Brad DeLong's Semi-Daily Journal (2004)

If you want to see Bush on job creation, check out the RNC's offshoring ops: www.hindustantimes.com/news/181_758377,0008.htm

The world looks a lot different if you can't remember anything from more than 15 minutes ago. Behold the Bush voter.

ONLY 1.6 million jobs lost (never mind that normal growth would have produced a 4 million or so increase). Yes - let this be the new Bush Cheney '04 slogan.

We need to raise taxes on the upper 2%, most of the energy inflationary pressure is generated by Bush's devaluation and by a speculative bubble created by too much money at the top and the Iraq risk premium. These, alone, are shaving 1% off of real (trade weighted) GDP.

While I agree with Krugman's sentiment, the problem is that he has been beating the job report horse for two years. When it was bad, he could call it bad. Now that it is good, he repeats himself. Anyone on either side can pick apart his argument -- no, we don't want the job rate of 2000 anyway, because the labor market became far to tight and inflationary, and CEOs were raping companies to keep up with it all.

If the jobs keep coming, before the election Bush and Cheney will be declaring "the supply siders were right" and "Laffer is the man." I'd hope Krugman can polish up some better arguments than, 'well yeah, but it was better under Clinton'. I hate to say it, but he's sounding like a broken record.

Inflationary problems in 2000? Follow the link to the consumer price index data here - http://www.bls.gov/cpi/ - and see what nonsense that is. If you're referring to the rising wages we experienced in the '90s as a bad thing, perhaps there's a job opening for you in the Bush administration. Personally, I didn't mind seeing my paycheck grow.

Not to mention the reappearance-- with a vengeance-- of runaway deficit spending with no end in sight. Even Joe and Jane FoxNews viewer can understand that that's a problem.

No question the jobs picture has improved over the last 2 months. However, PK is correct. The jobs picture is not out of the woods. Jobs are spotty. There are places that are doing OK but still places with double digit unemployment.

For the life of me, I don't know what paulo is talking about with a "job market tight and inflationary". That was the whole point of the Clinton Greenspan deal. The unemployment dropped to 4% without being inflationary in part because of the global work force.

Did we see a shorter work week? Did we get a living wage? Did we get a lower ratio of worker to CEO pay? NO. We got none of those. The job market in the late 90s was not "tight". Ok, maybe for some special skills like overpaid comp sci grads. For common labor it was not. Anyone who thinks otherwise is delusional.

Look at the state by state numbers

http://www.bls.gov/news.release/laus.t03.htm

Ohio is a good example.
Employment 4/03 5918 4/04 5869

Loss of 50,000 jobs. Not much change since Feb.

Unemployment 4/03 369 4/04 340
A lot of people left the state or the workforce in the last year. Neither is a good sign.

The percentage drops from 6.2 to 5.8, but we know that is not a good measure of the misery.

Who has a lot more jobs this year than last year? Texas? VA (defense jobs) AZ. Point to 5 states that have significantly more people working this year than last. If you decided to move to get a job, where would you go? This is why Bush gets no credit for the economy.

Bottom line. This economy still sucks.

Is Paolo an idiot?

I'm convinced that the Bushies are planning to win an election by appealing exclusively to their hardened right-wing core constituency plus ignorant "centrist" whim voters who can be swayed by a cute add ora last-minute smear. He doesn't need the grownup Republicans or the libertarian Republicans.

2000 was a peak in the employment - 2002/3 the trough.

What Krugman is advocating by arguing that the Bush should try to achive this peak by November 2004 is in effect that the Business cycles should be cut to 4 years. Why?

Like they say, there's crazy and then there's Paul Krazeman.

2000 was a peak in the employment - 2002/3 the trough.

What Krugman is advocating by arguing that the Bush should try to achive a new peak by November 2004 is in effect that the Business cycles should be cut to 4 years. Why?

Like they say, there's crazy and then there's Paul Krazeman.

paolo is a "troll lite"; a real troll just pisses people off and doesn't change anyone's mind since they're obviously looney and they overreach.

The lite version pushes the negativity as far as they can without being rabid and avoids alienating the center; in the end it's I believe it's a more effective troll strategy.

Ditto for Giles.

Uh Giles, What PK has been advocating since 2001 is replacing the tax cuts for the wealthy with a fiscal stimulus targeted to create jobs. Mr. Bush could have tried such a strategy and ended up with much better employment today. He obviously didn't care about unemployment as much as he cared about cutting all taxes on the investment class. Krugman would argue that any administration should aim at full employment and that Mr. Bush deserves blame for not even trying to reach full employment.

