-cutting" as if jobs aren't involved there.


No matter how much money rich individuals accumulate, there's only so much they can spend.

The basic question is, what leads to more incremental economic growth, an increase of $1 million in discretionary income for one person or an increase of $1 million in discretionary income spread across 1,000 people?

 

[explanade]

You have it all figured out then, Eat the rich and prosperity will suddenly show up.

Those rich need their comeuppance anyway.

Well the tax cut advocates certainly don't have it figured out.

We have the lowest marginal rates in decades and also the lowest growth in decades.

Can you explain that or is snark all you have?

 

[Hamlet]

You must be looking at a different chart. If you look at the 2010 line everything is lower than it has been for a very long time.

The projections are mostly meaningless. I expect that they assume that all the "temporary" Bush and Obama tax cuts will expire and we will go back to tax rates from 2000. I think we can all agree that that is not likely to happen.

Having the chart go back to 1900 is a little ridiculous unless you advocate going back to a government style of that era, ie-- getting rid of SS, Medicare, and Medicaid. That's a valid idea, but I think that the vast bulk of the country would be opposed to that.

I think the chart below shows that the trend in taxes was the same as spending....

And you can see that the projections forward to 2015 increase the percentage back closer to 20% without any changes to the current tax code...

It looks like 2000 was the highest total as the states have also been increasing is size... having them cut back is also a plus...

 

[ERD50]

And how has job growth been during this period?

What's that you say, it's been subpar despite all these tax cuts for "job creators?"

That can't be!

Do you really believe that is a reasonable conclusion?

It's tough to say for sure, but the argument can be made (and it seems logical) that the job creation would have been worse w/o those tax cuts. If job creation didn't go up in absolute terms, it does not mean there was not a positive effect.

Using your 'logic' there must be no benefit to flu shots. You know, the number of people who get the flu goes up in flu season, even with all the shots that are delivered. We should just stop giving/getting shots, and save money!

I consider myself mostly a good capitalist and I'm no fan of high taxes and big government. But I do think we are reaching the breaking point with respect to how much Middle America can bend over for Corporate America.

What do you mean by 'breaking point'? As I see it, as long as there is global competition for these jobs (and/or a better overall business climate elsewhere), what choice does Middle America have but to 'bend over'? What's gonna break? Maybe our standard of living approaches that of our competition, but what to do about that? It's another form of 'redistribution of wealth', and AFAIC, it is more noble to see people willing to work for that wealth than some of the redistribution that I hear called for in the US.

And looking from the other side, I would say the UAW forced the Big-3 to 'bend over' when they threatened to strike and tie up all that expensive capital. It's not a one way street.

-ERD50

 

[ziggy29]

What do you mean by 'breaking point'? As I see it, as long as there is global competition for these jobs (and/or a better overall business climate elsewhere), what choice does Middle America have but to 'bend over'? What's gonna break?

Maybe we need to look at what Germany is doing? They have a labor cost structure even higher than that of the U.S., have an even more burdensome tax and regulatory environment (for the most part) and yet they are doing (relatively) well despite cheaper foreign competition. (And they'd be doing a lot better if the PIIGS weren't driving them down.)

So to some degree, I think "global economy" and "cheap foreign competition" are legitimate factors but they are too often an excuse to accept a steadily declining deal. The Germans are showing that one doesn't have to lead to the other in the extreme.

 

[Texas Proud]

You must be looking at a different chart. If you look at the 2010 line everything is lower than it has been for a very long time.

The projections are mostly meaningless. I expect that they assume that all the "temporary" Bush and Obama tax cuts will expire and we will go back to tax rates from 2000. I think we can all agree that that is not likely to happen.

Having the chart go back to 1900 is a little ridiculous unless you advocate going back to a government style of that era, ie-- getting rid of SS, Medicare, and Medicaid. That's a valid idea, but I think that the vast bulk of the country would be opposed to that.

I did see a chart that showed back to the 60s or so.... and you can see from this chart that we are at the low since before WWII... but it is not due to the tax cuts that you keep talking about.... it is due to a lot of people who used to pay taxes not paying taxes... when the economy recovers (and it will, someday...)... then the percentage will increase back to a more normal level... without 'raising taxes'....

