Theory of Capitalism collapses

[_CaliforniaKid]

By the way, guys, the empirical research on taxes suggests that neither high taxes nor low taxes are a magic bullet for economic growth. Rather, tax rates have an inverted-U relationship to economic growth, with the optimal-growth tax rate being around 20-25% of GDP. Presently the US is at about 28% of GDP, so we're not far from the optimal range.

This might be taken to mean that we should reduce our tax rate by a few percentage points to get down into the optimal range. But that assumes that optimal growth is the government's sole objective. There are other important objectives to be considered, such as equality, security, and public health. To some extent, what we're confronted with is a tradeoff between a few percentage points of economic growth on the one hand, and a higher average quality of life on the other.

[_Obiwan]

Kevin.... Your "stats" are typical Liberal ignorance....

You can't judge statistics simply by "certain" statistics while ignoring others, and by who was President at the time.
You have to throw in a LOT of other things, especially the fact of who was in the Senate and House, as well as related policy's etc., to get at the ACTUAL FACTS of the numbers and what they mean.

Typical liberals can't think beyond the OBVIOUS.... Moron's who think that simply because "some" economic stats say GOOD, and a Democrat was President at the time, then that by golly must mean it was the Democrat that was good, and the Republican was bad when those particular stats showed BAD when a Republican was President. Idiots! :(

Perfect example of my claim that most liberals think like "children", no deeper than what's in front of their face obvious.

[_CaliforniaKid]

You libs is like childrens cuz you don't think good!

[_Markk]

They are responsible for creating pesticides as well as chemical weapons such as Agent Orange, which was used in Vietnam/Cambodia, resulting in the deaths and mutations of thousands of innocent civilians.

Open your eyes Kevin, who bought and used agent orange? If I am correct it was started under the Kennedy and LBJ administrations and continued under Nixon. If nobody bought it from Monsanto, Dow, and other smaller pesticide manufacturers then this would not have happened. Did the gov go to Monsanto? or did Monsanto pitch this policy to the gov...I don't know?

The seed thing is something that Glenn Beck is hammering, and seeing how farming is one of the most subsidized government programs they ( the gov) should simply say if you use the seedless product, and waste the peoples money, you won't receive a check from us. If a farmer buys seedless seeds with their money (? oxymoron) then that's their business, it is their money and they are most likely doing it for business reasons we are not aware of, like a better and more yielding disease free product. by the way I buy seedless seeds (hybrid) for my garden every year, I get a better yield and better tomato for the very most part, and they are by far greater disease resistant which saves me time and $, and save the environment from using pesticides.

[_MadMonk]

Suffice it to say, I think the idea that corporations are evil and government is good is seriously wrong.

It certainly is, as are all reductionist arguments based on emotion, not fact.

Both are made up of individuals seeking their own self-interest through whatever channels they can. With corporations, individuals seek their own self-interest by trying to make and sell products that other businesses and consumers will purchase.

This is accurate in theory, but not always in practice. One of the problems the Amrican automobile industry faced in the 1970's and '80's was that they were building what they wanted the public to buy, whereas their Japanese competitors actually investigated what the public wanted and gave it to them. I remember resenting Lee Iacocca's "Buy American" mantra at the time as anti-capitalist. I always found myself thinking "Make something I want, then!" in reply.

The individuals in government seek their own self-interest by doing what they must to repeatedly get elected (I'm speaking largely of elected officials). Elected officials need a lot of money to repeatedly get elected so they tend to do the bidding of those people who fund their campaigns (unions, large corporations, etc.).

This, alas, is all too true in fact, as well as in theory, and it's the main argument in favor of reforming campaign financing. It amazes me that my conservative relatives can see it in the abstract (as a reason not to trust government), but resist any notion of campaign-finance reform (I hate to say this, but I suspect they don't trust the party of their choice to succeed on the basis of its platform, alone).

One big advantage we have with corporations is that our feedback is fast and very powerful. Competition forces these companies to continually become more efficient, drive down prices, etc. The winner is the consumer. We get iPhones, $10 jeans, flat screen TVs, etc. There is nothing comparable in government. The only way we can force change is through a relatively slow election feedback mechanism.

