Thoma on Capitalism, Inequality, Social Insurance, and Growth

From Mark Thoma writing in the Fiscal Times,

"Why is rising inequality a matter that our social insurance system should address? The idea behind insurance is to spread the costs of harmful events we cannot control across a large number of people. With fire insurance, for example, participants pool their money into a large sum, and the unlucky few that experience fires draw from the pool of money to cover their losses. In the end there is a redistribution of income from the winners who escape a fire to the unfortunate who don’t, but it would be wrong to view this as a net cost to the winners. The insurance premiums buy protection from fire – a benefit – and presumably the benefit exceeds the cost of the insurance.   

...

At some point, one I believe we’ve passed already, the benefits of inequality in terms of incentives are surpassed by the costs. As Joseph Stiglitz argues, “Inequality leads to lower growth and less efficiency. Lack of opportunity means that its most valuable asset – its people – is not being fully used. Many at the bottom, or even in the middle, are not living up to their potential, because the rich, needing few public services and worried that a strong government might redistribute income, use their political influence to cut taxes and curtail government spending. This leads to underinvestment in infrastructure, education, and technology, impeding the engines of growth.”"

Real GDP Growth and Top Marginal Tax Rates

Regressive fiscal policy depends on the idea that cutting upper bracket taxes will somehow bring growth. Reality seems to show quite the opposite results, as seen in the charts below.

GDP data from the BEA; covering the span of 1930 - 2011

One could argue that perhaps the above chart of GDP growth under the same year as the tax rate might not fully capture the impact because it may take time for changes in investment activity to filter into production of goods. So below let's look at a chart compiled by lining up the tax rates with the GDP growth for the year following the tax rate.

GDP data from the BEA; covering the span of 1931 - 2011

It's hard to get more clear than that. In both the same year and next year match-up scenarios, top marginal tax rates of 70% and above clearly correspond with higher GDP growth than top marginal tax rates below 70%. Indeed, during the Reagan years -- contrary to regressive notions -- lowered top marginal rates came with a corresponding drop in real GDP that manifested as a clear, year to year linear trending correlation. These correlations don't necessarily prove that the higher tax rates caused the higher GDP growth, but they certainly prove that lower tax rates have failed to fulfill the regressive claim. Judging from history, one can not reasonably expect that lowering upper bracket taxes will spur growth. And as Diamond and Saez have shown, there's no reason to expect lowering upper bracket taxes would increase our tax revenue either, since the optimal upper bracket rate for revenue collection sits far higher on the scale than where we are now, somewhere in the 70+% range.

If anything, the data suggests that raising upper bracket taxes may be more likely to spur growth. How could that be? The obvious answer is reinvestment. Lower upper bracket taxes encourage avoiding reinvestment to reap profit. Higher upper bracket taxes encourage reinvestment to avoid reaping taxable profit. That said, increasing upper bracket taxes alone will not fix everything. No matter how much tax policy encourages investment, there must be domestic market demand in order for domestic investment to make sense. Yet given enough demand to make domestic growth investments rational, higher upper bracket taxes can -- and logically will -- encourage that positive choice.

Oh, So You Noticed That Too, Ezra?

Back in January and February of 2011, I wrote a couple posts about the lack of evidence for the right-wing assertion that cutting top marginal tax rates would somehow help our job growth. (See "Tax Rates and GDP Growth" and "Chained to Real: Tax Rates, Inflation-adjusted GDP Measures, and the Difference")

I know it's a bit trivial to revel in my little soap-box covering something before one of the Big Names, but c'est la vie. Where's the fun in never letting loose with frivolity? I just noticed that in June of 2011, Ezra Klein covered the ground that I'd staked out earlier in that year with his post "Tax rates and job creation in one graph". I don't begrudge him that ground at all, of course. I have to admit the graph he posted shows a more compelling visual representation than mine did of why we shouldn't listen to that old excuse for cutting the top rates. Mine merely showed that the right-wing has no grounds for the claim, whereas the one Mr. Klein posted goes further and makes a somewhat persuasive argument in the other direction from the right-wing claims.

