PeakTrader.com

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PeakTrader:

JazzBumpa, your simple charts are full of missing variable biases, which I cited some before, and you obviously completely ignored.

You need to take into account other factors, e.g. population growth, or per capita real GDP growth, whether inflation was overstated or understated (for example, there’s substantial evidence inflation was understated in the 1970s and overstated in the early 1990s and beyond), trade deficits subtract from GDP (which increased from zero of GDP in 1980 to 6% of GDP in 2006, and remains relatively high, continuing to subtract from GDP growth – China has been to a large extent a U.S. factory, not counted in U.S. GDP), smaller economies tend to grow faster than larger economies, whether the top tax rate was raised too high and reduced total tax revenue (income could’ve been sheltered), etc..

If you believe in Keynesian economics, expansionary fiscal policy includes tax cuts. When the economy is in recession, cutting taxes generates growth and raising taxes slows the expansion to a sustainable rate, like in the 1980s.

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It’s been proven, mathematically and empirically, reducing taxes generates growth and raising taxes slows growth, ceteris paribus, like easing the money supply generates growth and tightening the money supply slows growth, ceteris paribus. It’s a major reason why the business cycle has been smoother.

Also, for example, if tax rates, or tax revenue, are too low, a tax cut will have less of an effect (e.g. in the 1930s) to generate growth. Similarly, if tax rates, or tax revenue, are too high, a tax cut will have more of an effect to generate growth (e.g. the 2001 recession, when per capita real GDP didn’t fall that year – of course low oil and commodity prices, the “peace dividend,” and demographics, i.e.. the peak of the 35 to 54 age group, which is the most productive group, contributed to the strong disinflationary boom from 1995-00).

However, reducing the top tax rate, or reducing taxes for the top 20%, for example, will have less of an effect to generate growth, because their marginal propensity to consume is relatively low and their marginal propensity to save is relatively high, which is less effective to generate a consumption-employment cycle.

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I’ve already shown mathematically when income = GDP = output rises through a tax cut, i.e. disposible income rises, both consumption + saving = income rise. Moreover, the marginal propensity to consume + the marginal propensity to save = unity.

And, it’s supported by overwhelming empirical evidence that expansionary fiscal policy generates growth and contractionary fiscal policy slows growth, ceteris paribus.

I guess, some people here believe when you cut taxes for workers in the top 20%, for example, they’ll save all of it, i.e. has zero effect on consumption, or maybe they believe if you cut their taxes $1, they’ll save $1.10. In reality, they’ll spend some of it and save some of it. Some will spend all of it and some will save all of it. Some may donate to the poor, and the poor will spend all of it.

You can also make the same false assumption with monetary policy and say when the Fed eases the money supply, growth slows, and when the Fed tightens the money supply, growth speeds-up. However, that’s not true.

For example, the Fed began an easing cycle in Sep 2007 and the economy peaked in Dec 2007 and fell into recession. Also, well before growth accelerates, the Fed will tighten the money supply, because of lags in the adjustment process, since the Fed works in the future economy.

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“Measuring GDP

Gross domestic product, GDP…Measures both output and income, which are equal.”

http://en.wikipedia.org/wiki/Measuring_GDP

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Jerry, there are many ways to account for GDP without an explicit tax rate variable.

And, you’re making assumptions, on employee compensation and tax rates, that aren’t based on anything.

I’ve shown, cutting taxes increases consumption and therefore income rises.

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Marko, when you owe $5,000 in high interest credit card debt, a $5,000 check from the government won’t help you. However, government spending $5,000 to hire and overpay five people to screw in a lightbulb will help you, particularly if you’re on the other side of the country

Of course, you could default and have banks pick-up the check (pun intended).

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Badtux, of course, government should spend and squander that $5,000. How much it costs to repave the road isn’t really important, as long as people are employed. When you bought those $5,000 worth of goods, they were meaningless trinkets. So, why pay for them and have another $5,000 to take the slack out of the economy and generate more growth? You just don’t know how to spend.

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I stated in Feb ’09:

1. Obama should change his stimulus plan to a $5,000 tax cut per worker (or $700 billion for the 140 million workers at the time, including through the earned income tax credit), along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets [i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc.]. This plan will have an immediate and powerful effect to stimulate the economy and strengthen the banking system. When excess assets and goods clear the market, production will increase.

2. Shift “toxic” assets into a “bad bank.” The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost “animal spirits,” and inflate toxic assets.

3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.

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So, you want to spend money on roads when the economy is underproducing by $1 trillion a year and there are over 20 million people unemployed or underemployed.

Perhaps, we should’ve jolted the economy into a self-sustaining consumption-employment cycle with $700 billion in tax cuts first, and then the country would be producing $1 trillion a year more in output, at full employment, while government revenue soared and government spending on the unemployed collapsed, resulting in much smaller federal deficits or federal surpluses. Then, the government would have lots of money to spend on paving roads (and state and local governments would also be fiscally strong rather than still on this on-going train wreck).

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The tax cuts were too slow and too small. They were only enough to place a floor on consumption, or certainly not enough to jolt the economy into a stronger and lasting recovery. I think, it amounted to $17 a week, on average, or some ridiculously low, and slow, amount.

