April 26, 2003
It's an Industrial Sealant! No, It's a Dessert Topping!
Paul Krugman takes aim at the Bush tax cut. The underlying problem is that the Bush administration had no agreement about what its economic plan was. (a) The political shop seems to have demanded a bold policy that would fight the recession and create jobs. (b) The people who actually control things demanded a tax cut for the rich. (c) The economists (chiefly Glenn Hubbard) sought a program to boost economic growth. This "It needs to be an industrial sealant! No, it needs to be a dessert topping!" policy-development process produced (a) an increase in the deficit that is not front-loaded toward today (when a bigger deficit would be good and boost employment) but back-loaded toward the distant future, and as a result the (b) tax cut for the rich that was proposed took the form of (c) proposing to permanently reduce the double taxation of corporate income.
(c) by itself might have been a good program to boost long-run growth, but not if it is accompanied (as it is) by a large, permanent increase in the government's budget deficit--an increase that is more effective at retarding long-run growth than the rationalization of corporate income taxation could possibly be at boosting it. (a) by itself might have been a good program to boost employment by boosting demand in the short term, but--as Krugman points out--it is extraordinarily ineffective and costly when considered as a program whose main point is to boost employment over the next two years.
Not surprisingly, we have something that is neither a good industrial sealant nor a good dessert topping. It is, however, still pretty effective as a tax cut for the rich.
New York Times: Still, let's pretend that the Bush administration really thinks that its $726 billion tax-cut plan will [boost employment by] 1.4 million jobs [for the next couple of years]. At what price would those jobs be created?
By price I don't just mean the budget cost; I also mean the cost of sacrificing other potential pro-employment policies on the altar of tax cuts. Once you take those sacrifices into account, it becomes clear that the Bush plan is actually a job-destroying package.
Not that the budget cost is minor. The average American worker earns only about $40,000 per year; why does the administration, even on its own estimates, need to offer $500,000 in tax cuts for each job created? If it's all about jobs, wouldn't it be far cheaper just to have the government hire people? Franklin Roosevelt's Works Progress Administration put the unemployed to work doing all kinds of useful things; why not do something similar now? (Hint: this would be a good time to do something serious, finally, about port security.)
The answer is that we can't have a modern version of the W.P.A. because, um . . . because tax cuts are essential to promote long-run economic growth. Yes, that must be it. Just look at a new study by the Congressional Budget Office, now headed by an economist handpicked by the Bush administration. It concludes that the Bush plan may have either a positive or a negative effect on long-run growth, but that in any case the effect will be small. Wait, that's not the answer we wanted. Quick, find another expert!
April 22, 2003
Jobs, Jobs, Jobs
id you know that President Bush's economic plan will create 1.4 million jobs? Oh, and did I mention that the plan will create 1.4 million jobs? And don't forget, the plan will create 1.4 million jobs.
Republican politicians are obviously under instructions to push that job number. On the Sunday talk shows some of them said "1.4 million jobs" so often that it sounded like an embarrassing nervous tic.
Of course, there's no reason to take that number seriously. Basically, the job-creation estimate came from the same place where Joseph McCarthy learned that there were 57 card-carrying Communists in the State Department. Still, let's pretend that the Bush administration really thinks that its $726 billion tax-cut plan will create 1.4 million jobs. At what price would those jobs be created?
By price I don't just mean the budget cost; I also mean the cost of sacrificing other potential pro-employment policies on the altar of tax cuts. Once you take those sacrifices into account, it becomes clear that the Bush plan is actually a job-destroying package.
Not that the budget cost is minor. The average American worker earns only about $40,000 per year; why does the administration, even on its own estimates, need to offer $500,000 in tax cuts for each job created? If it's all about jobs, wouldn't it be far cheaper just to have the government hire people? Franklin Roosevelt's Works Progress Administration put the unemployed to work doing all kinds of useful things; why not do something similar now? (Hint: this would be a good time to do something serious, finally, about port security.)
The answer is that we can't have a modern version of the W.P.A. because, um . . . because tax cuts are essential to promote long-run economic growth. Yes, that must be it. Just look at a new study by the Congressional Budget Office, now headed by an economist handpicked by the Bush administration. It concludes that the Bush plan may have either a positive or a negative effect on long-run growth, but that in any case the effect will be small. Wait, that's not the answer we wanted. Quick, find another expert!
Meanwhile, the United States is in effect about to run a W.P.A. program in reverse. That is, as a nation we're about to reduce spending on basic needs like education, health care and infrastructure by at least $100 billion, maybe more. And these spending cuts ? the result of the fiscal crisis of the states ? amount to a job destruction program bigger than any likely positive effects of the Bush tax cut.
