January 22, 2009
POLITICS: Deficit Disconnect: A Farewell to Rubinomics
Riddle me this. One argument you hear tossed around these days is that Bush's tax cuts somehow had something to do with the currently poor state of the economy. The argument is almost never backed by any serious attempt to explain how this is, simply that because the Bush critics don't like his tax policy it must be to blame.
More to the point, the case for blaming low taxes for the economic downturn is diametrically opposed to the "Rubinomics" line that liberals everywhere spent the first seven years of Bush's Administration pushing. The argument, at the time, was that low taxes would lead to big deficits, and big deficits would push up interest rates by "crowding out" private access to credit as safe federal borrowing sopped up all the available credit.
In fact, the conventional economic wisdom today is that precisely the opposite happened - that we had a credit bubble, and in particular a housing credit bubble, because interest rates were artificially low and private access to credit got too cheap, resulting in too many loans being made at rates that were not sufficient to cover the credit risks, especially systemic risks, being taken. When credit finally did get expensive, after the bubble burst and a lot of the lenders got essentially wiped out, the problem was less a market-wide lack of capital than a lack of faith in the ability to identify credit-worthy borrowers - interest rates didn't shoot up uniformly so much as they rose in comparison to the rates for sovereign borrowers like Uncle Sam (in the parlance of the markets, spreads widened). And even that only happened after years of overexpansion of private credit side by side with low taxes and high deficits.
In other words, the Rubinomics crowd, who claimed so much credit for the tech boom of the 1990s on the theory that eliminating the deficit had created prosperity by lowering interest rates, turned out to have their diagnosis completely wrong, or at any rate so oversimplified given the many other variables involved as to be meaningless. Which was pretty much what the supply-siders had been saying all along: not that deficits are a good thing, but that in the grand scheme of things, the economic effects of deficits on access to cheap private credit is not one of the major drivers of economic prosperity, nor of economic downturns.
Of course, Rubinomics won't have much if any influence in the Obama Administration, which is turning its back on the economic theory and practice of the post-1940 period and heading for old-fashioned Keynesian 'pump priming' and trillion-dollar deficits as far as the eye can see. And the onetime disciples of Rubin will simply declare that this is what they have always believed in, and that it still means low taxes are bad. Change, after all, means never having to say you're sorry.
Good post, Dan, except for the part about "... turning its back on the economic theory and practice of the post-1940 period and heading for old-fashioned Keynsian 'pump priming'".
This wasn't really abandoned until the Clinton years.
How 'bout some big, whopping demand- and supply- side tax cuts to keep both the Keynesians and supply-siders happy?
Cut the payroll tax, and cut the corporate income tax, which is higher here than in almost any develpoed economy.
You're confused. De-regulation of the financial markets is what caused the current economic crisis.
Bush's tax cuts were just away to make government so small it could be "drowned in the bathtub".
Of course they meant the government that assists the citizens, not the one that stands-up and helps corporations and the rich.
I am all for tax cuts, but honestly this country first needs to go on a radical spending diet. Farm subsidies, SS reform, medicaid reform, pension reform, corporate welfare, do away with duplication of duties of our various intelligence agencies, base new weapon systems on actual need-not because certain congressmembers want certain weapon programs produced in their districts or states, close unneeded military bases here and in Europe and no new spending programs or entitlements- we need to get serious.
Hey Berto, there is no need to listen to anyone who starts talking about tax cuts and then says it results in less tax revenue and then ignores that the tax cuts have removed millions upon millions of the lowest earning taxpayers from the tax rolls. Such a person that states such things simply has no idea what they are talking about.
In 2003 W, with his republican majority in congress, signed the American Dream Downpayment Act, which, among other things (with a noble purpose and no forethought), discouraged that thing that W and you other conservatives seem to dislike: a paper trail. HUD also pressured Fannie Mae and Freddie Mac to help build up the sub-prime market.
Now I grant you that at the time, not many complained, and may others lauded the opportunity for African Americans and other minorities to finally cash in on what they were redlined out of for decades. But it's, as always, the president's job to lead, and all he did was be the drum major. There were certainly signs and portents, and the roots really start at the S&L crisis, which Reagan did much to help start with de-regulation (yeah, and it's done a lot for airline service too).
So don't act all high and mighty about who is to blame. While there is a lot to go around, the roads lead more to Conservative philosophy than many other places. Well, greed and stupidity too.
"I am all for tax cuts, but honestly this country first needs to go on a radical spending diet."
Couldn't have said it better myself.
The road doesn't "lead to conservative philosophy", as Daryl claims.
By 2002, the Federal Register of regulations had already broken the Clinton-era record: http://www.bizjournals.com/washington/stories/2003/07/14/newscolumn2.html
Bush didn't, on net, de-regulate the economy. That he did will likely be a Democratic party talking point for decades to come, but that won't make it true.
George Bush in no sense has been a small government guy.
"One argument you hear tossed around these days is that Bush's tax cuts somehow had something to do with the currently poor state of the economy."
Who argues this? Can you find any credible people who do? At best you find the argument that Bush's tax cuts did not provide the wonderful economic growth they have been touted as bringing, which in turn makes us more vulnerable now to greater problems.
It looks awfully like you've created a strawman to knock down there Crank.
"economic theory and practice of the post-1940 period "
1980s too: http://en.wikipedia.org/wiki/Military_Keynesianism
"Cut the payroll tax, and cut the corporate income tax, which is higher here than in almost any develpoed economy."
You really need to learn why the corporate income tax is higher here. Hint - it starts with a V.
Good point. Let's go on a spending diet and stop send trillions down the rat-hole in Iraq. You remember Iraq, right? Don and Dick's Excellent Adventure was going to pay for itslef through oil revenues
Okay Dave, I'll bite-why is the corporate tax higher here? I doubt that there's a good reason, but I'm willing to be educated.
