Posted by DeLong at September 9, 2004 01:59 PMAngry Bear: As we all know, Bush pushed through two massive tax cuts -- "the largest tax relief in history," according to the Bush campaign. Yet the current recovery is among the weakest in history, as illustrated in the previous post. Shouldn't the largest tax cuts in history have had more effect? How could such massive tax cuts have such little impact on the economy?
The answer is that it matters a great deal exactly how you cut taxes. Some tax cuts have bigger effects on the economy than others, for a given dollar amount of taxes cut. And clearly, the specific types of taxes cut by the Bush administration had just about the smallest bang for the buck imaginable.
Why? There are several ways in which those tax cuts were terribly designed to stimulate the economy. I won't go into all of them here, but let me address a couple of ways. First of all, the lion's share of the tax cuts went to the richest housholds. Since the marginal propensity to save is so much higher among high-income households than lower and middle-income households, this meant that a large proportion of the tax cut was simply saved, adding no demand to the US economy.... Much of the tax cut's 2003 effect was lumped into the third quarter of 2003. According to the BEA, the 2003 tax cut, which took effect in July of 2003, reduced personal income taxes by nearly $100 bn in the third quarter of 2003 compared to the same quarter a year earlier.... [T]he majority of that tax giveback was saved, not spent.
I seem to recall certain shrill commentators, at the time of these tax cuts, commentating that they seemed to be designed in the worst possible way for stimulus purposes.
One would think that these shrill commentators would be vindicated in the popular press and lionized as geniuses in all the business mags in much the same way as Abbey Joseph Cohen was during the bubble years.
Posted by: Kuas at September 9, 2004 04:17 PMBrad,
Why no column eating crow today on outsourcing? Samuelson blew you up in the NYTimes, today.
Best regards,
Moe Levine, who by comparison, deserves the nobel prize in economics when compared to the current crop .
Posted by: Moe Levine at September 9, 2004 04:28 PMGee, that was humble.
Posted by: Dragonchild at September 9, 2004 05:40 PMHave you noticed that the Fed is raising interest rates? Can you imagine how that might
bear on your claim that fiscal policy has delivered an insufficient boost to aggregate demand?
I agree with you that George Bush has come from and will return to hell. But you folks should know better than this. If demand is your problem, then the proximate cause is a policy error at the Fed, not the Treasury.
Posted by: Gerard MacDonell at September 9, 2004 06:39 PMBut Gerard have you noticed that since the 50bp rise in the Fed rates, the 30yr mortgage rate has declined by about the same amount? So what should we know better? Maybe self-selected Nobel Moe knows...
The reason the huge Bush tax cuts plus deficit spends had nil effect on the US economy is two-fold. First, the Clinton II economy was running on vapors. Vaporware and vaporstocks. Roaring Twenties and Gay (18)Nineties all over again. Statistically, it would've been near impossible to record any "gain" in the 2000-2004 economy, since traders, (aka traitors) are like vampire. Actually, it's a miracle DJIA is still >10K.
Second, military and DoD spending is one of the worst bang-for-your-buck ways to spend money, in terms of citizen dollars in the bank versus tax dollars spent. That $1B GBR SBX ship radar being built in Houston by immigrant labor doesn't even blip the take-home stats up a micron, since most of that $1B is going tax-free into corp coffers, where it's finagled off against a loss-leading division and disappears like rain on the Sahara.
All that discretionary spending on Defense is like throwing our paychecks into the ocean. It don't come back, no how. And has to be repaid.
Bush should have just given all the tax cuts back to Americans, and spent deficit funds on entitlement programs only, then let everyone be "rich" for a few couple of months, when all that tax money ended up right back in play again.
Alaska does it every year. Oil royalty checks are distributed to every citizen, and spent on rent, groceries and gas, keeping the Alaska economy warm all through the long, cold winter when there is little work to be had.
Greenspan and Rumsfeld are idiots, ya' have to say. Greenspan for not putting his foot down, and Rumsfeld for putting his foot to the floor.
Hey, I guess the war could've cost a TRILLION!
Posted by: Tante Aime at September 9, 2004 08:41 PMLevine:
What by Samuelson in the NYTimes today? I did a search of article text and bylines and found nothing over the last week.
G McDonnell:
"Have you noticed that the Fed is raising interest rates?"
Yes
"Can you imagine how that might
bear on your claim that fiscal policy has delivered an insufficient boost to aggregate demand?"
No, I have no idea at all.