Just remember, the Founding Fathers set things up that way, and for good reason. Tyrannies can respond more quickly to changing circumstances, but building consensus takes time. Nevertheless, I prefer living under a democratic government to living under a dictatorship.

One thing I will note is that many of the chattering class of liberals view every industry as some form of monopoly or oligopoly, i.e., a market failure. This is usually their justification for having the government step in and control it. In the situation of a true market failure, this the correct course of action. However, these don't happen very often.

That's why they're the "chattering class" and not actual policy-makers. And, of course, the same is true of the chattering class of conservatives who view every attempt of the government to fulfill its true role as referee of the system as intolerable interference in the God-given system of capitalism.

Sane people of whatever ideological bent realize that government is a necessary evil in a fallen world. They also recognize that capitalism, as a means of harnessing human greed for the welfare of society, serves its purpose better than other means of organizing the economy. What I have learned to distrust is absolutism and ideology. Anyone who tells you that government is automatically and ipso facto either the problem or the solution is either not thinking or has an ulterior motive (or both).

I distrust the Tea Party movement, for example, because the rank-and-file members are letting their emotions entice them into running with a simplistic, ideological solution to a real problem. I passed a demonstration on the way home yesterday afternoon, and most of them were of an age and income level to be depending on Medicare and Social Security. If you talk to them, you find that they want their taxes cut, but they don't want to lose their government benefits! Yet Social Security and Medicare together are over fifty percent of the Federal budget, and we could cut their taxes in half by eliminating them!

I also distrust people who automatically think that reducing taxes on the upper levels of income will automatically benefit the economy. It can work that way in some cases, but the money freed up by the Bush-era tax cuts all went into the stock market, instead of into new investment in manufacturing, research, or development. Of course it did; the stock market was providing a far better return on investment! It thus ended up helping to fuel the housing bubble, the CDS crisis, and nearly brought the economy to a halt.

Ironically, if the Glass-Steagl Act had not been repealed in December 2000, we could cheerfully have let the investment banks all go under without any major effect on the economy as a whole. But the fact that by 2007 those banks were all deeply involved in commercial banking, as well as investment banking, meant that their near-collapse almost brought the world economy to a standstill, instead of being just a blip on the radar.

[_Kevin Graham]

By the way, guys, the empirical research on taxes suggests that neither high taxes nor low taxes are a magic bullet for economic growth. Rather, tax rates have an inverted-U relationship to economic growth, with the optimal-growth tax rate being around 20-25% of GDP. Presently the US is at about 28% of GDP, so we're not far from the optimal range.

This might be taken to mean that we should reduce our tax rate by a few percentage points to get down into the optimal range. But that assumes that optimal growth is the government's sole objective. There are other important objectives to be considered, such as equality, security, and public health. To some extent, what we're confronted with is a tradeoff between a few percentage points of economic growth on the one hand, and a higher average quality of life on the other.

Here is a great overview of the history of tax cuts/increases, and the results:

http://www.huffingtonpost.com/larry-bei ... 94592.html

Our prevailing mythology is that tax cuts help the economy.

They stimulate it. They promote growth. They create jobs.

The truth is that tax cuts cause crashes.

Tax hikes end depressions and recessions.

Those are the broad strokes.

They need some parameters and qualifications.

In modern times -- since the introduction of the income tax by constitutional amendment in 1913 -- there have been three basic types of recession.

1. Post-war recessions come when war spending stops and the workforce swells with returning soldiers. We've had these after WWI, WWII, Korea, and Vietnam.

2. Fiscal policy recessions come from cuts in government spending, as in 1937 and 1973 to balance the budget, or a hike in interest rates to tighten the money supply and control inflation, as in 1949, 1958, 1960, 1969, and 1980.

3. Finally, there is the sequence of boom, bubble and crash. The first of these was in 1929. The collapse that followed was called the Great Depression. The others were 1990, 2001, and 2007, the one we're in now, starting to be called the Great Recession.