Mr. Klein got the chart he'd posted by way of the folks over at American Progress. As they point out about Speaker Boehner, candidate Romney, and their ilk regarding jobs and taxes,

"In fact, they are just as wrong about this as they are about the relationship between marginal tax rates and overall economic growth. In the past 60 years, job growth has actually been greater in years when the top income tax rate was much higher than it is now."

In this case, I'll follow in Mr. Klein's footsteps and post American Progress's chart as a follow up to my own.

from http://www.americanprogress.org/issues/2011/06/marginal_tax_employment_charticle.html 

They also have an article that -- like mine from earlier in that year -- focuses on GDP growth rather than job growth. And as they say there about top marginal tax rates and GDP growth,

"These numbers do not mean that higher rates necessarily lead to higher growth. But the central tenet of modern conservative economics is that a lower top marginal tax rate will result in more growth, and these numbers do show conclusively that history has not been kind to that theory."

It's good to see others using their larger platforms for refuting those conservative claims with the facts.

No, World War 2 Didn't End The Depression

There's a common myth out there that goes, "the Great Depression was finally ended by World War 2". It has some slight variations, such as "the Great Depression lasted 15 years" or even "the market didn't recover until govt spending stopped".

All of these are complete misunderstandings of history if not outright lies.

While there may not be as accepted a definition for depression as for recession, there's a good bit of consensus along the lines of these two criteria for an economic depression:

1. real GDP decline beyond 10%
2. period of decline lasting more than three years

Year	2005 Real GDP
1929	977,000
1930	892,800
1931	834,900
1932	725,800
1933	716,400
1934	794,400

Real GDP declined every year from 1929 through 1933. By 1934, the economy had been pushed back into growth again. There you have it: the end of the Great Depression. It was 1929-1933, far short of 15 years. One can not be in a depression and have real GDP growth because a depression is defined by GDP decline. One can note other factors peculiar to depression, such as deflation. But a depression only exists while there is a declining economy as measured by real GDP. One can debate what ended the Great Depression, whether it was a combination of monetary and fiscal policy, deficit spending alone, monetary policy alone, or some other set of factors. But there is no reasonable debate that the Great Depression ended years before World War 2 when the economy returned to growth.

Some effects of the Great Depression -- though mostly diminished -- did linger somewhat until World War 2. That much is true. Although unemployment had been drastically reduced before the war, it was still high until the war. Yet while it took quite a while to achieve full recovery, it did not take all that long to achieve renewed growth. Unemployment peaked in 1933. By 1936, the New Deal had kicked the economy into rolling again and -- though unemployment was still high -- the main economic indicators were back in gear. In early 1937, industrial production reached a level above that of 1929. But then pressure picked up to balance the budget, and FDR and Congress cut back spending. Although unemployment had been dramatically reduced from its peak, it was still too high for the economy to be self-sustaining. With the fiscal and monetary tightening of 1937, production dropped and unemployment went back up. Seeing the mistake, they stoked spending back up in 1938 and the recovery resumed.

Unemployment remained problematic throughout the 1930s and into the start of the 1940s. But even that measure declined every year that the New Deal was fully in force. The recession of 1937-1938 showed the effect of govt cutbacks pushed by Republicans overzealous to balance the budget at the wrong time. The cuts interrupted the full weight of the New Deal to push the economy forward. The unemployment rate continued to drop right up until the start of the war. We were already growing towards full recovery before the war. Admittedly, the massive increase of spending for the war -- far beyond that of the New Deal -- did push unemployment to very low levels far more rapidly than we would have achieved without the focus of a war effort. But the war boom runs quite the opposite of a case against spending. The extreme, focused spending for the war effort rocketed our economy higher. It was a finale to the New Deal, like a burst of fireworks at the end of a good 4th of July show. It couldn't be further from the truth to say that "the market didn't recover until govt spending stopped". When govt cut spending while the economy was still weak, the economy suffered. Except for the disastrous cut-backs that brought us the recession of 1937-1938, government didn't stop spending until the markets had recovered.

What Can We Really Learn From Estonia?

S&P Downgrade of U.S. and Upgrade of Estonia Inspires Misguided Admiration

In the wake of a few recent S&P decisions, fans of budget cuts are practically waving the Estonian flag. They point to Estonia's recent austerity measures and it's Q1 2011 growth as some sort of vindication. "Look, look ... we've got a positive example!" Ah, but if only it were that simple. There's more to Estonia's austerity and growth than meets the eye of the starve the beast crowd who would have us emulate their example. Estonia chose "internal devaluation," including wage cuts. So keep in mind what following the Estonian script would mean: big wage-cuts and a lower standard of living. Who really wants to sign up for that?