Until recently it has been hard to get people excited about the states' worst fiscal crisis since the Great Depression. For about two years state governments were able to use fancy financial footwork to put off the full effects, and the public probably regarded warnings about looming catastrophe as exaggerated. But now, as Timothy Egan reported yesterday in The
Aside from their cruelty and their adverse effect on the quality of life, these cuts will be a major drag on the national economy. So if the administration really cared about jobs, it would provide an emergency package of aid to state governments ? not to pay for new spending, but simply to maintain basic services. How about $78 billion ? the same sum just allocated for the Iraq war?
Oh, never mind. Anything that would distract from the tax-cut message is out of the question. In fact, rather than compromise on its goal of maximum long-run tax cuts for the wealthy, the administration now says that it's willing to phase tax cuts in gradually ? making them even less effective as an economic stimulus.
So when you take the policy consequences into account, it's clear that the administration's tax-cut obsession isn't just busting the budget; it's also indirectly destroying jobs by preventing any rational response to a weak economy. In its determination to stay on message, the administration is also determined not to do anything that would actually help ordinary families.
But did I mention that the Bush tax plan will create 1.4 million jobs?
JOBS, JOBS, JOBS: A FOLLOWUP (4/24/03)
Aha. It seems that I needed to explain something I took for granted in my piece "Jobs, jobs, jobs" in the NYT. I've gotten a fair bit of mail over the way I compared the annual cost of employing an average worker with the 10?year cost of the latest Bush tax cut. Some of the mail was in good faith, so here's the explanation.
No, I didn't forget to divide by 10. (For God's sake: whatever you think of my politics, I am a competent economist, and know how to use numbers.) What I foolishly assumed readers would know - this isn't condescension, I really was foolish - is that no serious economist thinks that a tax cut or spending increase will have any effect on employment more than a couple of years from now. The reason is straightforward: normally the economy is operating more or less at full employment, and any demand stimulus from a tax cut will be offset by an interest rate increase by the Fed. The Fed, of course, polices the economy to prevent inflationary pressures. And eventually we will return to normal circumstances.
The only situation in which a tax cut or spending increase creates jobs is when the economy is operating below full employment, and the Fed is unable to remedy the situation.
We are in such a situation right now - or at least I think we are. The Fed, by the way, does not agree: it thinks that a good recovery is just around the corner, and that it will soon be raising interest rates; in that situation any demand push from a tax cut will simply cause it to raise interest rates faster.
I don't agree, and neither do most private-sector economists; they think that the economy will remain sluggish for a while. And the Fed can't remedy the situation by cutting rates, because it has already cut them almost as far as it can. So since the economy could use a demand push right now, for the time being a fiscal expansion - either a tax cut or a spending increase - would indeed create jobs.
But this situation won't last forever. The conventional wisdom is that within a year or less the economy will be recovering nicely, and the Fed will be raising rates. So any fiscal stimulus that doesn't come in the next year will have no job creating effect; it will simply be offset by the Fed.
I'm less sanguine; I suspect that the sluggishness may persist longer. But even I don't expect a Japanese-style slump that goes on for a decade. Neither does the White House.
The bottom line is that when the Bushies talk about 1.4 million jobs, they don't mean 1.4 million jobs every year for the next decade; they mean 1.4 million jobs next year, and maybe a few the year after. Nobody, and I mean nobody, who knows any economics thinks that the tax cut will have an effect worth mentioning on employment 5 years from now, let alone 10.
And that, of course, is why the Bush tax cut gives so little bang for the buck. Almost 80 percent of the cost will come after 2004, that is, after most estimates suggest that the economy will already have recovered and won't need fiscal stimulus. By contrast, a job creation program that spent money now or in the near future would generate more jobs, at much less long-term fiscal cost.
So why didn't I explain all this in Tuesday's op-ed? Partly I fell prey to the occupational hazard of the professional economist writing for a general audience: I forgot that the ordinary intelligent citizen isn't necessarily familiar with the background material. (I'm in the same position when reading, say, about art or physics.) After 3 years writing for the Times, I usually have a good sense of what my audience doesn't know, but sometimes I forget.
The other answer is that this little explanation runs to 680 words. A whole op-ed column runs to about 730 words. You see the problem.
Update: A correspondent refers me to a nice piece by Dwight Meredith. Let me expand on that a bit. Whatever model the CEA is using, it clearly has the property that fiscal expansion has only a temporary effect on employment: the number of jobs increases at first, then falls back to the baseline. There's a reason their model does that: it's a property of every macroeconomic model I can think of. Only someone completely ignorant of what's in the textbooks would expect the Bush tax cut to have an effect on employment that is permanent, let alone one that grows over time.