No, it's not a troll, nor right wing. Bush' approach to job creation -- not doing anything but cutting taxes for the wealthy -- is a crime.

But if you read through Krugman's past work, he has repeated, it seems twice a month, the same point of no or too low job creation.

Now there is job creation that, if sustained and convincing to people, could help Bush win the election. What does Krugman say? The same old.

I'm not criticizing Krugman's politics. He's not wrong. But I am criticizing his laziness (or whatever it is) in not bringing something new to the argument. Nothing about that fact that new jobs pay less, are less stable,that employers are cutting benefits (and the government isn't find alternatives), etc.

Democrats aren't going to win an election complaining that things were really bad two years ago if the Republicans can show a sustained upturn in the six months before the polls; its like trying to win complaining that Bush stole the election in 2000.

And the point about supply side and Laffer: they're phony, but I'll bet anyone, if jobs growth is over 100,000 /month through November, Cheney will be out there saying he was right, cuttng taxes for the rich did work . . . whatever the deficit.

"He obviously didn't care about unemployment as much as he cared about cutting all taxes on the investment"

So are you advocating a strategy of creating jobs without investment? Factory jobs without factories? Research jobs without research equipment? Sounds well Krazy man.

Forget inflation, the real problem that we might have to watch out for is stagflation. If the currency pegs hold we may have 8-9% inflation. If the oil supply recieves a shock we'll get hit with stagflation. The Fed is not only behind the curve, it's not on the same planet. Greenspan is either trying to protect nominal GDP in an election year or perhaps trying to assure his legacy in the face of a fiscally incooperative ruling party. Either way I don't entirely blame it on him, but certainly he's not going to be bailing us out this time around.

Does anyone have any statistics on the quality of the jobs being created vs. those that were lost? If software engineers are now flipping burgers then these job creation stats are meaningless.

Giles,
"He obviously didn't care about unemployment as much as he cared about cutting all taxes on the investment"

"So are you advocating a strategy of creating jobs without investment? Factory jobs without factories? Research jobs without research equipment? Sounds well Krazy man."

Straw man Giles. The deficit functions as a disguised tax on investment. What happened with Bush's tax cut is that he created large deficits with very little stimulus. He expected that the economy would naturally return to full employment. (See Suskind). A properly crafted plan could have created far more stimulus for the deficit that was created. No one has ever advocated anything like "factory jobs without factories.

Well, when an administration has no domestic accomplishments to brag about after 3 1/2 years and its nominal foreign policy accomplishment is fast disappearing down the drain, what else can it do? Two months of tepid job growth is maybe the only real achievement the administration has to talk about. Does that set a new low in executive branch leadership in American history?

Uh Giles- The 2001 recession was characterized by a lack of demand, overcapacity and glut of products on the market (especially the tech area). There was plenty of investment cash. There was no place to invest it becuase of all the overcapacity. Bush giving tax cuts to the investor class, who already had too few good places to invest just recylcled the tax cuts into investments in Treasury bonds issued to cover the debt from the tax cuts. That is a net transfer of money from the US treasury to the investor class with no "investment" in jobs at all. By refusing to cover excessive Federal mandates on the states, Mr. Bush allowed the states to cut back spending, laying off workers, cancelling contracts and postponing projects, all of which exacerbated the job loss.

Yes if you have a roaring economy that lacks investment capital, you can stimulate growth by making more capital available. However, if you have an excess of capital and slack demand, you cannot stimulate the economy by adding more capital. It is like pushing on a string. The way to stimulate an economy with slack demand is to stimulate demand.

paulo-

look at the bls numbers and tell me that the job picture is pretty in most states. It isn't.

http://bls.gov/news.release/laus.t03.htm

If jobs really take off, then there may be some hope for Mr. Bush. Another clue. $2+ gas prices are not conducive to creating large numbers of jobs.

“The deficit functions as a disguised tax on investment.”

No - public debt is a disguised tax on investment. At the current rate GDP growth is faster/about the same as the growth in the national debt. Hence no tax - yet.

I agree that the structure stimulus wasn’t optimized to stimulate demand – but I think this relates back to the factories point. Its not clear that the jobs of the future will necessarily be created in the areas in which bakho says there was already over investment. Hence the need for some sort of accompanying investment stimulus to build the jobs of the future. As evidence for the efficacy of this policy, I would cite that the BLS is somewhat perplexed about where the new jobs are being created – it seems that they are in new, not pre existing businesses. And new businesses need new investment to get started. Thus the mixed stimulus Bush delivered was I think best in the long term. As stimulus focused solely on demand would just have created a short lived boom in dying industries.