Except for 2001, these also included massive bank failures.

Economists, historians, and, as we move into the present, journalists and pundits, offer a mixed multitude of reasons for each of them.

But now that we've had four of them (including the crash of 2001), we can see a pattern.

The sequences of boom, bubble, and crash have, in each and every case, been preceded by a significant tax cut.

Coming out of World War One we had a top marginal tax rate over 70%.

From 1921-25 it was cut, in steps, down to 25%.

There was a boom, particularly in the fiscal sector.

The crash came in 1929.

When Ronald Reagan came into office in 1981, the top marginal rate was, once again, 70%.

Reagan started cutting in 1982, down to 50%, then to 38.5% in 1987, and 28% in 1988. There was a boom in the fiscal sector. In the mid-eighties the collapse began, and over 1,600 banks failed. There was a huge bailout.

It was followed by the recession of 1990.

Taxes went up slightly under George H.W. Bush, then again under Bill Clinton. The economy recovered.

However, in 1997, the Republican congress pushed Clinton into cutting the capital gains tax from 28% down to 20%. It was called The Taxpayer's Relief Act. It marks -- almost exactly -- the moment when the dot.com boom turned into the dot.com bubble.

It burst in 2000, and, along with the 9/11 attacks, there was another recession.

George W. Bush launched another round of tax cuts. The top rate went down to 35%. Capital gains rates were cut to 5%.

This was followed by the Bush boom.

There was huge growth in the fiscal sector, but "mysteriously," it was a jobless recovery. The boom was hollow. It was a bubble. It led to the Crash of 2007, with massive bank failures, followed by our current recession.

How does this type of recession -- boom, bubble, and crash -- end?

In 1932, Herbert Hoover raised taxes. He did it to balance the budget. In 1933 the economy changed direction and began moving upward.

In 1991, George H.W. Bush, disturbed by the huge deficits that followed Reagan's cuts, raised taxes. The economy subsequently turned around. When Clinton raised taxes again, the economy really took off, leading to the longest sustained period of growth in modern times. With some of the highest employment growth.

The 2,000 recession was followed by tax cuts. Not tax hikes.

A very strange think followed. There was great growth at the top. Corporate profits rose, there was a boom in real estate and in the fiscal sector generally.
But for normal people the recession never ended. There were no new private sector jobs. Median income went down. Manufacturing continued to decline.

The historical record suggests that this recession won't end until there is a tax increase.

Economies are complex. There are always a multitude of factors that effect booms and busts, growth and recessions. It is also a commonplace that correlation does not necessarily imply causality.

Nonetheless, if the same sequence takes place a multitude of times in different circumstances and the sequence takes place four out of five times -- tax cut, fiscal sector boom, bubble, crash, bank failures and recession or depression -- it makes a very good case for causality.

There is one significant tax cut that does not quite fit the model. In 1964 and 1965 the top marginal rate went down from 91% to 70%.

Tax cut enthusiasts always refer to them as the Kennedy tax cuts, but they took place under Lyndon Johnson. They also always cite them as a great stimulus to the economy.

In the short term, they had the same effect as the other tax cuts.

The Dow Jones had an upsurge and then a crash.

Over the next twenty years, it bounced around between 600 and a 1,000, a lot of fun for speculators, but as a measure of serious economic growth over the long term it is astonishingly flat.

The other standard measure of economic policy success is the increase, or lack thereof, in the Gross Domestic Product. Over the next two decades, there was only one year in which the rate of increase in the GDP matched the high tax periods that preceded them. Those rates go lower and lower with each tax cut.

Our public policy dialogue has little basis in fact or rationality.

Much of it, even in the academy, is bought and paid for. There is no interest group willing to pay foundations, endow universities, buy radio ads for commentators, who will advocate higher taxes.

But there's lots of money willing to invest in propaganda that calls for lower taxes and claim that they're good for the economy.

So you won't hear calls for higher taxes. You won't find politicians who dare to propose higher taxes.

If the Bush tax cuts are allowed to expire they will, hopefully, work as tax hikes. That will mark the beginning of a real recovery.