My own view is that the tax cut - or any fiscal policy - will have a positive effect on employment only as long as the economy remains close to a liquidity trap. That is, once the Fed is no longer constrained in how much it can cut interest rates, fiscal policy adds nothing to the ability of policy to achieve full employment. Now most forecasts presume that we'll be out of the trap by next year - that is, before most of the supposed job creation from the tax cut takes place. Even if you're more pessimistic than that, we're probably looking at only 1-2 years when fiscal policy creates jobs.
And the basic point remains: Bush wants a long-term tax cut, most of whose impact will come long after job creation has ceased to be an issue. Yet he sells it as a job creation policy.
Oh, one last thing: according to Dana Milbank in the Post, Bush now
says that the big job estimate comes from independent economists - when
in fact it comes from his own CEA, and few people outside the administration
think it's realistic.
Posted by DeLong at April 26, 2003 04:42 PM
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I continue to wonder about the target audience for the Bush tax cutting. High income types? Many high income people do better in good economic times - they'd benefit more from a good economy than a few points of tax cut. My business certainly does better in good economic times. The wealthy? The positive effects of a good economy on an investment portfolio would seem to greatly outweigh any benefits of a tax cut. Just who is this tax cut good for? Better, who would be better off under this tax cut than under more rational economic policy?
Hmmm... maybe it's not about increasing the absolute wealth of the richest Americans, but rather, their relative wealth, which seems to be as important in many circumstances. I can't remember exactly where, but I remember a study from Harvard medical school showing that most people prefered having $50,000 and everyone else having $25,000 to having $100,000 and everyone else having $200,000. Perhaps that's the idea, to impoverish everyone, but to impoverish the wealthiest less than everyone else, so that they have higher status?
Posted by: Julian Elson on April 26, 2003 07:14 PMPK mentions the $726 Billion tax cut and compares that to an average salary of $40,000 per year. But the tax cut is over 10 years, or $72 Billion per year. Divided by the 1.4 million jobs, that is about $52 million per job per year. Even so, the tax cut for the wealthy is a bad deal. I don't pay much dividend tax and neither do most elderly with income under $50,000.
Brad, have you ever considered that Bush and his administration believe their own rhetoric, that government spending can have no long term positive effects on jobs? So if you believe that creating a government job takes a job out of the private sector and your ideal is to decrease the size of government, then why spend directly on government jobs. So if you rule government job creation as one fiscal policy then the only option left is tax cuts. If you are a politician and want to reward your donors, why cut taxes of people that as a group don't vote for you or contribute to your campaign?
Posted by: bakho on April 26, 2003 07:15 PMSlipped a few digits in the last post. THat should be $52,000 per job per year.
Posted by: bakho on April 26, 2003 07:47 PMQuite a few conservative Krugman-haters have alrady mentioned Krugman's howler mentioned by Bakho, including the decidedly weird Donald Luskin (who, by the way, said that "not even Krugman sycophant and Pillsbury Dough-Boy look-alike Brad DeLong has defended his comment". Giggle him to death, Brad!)
However, Luskin and Bakho commit a howler of their own -- that 1.4 million job figure is for the first TWO years of the Bush tax cut, not the first (as Luskin himself said later on in his blogsite), and so the actual figure is about $104,000 in foregone yearly taxes to create each $40,000-average-yearly salary job. Which means that -- while Krugman has come up with a thoroughly unconvincing and tortured attempt to try to cover for his original mistake on the Unofficial PK website -- the Bush tax cut is still, by Bush's own figures, almost certainly a lousy idea. I just had a little set-to this morning with Luskin over this (and his penchant for childish name-calling), who ended up refusing to explain his own slipup. Egotism makes fools of leftists and rightists alike.
Posted by: Bruce Moomaw on April 26, 2003 08:02 PMQuite a few conservative Krugman-haters have alrady mentioned Krugman's howler mentioned by Bakho, including the decidedly weird Donald Luskin (who, by the way, said that "not even Krugman sycophant and Pillsbury Dough-Boy look-alike Brad DeLong has defended his comment". Giggle him to death, Brad!)
However, Luskin and Bakho commit a howler of their own -- that 1.4 million job figure is for the first TWO years of the Bush tax cut, not the first (as Luskin himself said later on in his blogsite), and so the actual figure is about $104,000 in foregone yearly taxes to create each $40,000-average-yearly salary job. Which means that -- while Krugman has come up with a thoroughly unconvincing and tortured attempt to try to cover for his original mistake on the Unofficial PK website -- the Bush tax cut is still, by Bush's own figures, almost certainly a lousy idea. I just had a little set-to this morning with Luskin over this (and his penchant for childish name-calling), who ended up refusing to explain his own slipup. Egotism makes fools of leftists and rightists alike.