Could you please try to explain it to me? I am a humble person and do not mind humiliating myself by admitting I do not understand your argument, either in this post or previous ones. First, the Fed may have other fish to fry on a short term basis than supporting aggregate demand in every move it makes. Second, what has the Fed been doing for the last several years? If the fiscal stimulus from the tax cuts were working, what evidence was there until the last month or so, that the Fed was trying to neutralize anything.
I still think that you believe that the economic fundamentals can only be perceived by working backward from what the Fed does. And apparently assuming that the Fed always does the right thing, and the main thing on the Feds mind that month is supporting aggregate demand. Those assumptions are much too strong for my taste.
Posted by: jml at September 9, 2004 09:58 PMTante Aime:
"the Clinton II economy was running on vapors. Vaporware and vaporstocks."
Is there any argument backed by some kind of figures or evidence to support this claim? By real economic measures it was a mild recession. The problem was the coutercyclical policy was so inefficient that the recovery was slow. For example, relatively little job destruction during and right after recession, but abnormally low job creation during recovery. A stock market bubble burst is not the same thing as a severe recession in real terms.
"Roaring Twenties and Gay (18)Nineties all over again."
Hate to be pedantic, but the Gay (18)Nineties were a series of sharp real economic downturns interrupted by rapid, but quickly aborted upturns. A very unstable and uncertain time. In terms of average peoples' incomes, it stunk.
So see how myths can grow?
But think about it, a period that produced Barbershop Quartet harmony must have been a desparate time.
Posted by: jml at September 9, 2004 10:23 PMSeptember 9, 2004
An Elder Challenges Outsourcing's Orthodoxy
By STEVE LOHR - New York Times
At 89, Paul A. Samuelson, the Nobel Prize-winning economist and professor emeritus at the Massachusetts Institute of Technology, still seems to have plenty of intellectual edge and the ability to antagonize and amuse.
His dissent from the mainstream economic consensus about outsourcing and globalization will appear later this month in a distinguished journal, cloaked in clever phrases and theoretical equations, but clearly aimed at the orthodoxy within his profession: Alan Greenspan, chairman of the Federal Reserve; N. Gregory Mankiw, chairman of the White House Council of Economic Advisers; and Jagdish N. Bhagwati, a leading international economist and professor at Columbia University.
These heavyweights, among others, are perpetrators of what Mr. Samuelson terms "the popular polemical untruth."
Popular among economists, that is. That untruth, Mr. Samuelson asserts in an article for the Journal of Economic Perspectives, is the assumption that the laws of economics dictate that the American economy will benefit in the long run from all forms of international trade, including the outsourcing abroad of call-center and software programming jobs.
Sure, Mr. Samuelson writes, the mainstream economists acknowledge that some people will gain and others will suffer in the short term, but they quickly add that "the gains of the American winners are big enough to more than compensate for the losers."
That assumption, so widely shared by economists, is "only an innuendo," Mr. Samuelson writes. "For it is dead wrong about necessary surplus of winnings over losings."
Trade, in other words, may not always work to the advantage of the American economy, according to Mr. Samuelson.
In an interview last week, Mr. Samuelson said he wrote the article to "set the record straight" because "the mainstream defenses of globalization were much too simple a statement of the problem." Mr. Samuelson, who calls himself a "centrist Democrat," said his analysis did not come with a recipe of policy steps, and he emphasized that it was not meant as a justification for protectionist measures.
Up to now, he said, the gains to America have outweighed the losses from trade, but that outcome is not necessarily guaranteed in the future.
In his article, Mr. Samuelson begins by noting the unease many Americans feel about their jobs and wages these days, especially as the economies of China and India emerge on the strength of their low wages, increasingly skilled workers and rising technological prowess. "This is a hot issue now, and in the coming decade, it will not go away," he writes.
The essay is Mr. Samuelson's effort to contribute economic nuance to the policy debate over outsourcing and trade. The Journal of Economic Perspectives, a quarterly published by the American Economic Association, has a modest circulation of 21,000 but it is influential in the field.
Indeed, Mr. Bhagwati and two colleagues, Arvind Panagariya, an economics professor at Columbia, and T. N. Srinivasan, a professor of economics at Yale University, have already submitted an article to the journal that is partly a response to Mr. Samuelson. Theirs is titled "The Muddles Over Outsourcing."
The Samuelson critique carries added weight given the stature of the author. "He invented so many of the economic models that everyone uses," noted Timothy Taylor, managing editor of the Journal of Economic Perspectives.