Really, Giles, we're out of your league. Stop trying to waste our time.

The only problem I have with Bakho's account, of tax cuts to supply investment capital replacing tax receipts with bond obligations, is that the Asian central banks have been buying up so much of the newly created federal debt. So where did all that newly created investment capital go, if it failed to produce a domestic investment boom? Perhaps to investment in overseas production platforms to cope with the competitive conditions of low prices, due to stagnant domestic employment/stagnant domestic demand? Jeez, do ya think that that's what all those corporate "Pioneer" donors wanted all along?

Bahko,

Exactly. Bush and his ace economic team managed to identify the economy's worst problem, then spend a trillion we don't have to make it worse. It's nuts, plain and simple. I don't understand why this is so hard to understand-- or to explain in a politically useful manner.

Of course, Krugman explicitly compared this with the recovery from the recession of 1991 in 1994, not just comparing it with 2000.

I'm not sure I agree with Paulo (recently, Krugman's actually taken a turn for the better, IMHO: some of his recent articles have been fairly on fresh (for him) and non-partisan topics, like his columns on oil demand and the [lack of] potential to solve the problems of Iraq), but it isn't trolling to suggest that Krugman can be right without always being an engaging or persuasive read. I don't think Krugman is at his best in 800-word op-eds. I think Kristof, for instance (while generally right), is good at the op-ed format, even if, generally, his columns aren't as likely to point out what everyone else is missing and add new things to the discourse.

As for the fact that the economy, foreign policy, and all seem to have gay-bashing blown up in the Bush administration's face, they're proven right: their favorite axiom is good policy makes good politics, which, as one MY commentator pointed out, is more applicable in the contrapositive form: bad politics makes bad policy.

Oh, and one more note for Giles: debt-GDP ratio only stays constant if the deficit and GDP growth are the same if the debt is at 100% of GDP. If debt is 60% of GDP, though, then 3% deficits with 5% growth will keep the debt-GDP ratio constant. I'm not sure if that's what you were talking about, but I just thought I'd point that out.

I dislike seeing people like Paulo being called a troll just because they don't agree with many of the posters on this site. If you disagree with his arguments, say so and articulate the reason for the disagreement. Otherwise, you're the one being the troll.

On the employment front, I would like for once to see somebody dissect the data for the structural change story that must surely lie near the heart of the numbers. This was certainly part of the equation during the 1990s, when the economy destroyed a remarkable number of jobs as it created a vastly larger number of new ones. This was clearly the American advantage over Europe and Japan, and it made sense that direct investment in this country from those two sources was as strong as it was. I can't tell the degree to which we are now seeing something similar on the structural change front, but the accompanying productivity story, and the outsourcing phenomenon, suggests maybe so. (I wouldn't credit the clueless Bush people for any good news, mind you, I just wonder if there is some decent news after all.)

This is kinda sad.

OK, here we go. “..stimulus focused solely on demand would just have created a short lived boom in dying industries.” A fiscal policy aimed at boosting demand, with spending left in consumer hand rather than run through some spending program, would put demand where the spending public wants to put it. Dying industry? Not if consumers say “live.” So scratch that part of the argument. I know it is a favorite of critics of the Krugman approach (for lack of a better name), but it doesn’t take much thought to see the weakness in saying that demand stimulus must prop up dying industries. "Short lived" is not a sin when trying to get the economy back to trend (or above, to soak up laid off workers), but it is also an assumption that runs counter to the Bush "stimulus plan" which has created a future full of deficits. Apples and apples, please.

The ratio between GDP (growth) and debt (growth) is an important bit of macroeconomic math, but Giles seems to have created a new use for it. Just because public debt is a stable share of GDP does not mean that public debt is not a burden on the private sector. It just means it is sustainable. Those who point at prior periods (which is essentially what is being done when appealing to a steady ratio) have missed the urgent demographic-instilled need to boost the national savings rate. It is also a bit weird to claim that the debt/GDP ratio is steady when we have gone from surplus to deficit – the implication of which is that we have changed the path of the debt/GDP ratio markedly.

Giles has a circular argument. If we don't support public works projects (roads, water, sewer, etc) then the industries that support them are going to die. However, it is very shortsighted to underfund infrastructure as we have been doing in the US for the past quarter century.

Here is a concrete example. We have a resort town on a lake with room to build. However, no building or expansion can take place because there is inadequate sewage treatment system to handle the current units, so no new ones can be built until a new sewage system is built.