Posted by: Bruce Moomaw on April 26, 2003 08:04 PMGoddamnit, I posted that behemoth of a message twice. Sorry.
Posted by: Bruce Moomaw on April 26, 2003 08:05 PMHi bakho. I think this post by Krugman will address your concerns:
http://www.pkarchive.org/economy/042203Follow.html
I would also advise Brad DeLong to put this particular Krugman post as a companion to the article. There has been A LOT of misunderstanding regarding the $500 thousand per job stat which it turns out is correct.
Posted by: Bobby on April 26, 2003 08:59 PMOh and the Krugman Follow up is QUITE convincing. This ties into one of the great Krugman pet peeves. That is people not realizing that the Fed usually controls the unemployment rate and the vulgar Keynesian failure to realize that at full employment any fiscal attempt to create jobs is met by contractionary monetary policy that destroys an equal number of jobs to keep unemployment at its natural rate. There is an entire section in his book The Accidental Theorist on this topic with the title "Jobs, Jobs, Jobs." Here's one that makes the point:
http://www.pkarchive.org/trade/respond.htm
>>But the tax cut is over 10 years, or $72 Billion per year. Divided by the 1.4 million jobs, that is about $52 [thousand] per job per year.<<
No. The boost to employment caused by the tax cut goes away after a couple of years, but the costs of the tax cut continue. A good job creation program is front-loaded. This is back-loaded. That was my point.
Posted by: Brad DeLong on April 26, 2003 09:35 PMI should clarify Krugman's pet peeve regards any "job creation" policy and not just fiscal policy. It is that they do not create jobs and this really the Fed's realm. Here are some more articles where he says this:
http://www.pkarchive.org/trade/ForeignPolicyStupid.html
http://www.pkarchive.org/crises/trouble.html
http://www.pkarchive.org/trade/company.html
http://www.pkarchive.org/cranks/vulgar.html
Posted by: Bobby on April 26, 2003 09:40 PMOn the advice of Dwight Meredith's blogsite (
http://pla.blogspot.com/2003_04_20_pla_archive.html#93236677 ), I just took
a look at the CEA's official report on the economic consequences of Bush's
proposed tax cut (
www.whitehouse.gov/cea/cea_growth_package_macroeconomic_effects.pdf ) -- and
Meredith is right: something very, very strange is going on. The report
flatly states (pg. 6): "On average over end-2002 to end-2007, job creation
as a result of the package would be 140,000 higher than otherwise." This is
explicitly repeated in the table on page 7. Now, as Meredith points out, if
new job creation per year averages 140,000 from the end of 2002 through the
next 5 years, then 700,000 new jobs will have been created during that
period -- but since the report also says that a total of 1.4 million new
jobs will be created in 2003 and 2004, then Bush's tax cut will DESTROY a
total of 700,000 jobs in 2005, 2006 and 2007!
I went through the report with a fine-toothed comb -- but there is no
further explanation. So either the CEA report contains a very strange pair
of misprints, or else the CEA is saying that the tax cut will actually start
destroying jobs after 2004. (It could, I suppose, have intended to say that
the tax cut will produce an average of 140,000 new jobs yearly during the
2005-2007 period, rather than the 2003-2007 period. Assuming that it
continues to produce them at that rate, then it would produce a total of
2.52 million new jobs over 10 years -- at a cost of $288,000 in lost tax
receipts for each $40,000-a-year-average job it creates. Either way,
Krugman's mistake suddenly looks a lot less serious.)
Krugman says in his followup that in a few years the job creation effect of the tax cut peters out to nothing as we return to full employment, and that's when my previous comment about the Fed no longer allowing the tax cuts to create more jobs applies. As you can see Krugman has discussed very frequently in the past how little government "job creation" policy actually creates jobs. His followup to the 4.22.03 article, which I linked to, is just another article in this tradition. So it is completely wrong to call it tortured or unconvincing.
Posted by: Bobby on April 26, 2003 10:01 PMI messed up in the last post. Krugman says that the job creation effects of tax cuts are really worth anything only when you are in a liquidity trap, whereby the Fed cannot cut interest rates any further (it's at zero) and conventional monetary policy becomes unable to fight recessions. But once you're out of the trap, the job creation effects of tax cuts really aren't worth discussing since the Fed can do the job at least as well. Any attempt to get back to full employment through fiscal policy is matched by forgone interest rate cuts. If you assume that we will be out of the trap within a year or two, his predictions hold.