For generations of undergraduates, starting in 1948, the study of economics has meant a Samuelson textbook, now in its 18th edition, with William Nordhaus, a Yale economist, as a co-author since the 12th edition. Because he has taught at M.I.T. for six decades, the elite ranks of the economics profession are filled with Mr. Samuelson's former students, including Mr. Bhagwati and Mr. Mankiw.
According to Mr. Samuelson, a low-wage nation that is rapidly improving its technology, like India or China, has the potential to change the terms of trade with America in fields like call-center services or computer programming in ways that reduce per-capita income in the United States. "The new labor-market-clearing real wage has been lowered by this version of dynamic fair free trade," Mr. Samuelson writes.
But doesn't purchasing cheaper call-center or programming services from abroad reduce input costs for various industries, delivering a net benefit to the economy? Not necessarily, Mr. Samuelson replied. To put things in simplified terms, he explained in the interview, "being able to purchase groceries 20 percent cheaper at Wal-Mart does not necessarily make up for the wage losses."
The global spread of lower-cost computing and Internet communications breaks down the old geographic boundaries between labor markets, he noted, and could accelerate the pressure on wages across large swaths of the service economy. "If you don't believe that changes the average wages in America, then you believe in the tooth fairy," Mr. Samuelson said.
His article, Mr. Samuelson added, is not a refutation of David Ricardo's 1817 theory of comparative advantage, the Magna Carta of international economics that says free trade allows economies to benefit from the efficiencies of global specialization. Mr. Samuelson said he was merely "interpreting fully and correctly Ricardoian comparative advantage theory." That interpretation, he insists, includes some "important qualifications" to the arguments of globalization's cheerleaders.
Those qualifications are not new to Mr. Samuelson. He noted that in a different context, he touched on similar matters as far back as 1972 in a lecture he delivered shortly after he won his Nobel Prize, titled "International Trade for a Rich Country."
For his part, Mr. Bhagwati does not dispute the model that Mr. Samuelson presents in his article. "Paul is a great economist and a terrific theorist," he said. "And in markets like information technology services, where America has a big advantage, it is true that if skills build up abroad, that narrows our competitive advantage and our exports will be hit."
But Mr. Bhagwati, the author of "In Defense of Globalization" (Oxford University Press, 2004), says he doubts whether the Samuelson model applies broadly to the economy. "Paul and I disagree only on the realistic aspects of this," he said.
The magnified concern, Mr. Bhagwati said, is that China will take away most of American manufacturing and India will take away the high-technology services business. Looking at the small number of jobs actually sent abroad, and based on his own knowledge of developing nations, he concludes that outsourcing worries are greatly exaggerated.
As an example, Mr. Bhagwati pointed to the often-repeated estimates that, because of the Internet, as many as 300 million well-educated workers, mostly from India and China, could now enter the global work force and compete with Americans for skilled jobs.
In their paper, Mr. Bhagwati and his co-authors write that such an assessment of the education systems of India and China "almost borders on the ludicrous." In an interview, Mr. Bhagwati said, "You have a lot of people, but that doesn't mean they are qualified. That sort of thinking is really generalizing based on the kind of Indian and Chinese people who manage to make it to Silicon Valley."
The Samuelson model, Mr. Bhagwati said, yields net economic losses only when foreign nations are closing the innovation gap with the United States.
"But we can change the terms of trade by moving up the technology ladder," he said. "The U.S. is a reasonably flexible, dynamic, innovative society. That's why I'm optimistic."
The policy implications, he added, include increased investment in science, research and education. And Mr. Samuelson and Mr. Bhagwati agree that the way to buffer the adjustment for the workers who lose in the global competition is with wage insurance programs.
"You need more temporary protection for the losers," Mr. Samuelson said. "My belief is that every good cause is worth some inefficiency."
Gerard MacDonell wrote, "If demand is your problem, then the proximate cause is a policy error at the Fed, not the Treasury."
Huh? I thought the Fed bent over backwards to stimulate the economy these past few years.
I'm only a naive watcher of these things, but my impression is that right now, money market funds and short term bonds are yielding less than inflation.
And much of the talk until say a year ago was about the Fed *worrying* about a liquidity trap. Yes, I seem to recall you posting before on SDJ that we weren't *in* one; but that doesn't mean the Fed wasn't worried about the possibility.
Finally, some analysts thought Greenspan's policy was far too loose and may have ignited an asset inflation bubble (particularly housing). Not clear that's true, of course.
Overall, you can't just claim that the Fed will always neutralize fiscal stimulus; it's an empirical question.
Posted by: liberal at September 10, 2004 04:12 AMjml wrote, "Is there any argument backed by some kind of figures or evidence to support this claim?"