If they don't, and there are no other tax increases, expect lingering unemployment, lower wages, increased corporate profits, especially in the fiscal sector -- which we're already seeing -- a short term boom in the stock market, and another crash.

[_MadMonk]

[Our public policy dialogue has little basis in fact or rationality.

Much of it, even in the academy, is bought and paid for. There is no interest group willing to pay foundations, endow universities, buy radio ads for commentators, who will advocate higher taxes.

But there's lots of money willing to invest in propaganda that calls for lower taxes and claim that they're good for the economy.

So you won't hear calls for higher taxes. You won't find politicians who dare to propose higher taxes.

If the Bush tax cuts are allowed to expire they will, hopefully, work as tax hikes. That will mark the beginning of a real recovery.

If they don't, and there are no other tax increases, expect lingering unemployment, lower wages, increased corporate profits, especially in the fiscal sector -- which we're already seeing -- a short term boom in the stock market, and another crash.

In other words, we're screwed, folks!

MadMonk

[_Brackite]

I now very much like Congressman John Boehner of Ohio, as Speaker of the House. Speaker John Boehner did a great job with compromising a deal with President Barack Obama and Senate Majority Leader Harry Reid.

It is because of idiots like Boehner that a Government Shutdown was ever likely to happen. Now you want to give him credit for not going through with this threats?

Jesus.

Well, Yea, Naturally blame The Republican Person. The Republicans ended up winning control of the U.S. Congress just last November, by the American voters. The Democrats had a chance to pass the budget last year when they still had full control of the U.S. Congress. However, they failed to do so.
People on the right wing, such as Rush Limbaugh and Sean Hannity are not that happy that Speaker John Boehner ended up compromising with President Barack Obama and Senate Majority Leader Harry Reid. The Federal Government ended up Not shutting down. What is it Specifically about this last budget deal that you don’t like about, Kevin?

[_MadMonk]

Sorry, Fifth Columnist, I somehow overlooked your post on the first go-round.

CFR that the economy booms and American businesses expand right and left when the top tax rate is 91%.

I don't know if it always works that way (CaliforniaKid's recent post is relevant here), but I remember the late fifties and early sixties, and how prosperous they were.

Tax policy is all screwed up. That doesn't mean I favor higher or lower taxes. It means I favor different taxes (consumption taxes) and there should be a constitutional limit on the amount of GDP that is consumed by taxes (with some exceptions for times of war and possibly a few other things)

Sales taxes are highly regressive. Assuming that a poor person and a rich person bought the same quantity of food and clothing, and purchased the same amount of services, the tax generated would amount to a far higher percentage of the poor person's income than of the rich one's. This is why the Federal income tax was instituted in the first place: it just wasn't possible, even back then, to raise enough income with import/export duties and excise and sales taxes. Try it again today, and you will find it impossible even to fund those government programs you approve of.

Your "crushing burden" argument is not why most Republicans oppose increased taxes on the wealthy. The real reasons for not implementing these taxes is because it very contractionary, stifles new investment, and decreases overall output in the economy (see Romer's article above). Individuals acting in their own self interest will choose to go somewhere else to do business to the extent possible (Hong Kong, Singapore, Denmark). Don't get me wrong, this is not the only effect, but it is significant.

Our tax rates are already lower than in the jurisdictions you mention. Why do they need to be even lower?

I don't really care about scriptural based economic systems.

Sorry. In that passage I was addressing myself to Christians, not to non-Christians such as yourself.

MadMonk

[_CaliforniaKid]

I don't know if it always works that way (CaliforniaKid's recent post is relevant here), but I remember the late fifties and early sixties, and how prosperous they were.

The optimal tax rate I cited refers to the total tax revenue as a percentage of GDP. This is different from the top marginal rate, which is what the 91% figure refers to. The studies I had in mind do not comment on progressive vs. flat tax schedules, though they do find a weakly negative effect of economic inequality on growth.

It's also important to keep in mind that the studies I cited were looking at broad statistical trends over the long term. They don't tell us much about the immediate effects of a large tax cut or hike.