Posted by: Bobby on April 27, 2003 06:13 AMbtw - in the original Saturday Night Live sketch, the product ('Shimmer') was a floor wax and a dessert topping:)
Posted by: David G on April 27, 2003 06:51 AMbtw - in the original Saturday Night Live sketch, the product ('Shimmer') was a floor wax and a dessert topping:)
Posted by: David G on April 27, 2003 06:53 AMDeLong's comparison of the Bush conflicting rationales to the classic SNL commercial was really funny. The attempt by Luskin to discredit Krugman's budget cost per job created figure and Krugman's effective rebuttal shows the misunderstanding of what this Bush claim is all about. Krugman simply noted economies eventually get back to full employment so more consumption = less investment and lower long-term growth. But yese we are below full employment but not from a lack of consumption but rather from falling business investment that continued to drop even in 2003QI. Bush might think voters are stupid but Wall Street is not. The lack of fiscal credibility may be why investment continues to drop which is why we stay below full employment. So my only complaint with the Krugman figures is he concedes this creates jobs in the short-run. Maybe the Bush tax cuts are actually reducing job creation?
Posted by: Hal McClure on April 27, 2003 07:52 AMThanks for the enlightenment on the number of jobs. Very confusing. A statistic of job-years (number of jobs created times the average number of years for each job) would simplify the discussion.
I thought the point of the Bush tax cut is that it contains the rest of the tax cuts that Bush wanted as part of his original 2001 plan, but were eliminated due to the political need to make the number about $1.35 trillion. We have Dilulio claiming that the politics drives the policy in the Bush administration. We see that Bush has not changed his basic fiscal policy since he came into office in spite of revenue decreases and unemployment rise. So why not assume that the primary reason for these tax cuts is political? Maybe the administration claims for the tax cuts (economic stimulus, jobs, fairness, etc.) is nothing more than political spin to disguise the fact that a large amount of money is being transferred from the US treasury to very wealthy individuals many of whom use some of that money to support the candidacy of Mr. Bush.
The usual kickback schemes entail businesses being awarded contracts, then returning a portion of that contract to the politician in charge for personal use or for running a political campaign. Can tax cuts can be used as kickbacks in a similar manner? A tax cut could be given that targets a select group, closely allied with the politician. The politician gets contributions from the group and the group gets a large return on investment through large tax cuts. Of course, the GOP has argued for years that Democratic programs favoring the poor and minorities are political payoffs to their supporters. Does the GOP see this as a political war where their supporters, the wealthy, win and the Democrat supporters, the poor get punished?
This is the way Banana Republics are run. This fiscal policy will eventually put the US in the same fiscal straights as those Banana Republics.
Posted by: bakho on April 27, 2003 08:12 AMHal, in this economy I agree with your comment that the Bush plan may not create nearly as many jobs as claimed. This economy is characterized by overcapacity. Business is not investing in new capacity, because demand is not there. So giving business investors more money is supposed to create more business investment when a lot of money is already sitting on the sidelines?
It would seem that most of the tax cut would not go to stimulate business investing, but would go to buy government bonds to finance the new debt or into the housing market where the lowest interest rates in 30 years decreases financing costs and increases the return on investment. This is creating overcapacity in the housing market.
We are seeing this in our own community. Apartment complexes are being built like crazy even though many units are vacant. Companies are locking in low interest rates in the hopes that when rates go up, building will fall off and the population will grow into the vacancies. However, there will come a point when even the allure of locking in low interest rates cannot justify building new units in the face of a large vacancy rate.
Overall, more business investment money is not the solution for our current economic problems and may make the future situation much worse. What is needed is to stimulate demand. Only then will the money come off the sidelines and expand businesses again.
Posted by: bakho on April 27, 2003 08:23 AMThough the President's tax cut plans are designed to further enrich the rich, I do not think that is how the were shaped. This Administration is most heavily influenced by lobbying, and policy is designed to the dictates of major lobbies. The wishes of the rich are simply far better represened by lobbies than the needs of the middle class or poor. Wait and see the campaign chest put together by the President for the coming election. Who will the donors be?
We have policy shaped by lobbies, and lobbies best represent the wishes of the rich.
Paul Krugman and Brad DeLong and Stephen Roach [Morgan Stanley] are right on the lack of stimulus of the last and current tax cut schemes, and on the harmful long term deficit effects. Paul Krugman draws the hacks, for the sense of the New York Times articles and the popularity make PK a prime problem for the seld-styled "compassionate conservatives" whose policies are heartless and radical.
Posted by: anne on April 27, 2003 08:36 AMInterestingly, righties bashed Paul Krugman to bits for complaining about Assistant Secretary of the Army Mr. White. Mr. White ran run of the worst offending divisions of Enron, while apparently knowing nothing of nothing. Well, Mr. White has just been forced to an early retirement by the Secretary of Defense. Knowing nothing of nothing at Enron was apparently not enough for the Army posting.