One of the things that most people seem to forget is that if you combined all of the tax cuts you mentioned, it does not come close to the tax increase that Obama passed for the health care bill... so, don't forget that in total he has raised taxes more than anybody in history....

 

[ERD50]

Well the tax cut advocates certainly don't have it figured out.

We have the lowest marginal rates in decades and also the lowest growth in decades.

Can you explain that or is snark all you have?

It wasn't directed at me, but it's related to my previous post, so I'll throw in my 3 cents:

A) It doesn't even need to be 'explained' relative to marginal tax rates - we have low growth because we are coming out of a bubble.

B) Can you explain to me how higher taxes would provide positive growth (and I mean positive absolute growth, not even relatively higher growth, as absolute growth seems to be your measure).

C) just a side note - Marginal rates are not a good measure of anything. Tax code is complex and it is the effective tax rates that matter.

-ERD50

 

[explanade]

Do you really believe that is a reasonable conclusion?

It's tough to say for sure, but the argument can be made (and it seems logical) that the job creation would have been worse w/o those tax cuts. If job creation didn't go up in absolute terms, it does not mean there was not a positive effect.

Using your 'logic' there must be no benefit to flu shots. You know, the number of people who get the flu goes up in flu season, even with all the shots that are delivered. We should just stop giving/getting shots, and save money!

Go ahead, make the argument. I want to hear how much worse it would have been without those tax cuts.

I'm not saying lower taxes are completely responsible for lower growth. But I don't think it's purely a coincidence either.

Job growth was better in decades where the marginal rates were higher. Again, not 100% causality but not 100% coincidence either.

It may be that concentration of wealth among fewer people is connected to lower growth, because we have an economy heavily dependent on consumption, especially mass consumption.

That is, economy does better when a lot more Escorts are being sold than when a lot more Gulfstreams are being sold, because we're talking about several orders of magnitude different in volume.

 

[ERD50]

Maybe we need to look at what Germany is doing? They have a labor cost structure even higher than that of the U.S., ...

Perhaps - I haven't followed them much since my own MegaCorp was shutting down our high labor rate plants in Germany and moving production to China (early 2000's).

It would be worth a look though, if they've been turning this around. I do think there are actions we can take to mitigate the effect. Basically, we need to work relatively harder/smarter, and/or make better use of our own resources (sum it all up as 'efficiency'), than our global competition. We have to at least narrow the gap. And/or provide value in areas not so easily outsourced.

If the Germans have some lessons to learn from, we should definitely be paying attention. I suspect there are some differences (cultural, geo-political) that we may not overcome, but maybe still some things to learn from.

-ERD50

 

[explanade]

It wasn't directed at me, but it's related to my previous post, so I'll throw in my 3 cents:

A) It doesn't even need to be 'explained' relative to marginal tax rates - we have low growth because we are coming out of a bubble.

B) Can you explain to me how higher taxes would provide positive growth (and I mean positive absolute growth, not even relatively higher growth, as absolute growth seems to be your measure).

C) just a side note - Marginal rates are not a good measure of anything. Tax code is complex and it is the effective tax rates that matter.

-ERD50

A. I'm not referring only to the past couple of years. The whole past decade, during which these lower marginal rates have been in effect, saw lower growth, especially job growth. And if it wasn't for the buildup of the bubble in the years leading up to the bursting of that bubble, the growth numbers would look even worse.

B. Higher marginal taxes shouldn't lead to higher growth. But I wasn't arguing that. I was merely pointing out that when we had higher taxes, growth was still better. IOW, higher taxes are not necessarily the impediment to growth as it's claimed.

Oh and the corollary is that we should be completely disabused of the notion that lower rates lead to higher growth sufficient to offset the lower revenues caused by the lower rates. Thirty years of supply-side economics and the ensuing deficits and debt should have demonstrated that to anyone capable of empirical reasoning. Unfortunately, this sham still works.