In the 2001 recession, state revenues dropped and the state responded by cutting back on numerous projects including water and sewer projects. In this example, we have a demonstrated need. A new sewer system would allow economic expansion that would expand the tax base and likely return investment in the sewer system over the long run. The project would have made use of idle construction workers and part of the glut of manufactured parts that go into building a sewage treatment system. Instead, the state cancels these types of projects because they have to fund the increased health costs and unemployment that come with the recession and they get no help from the Federal government, only mandates. Meanwhile, Mr. Bush is giving tax breaks to the wealthy, but they will not invest because of inadequate infrastructure (lack of sewer). Private individuals will not build the sewer because they cannot get a high enough return on investment.

Private individuals instead invest there money where they believe it will give the greatest return on investment. As john halasz suggests, investment capital is connected to the world economy. There is no guarantee that putting more money in the hands of the investing class will see that money invested in the US. If the greatest return on investment is overseas, that money will be invested overseas. The nationality of the investors makes some difference (investors are more likely to invest close to home) but not a lot of difference.

As for jobs in the Midwest, we are starting to see an increase in mfg because of a direct demand stimulus from the Federal government. Over one year of Iraq occupation and the equipment is wearing out. The parts orders for Bradleys, Humvees, etc are increasing by leaps and bounds. We are finally getting a demand stimulus that will lead to more employment, because of a flawed foreign policy, not because of a well planned fiscal policy.

http://bayh.senate.gov/releases/2004/05/25MAY04pr.htm

http://bayh.senate.gov/releases/2004/05/B25MAY04pr.htm

A "concrete example" of infrastructure needs bakho?

Boooo!!!! Hisss!!!!

Bad pun.

Hello:

The main reason jon growth is bad is for 1 giant reason:

HEALTH INSURANCE FOR FULL-TIME EMPLOYEES

****Everyone knows the healthcare lobbyists finally got what they wanted, inside the beltway: deregulation is what caused "across the board" increased - and language and research that "tailors" each companies health-care coverage to "screw" potential sick people from receiving coverage for certain treatments, et cetera.

This increase in health coverage; and squeezing smaller companies into less-quality plans...by raising costs for last-year's plan, and thus making it impossible to stay in last-year's plan

When a employer has to think about hiring a new employee (maybe to replace someone who departed; or to cover growth in business)- this employer has to weigh the extra cost of health cost, which can range per employee, depending on if that employee has a family to cover, at a average cost of $12,000 annual per employee-
GUESS WHAT
The work gets spread around- and there is a hiring freeze; or the employee is hired as a psuedo employee without coverage.
For a business of 7 people- the cost can be $120,000 per year!!!!
Solve the health insurance crises and employement growth would rise big-time...
But wait, the Bush Administration had to reward its RICH donars at the expense of the average citizen- sound familiar
BUT wait, no worry because they (Republicans) have great jobs waiting for them in health care industry when they lose the election (2004 or 2008). How do you think Cheney got that Halliburton job
It is all incestuous- (remember the Boeing/Pentgagon incestuous relationship)It is all what Adams, Jefferson and the rest feared the most, old England good-old-boy network.

They win; you lose= game over

enjoy your six-pack after work

Harris
If you want to look at why the debt is more important look at Ricardo or Mankiw's gamble for growth argument. As long as a deficit induced boom produces sufficent growth it doesnt raise future taxes and so is not a burdern.

On the demand stimulus point you're all still arguing that jobs can be created without private investment. I think you might be on stronger ground trying to argue about where that investment has gone - but never mind.

The industry that supports "public works" is construction. An industry that is in no danger of dying, with or without, public expenditures. On a broader level Giles is confusing two things. Short term stabilization which addresses drops in aggregate demand through precisely "short term booms." So fiscal and monetary policy can easily be directed toward that end. We know a lot about the effects of stabilization policies. All of which the Bush Administration ignored. Basically they substituted long term tax cuts (10 years or more) heavily tilted toward the extreme upper income brackets for short term stimulus. They compounded this error by increasing rather than decreasing the climate of fear and uncertainty in the country through their adventure in Iraq.

Long term growth boils down to labor productivity, and anything that increases it. This means increases in capital investment (including infrastructure), increases in education and skill training, and increases in public and private sector R & D. Bush's policies are if anything even worse in this area. For example his tax policies are leading to ever larger deficits, and thereby ever larger public debt. As a result the Federal Government is borrowing increasingly larger amounts of capital to fund the debt,, and threby increasing the cost of capital and iimiting its use in private sector investment.

Giles,

The gamble notion is, ya understand, a gamble? It is not a sure thing.