But more importantly, one should take a closer look at the impact on the Estonian economy before declaring them a model that everyone should copy. I'd swallow some short-term pain if it made the overall situation better for my country in the long run. But in the case of Estonia, the trouble didn't entirely end with the turn-around from the -13.9% plummeting GDP in 2009 to the 1.8% growth in 2010 and varying more-or-less positive growth forecasts for their future. While Estonia has returned to GDP growth, they're doing so on the backs of their neighbors. The one bright-spot in their economy is exports, which were up 43% from a year earlier in June. (Although June's figures showed a drop from the previous month.) Their unemployment remains high. Their retail sales and non-govt construction are both still down significantly. The domestic market isn't looking so good there. But in Sweden, Russia, and Finland demand is rising. All three of Estonia's biggest foreign markets saw significantly higher GDP growth in 2010 than Estonia. The strong growth continues in Sweden in particular ... plenty to explain why Estonian producers have still had a market in the face of lower internal demand. Having growing trading partners is great. But in the long run it's a poor substitute for steady internal demand. Estonia's internal devaluation has made them even more dependent on their neighbors. Should the growth in Sweden, Finland, and Russia cease or even slow down significantly, Estonia could find itself in deep trouble with no fuel for its economy. That sort of dependence on -- and vulnerability to -- foreign trade partners has lots of drawbacks. Sacrificing domestic demand to gain foreign demand means a weakened domestic economy.

So what can we really learn from Estonia? Mainly that it's good to have trading partners who have money to spend on what you're making. That's not a lever we (or anyone else) can control. It's up to our trading partners to keep their economies moving. Aside from maybe lending the occasional wrench, we can only look to get our own engine revving again. But we can also learn that worrying too much about increasing our exports can cause a nation to become export dependent -- at the mercy of the whims of foreign markets. While that may be nice when those markets are thriving, do we really want to count on them completely and make ourselves export dependent? Wouldn't you rather we fixed our domestic shortage of demand instead of sacrificing what's left of it in the vague hope for an uncertain boost to exports?

Pawlenty vs FDR

Sustained five percent growth? One might ask when we could possibly find an example of that sort of growth in American history.

From "Pawlenty’s 5 Percent Growth Solution Makes Historical Sense"

"So, yes, the U.S. economy has indeed shown an ability to grow at an average of five percent over a 10-year period. The problem for Pawlenty, and for many other modern-day politicos who believe they know the secret to rapid growth, is that all this growth came under Franklin Delano Roosevelt.

In the 1930s, as Roosevelt and his allies saved American-style capitalism from its own gaudy excesses and pathetic failings, Republican opponents, business interests and trade groups stomped their feet. They accused FDR of being a Socialist, of burdening the economy with regulations, of scaring investors by fomenting uncertainty, of hampering investment by instituting a new safety net, of placing restrictions on a bankrupt Wall Street and banking system. These crazy Keynesian schemes would never work. Why, they would turn the U.S. into a weak clone of the U.S.S.R., unable to compete in global markets, lead, or stand up to external enemies. (Plus ca change. . .)

Of course, the exact opposite happened. In the 1930s and 1940s, the U.S. economy (and its stock market) got back on its feet, rediscovered its capacity to grow, expanded and then led the world to victory over Fascism."

Sadly, Pawlenty is no FDR. Despite all the Republican grumbling about President Obama, sadly, President Obama is no FDR either. But who knows? Maybe there's a chance we voters will get our act together in 2012 and elect a Congress full of FDRs in response to what the Republicans have been trying to do. That's the only way we'd be likely to see that sort of sustained growth any time soon.

Reagan, Tax Cuts, and GDP

In honor of the 100th anniversary of President Reagan's birth, lets take a look at the effect of his tax cuts for the top marginal rate. When we looked at the course of the past 80 years as a set, it looks as if there isn't a particularly clear correlation between top marginal tax rates and GDP growth. But what if we weren't looking close enough? After all, the last few decades seemed to have a noticeable symmetry.