C. What's on the table are marginal tax rates. There's talk about tax reform and better tax efficiency, closing loopholes, etc. That's not going to happen in the near future and it's not going to happen as long as the govt. is for sale. The corporations paying an effective tax rate of zero will make sure of that.

 

[explanade]

Germany runs a trade surplus and export some precision tools and machinery which haven't yet been undercut by Asian manufacturing.

That's why they're doing well now.

If they don't bail out Southern Europe, then their banks may suffer and fewer Greek and Italian bureaucrats will by Mercedes cars. I was in Siracusa last month and they use BMW wagons as police cars down there.

During the technology boom, Germany lagged, with high unemployment. Part of the problem then was that they were still trying to integrate the former East Germany.

Since the crisis, supposedly they had work sharing rules. Rather than lay off people, they reduced hours and had other incentives to keep people on payrolls.

 

[ERD50]

Go ahead, make the argument. I want to hear how much worse it would have been without those tax cuts.

I'm not making the argument, I'm only questioning your assertion that lower taxes are linked to lower growth...

I'm not saying lower taxes are completely responsible for lower growth. But I don't think it's purely a coincidence either.

Job growth was better in decades where the marginal rates were higher. Again, not 100% causality but not 100% coincidence either.

Her's a parallel I like to make - if you take a complex situation with lots of variables and influences, it is tough to parse out cause and effect. You can try, and you will likely make an error somewhere. In a case like that, I like to look at what we know to be generally true. So here is my parable:

So let's say I have inadequate insulation in my attic. We know enough about how insulation works to be able to predict that it makes good economic sense for me to add insulation. So I do it. But the next two years, let's say we have unusually cold winters, maybe we have more people in the house, maybe the price of NG goes up. So maybe my heating costs go up, not down. That does not change my view on the benefits of insulation. It gave me a relative benefit. I can be very certain of this, based on what I know about insulation. Get it?

Likewise, it's hard to see how raising taxes would not put a relative damper on business investment and therefore job growth. Other environmental effects may swamp that out, but the effect is still there.

The basic question is, what leads to more incremental economic growth, an increase of $1 million in discretionary income for one person or an increase of $1 million in discretionary income spread across 1,000 people?

Let's take a more balanced data point - Let's say $500,000 to one person, plus $500,000 spread across 1,000.

Maybe that means the guy with $500,000 can expand his business, and hire a few people. And this makes sense since there are 1,000 people with some money to spend to buy his products.

I had a post earlier that I think got gobbled when our internet was up/down in the storm and power glitches here yesterday - but I was referring to this as a symbiotic relationship. I don't see it as one class against another. Not everyone has what it takes to be an entrepreneur or a business leader. The worker bees need them, and the businesses need worker bees.

If given the chance to invest your own $$$ into the bottom 1% of an average high school graduating class - would you expect them to be able to go out and build successful businesses and create jobs, or would you expect to lose your investment? Do you think you'd have better odds with the top 1%?

-ERD50

 

[explanade]

What's driven job creation is clearly not tax rates. It's been labor costs.

As in, you give the entrepreneur more money in tax cuts and if he invests it at all, he's more likely to do it overseas, where the cost savings dwarf whatever tax savings he might have gotten with those tax cuts.

Or, if he has to hire domestically, it's with lower benefits, like doing away with health care coverage, as a lot of businesses have done in the past decade.

I would suggest that is why despite the lowest rates in decades, job creation has been anemic, because labor cost factors trump lower tax rates. Currently, it doesn't help that after all the job losses in recent years, demand has plummeted so even if you cut taxes further, there is no business case for expanding capacity and creating new jobs.

As for the symbiotic relationship, you have a real rosy view, especially at ER, where people are driven to retire early for various reasons, not the least of which is freedom from bosses.

 

[ziggy29]

I would suggest that is why despite the lowest rates in decades, job creation has been anemic, because labor cost factors trump lower tax rates. Currently, it doesn't help that after all the job losses in recent years, demand has plummeted so even if you cut taxes further, there is no business case for expanding capacity and creating new jobs.