The investment-leads-jobs argument is getting to be an awful lot like the "the personal is political, the political is personal" chant from a couple of decades back. You could be pretty sure that, about the third time you heard somebody say it, they were no longer thinking, just reciting.

Investment necessarily leads jobs when there is idle capacity? Nope. Such a notion also ignores the fact that there are also precursors to investment, orders among them. Orders reflect demand. Demand stimulus can lead to investment, and to jobs. Planting a flag at one's favorite point in this cycle is a favorite form of debate, but it is not analysis.

I think both of your are being just a tad extreme - no one ,sane, thinks that the tax cuts were directed solely at investment in 10 years time - the stimulus is a mix of demand and investment stimulus - it would be practically impossible to create a stimulus of the charecter that both of you attribute to Bush. You by contrast seem to be suggesting that if in charge you would have cut interest rates further and raised the defict more to increase demand - in which case I can only say god help the world if anyone listens to guys like you.

Some people argue that the tilt towards investment was too strong. Idiots argue that there was no demand stimulus nor any investment stimulus - Lawrence you seem to be both in favor of Ricardian equivalence and then in the next sentence against it - bizare.

From an international perspective the US taxes investment income much more than many other similar developed countries. Addressing this may therefore help stabilise the trade deficit. Hence that is why I think it was a good idea.

On the productive capiacity point

For J. Harris, on structure of current job growth:
I saw a report that said current good (but by 90's and other previous expansion standards, mediocre) job market is due mainly to cessation of job destruction, job creation is still poor. But I cannot find the reference or URL now. Anyway, that is something to check out. The implication is that net job creation is not due to sudden spurt in new job creation, but continued rather low level of new job creation added to lower level of job destruction.
I will go look for the news article when I have time.
If this is true, net job creation stats may be misleading, and a lot of people who are on market for new jobs would still be hurting.
For Giles,:
Seems to me that Bush admin is losing its bet -cumulative GDP growth in current expansion is below previous ones, and the few months of high growth have not made up the difference. Whole long will we have to wait before we can decide this gamble has become a very long shot because of accumulating deficits that have produced little domestic activity per deficit dollar spent?

Giles said, " As long as a deficit induced boom produces sufficent growth it doesnt raise future taxes and so is not a burdern."

Even the CBO using dynamic scoring says the tax cuts are a revenue loser and do not pay for themselves. Therefore they are a burden.

JMI said, "If this is true, net job creation stats may be misleading, and a lot of people who are on market for new jobs would still be hurting"

You are correct. I am coming up on the two years aniversary of IBM sending my job to India without a replacement. Mid 50s doesn't help if you are in the job market but I can assure there are no jobs out there, unless one wants to be on of the 2000 part timers being hired at Disney World or the local McDonalds that is hiring 60.

Giles- "if in charge you would have cut interest rates further and raised the defict more to increase demand"

Not at all. I would have cut taxes much much less than the Bush cuts. Targeted the tax cuts only to the lowest paid workers and used a mix of revenue sharing with the states and job training moneys to address the 2001 recession. It would have been far cheaper, rung up much less debt and put our workforce in a better position in 2002 coming out of the recession.

Giles,
Would you not agree that although in theory the Bush tax cut to the investor class should have boosted economic output, the actual bill that Congress adopted on Bush's behalf was ineffectual, mostly because it fails to address the biggest flaws in the US tax system?

Most of the Bush cuts were in personal income tax and dividend taxes. With the personal tax cuts I agree that if you are taking a top marginal rate from say 70% to 40%, you are going to see an big impact. This was the Kennedy tax cut. But if you are taking the top rate from 39% to 29% well you are just not going to get as big a bang for the buck. You may even get diminishing returns. At some point there will be no supply side effect. This is especially true if the revenue needs are lacking to support the government inputs that support successful investment: roads, educated workforce, healthy workforce, police, army, etc....
And this analysis is before we factor in the deficit financing used on the tax cut. I agree if the revenue catches up - you are a genius. But if the revenue doesn not catch up. Well then you have reduced the overall growth rate. I think with the Bush tax cuts because top rates were low already, the revenue growth payoff is not there.
I am open to be proven wrong. But I would have to see an econometric study with the assumptions clearly indicated in the notes. My argument is that theoretically on the income side, the Bush tax cut is unsound.