Posted by: bill on April 27, 2003 08:50 AMoops - that is ran "one"
Posted by: bill on April 27, 2003 08:57 AMAnne
Are you worried about the lack of a private middle class savings cushion as the baby boomers pass through the prime earnings years. We appear to be savings short. A growing federal deficit would seem to make the problem of a saving shortage worse. How much foreign capital can we count on to fund our deficit?
Posted by: lise on April 27, 2003 09:32 AMThe decline in private savings in the 80's and 90's is a puzzle. We were told not to worry because the numbers did not reflect capital gains on stock holding, but John Bogle showed actual capital gains were not close to a low cost tax-efficient index fund. Recently, we have been told that rising prices for homes has negated a loss savings during the fierce bear market in stocks. However, homeowners appear to have drawn equity from homes to maintain spending patterns.
We really must be savings short. Why is there not more discussion of the problem? I do not know. Will there be an endless stream of foreign capital to America to offset our deficits? I do not know. What of interest rates in future? Oh well.
Posted by: anne on April 27, 2003 10:13 AMI do have to say that it's these sorts of debates that make the PKArchive an invaluable resource....
Posted by: Paul on April 27, 2003 10:28 AMEconomists who support the President's tax cutting objectives argue that our high productivity and so future high growth rates will offset deficits from private to public. Several members of the Fed Board seem to be taking this line. Fed Board members are fairly optimistic about growth in the economy from summer on. I do not understand the optimistic reasoning, but would welcome more discussion.
Posted by: jd on April 27, 2003 10:59 AMhttp://www.morganstanley.com/GEFdata/digests/latest-digest.html
Stephen Roach
When the federal government runs a budget surplus, it is making a positive contribution to the pool of national saving. Conversely, when the government budget goes into deficit, the public sector is then “dissaving” -- in essence, offsetting the private saving generated by households and businesses. If the private sector has an ample reservoir of saving, the economy can afford large government budget deficits. However, if private saving rates are low, fiscal profligacy becomes unaffordable....
Posted by: jd on April 27, 2003 11:05 AMPaul Krugman and the PKArchve are leaving an invaluable set of colurageous and beautifully written articles to help in understanding contemporary economic policy. Between Krugman and DeLong we finally have a basis for consideration of economic policy aside from simple political ball tossing. There is a reason whyt every Krugman article in the NYTimes becomes the most e-mailed article in the Times.
Posted by: anne on April 27, 2003 11:17 AMThis whole discussion I find really depressing. We have economists from both the left and right discussing how many angels can dance on the head of a pin.
Wasn't the tax cuts for the rich already tried in the eighties and what happened?
We give money out to poor working families in the form of the EITC January-March. What is the effect of of that in the first quarter?
I'm sure it must have some positive effect. I've done income taxes for these people, and I'm sure the money gets spent almost immediately. Try renting an apartment and buying groceries for a family on $15,000 a year. I know people have said a lot of bad things about Nixon, but I believe it was Nixon who started the EITC, which I consider to be one of the most progressive tax laws that help the poor, and he was a Republican.
Regarding why people don't save money-
A lot of the economy in the last 25 years or so I do believe has been heavily influenced by the boomers. Inflationary trends in housing and the stock market were exaggerated by the large numbers of people moving through that phase of their life, compounded by the effects of tax laws relating to housing and retirement savings.
Remember the housing market in 70's? There was so much inflation in that period that you were dumb to save money. (I am 50 yrs. old.)
Then after we bought our homes, we started saving for retirement, so the same rules applied. You were dumb to put money into savings if the stock market was going up 10-20% a year, and you were also saving 20-40% in taxes on that money by putting that into retirement.
And so now the feds have lowered interest rates to what?
That's why we didn't save money. The government wanted us to put it in houses and the stock market, and that's what we did.
Anyhow, we can't save any money right now because we are paying for our kids to go to college.
Interesting. There is no question we could have a quick and fair stimulus with a temporary payroll tax cut. Sadly, that is not going to happen.
Back to saving -
If John Bogle is correct, even through the great bull market from August 1982 to March 2000, actual investor returns were far less than the S&P index would show they could have been.
Home owners have tended to draw on rising equity for additional spending. Too little saving there.
Again, although we save relatively little, we are still net creditors. But with interest rates so low, interest payments will be low for some time and put further pressure on those trying to save. Older women and men who may wish to rely more on bonds for income are going to be squeezed for some time to come.