IMO there are other factors too. Look at the large companies today compared to large companies (say) 50 years ago. Where did much of the growth come from 50 years ago? Often from internal R&D, from expanding markets, that sort of thing. These activities actually increased investment and created more jobs -- not just for the growing business but all the other businesses that received more business helping them grow.

Today? Organic growth is increasingly rare, and "growth" comes from from M&A activity as opposed to internal R&D and marketing efforts. These are *destructive* forces for labor, not the beneficial forces of decades past, where corporate earnings growth means less competition, reduced consumer choice and increased job losses due to "elimination of redundancy."

I was a Reagan Republican when I reached voting age (indeed, my first significant election as a voter was in 1984). Because for a few years, it seemed to work. Maybe it was fueled by deficits, maybe it was the natural emergence from a deep recession (the deepest since the Depression until recently), maybe it was the end of an oil shock. And maybe to some degree, when tax rates are too high, tax cuts do work. JFK saw this, too. At that age, I wasn't down with all the cause and effect, all I knew was: we elected Reagan in 1980 to cut taxes and the economy boomed while inflation almost vanished. (When you're 19, thinking can be this simplistic.)

But as I've watched the economy of the last 20 years, I'm not convinced we're in a situation where low and/or reduced taxes across the board will lift all boats. Yes, it will create a generally rising tide; GDP will rise, national wealth will rise, but now it feels like it only impacts a few boats. And I worry about the civil disorder that could ensue if the concentration of wealth continues to bifurcate and more and more of the middle class is pushed closer to the ranks of the poor; I think of France 1789, Russia 1917 and Cuba 1959 among others. This is not good for anyone, certainly not the affluent. But as so many corporations post record earnings even as their employees are getting pink slips and no raises for years, it leads me to reconsider the ideology of my youth, at least in some ways. And to pray that we can rescue the falling middle class without violence or significant economic upheaval.

I support capitalism, I support relatively low taxes and relatively free markets; in general I think it's pretty clear these create wealth. But I think this is a case where it is possible to get too much of a good thing when the wealth that's created doesn't broadly increase prosperity. And it may be the case that to preserve and protect the long-term future of market capitalism, it may need to be kept in just enough check to ensure that no significant "overthrow" attempts are induced (whether at the ballot box or otherwise).

 

[Hamlet]

Agreed. Taken in a vacuum, having lower taxes will improve the jobs outlook, although the size of this affect has been highly debated. I suspect that the size of this effect is currently pretty small, since we have a serious demand side problem in the economy currently.

However, the same is true of government spending. All of the cuts to spending involve laying off government workers, or reducing payments to private interests that also support jobs. In the short to medium term, cutting spending is going to hurt the economy. You can see this in the current jobs reports. Government is shrinking, and last month that counteracted most of the private sector job growth (which was anemic anyway).

Deficit spending tends to juice the economy, all things being equal. You're getting the spending without paying the price of the taxes. It is not something that can be done forever.

A wisely run government would run surpluses during the boom years so that they could deficit spend in the bad years. We've been deficit spending through the boom years, which has made our situation all the more disasterous.

So let's say I have inadequate insulation in my attic. We know enough about how insulation works to be able to predict that it makes good economic sense for me to add insulation. So I do it. But the next two years, let's say we have unusually cold winters, maybe we have more people in the house, maybe the price of NG goes up. So maybe my heating costs go up, not down. That does not change my view on the benefits of insulation. It gave me a relative benefit. I can be very certain of this, based on what I know about insulation. Get it?

Likewise, it's hard to see how raising taxes would not put a relative damper on business investment and therefore job growth. Other environmental effects may swamp that out, but the effect is still there.
-ERD50

 

[Automatika]

What's driven job creation is clearly not tax rates. It's been labor costs.

As in, you give the entrepreneur more money in tax cuts and if he invests it at all, he's more likely to do it overseas, where the cost savings dwarf whatever tax savings he might have gotten with those tax cuts.

Or, if he has to hire domestically, it's with lower benefits, like doing away with health care coverage, as a lot of businesses have done in the past decade.