Where should we look? For President Reagan, whose tax cuts came into play around 1982, we should see those rates working their magic on the economy by two years later in 1984. The rates would continue any effect after President Reagan left office, so lets keep looking up through 1992.

Tax rates on left scale; GDP growth rates on right scale

Inspiring, don't you think? Apparently that GDP growth going down in about the same slope that top marginal tax rates were going down must have been what they meant by "trickle-down."

Of course, that might not be entirely fair. We should probably look at the President's entire term and see what happened in case we can credit the tax cuts immediately with a big initial boost that gradually faded.

Tax rates on left scale; GDP growth rates on right scale

As seen in the chart of 1980 to 1992, there is indeed a big spike in GDP growth immediately after the tax cuts begin. Yet that conflicts with what we see in the rest of the chart. Why would lowering taxes correspond with expansion in one section of the chart and contraction in another? In this case, we need additional data: the Fed rate. The Fed ramped up interest rates brutally high for the early 80s in order to tame massive inflation. The Fed rate had been slowly ratcheted up over 1978 and 1979. The rate for 1979 started at 10% and went up to almost 14%. For 1980, the rate averaged 13%. For 1981, the rate averaged over 16%. The prime interest rate even ventured into the 20s in 1982. These high rates did tame the inflation, but in doing so they brought on the recession of 1981-1982 because they made it much harder to borrow to invest for growth. Naturally, when the brutal interest rates were eased back down in 1982, there was some pent up thirst for financing just waiting for lower interest rates.

What can we draw from 1980 through 1992 as far as taxes and GDP? If these years are indicative of anything, it is that under relatively normal interest rates lowering the top marginal tax rate appears to come with a corresponding drop in GDP. Whereas during a period of extreme high interest rates, there appears to be no correlation between top marginal tax rates and GDP because of the growth-blocking effect of extremely high interest rates.

For the Gipper, unfortunately, that top marginal tax cut play doesn't seem to have been a win.

Chained to Real: Tax Rates, Inflation-adjusted GDP Measures, and the Difference

The question:  what impact (if any) do top marginal tax rates have on GDP growth rates?

Our previous chart of top marginal tax rates versus GDP growth rates utilized "chained dollars," a measure with which not everyone is familiar. That data was drawn from the BEA's Current-dollar and "real" GDP table. While the chained dollars therein are a measure of real GDP, they're not the only measure. There's a slightly different set of data at the BEA's NIPA Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product.

To satisfy those who wonders whether the result would be different if we use another measure of inflation-adjusted GDP:

Left scale for top US marginal income tax rates. Right scale for GDP growth in inflation-adjusted "real" dollars. A 10 year moving average for each figure is also included. GDP data from the BEA. Tax rate data from TruthAndPolitics.org

The results of using this measure of (inflation-adjusted) real GDP are almost the same as using the (inflation-adjusted) chained dollars. From 1951 through 1963 the top tax rate varied between 91 and 92%. During those years, the average rate of inflation adjusted GDP growth (using real dollars) rested at 3.72%, a rather robust growth rate. (GDP growth averaged 3.39% from 1951 through 2007.) By contrast, the GDP growth under the average 37.4% top tax rate from 1986 through 2008 was only 3.2%, 0.52% lower growth than under the much higher 1951 - 1963 tax rate.

Regardless of which inflation-adjusted measure we use, the answer is still the same: Overall, the past 80 years show us a thorough lack of clear correlation between the top marginal tax rate and GDP growth. The data's closest hint of a relationship derives from the slightly more robust average GDP growth back when the top rates were higher, but that closest hint isn't close enough to be sure of an ideal rate. The notion that lowering the top tax rates improves the economy just doesn't hold water. Indeed, these 8 most recent decades show us that increasing the top tax would not necessarily have any impact on the economy, let alone slow it at all.

original chart

Update 02/07/2011:  Replaced original chart with improved version featuring better parity of scales, better visibility of trendlines, and replacement of the poly trend with a linear. The change in scale does suggest an interesting symmetry in the past two or three decades. We'll look at that in more detail later.