Now the dividend tax cut. How exactly does paying investors higher dividend returns increase overall investment levels? Haven't dividend stocks always been passive investments? I mean you are looking for yeild over growth. You are encouraging companies to give their money out in dividends instead of reinvesting in innovation or growth. No? I don't see how the dividend cut helps the economy. Ok it makes stocks more attractive overall as an investment category. Great. Where is the payoff for the Economy as a whole? Are we expecting money to flow from consumption to investment because dividends are taxed less? I don't know. Where is the extra disposible income going to come from to buy these stocks? Aren't we just rewarding existing stock holders?

If the Bush tax cut were to be more effective it would look at ways to reduce payroll taxes. Far better for Income taxes to stay at Clinton levels if it means the US can reduce payroll taxes, which are a direct tax on jobs. My personal choice is a VAT sales tax, but the bigger point is that the debate should be joined.

As far as a response to the recession I think Bush should have focused on the demand side. Keep the states fully funded and extend the unemployment benefits. Funny enough Bush is embracing demand side stimulus with the military spending for Iraq. Its classic demand side stimulus. We would have a deficit now, no one argues that point. What we wouldn't have is a permanent structural deficit, which is what I beleive we have now.

Bugger! What I meant to say was:

http://jules.rooms.rubberrooms.net/cap-util.gif

Giles,

So, unable to answer the objections raised to your position, you simply attribute weak positions to others. Naughty, naughty.

I don’t remember mentioning monetary policy. You assert that I want lower rates than the Fed has provided, but that is not what I said. The entire discussion here is about fiscal policy. I didn’t call for a greater deficit, as you assert, but rather for a deficit aimed more at generating consumption, less at savings. At one point, you argue that the “other side” is for a short-term demand boost (an argument that I have tried to answer, with no direct rebuttal from you that I can discern). At another, you assert that the Bush policy cannot be deemed a boon only to investment and not consumption in the long term. Are we arguing short or long term impact? ‘Cause the basic “Krugman” view is that demand stimulus in the short term and fiscal rectitude, rather than any stimulus, in the long term is the right medicine. That’s the position, and you have not answered it.

I will grant that, unlike some unfortunates who show up here, your manners are sporadically good – other than questioning the sanity of those who disagree with you and attributing idiocy to straw men who hold positions you seem to think are close to some expressed here. Still, even when you manners hold up, you can’t expect anybody to credit responses that conveniently misstate the positions of others. Yes, there is no way to avoid demand stimulus in some measure from any fiscal stimulus. The question is the mix. The Bush program would generate, has generated , spending on consumption goods, no question. A better designed program could have generated more, and so have led to more job growth sooner. That was the point of Krugman's critique. You avoid dealing with that inconvenient fact by construing extreme positions to those who disagree with you, rather than answer their actual arguments. Another post here suggests you are in over your head. You don’t seem to be doing much to correct that impression.

Scott
The double taxation of dividends is an area where the US actually has higher taxation than other countries - may be there's a good reason for that. But I think that its is highly unlikely that a tax, as you suggest, wont have a any distortion effect. It may not reduce equity investment by as much as I think but, like any tax, it must surely reduce it a little.

To give you a couple of mechanisms - you state that profits should be retained and reinvested in r &d etc. However what if the company has only low profitability investment r& d opportunities while the shareholder have high return opportunities available to them? A dividend tax then taxes the efficient redistribution of profits towards the higher return. This is not very efficient (and is a reason people often give for the weakness of loan based capitalism in countries like Germany).

You secondly state that rolling profits over into capital gains is better. But again this only works if profitable investment opportunities exist – if not then we’re into “burn rate” and Enron economics. Again not very efficient.

The third argument is that old people depend on dividends for pension income and so a tax on dividends is a tax on retirements / old people (maybe this is efficient since it encourages people not to get old?).

So I feel that the dividend tax cut was a masterstroke.

On the higher rate tax issue, obviously redistributing this too the poorer end would have been more demand stimulatory but I think the size of this effect is often overstated in order to rationalize social equity arguments. Personally, within reasonable limits, I’m not that bothered about income inequality and I don’t think, relatively, speaking it’s a major problem in the US at the mo. I suspect you feel differently.

But in absolute terms the top 2% cut wasn’t that large a part of the cuts and so redistributing others wouldn’t make much difference economically. Arguing it on economic grounds I think displays a certain timidity in addressing social issues. Where’s Howard Dean when you need him.