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Jerry, the data prove tax cuts promotes growth. There are only disputes, by NeoClassical and NeoKeynesian economists, with the multiplier effect.

A tax cut was needed more than ever before for reasons I stated, which you also seem to completely ignore. However, another major reason for a substantial tax cut is the imbalance caused by international trade.

U.S. consumers increasingly bought foreign goods and foreigners increasingly bought U.S. Treasury bonds. Those dollars should’ve been “refunded” to U.S. consumers in the form of tax cuts to allow the spending to go on. Unfortunately, government kept, spent, and squandered too many of those dollars instead, and now have weak demand.

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I’ve already cited mathematical proof and empirical evidence lower taxes generates growth and raising taxes slows growth. Look above.

And, Badtux believes tax cuts simply disappear into mattresses or banks.

A $5,000 tax cut for each worker can increase discretionary income, particularly when household debt is high.

For example, if someone owes $5,000 on a car debt and pays $400 a month, a $5,000 tax cut can pay-off the loan and raise discretionary income $400 a month. Moreover, if all workers receive a $5,000 tax cut, it will be much less likely debts will default, because people will make appropriate and rational choices. The sum of those choices will raise output and employment substantially.

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EMichael, when there’s excess inventory, no production, and no customers, is the solution to have government produce another good?

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JazzBumpa, you can also say Fed easing cycles correlate with slower growth and Fed tightening cycles correlate with faster growth. Then, suggest when the Fed eases, you get slower growth and when the Fed tightens, you get faster growth. Yet, you know, or should know, that’s not true.

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Jerry, that’s the debate between NeoKeynesian and NeoClassical economists, which has a higher multiplier effect, government spending or tax cuts.

I’m saying when household debt is high, a tax cut has a higher multiplier effect.

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Arne, stronger growth will increase tax revenue. The question is what will generate faster growth through federal budget deficits, spending or tax cuts.

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EMichael, here’s part of it:

I’ve already shown when income = GDP = output rises through a tax cut, i.e. disposible income rises, both consumption + saving = income rise. Moreover, the marginal propensity to consume + the marginal propensity to save = unity.

And, it’s supported by overwhelming empirical evidence that expansionary fiscal policy generates growth and contractionary fiscal policy slows growth, ceteris paribus.

Moreover, I may add, we saw substantial tax cuts spur the Kennedy, Reagan, and Bush economic booms (the second, third, and fourth longest expansions in U.S. history). Of course, the Bush 41 boom, from 1991-01 was the longest expansion, which also included a “peace dividend,” low oil and commodity prices, and the productive peak of the Baby-Boomers, i.e. reaching “prime-age” from 1995-00. Also, I may add, the Bush 43 boom from 2001-07 followed a very mild recession, where per capita real GDP didn’t fall in the 2001 recession and real GDP growth averaged about 3%, in spite of trade deficits reaching 6% of GDP, which subtract from GDP.

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I want to clear up one of Badtux’s misconceptions. He stated: “This isn’t brain surgery. This is economics 101. Our economy is no longer local, and hasn’t been for over half a century. Money injected in one section of the country doesn’t stay there, and hasn’t stayed there for over half a century.”

There was a map of the North Dakota fracking boom that showed the multiplier effect was strongest at the center of the oil boom, became increasingly weaker away from the center, and was almost non-existant, perhaps 200 miles from the center.

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http://angrybearblog.com/2014/01/republican-state-of-disunion-taxes-edition.html#comments

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PeakTrader:

Low costs, competition, and productivity are good for producers and consumers. We want “lean and mean” firms, and want lower prices.

Of course, a $15 minimum wage won’t stop firms from becoming “lean and mean,” and the higher wage will reduce other production costs, e.g. the extensive and enormous costs of turnover.

Moreover, real wages for low income workers will rise more than real wages for high income workers will fall, through higher prices (note, the Fed has been trying to inflate the economy, because raising nominal growth raises real growth).

A $15 minimum wage will not only give a raise to minimum wage workers, it’ll give a raise to all workers earning between the minimum wage and $15 an hour, and will likely raise wages for workers earning over $15 an hour, perhaps up to $25 an hour.

The (positive) income and multiplier effects may be stronger than the (negative) employment effect, up to a $15 national minimum wage, and the minimum wage can be higher in some parts of the country.

However, we also need to deregulate some of the $2 trillion a year in federal regulations, which are generally regressive, raise prices, lower real wages, and have yet to be absorbed in the economy, along with removing and reducing some state regulations. Furthermore, reducing tax rates for the “middle class” will boost consumption, output, and employment to raise tax revenue.

The higher minimum wage can allow all workers to pay some income taxes, to make fiscal policy more effective, i.e. raising tax rates when economic growth is strong and reducing tax rates when economic growth is weak, to more effectively achieve a more sustainable growth rate. Economic boom/bust cycles are inefficient both in the boom and bust phases, because of periods of strain and slack.

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Also, I may add, profit is the result of efficiencies in the (competitive) free market. Every firm should maximize profit. Well managed firms should win and poorly managed firms should lose.

Firms should maximize profits (legally, of course, and on a level playing field) whether the minimum wage is $7.25 or $15.

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