Tax Rates and GDP Growth

Let's see whether we can prove that higher taxes are bad for the economy by charting the top marginal tax rate versus the % growth in GDP for each year. If higher taxes stifle the economy, we should see an increase in growth each time we lower tax rates. And likewise, if the theory holds, we'll see a drop in growth each time we increase the tax rate. Does that pan out?

Left scale for top US marginal income tax rates. Right scale for GDP growth in chained 2005 dollars. A 10 year moving average for each figure is also included. GDP data from the BEA. Tax rate data from TruthAndPolitics.org

There's a lot of fluctuation, including some times when the line for GDP growth is off the chart; but the 10 year moving average trend gives a good idea of the general direction. Growth ramped up after the tax rate increased sharply following the Great Depression. Then after sling-shotting back down, growth gradually stabilized with a rather steady 10 year moving average lightly bouncing around 3% growth from the late 1950s through 2007. Interestingly, that 3% stabilization formed during the years when the top marginal tax rate was 91% or higher. From 1951 through 1963 the top tax rate varied between 91 and 92%. During those years, the average rate of inflation adjusted GDP growth (using chained dollars) rested at 3.51%, a rather robust growth rate. By contrast, the GDP growth under the average 37.4% top tax rate from 1986 through 2008 was only 2.83%, 0.68% lower.

Overall, the past 80 years show us a thorough lack of clear correlation between the top marginal tax rate and GDP growth. The data's closest hint of a relationship derives from the slightly more robust average GDP growth back when the top rates were higher, but that closest hint isn't close enough to be sure of an ideal rate. The notion that lowering the top tax rates improves the economy just doesn't hold water. Indeed, these 8 most recent decades show us that increasing the top tax would not necessarily have any impact on the economy, let alone slow it at all.

Update 02/03/2011:  see Chained to Real: Tax Rates, Inflation-adjusted GDP Measures, and the Difference for a version of the above chart using another inflation-adjusted measure of real GDP growth (with roughly the same result).

Original chart

Update 02/07/2011:  Replaced original chart with improved version featuring better parity of scales, better visibility of trendlines, and replacement of the poly trend with a linear. The change in scale does suggest an interesting symmetry in the past two or three decades. We'll look at that in more detail later. 

Plan For Growth

"It takes as much energy to wish as it does to plan." - Eleanor Roosevelt

We have uncomfortably high unemployment. We want that to come down. We also have an uncomfortably high deficit. That needs to drop too. What we need is a plan. One that can do both. One that can work.

Our new House majority has loudly pushed focusing on the deficit with budget cuts. The trouble, as I've previously shown and discussed in relation to specific budget cutting figures, is that any significant budget cuts are very, very likely to steer us into far higher unemployment. That would further reduce tax revenues and make the deficits worse. So that just won't work. We can't get rid of the deficit by chopping growth and making the deficit worse.

What can we do?

Well, what happens if we maintain the status quo? What happens if we proceed with spending at the exact dollar amount it is now, keep tax rates exactly where they are, and manage to keep the pace of growth at the roughly 3% estimated for 2011? (Note that spending is scheduled to shrink in 2012 with the expiration of stimulus programs and the winding down of expensive wars. So this assumes we actually spend more than is currently expected for some of these years.)

Deficit/surplus assuming budget holds steady, 3% GDP growth, and revenue stays at the current 14.81% of GDP

Interesting. We'd have a surplus by 2029 at that rate and could start reducing our debt. That's without budget cuts. That's even assuming more spending for at least one of those years than is currently projected. We'd all love to see that budget gap closed sooner, but that's going in the right direction.

OK, how can we speed that up? What happens if we go back to the 30-year average of revenue as a percentage of GDP starting in 2012 but keep all else as before, with spending staying at the 2010 dollar level and a 3% GDP growth rate?

Deficit/surplus assuming budget holds steady, 3% GDP growth, and revenue goes back to 18.2% of GDP in 2012

A bit better. That'd have the surplus and its potential paying down of the debt begin in 2022. But let's try for more. What happens if we go back to the 30-year average of revenue as a percentage of GDP starting in 2012, keep spending at the 2010 dollar level, and find some way to increase our growth rate over 3%? For the sake of charting, let's imagine we get it up to 4% in 2012, peak at 5% in 2013, and then manage 4% thereafter.