Not to intrude too much into this learned discussion, but there seems to be an obvious factor that has not been mention. The stock market bubble triggered an income effect, which, because stock prices are set on the margin and because they would inevitably come down, amounted to dissavings based on monetary illusion. The Bush tax cuts targeted to the very well-to-do and to investment income amounted to a partial reflation of the stock market, which would be a further incentive to income effect dissavings. Furthermore, because there was an inadequate demand stimulus and hence stagnant employment and wages, the Fed accomadated the Bush administration's fiscal policy with extremely low interest rates, which set off a mortgage refinancing boom, which has been one of the principal sources sustaining consumer demand. But once inflation and/or real interest rates start to rise, there will be an end to the rising home-equity values and a financial shake-out. Now home-equity is the single largest source of accumulated equity values- (stock equities only briefly rose above them at the peak of the bubble)- and they are much more widely distributed than stock equity holdings. At least measured by longer-run interest rate and home prices expectations, the refinancing boom has to have amounted to another large source of dissavings. So even leaving out any leakage of investment capital overseas, the overall mix of economic policies has created dissavings that countermand the claim that they are aimed at increasing the long-run availability of investment funds, which would depend on increasing the aggregate net savings rate. Any takers on this?

you're onto the Beezle there John.

http://www.crookedtimber.org/archives/001922.html
http://www.johnkay.com/trends/336

bakho: sewer example

Excellent presentation. Thanks!

"if you are taking a top marginal rate from say 70% to 40%, you are going to see an big impact. This was the Kennedy tax cut. But if you are taking the top rate from 39% to 29%..."

Your first example is closer to Kemp-Roth than Kennedy. And your latter isn't Dubya's.

"Long term growth boils down to labor productivity, and anything that increases it."

In which case Bush has been a smashing success.

So what has Mr. Bush done to boost labor productivity?

I'm going to question one part of the argument that seemingly is accepted by everyone, that the cut in the dividend tax is good for the stock market.

Remember, the original proposal was to cut both dividend and capital gains taxes so as to keep the changes neutral for stocks. But what we got was only the divident cut.

That creates a bias in favor of dividend paying stocks. But if this leads to firms paying out more of their earnings in dividends it will lead to a fall in their investment and growth rates.
Consequently, what we get is a bias in favor of current returns vs future returns that shoud be reflected in a lower stock market PE. Historically, going bck as far as the data goes
the stock market PE plus the dividend yield has been extremely stable. This sum has averaged 19, and has been within plus or minus 20% of 19 well over 90% of the time. While not proof, it does provide some support that if the tax change creates a bias in favor of dividends it also will lead to a fall in the market PE.

Interestingly, last year the returns on value versus growth stocks was about the same. But this is extremely unusual for the first year of a new bull market. Historically, the first year of a new bull market has been driven by PE moves that favored growth stocks. But this time the first year of the new bull market was driven by earnings -- the PE of the S&P 500 did not change significantly. Moreover, so far this year value stocks are outperforming growth stocks.

While the argument is not completely convincing, it is starting to look like the cut in the dividend tax without an offsetting cut in the capital gains tax is actually bad for the stock market.

JML -- on job creation vs job destruction go to the BLS web site (bls.gov) and look at the new employment dynamics series. This is a new series just created by bls that measures both job creation and job destruction. It is the first broad measure of both side of the equation and data only starts in the 1990s so you can not see what happened in earlier cycles.

It shows job destruction-- lay offs-- has fallen back to the low levels during the boom of the 1990s. But is shows that job creation has bottomed at vey low levels and has not rebounded significantly.

This is the source of the coment you quoted about what is happening is job destruction has quit, but job creation has not rebounded.

This may be why the unemployment claims have been leading to economists being too optimisitc about employment. Claims only measure the job destruction side of the equation, not the job creations side of the equation. We are finally starting to see help wanted ads growing, the monthly measure of the job creation side of the equation.

"So what has Mr. Bush done to boost labor productivity?" - left less capital (or at least not as much as it would have) in the hands of government.

Some people say that there is no guarantee that the money not taxed thanks to Bush tax cuts will be invested. But if the taxes were left higher and the money would be taxed it would be guaranteed that there would be no long-term growth in jobs, as I hope we absorbed the hard lesson of 20th century that govt spending isn't really way to create real jobs that are going to stay around for a while. Better guaranteed loss than non-guaranteed opportunity? Is this new (old?) line of thinking?

I would also like to suggest another way of looking at the investment question as well--
it is a very simple econ 101 approach.

While we were over investing in technology in the 1990s and creating massive excess capacity in that area we were underinvesting in traditional, old line, basic industries.
Consequently what we are left with is over capacity in technology -- capacity utilization in the communication equip industry is now about 50% for example -- it is 70% for computers.
But this means we did not create suficient capacity in basic industries. Capacity utilization by stage of production is 85% at the crude level, 79% at the intermediate level & 72% at the finished level.