The great bull market in bonds began in October 1981 and may well have ended this March. Bonds are surely going to provide lower returns for years to come. Stocks are far better valued than in 2000, but are still not nearly as cheap as in 1982. Homes are likely to appraciate in price more slowly for several years. Wage increases have slowed and far too few jobs are being created by businesses. Darn, we have a problem.
Posted by: anne on April 27, 2003 02:06 PMThanks Paul and Anne :)
Posted by: Bobby on April 27, 2003 03:54 PMI don't know about the payroll tax idea-EITC already is a sliding scale payroll tax cut to single filers/married+no children up to about $10,000 income, and a sliding scale payroll tax cut/child bonus to head of household or married to about low $30,000. Maximum benefit is mid point on the no child/1child/2child tables. So, it would be only provide additional benefit above those income levels. Plus, wouldn't that scare the people who are the savers in our economy, like my parents who grew up in the depression, and clamp down on their spending for the slightest thing? They might not like the fooling around with the payroll tax if they think it will affect their social security. But, expanding the EITC amounts and raising the income limits on the tables might be a help, and wouldn't sound so scary to the old people.
Another thing about payroll tax and starting out your own business- that 15% payroll tax (employer + employee) is a real killer, and a discouragement to business startup. Some relief on payroll tax in that range would be helpful to someone who is just starting a business, perhaps a sliding scale for payment of the employer portion for Schedule C business income $0-$20,000. People who take advantage of the working poor lots of times pay them (illegally) as independent contractors instead of employees, but they usually don't have the energy to fight it, so that would give them some relief as well.
Also, people who are paying college expenses could use a little more relief on the interest rate for college loans. I had student loans in the early 70's and the interest rate was 3%. I don't remember what the fed rate was then. But with the fed rate as low as it is now, why are the plus loans and non-subsidized student loans still at 4-6%? In such a low interest environment , the financial aid formula really punishes people who have saved.
Anyway, about this lowering of the interest rate so much, I admit I have lost some confidence in Mr Greenspan. I hope that I am wrong, but I am afraid that he "did a Japan". There is a point where if the lowering of interest rate does not achieve the objective (increase business investment), why keep doing it if you further decrease personal investment income? My parents income is much smaller this year because of the low interest rate, and anyone who saved for college expenses has to use the principal, so that's decreasing our savings. Why is that a good thing?
So Mr. Greenspan cut the interest rate to promote business investment so we can become more productive, even though we are already such good worker bees that they need less of us to work right now, so if everything works out as he planned they will need even fewer of us to work in the future. What is the logic of this?
Great title.
Posted by: John Isbell on April 28, 2003 03:56 PMPerfect example of the poisonous effects of Paul Krugman:
" Interestingly, righties bashed Paul Krugman to bits for complaining about Assistant Secretary of the Army Mr. White. Mr. White ran run of the worst offending divisions of Enron, while apparently knowing nothing of nothing. Well, Mr. White has just been forced to an early retirement by the Secretary of Defense. Knowing nothing of nothing at Enron was apparently not enough for the Army posting."
Absolutely ZERO evidence has surfaced to connect any wrongdoing at Enron with Thomas White. And, Enron certainly didn't have anything to do with his dismissal as Army Sec'y. That's being reported as fallout for his disagreement with Donald Rumsfeld over the Crusader Artillery piece.
But that doesn't stop the gratuitous slander of the man even now.
Posted by: Patrick R. Sullivan on April 28, 2003 04:16 PMIt is my opinion that Jack Krugman doesn't know his ass from a hole in the ground and any institution that would take him seriously or bother to print his ridiculous rantings aren't worth the paper or cyber space his garbage is printed on. In the first case to arrive at a conconclusion that a $500,000 dollar tax cut will result in the creation of but one job is ludicrist. What does the man think a person will do with the money?, give it to someone to guard for the cost of $50,000 a year? Then the person receiving the money will probably stuff it in his or her mattress and save it till the day they die. Their kids will probably just burn the money because we will be in a socialist utopia by then and the government will just print jobs as they are needed and we will all stay home and watch the money roll in! Much like the Heaven that FDR envisioned, a perfect example of which is the ponsie scheme he gave us that is called Social insecurity!! What a joke!! I have yet to find any positive program that was actually good for this Country in the long term created by Franklin Duffis Roosevelt. I am just a middle class worker who is tired of being told by so called intellectuals such as Mr. Krugman how ill informed we are. I for one think that Mr. Krugman is either more ignorant than I am, or worse well aware of the deceit he is portraying and for whatever reason has his own motives!!!