Deficit/surplus assuming budget holds steady, but revenue goes back to 18.2% of GDP and avg. 4% GDP growth from 2012

That's more like it, don't you think? If we could achieve an average 4% GDP growth over that time, we could be seeing revenue eclipse spending in 2019, assuming we keep spending at the dollar amount from 2010 and return revenue back to the 30-year average of 18.2%. That's just 8 years from now. I don't know about your kids, but that's even before my older daughter will start college.

That's fairly vague, I'll admit. I've left a lot of room for what exactly those efforts to increase the rate of GDP growth might be. Where to get the money? I'm not a defense expert, but even some conservatives are suggesting we have some fat to trim in the defense spending. Imagine if we took those proposed cuts on spending beyond what the Pentagon actually needs to do its job and transferred that money into real job creation programs.

Off the top of my head, I can come up with several ways we could be doing more to create jobs through our Federal govt:

1. a reborn national Civilian Conservation Corp chartered for 5 with potential to renew
2. repairs to all of our crumbling bridges (and maybe revamping some roads too)
3. high tech research towards "green" energy and products

The first two of these would easily pay off right away. We've got a lot of unemployed construction workers, and it shouldn't take a terrible lot of retraining to put a lot of them to work in a CCC or on improving our transportation infrastructure. The research part might take a bit longer to get going, but the pay-out would go even further. Well beyond when we might have brought our unemployment down using a CCC and beefed up infrastructure projects, we could be benefiting from jobs and sales in exporting of green tech, just like we've benefited from Defense Department and NASA research in our computer industry. That's investing prudently in a future for our children.

It's time.

GOP Seeks Lower GDP

Sen. Rand Paul

Sen. Richard Shelby (R-AL) feels we can cut 30% across the board. Or maybe 10%. According to Ben Armbruster of ThinkProgress, "It is unclear which reduction figure, 10 percent or 30 percent, he is officially advocating." On ABC's "Top Line", Rep. Michele Bachmann (R-MN) says that she's found "about $450 billion worth of cuts." That'd be around 12%. Sen. Mike Lee (R-UT) has talked about cutting the budget by 40%. Sen. Rand Paul (R-KY) strikes it at a balanced budget, which means roughly 33%.

As previously detailed, when we cut the budget to avoid borrowing, those cuts don't come from nowhere. They come out of spending, reducing demand, lowering our nation's GDP. In good times, that's fine. When GDP growth is high enough, we can afford to cut. But we can't afford to drop our growth below around 2.5%. Otherwise we get rising unemployment. One would hope that these members of Congress understand national budgets, have done the math, and wouldn't propose a drop that would take us below 2.5% GDP growth, right?

So what would each of those figures mean? We can plug these into a rough formula. Some of the lower estimates figure the government around a 25% share of GDP. To give these members of Congress the most benefit of the doubt, we'll go with this low estimate. So when you cut government spending by a percentage, you effectively cut the GDP (or more precisely lower the percentage change in GDP) by roughly 1/4 of the percentage by which government spending was cut. Applying Okun's Law (or Okun's Rule of Thumb), we can expect roughly a 1% drop in employment per 2% reduction of the GDP growth below 2.5%. It's a rough figure, but it tells us more or less what we should expect.

Govt budget cut % / 4 = -% GDP impact

Our baseline is 3%. Why? That's a typical estimate for our GDP growth for 2011. Since the stable point for unemployment is around 2.5%, we might theoretically be able to take about a 0.5% drop in GDP without adding more to the unemployment roster and reducing our payroll tax revenue (thus increasing the deficit).

Let's start with the most modest of these, Sen. Shelby's 10% (assuming he didn't really mean 30%).

10% budget cut / 4 = 2.5 % GDP impact

est. 0.5 % GDP meaning 1% added to unemployment rate

Well, that's not very pleasing. So what do we get from the others?

Rep. Backmann's 12%:

12% / 4 = 3%

est. 0% GDP meaning 1.25% added to unemployment rate

Sen. Paul's 33%:

33% / 4 = 8.25%

est. -5.25% GDP meaning 3.875% added to unemployment rate

Sen. Lee's 40%:

40% / 4 = 10%

est. -7% GDP meaning 4.75% added to unemployment rate

So just how much unemployment do they suppose we can handle? Either the answer is above, or they just don't realize that their slash and burn plans would raise unemployment. Even the most modest of them would cause unemployment to rise at this point of not particularly fast growth.