I assume Dave means the Value Added Tax. I'm no fan of the VAT but it creates a whole different set of incentives and complexities than corporate taxes, being at least in theory a consumption tax.
Biden, days before the big bailout was announced, before any of the analysis we've seen come out about how the economy has gone into freefall, and trying to make anything stick while stuck in talking point mode? Come on Crank, I expected something both recent (not 4 months ago) and a bit more direct (his statement could easily be attributed to the AIG bailout alone).
I don't put any more stock in this than various Republicans who floundered around with socialist.
"Okay Dave, I'll bite-why is the corporate tax higher here?"
Yup - it's the VAT. Take our corporate income tax - I think on $1mil income, it's around 35%.
Take Ireland, which many people tout. 23% on goods+services, 12% on income. Ignoring reduced rates for a bit.
If you have taxable income on $1mil of services provided (let's say law), you'll pay Federal taxes of around $350k.
In Ireland, you would pay income tax something along the lines of 12%, which is about $120k. But, since you're also paying VAT on your services provided, it's another 20%ish of the total, or about $200k. And that's without the VAT they pay on goods they are the end consumer of, such as computers or paper.
Most people who bring up corporate taxes compared to other developed economies do not bring up the VAT at all, which exist almost everywhere. Tax dodges and loopholes aside, this eats up most of the difference in what makes us higher. Complex tax laws and exemptions drive it lower.
VAT is going to be a tool to be used in tax simplification. If we can ever get there.
Don't forget all the money that Ireland gets from the EU.
Bush's tax cuts - combinded with his reckless spending - have hurt our economy because, contrary to Dick Cheney's wisdom, deficits DO matter.
I agree with Crank: the so called crowding out effect of deficit spending on private borrowing is negligible. With so much foreign money sloshing around the globe, even George Bush's profligate ways couldn't make a dent in the funds available to lend world wide.
But our government is drastically weakened because of these deficits. In Fiscal Year 2009 the US will pay about $450 billion in interest payments on our debt, making interest the fourth largest expense in the federal budget behind Medicare-Medicaid, Social Security and defense spending.
Crank likes to point out that this massive transfer of wealth each year from US Taxpayers to US Creditors doesn't harm the country because we are paying the interest to our own citizens.
To that I say, Crank - you may want to purchase an economics textbook published after 1978. Today almost a third of our national debt is held by foreigners. So that money is gone baby gone.
And sadly, very little of the debt racked by Bush went towards making the country more competitive. Health care is still a mess; our infrastructure has been neglected; and the social security time bomb continues to tick.
So now, when our Country, rightly should be going into deficit spending to address the financial crisis, we instead have to go DEEPER into already frightening deficit spending -- to the point, that our currency could falter and our credit around the world may be called into question.
That is why Bush's deficit spending was a bad idea.
Can I actually say something nice about W here? The beginning of his second term, he wanted to spend his capital on what the real danger is: social security. No, I didn't like his approach, but there are some examples of a privatized pension system that works, such as in Chile. OK, the nice thing? HE WAS WILLING TO TALK ABOUT IT.
We boomers (and yes I am a card carrying boomer--and by card, I mean AARP) represent a direct threat to this nation's economy as we age and demand what we "think" is our due: Live long, live well, but as we age, get paid for it by the government. This economic matter-antimatter bomb (think Starship Enterprise Warp Core Breach) will make the sub-prime fiasco (and yes, we can blame Clinton for some, and Bush for much, and Reagan too) look small.
The VAT-fine-but unless I'm wrong, there are at least some countries in Eastern Europe that both lack a VAT and have a lower corporate income tax than we do.
In any case, lowering OUR corporate income tax, as well as the payroll tax, would be good policy. Any benefit we might get out of stimulus spending today, we'll pay for tomorrow in higher taxes, or borrowing, or inflation.
Plus that benefit might not exist anyway-there was a good piece is yesterday's WSJ by Robert Barro-
about the fact that the multipler for big rampups in federal spending (such as WWII) being less than one. So economic activity is actually, on net, reduced, currently unemployed resouces not withstanding.
"But our government is drastically weakened because of these deficits. In Fiscal Year 2009 the US will pay about $450 billion in interest payments on our debt, making interest the fourth largest expense in the federal budget behind Medicare-Medicaid, Social Security and defense spending."
Patrick, I'm with you on this point, and I've raised this fact here before and heard a deafening silence.
Republicans claim that government spending is too high, and yet Crank's last word on that subject was that the debt-to-GDP ratio is all that matters. But you can't have it both ways. If you really care about government spending, you can't ignore the huge burden that financing our debt has become.
The better explanation is that the Republicans don't mind government spending at all as long as it is spent to further their platform.
Republicans like Dick Cheney and Crank worship all things Reagan. And though Reagan deserves credit for reshaping our fiscal policy for the better -- he established that marginal tax rates above 40% are not acceptable -- he ran up huge deficits in the process of doing so.
Back in the 80s, many people were screaming that the deficits would "drastically weaken" our economy. And in the long run they really didn't. But guys like Cheney and Crank never ask why that didn't happen.
We were spared any serious pain from those two deficits for two reasons. First, Reagan was followed by two fiscally responsible presidents: Bush I and Clinton, both of whom spent political capital on getting our budget in order, each raising taxes (though never above the 40% marginal rate threshold).
And second, the booming economy of the mid to late nineties, which was mostly the result of advances in technology (eg the internet).
Take away the Bush I & Clinton fiscal responsibility and the 90s boom and we would still be carrying that debt from the Reagan era. Now if we are that fortunate again in the next 12 years, we're all set.
But deficits DO matter. And as I mentioned before, we now find ourselves in same position were in 1988, but with little to show for it.