Posted by: David Foor on April 28, 2003 07:28 PMIt is my opinion that Jack Krugman doesn't know his ass from a hole in the ground and any institution that would take him seriously or bother to print his ridiculous rantings aren't worth the paper or cyber space his garbage is printed on. In the first case to arrive at a conconclusion that a $500,000 dollar tax cut will result in the creation of but one job is ludicrist. What does the man think a person will do with the money?, give it to someone to guard for the cost of $50,000 a year? Then the person receiving the money will probably stuff it in his or her mattress and save it till the day they die. Their kids will probably just burn the money because we will be in a socialist utopia by then and the government will just print jobs as they are needed and we will all stay home and watch the money roll in! Much like the Heaven that FDR envisioned, a perfect example of which is the ponsie scheme he gave us that is called Social insecurity!! What a joke!! I have yet to find any positive program that was actually good for this Country in the long term created by Franklin Duffis Roosevelt. I am just a middle class worker who is tired of being told by so called intellectuals such as Mr. Krugman how ill informed we are. I for one think that Mr. Krugman is either more ignorant than I am, or worse well aware of the deceit he is portraying and for whatever reason has his own motives!!!
Posted by: David Foor on April 28, 2003 07:29 PMIt is my opinion that Jack Krugman doesn't know his ass from a hole in the ground and any institution that would take him seriously or bother to print his ridiculous rantings aren't worth the paper or cyber space his garbage is printed on. In the first case to arrive at a conconclusion that a $500,000 dollar tax cut will result in the creation of but one job is ludicrist. What does the man think a person will do with the money?, give it to someone to guard for the cost of $50,000 a year? Then the person receiving the money will probably stuff it in his or her mattress and save it till the day they die. Their kids will probably just burn the money because we will be in a socialist utopia by then and the government will just print jobs as they are needed and we will all stay home and watch the money roll in! Much like the Heaven that FDR envisioned, a perfect example of which is the ponsie scheme he gave us that is called Social insecurity!! What a joke!! I have yet to find any positive program that was actually good for this Country in the long term created by Franklin Duffis Roosevelt. I am just a middle class worker who is tired of being told by so called intellectuals such as Mr. Krugman how ill informed we are. I for one think that Mr. Krugman is either more ignorant than I am, or worse well aware of the deceit he is portraying and for whatever reason has his own motives!!!
Posted by: David Foor on April 28, 2003 07:30 PM>>I for one think that Mr. Krugman is either more ignorant than I am
In which case the family of "Jack Krugman", whoever he may be, have my sympathy.
Posted by: dsquared on April 28, 2003 11:38 PMMaybe Mr. Foor is talking about Jack Klugman, who unbeknownst to us was - like Ben Stein - a practising economist when not an actor.
Posted by: achilles on April 29, 2003 07:45 AM"Absolutely ZERO evidence has surfaced to connect any wrongdoing at Enron with Thomas White."
If you assume that the writer of the Salon piece made it up; otherwise there's one piece of evidence. Did you ever try calling the source?
Posted by: Jason McCullough on April 29, 2003 01:46 PMMuch of the confusion regarding the "cost per job" of the tax cut stems from the use of the term "jobs created" for what is more properly termed "an increase in employment." The tax reduction may increase employment (above what it would be in the absence of the cut or with an alternative policy)by a certain number as of a future date. Nothing has been "created". Consequently, the relevant question regarding "cost" per "job" is, as a consequence of the cut, how many more workers are employed and for how long.
Once employment effects of discretionary fiscal stimulus are termed "job creation" then it seems logical to divide the costs by what ensued from incurrring the costs - namely the number of jobs created. To counter this it becomes necessary to argue that as the economy moves toward full employment the jobs created by the fiscal stimulus are somehow destroyed and replaced by jobs created due to other sources of aggregate demand. Characterizing the effects of the cut as increasing employment avoids this confusion.
Posted by: Jerry Miner on May 8, 2003 10:56 AMRichard wonders whether the tax cuts really are in the interests of the wealthy, and presents a convincing agument whey they are not. But it is possible that Richard asked the wrong question. From the White House's perspective, what matters for Bush's re-election effort is that the wealthy PERCEIVE that they are better off from tax cuts and corporate subsidies. If they so perceive and contribute only a tiny percentage of their wealth to Bush's re-election effort that could more than offset the votes that Bush loses due to unwise economic management, and he gets re-elected. Then Bush starts the same cycle all over again, possibly invading a few more hapless countries along the way, to build support for his Republican successor. This is called a "political machine". Lamentably, the fact that this kind of vote-buying is hardly sustainable and could easily lead to the U.S. becoming a second-rate world power either hasn't occurred to them, or it has occurred to them and they don't care.
Posted by: Sam Brasel on May 9, 2003 06:26 AM