Saturday, May 2, 2009

Was Keynes a modern Republican?

Supply Side Economics versus Republican Keynesian Economics
Remember the term Supply Side Economics? It seems so long ago in 1993 when Clinton got elected and invisible Republicans were replaced by real conservatives (in the minority.) We heard about the market, and capitalism and capital and how federal deficits were bankrupting our children. After years of controlling the congress, Republicans finally got the White House and a slowing economy and then September 11, 2001 happened. The economy slowed dramatically after the attack and three things were done to generate a major recovery :1) Bush finally got a number of different tax cuts through a (barely) Republican Majority Congress, 2) Greenspan Federal Reserve Bank created a huge amount of money for low interest rates loans and to help fund the government spending, and 3) there was a increase in huge government spending much of which was defense and War. There was also deregulation that allowed foreign investors to buy bundled home loans. This provided a huge economic Keynesian stimulus that could not help but get the economy moving. Add massive legal and illegal immigration to fuel both ends of a housing boom. But none of this could last because it was all borrowed and printed money, both private and public foreign borrowing.

Tax Cuts Pay for Themselves?
One of the supply side theories repeated on talk radio and is that tax cuts pay for themselves. This was first proposed by Reagan and then Rush repeated it in his book. It has never been proved because whenever federal taxes were cut (under Reagan and GWB) both social and military deficit spending went up increasing both tax revenues and deficits. The reason why this "pay for itself" theory seems to make sense is that taxing something will in general decrease the demand for it, like with higher prices. But what about the fact that tax cuts always go along with spending increases, huge spending increases mostly for political reasons? And what about that fact that government spending increases tax revenue, but not NET tax revenue (taxes minus spending.)

Bush Tax cuts Saved the Economy?
Now we are left with Obama who is increasing spending, borrowing money, passing tax credits (for many that pay no income taxes ) and Federal reserve Chair Bernke creating Trillions of $$$ to supposedly cure the economy. Something seems strangely familiar about the path we are on. We are told on talk radio that the Bush tax cuts alone saved the economy back in 2003 and paid for themselves through increased tax revenue. But again, the federal debt went up every year, with deficits exploding 2008 (the burst housing bubble is another topic.) Not only that but back in 2002 to 2005 Greenspan/Federal Reserve created a huge amount of NEW money for economic stimulus: loans and government borrowing. Talk radio never talks about that increase in money supply because it weakens the "Bush Tax Cuts saved us" narrative. In fact is the Federal Reserve that had to start contracting that money supply in 2007 and 2008 to control inflation, and that triggered the inevitable housing bust. The narrative of temporary growth and economy crash is not what anyone wants to take credit for.

'Tax Cuts paying for Themselves' disconnects Voters from Costs of Government
Instead of 'tax cuts paying for themselves' let me propose another theory: 'Tax cuts paying for themselves theory' disconnected the voter from the spending. So the voter can ask for more and more spending without worrying about paying for it. We invaded Iraq and republicans paid less. We gave free drugs to seniors and democrats paid less. We hired school teachers and the single Mom's paid less. So where was the limitation on spending going to come from? Talk radio has ideas on that : 1) We need to teach the public that social spending/borrowing is unconstitutional but military spending/borrowing is constitutional and 2) All that matters is the debt to GDP ratio. The political problem with pitch (#1) is when you rebuild a school in Iraq and then a voter wants his school rebuilt too, he will not appreciate it if you try to tell him his kids school project is not constitutional. The other problem is the supreme court is not likely to rule this way again in our lifetime. The debt to GDP ratio argument (#2) causes a problem when the GDP becomes comprised of mostly debt and consumption (and government spending.)

Repealing Keynesian Tax Cuts Hurts the Economy and Tax Revenues?
So how about making the voters pay for increases in government services and military spending so there will be a limit on government growth? I certainly see why the elected don't want this, but we are taught (and I mean taught) by talk radio that ANY tax increases will decrease tax revenue. Really? All tax increases? Always? What about the worker who got removed from the income tax rolls under the GWB tax cuts? (This was politically popular.) Is his paying no income taxes now creating more revenue than before when they paid taxes? Is that a supply side tax cut? He is most likely consuming that additional income. If he had to pay that tax again to pay for the increased government, how would that raise less money in tax revenue? Now Obama just gave him a tax credit, extra money he did not originally pay in federal taxes, except maybe payroll taxes. He will either spend that borrowed money or pay off bills too. Is that supply side? Will that pay for itself too? Democrats have co-opted republican language and claim their tax credit will jump start the economy and raise tax revenues, eventually. In both cases the taxpayers, at least those taxpayers, pay less taxes and revenue is less. This disconnects them from the cost of government so they want more. In fact this guy still feels entitled to social Security Benefits.

Tax Revenue increasing with government Spending and Debt
Now let's look at the tax/revenue question again. GWB cut taxes but increased government workers. So the government hires a worker, he pays new income taxes and tax revenues go up. He also cut the income taxes which reduced that tax revenue a bit. But the government is still in debt for his salary minus the taxes he pays. Where did that money go? Into the economy! Where is it now? It is consumed! He bought a couple houses and cars and TV sets. Did that grow the economy? Temporarily but now only the debt is left. Another case is federal funding of education. A public school hires a teacher with federal money. She pays federal taxes which increases tax revenue. A single Mom was happy too with Bush because her kids school got a new teacher. The teacher was happy with Bush because she got a job (until Ted Kennedy told her No Child Left Behind was underfunded.) The single Mom was also happy because Bush gave her a tax credit, the single Mom tax credit. That's money the government borrowed to give to her for having kids, and she spent it hopefully on the kids(and the child support too.) Did this tax credit "pay for itself" ?? Would there be less tax revenues if the government took it back by raising both their taxes? Ironically all that money is borrowed and those two Bush voters are unhappy with him now and voted for Obama. So now we have debt. I am not saying tax increases are are good or tax cuts are bad, here, just that Keynesian tax cuts do not pay for themselves. They are when combined with spending 'consuming today, to hell with tomorrow'. These Keynesian tax cuts and credits are passed for political reasons..

In conclusion the theory that 'tax cuts pay for themselves' just leads to increased spending and increased debt. It removes any limitations in spending. It disconnects spending from the costs of spending. Republicans moved from Supply Side economics to Keynesian economics for political reasons, they were in charge (ala Jack Kemp rest his soul.) Unfortunately the passing of productive supply side tax cuts (not the Keynesian one's above) themselves creates pressure for more spending, as democrats yell and scream and call for "priorities" and how the rich are getting away with murder. This is not to argue against tax cuts themselves as long as spending is being cut at the same time, a VERY difficult task. But I finish with a conclusion that will irk conservatives that have grown up on talk radio. " Government spending is redistribution even if it comes with tax cuts". In fact, those that get the tax cuts are likely to be demanding the "government do more" just like those that don't. In this case, is it still their money? (Rhetorical question) The economy is so socialised by BOTH parties, everyone demands something. Republicans claim they earned Social Security for example. So maybe we need to limit government by not claiming it is free.

1 comment:

  1. One thing to remember is that salary ranges are all very well, but the key to maximizing your compensation is about clearly demonstrating the benefits that you can bring to an organization. A well-documented performance which provides a prospective employer with quantitative results and shows him how you solved problems or accomplished tasks is pretty tough to argue with!