I would suggest that is why despite the lowest rates in decades, job creation has been anemic, because labor cost factors trump lower tax rates. Currently, it doesn't help that after all the job losses in recent years, demand has plummeted so even if you cut taxes further, there is no business case for expanding capacity and creating new jobs.

As for the symbiotic relationship, you have a real rosy view, especially at ER, where people are driven to retire early for various reasons, not the least of which is freedom from bosses.

As a former entrepreneur who hung out with a lot of other entrepreneurs I can say that in MOST of the businesses I was associated with hiring overseas was not an option. A great deal of jobs are provided by small businesses in this country, mostly in service industries but also in manufacturing. If I were still hiring I would say that I would be very cautious and conservative in the current political climate when there is so much uncertainty with taxes and partisan warfare. Especially when considering what we're just climbing out of.

 

[M Paquette]

A) It doesn't even need to be 'explained' relative to marginal tax rates - we have low growth because we are coming out of a bubble.

More specifically, a 'credit crunch', or balance sheet recession. These take a long time to recover, as they are resistant to the tools the Fed and government have (forms of monetary stimulus). There just isn't much growth in a recovery from a balance sheet recession until all that private sector deleveraging is finally done.

Japan went through one of these, complete with real estate bubble. It's our turn now.

 

[Hamlet]

Bingo.

It's more than a few boats of course. I would say that if you are in the top 20%, you have probably seen an improving situation over the last 20 years.

The next 30% or so have been treading water.

For the bottom half of the population, things have been getting steadily worse.

For those of us with good jobs (secured by our education and relative intelligence, or work-ethic, or connections), life is pretty good. I'm able to obtain goods and services at amazingly cheap prices, due to the increasing desparate situation the majority of people are in, and the incredible access to foriegn markets (which have people desparate on a whole different level).

We are able to invest our surplus money in companies that have an unprecidented ability to drive down workers' pay, and drive record profits to the bottom line.

I am concerned though, that if too many people get to the point where they feel they have nothing to lose, we may reach a tipping point where everything comes apart at the seams.

I don't think dismantling the safety net at this point is particularly wise.

But as I've watched the economy of the last 20 years, I'm not convinced we're in a situation where low and/or reduced taxes across the board will lift all boats. Yes, it will create a generally rising tide; GDP will rise, national wealth will rise, but now it feels like it only impacts a few boats.

 

[ERD50]

Agreed. Taken in a vacuum, having lower taxes will improve the jobs outlook, although the size of this affect has been highly debated. I suspect that the size of this effect is currently pretty small, since we have a serious demand side problem in the economy currently.

Well, I should run and work on my honey-do list, so for now...

It could be very small (as others just posted, there are a lot of things holding down growth), and we could very well be on the side of the Laffer curve that says increased revenue from taxes would still outweigh the negative effects on growth. I don't think anyone can really know where we are on the curve though, but it wouldn't surprise me.

However, the same is true of government spending. All of the cuts to spending involve laying off government workers, or reducing payments to private interests that also support jobs. In the short to medium term, cutting spending is going to hurt the economy.

I suspect that a lot of those cuts will be toward reducing non-value added spending. In Chicago, the new mayor is trying to tighten Union rules to get more work out a crew in a day (the 'driver' will actually need to work during the shift, not just drive the crew to/from the job).

I think it was mentioned earlier, but if govt hiring helped the economy, we could solve everything by just hiring people to do busy work. No, there has to be value added (or support for value added jobs, like building the roads so people can get to their value-added jobs).

A wisely run government would run surpluses during the boom years so that they could deficit spend in the bad years. We've been deficit spending through the boom years, which has made our situation all the more disastrous.

+1

As for the symbiotic relationship, you have a real rosy view, especially at ER, where people are driven to retire early for various reasons, not the least of which is freedom from bosses.

Oh trust me, it has nothing to do with any rosy view. I can't ever recall being accused of having a rosy view! An employer can hate the employee, and the employee can hate his employer, but if they both have something the other needs (a hard to replace paycheck versus a hard to replace skill set), they may stick with that symbiotic relationship.


-ERD50