Well, the stock market isn't the most important economic measure, but at the peak of the bubble, the market cap/GDP ratio had reached totally absurd highs. That particular measure (imperfect, of course) made the same number in 1929 look tame by comparison.
"By real economic measures it was a mild recession. The problem was the coutercyclical policy was so inefficient that the recovery was slow. For example, relatively little job destruction during and right after recession, but abnormally low job creation during recovery. A stock market bubble burst is not the same thing as a severe recession in real terms."
That's completely true. But IIRC there were lots of strange things about the early 1990s recovery, and my vague impression is that they weren't completely dissimilar to your observations about the current one. (In particular, I thought that job recovery then was pretty anemic.)
So I would posit a possible change in the nature of the economic cycle, at least as far as recoveries go. But that doesn't mean Tante Aime's deprecation of the boom *before* the bust is incorrect.
Just from personal, anecdotal observations at the time, there was definitely a bubble in the infotech sector.
Posted by: liberal at September 10, 2004 04:18 AMWhile I'm an agnostic on the effect of outsourcing, the NYT piece on Samuelson is vague enough that any reference to it in favor of the argument that outsourcing might be a net negative is an unsubstantiated appeal to authority. Viz, we'd have to see what Samuelson's model really says, and we don't have that. All he's saying, it appears, is that it's *theoretically* a net loss.
I think the better *positive* (ie nonnormative claim) is that while it might be a net gain to the economic, outsourcing and other aspects of globalization will very likely put substantial downward pressure on wages due to factor price equalization effects.
Posted by: liberal at September 10, 2004 04:23 AMThe need is to continually carefully examine the effects of outsoucing. We should surely not be subsidizing outsourcing through the tax code till we at least better understand the possible problems. We should attend carefully to those directly effected.
Posted by: anne at September 10, 2004 06:18 AMFrom where I sit and observe things, outsourcing is a secondary effect brought on by those that control distribution.
Point, google walmart+pickles excellant article on how Walmart charts the courses of it suppliers. I see this happening in industries across the board
Posted by: little alex at September 10, 2004 07:20 AMNice:
>yields net economic losses only when foreign nations are closing the innovation gap with the United States.
I hate to put words in people's mouths, but when you say this, and then when you say you are "optimistic" it won't happen, then when I crank this through the logical equivalence machine I get:
"Net economic losses will only come when foreign nations are closing the innovation gap, and I don't think the yellow and brown people will be able to do that."
Funny coming from a guy with the surname of Bhagwati.
Oh, I forgot, us globalskeptics are the racists. Never mind.
Posted by: a different chris at September 10, 2004 08:00 AMGerard MacDonell: "If demand is your problem, then the proximate cause is a policy error at the Fed, not the Treasury."
Not necessarily. If your car has a leak in its gas pipe, I'm sure your solution will not be to go to the gas station more often, but to plug the leak.
The Fed can only pump money into the banking system, and the pockets of US govt notes investors. To get this money to the places where effective _real_ demand for actual goods & services is happening (as opposed to "investments" in financial paper and property) is neither under its control nor its job. That's where economic & fiscal policy come into the picture.
What you are saying to the guy whose car is losing one gallon every 5 miles is "you are running out of gas because you don't go to the gas station often enough".
thanks anne, liberal, and cm. Yahooo!
Anne is absolutely 100% correct on an important, and policy-relevant issue. Why the tax subsidy for companies that outsource? What is the justification for it? Why is this not, even by the most dismal hard-nosed dog-kicking child-labor-loving economist standards, a distortion that reduced efficiency. What possible argument is there for this tax subsidy?
One thing caught my eye:
"Paul and I disagree only on the realistic aspects of this," he said.
Only an economist would say this. In economics, realtiy is just a special case. Always remember that.
I like this discussion. I'm in 100% agreement that the tax cuts were misdirected since the US does not have a supply shortfall, but rather a demand shortfall. I'm puzzled that Friedman money supply analysis is so lauded. It is a tautology that GDP = (money supply) * (money velocity). But isn't it true that the business cycle has higher frequency than normal changes in money supply so recessions are caused by declining velocity? that the classical business cycle theory assumes the cause of recession is excessive capital accumulation? If so, why don't economists concentrate on measures that increase velocity?
Posted by: Craig Nelson at September 10, 2004 10:57 AMCraig Nelson:
I'm not a strong macro person, but if I remember correctly, the monetarists' equations, and the measured parameters (like velocity) have become unstable over time, especially when used as a rule to try to control monetary policy.