Meanwhile, each of these increases in unemployment would mean fewer people on payrolls. That means less income tax revenue. Since a drop in revenue doesn't generally cause our costs to drop, that means that assuming we went with Sen. Paul's balanced budget, we'd build ourselves a brand new deficit because of that extra almost 4% tacked onto the unemployment picture. So to use Sen. Paul's "ironclad" balanced budget rules, we'd have to make further cuts. Assuming nothing else rescued our GDP from outside, that'd mean a further drop in GPD and more unemployment. Let's not do that. Not now. Not while we don't have enough growth to afford cuts.

Private Payroll Employment picture

Quite the picture...

from "New Jobs Numbers & New Hands on Deck to Keep Them Growing"

Speaking of job growth, in Repealing the Affordable Care Act will Hurt the Economy, Stephanie Cutter, Assistant to the President for Special Projects, says that repealing health care would be "Preventing 250,000 to 400,000 jobs from being created annually over the next decade." Part of the reason why:

"The law reduces small businesses’ health care expenses by giving them $40 billion worth of tax credits,and through the creation of new, competitive state-based insurance Exchanges. Exchanges will enable individuals and small businesses to pool together and use their market strength to buy coverage at a lower cost, the same way large employers do today, giving them the freedom to launch their own companies without worrying whether health care will be available when they need it."

Taxes and Jobs, part 2

My earlier chart showed that lowering taxes has not bought us improved job growth. So what would?

From the figures for tax rates and job growth alone, one might think that we could just raise the marginal tax rate on the top bracket and the rock would crack, jobs would flow forth, and everyone would dance around with leprechauns showering us in cash. Sadly, while some of my relatives have been suspected of being leprechauns, showers of cash don't tend to come quite that simply. (And beside, those relatives are too busy with small farms to shower anybody with cash even if they had it.) Yet the answer isn't all that complex either ... it just takes more than a mere one rate.

What are the mythical arguments against high taxes on upper brackets?

1. It's not fair.
2. They'll take their money and go elsewhere.
3. They'll have less money to use to create jobs.

Myth #1: "It's not fair."

The easiest of these to address is the crying baby argument: "Wah, wah ... I worked hard for this money and I deserve it ... it's not fair to tax me more." In the upper incomes, one should beware of doing anything that invites comparison of effort to income. Does anyone really believe that a multi-million-dollar CEO works harder than a construction worker lifting heavy loads all day, a crop picker bent over the fields, or a dishwasher scouring pans? Does anyone really believe that a hedge fund manager is hundreds of times smarter and more productive than the average teacher, engineer, or computer programmer? Yes, the upper brackets may have worked to get where they are. So did most everybody else who isn't paid as much. Even more importantly, does anyone really believe that people who make a lot more money aren't benefiting a heck of a lot more from the services of our government -- e.g., protection of property -- than people who make a lot less money? The truth of the matter goes far beyond it being fair. It isn't fair to tax the upper brackets equally, because the upper brackets reap more of the benefits of our government. The upper brackets get more; it is only fair for the upper brackets to pay more. Yet, as Warren Buffet tells us, the wealthiest pay lower effective tax rates than their secretaries.

Myth #2: "They'll take their money and go elsewhere."

Where? Where exactly would they go? China is growing, but carries its own risks. (income inequality, food price inflation, a suspected housing bubble that may dwarf the one we had, etc.) Europe has the Euro, which is rather wobbly at this point. Who really wants to shift all their investments to a zone where there are credible fears that the currency may collapse and possibly have half the nations involved break away? Even if the Euro doesn't collapse, austerity measures are widespread around Europe, so they'll likely see negative growth rates around much of Europe over the coming years. Who wants to send money in for negative growth? South America has seen a number of industries nationalized. Africa? Not the most stable investment. Besides, we've got relatively low taxes. There are a lot of nations for which we'd have a lot of room to raise ours before we even matched theirs.

Myth #3: "They'll have less money to use to create jobs."