So what we are seeing is a shift in resources to the areas with insufficient capacity. That is why we are seeing large jumps in commodity prices but they are barely starting to appear in final inflation. Along these lines, Alcoa just announced that they are going to build a new facility-- the first in many years. The problem is that they are going to build it in Jamaica, not the US.

This line of analysis suggest the basic problem with the Bush tax policy. It assumes that it will lead to new investments, but if the problem is excess capacity and low returns that assumption is invalid. It goes back to the entire White House, they do not have any knowledgable people in position of power. So policy is based on simple assumption that may or not be valid and is driven by political goals rather than a realistic evaluation of the actual situation. This critism certainly applies to the Iraq war as well.

Mark- I don't get your point about Mr. Bush leaving less capital in the hands of the government.

In 2001, the US government only held $3.3 trillion in capital in the form of bonds. Today it holds $4.2 Trillion. The Govt has sucked up $0.9 trillion in capital in less than 4 years.

Bakho is right. The structural federal deficit is now taking over 25% of the supply of private savings.
I for one can not figure out how that leads to greater investments except in the early part of the cycle when it is stimulative.

In the 1980s when the federal deficit absorbed only around 15% of savings we were bailed out by the japanese savings surplus. The problem this time is there is nothing comparable to the Japanese surplus this time.

In the 1990s the federal surplus plus foreign capital financed almost 50% of capital spending.

Thanks, spencer, for pointing me to the BLS employment dynamics series. They are interesting and I will keep a watch on them.

I looked but cannot find the news article I had read, and mentioned above, on job creation/destruction. The BLS site only has data to Q3 2003. I think the article that I saw reported more recent data. Do you know of any business surveys that would produce similar statistics?

Regarding this whole debate about Bush macro policy, it seems to me that the evidence is in. By every measure, what everyone agreed was a mild recession in 2001 turned into a relatively severe one in terms of employment because there was no job creation. Every analysis that looks at the numbers comprehensively that I have read reaches the same conclusion. And the BLS stats back this up, at least until then fall of 2003. Most of the changes in the employment situation are driven by changes in job destruction, job creation has been poor. And by other measures, such as growth in real per capita wages and real GDP growth, this has been a very sub-par recovery. A few, or even many, months of *average by historical standards* employment growth will not make up for the cumulative history up to now.

And what has been different? The Bush admin's very strange macro policies. People shouldn't throw away natural experiments in macroeconomics, the data is just too valuable! And I think if you look at this blog's archives and what mainstream macro economists have said over the last four years, you will find that they were much more right more often than the Bush team.

The Bush administration defenders here make points by ignoring the difference between short run and long run deficit financing, among other blunders, that make them hard to take seriously.

Giles-"But in absolute terms the top 2% cut wasn’t that large a part of the cuts and so redistributing others wouldn’t make much difference economically. "

My memory isn't the greatest, but didn't over 50% of the 2003 cuts go to that bracket?

we are students. we have to do a work of outsorcing. Please, could you tell were we can find information about it?

thanks

Everything is revealed by compare and contrast.

http://warwick.ac.uk/staff/David.Baker/ F&N/Studnotes1/lect4.pdf

Bush e Tito?

Italian Corporate-State (Fascism) proved better at social and cultural propaganda and grand
gestures than social engineering. The fact that
Mussolini remained a popular leader (until world war was approaching) is a testimony to the success of this form of propaganda.

Fascist state policy (was) to destroy
trade union power and discipline the workforce, to increase profits, to destroy middle-level
competition, and to set up what were in effect monopoly capitalist enterprises.

This was basically Authoritarian Keynesianism.
The Fascists were also willing to run up **huge budget deficits** to achieve their aim of an "Autarkic" state, a problem unsolved as Italy plunged into world war in 1940.

Workplace (wage) conflict was simply suppressed and working conditions steadily worsened - real wages fell by 11% between 1925-1938 and after 1928 the eight hour day was abandoned and working hours unilaterally increased. Labour was, in effect, conscripted into fulfilling State dictated quotas.

Many policies were simply tolerated and only
those policies which favoured the masses and
were stripped of most of their Fascistic
activities were widely popular. The middle classes benefited from Fascist Party membership as simply a meal ticket or necessity for promotion, rather than a sign of any deep commitment to the ideals of Corporate-State Fascism.

Above all, Italians were not transformed into a nation of aggressive, militaristic, unthinking brutes as Mussolini clearly intended.

============

Americans, blindered and dociled, may not be so lucky, but it may be that Bush's war contained within itself seeds of Bush's own destruction.

Nice site. Keep up the good work. Bryian

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