For corporations, only the profit is taxed. How does a corporation deal with low taxes? Maximize profit ... send more cash to the owners. How does a corporation deal with high taxes? Reinvest ... plow income back into the building a better company to minimize taxable profit and thus tax. Reinvestment means more jobs. You'd have to raise corporate taxes quite a bit before they'd see low enough taxes elsewhere to make it worth moving, given all the disadvantages of doing business elsewhere. So there's leeway to encourage job-creating reinvestment by raising corporate taxes.

For individuals, the tax structure doesn't work quite the same way (although it probably should). But our economy is driven by spending ... not by income. People don't generally build a widget factory just because they had some spare cash. If they're smart, people only build widget factories because they expect more demand for widgets than production of widgets. It's the buyer. The buyer makes it worth building the factory to make the product. Without a buyer to make a factory worthwhile, cash goes into gold, treasuries, money markets, etc. ... things that don't directly provide many jobs. No matter how much money you have, you only need so much actual stuff. If I had ten times my current income, I wouldn't need any more food than I need now. I might get a slightly nicer house and another car. But still, there's only so much I can use -- let alone need -- that I don't have. After about $373,650 or maybe $500,000, one quickly reaches a point where more money just means you can squirrel away more cash into gold (or whichever investment vehicle is offering the best risk/return ratio at present). But until you reach that point -- for the least wealthy (maybe 98%) of the nation -- more money means you can buy more ... and almost certainly will. For the most wealthy (c. 2%), more money just means more money.

Will the wealthy spend more if they're taxed more? Not without incentive. But what if we say that for each 1 dollar you spend on domestic job-creating investments, you can lower your taxable income by 70 cents down until you reach $500,000 (pegged for inflation, please). Imagine that. So if a billionaire spends $100 million building/expanding factories, buying equipment domestically, employee training, or hiring somebody he wasn't paying before, he might then lower his taxable income by $70 million. And keep in mind that this billionaire would own that investment, a fact unchanged by using it to lower taxes. Sound like incentive to invest in American jobs? Maybe. How about if we raise the tax rate on income over $500,000 from the current 35% to 70% or maybe even the 90% we saw under President Eisenhower? What would you do if you were faced with the choice of paying 90% tax on your extra cash (before you could buy gold with it) or investing in something that would create jobs -- something you'd own -- to avoid paying so much tax?

That high is a bit extreme. 90% wouldn't leave much exit for an entrepreneur who wished to retire, so under ordinary circumstance -- outside wartime -- it shouldn't be that high. Perhaps 70% might be high enough. But if we really, really wanted to get people with money to plow it into jobs over the coming year and drop unemployment quick, imagine what a 90% rate on the top bracket (with a job creation taxable-income adjustment) for a year or two might do to lower our unemployment rate.  If we create strong incentive to invest domestically instead of abroad, the investors will find places to make it work.

There is, of course, a catch.  The catch means we should be very careful about putting such a strong incentive to invest into play for very long.  In our crisis shocked market, caution stands so high that supply and demand are strongly linked.  Companies now hesitate to invest in expanded supply until the demand clearly surpasses their production capacity.  Demand growth is slow, and so supply growth is slow.  For stability, this is great.  That stance helps avoid new bubbles.  But for fixing our unemployment problem, such caution hurts.  High unemployment drags on the economy, demanding repair.  The costs of high unemployment to our market's strength require that we get things rolling faster to trim those costs.  To do that, we need to risk encouraging supply to worry less about demand, at least for a while.  Just for a little while ... just long enough to get things rolling.

If folks who can make these changes ever embrace this idea, better ready the leprechauns...

Taxes and Jobs

Check out this chart of taxes and jobs in Presidential administrations back to the Great Depression. The middle number is the average tax % for the top tier. The third number is the average annual job growth.

If you buy that job creation is tied to the taxes on the wealthy, then from these figures the ideal top tax rate would be somewhere in the area of 75% ... certainly in the 70 to 89% range. According to the notion that job creation is tied to taxes on the wealthy, clearly we need to at least double the taxes on the top bracket in order to ramp up job creation.

[I don't necessarily believe that notion, but even without that it still looks like we've dropped taxes on the wealthy too low.]

Figures from http://en.wikipedia.org/wiki/Jobs_created_during_U.S._presidential_terms and http://www.ntu.org/tax-basics/history-of-federal-individual-1.html