Second look at some numbers from Twenty-Cent Paradigms.
Fairness is in the eye of the beholder, but the US economy actually grew faster when top marginal tax rates were higher. Here is the annual average growth in real GDP and the average annual top marginal tax rates for the US, by decade:
1951-60 - 3.42 - 91.2%
1961-70 - 4.11 - 78.4%
1971-80 - 3.14 - 70.0%
1981-90 - 3.21 - 44.5%
1991-2000 - 3.22 - 37.9%
2001-2006 - 2.51 - 36.2%
1961-70 - 4.11 - 78.4%
1971-80 - 3.14 - 70.0%
1981-90 - 3.21 - 44.5%
1991-2000 - 3.22 - 37.9%
2001-2006 - 2.51 - 36.2%
So I put those numbers into a graph, and let Excel add trend lines for them:
Everything trends downhill, at least since the '60s. But then, so do my spirits. Come to think of it, maybe the economy's long decline is all my fault. Maybe if I cheer up, the economy will get better.
Oh, wait. I thought I was making a joke. But that's not a joke. It's the actual view of all those economists who say the problem is expectations.
17 comments:
I think it has something to do with correlation vs causation . . .
Cheers!
JzB
High taxation rates are about preventing income and wealth disparities, and encouraging or discouraging economic behaviors.
All this shows is that contrary to some assertions, growth and high tax brackets can be quite compatible. There is a weak correlation at best between high taxation rates and growth.
I could make a case for a causality, but it would be a weak case, if we only look at tax brackets in isolation. We could make a much stronger case for high tax brackets as being one of a set of policies, which in combination lead to high growth.
But this whole discussion leads me to ask a more important question. Why is growth considered to be an essential part of a healthy economy?
.
"Why is growth considered to be an essential part of a healthy economy?"
If the pie gets bigger, everyone can have more, that's what I was told. A rising tide floats all boats. Yadda yadda. Here's what I think:
Want a job? To create jobs we need economic growth... or else some bizarre, sci-fi alternative.
Population increasing? To simply maintain existing standards of living, we need economic growth.
Unhappy with things as they are today in your part of the world? You are unhappy because economic growth is inadequate.
That's what I think.
I've parsed GDP growth differently.
Clonal - I think you can make an excellent case for causality, based exactly on preventing income and wealth disparities, and encouraging or discouraging economic behaviors.
Many of my recent posts are so motivated, and I invite you to have a look and comment.
Art has given a good answer to your growth question. I'll add that flat line stability is not a real world option. You either have decline, or lost decades, a la Japan, which lead to high unemployment in some population segment - the 20 to 35 age group in Japan's case - and therefore increasing wealth disparity.
Cheers!
JzB
of the reasons you have given, only population growth and a rising standard of living appear to have merit.
So let me rephrase my question. Why would economic growth be required to maintain a healthy economy with a stable living standard and a stable population?
.
So let me rephrase my question. Why would economic growth be required to maintain a healthy economy with a stable living standard and a stable population?
Okay, but maybe we should throw in an unchanging technology as well... Then the only push for growth that I can see comes from people's desire to improve their condition and that of their children. So then you have to change human nature, or suppress it. Perhaps you would have to return to a feudal society.
I would also point out that your "stable living standard" presumes stable ratios between wages and profit, wages and rent, profit and rent, wages and interest, etc. So we could not have any economic policies that change those ratios.
Art,
What I am trying to get at, is the whole problem of debt and interest. In horizontal money creation (as opposed to vertical money creation by deficit spending on the part of the government,) the money is created as debt by the private banking system. The debt has a cost associated with it - namely interest. When creating the loan, offsetting journal entries are created in the bank books -- and they should also in your books (using double entry bookkeeping.) And since all horizontal money is debt, where is the money to pay the interest going to come from?
In other words, X dollars have been created, and say with 100% interest, 2X dollars are owed the bank. Where does the other $X come from?
I am going somewhere with this, so please humor me!
.
"where is the money to pay the interest going to come from?"
The money comes sometimes from continued expansion of the private sector, as the DPD graph shows (1947-2007) and sometimes from the public sector (1933-1947).
"I am going somewhere with this..."
I'm ready now.
Yes you hit the nail on the head! Expansion means growth of the debt. In other words, the growth has to take care of the interest, plus all the other needs you mentioned earlier. But that puts an upper bound to the interest for it to be sustainable. In other words, on the average, the interest has to be lower than the growth rate.
Debt is only possible, as long as the growth achieved by taking the loan exceeds the interest payment, and the interest payment is used to purchase goods and services in the economy -- it cannot be saved.
If these two conditions are violated, then the money has to come from government deficit spending, and that cannot be interest bearing debt. This allows the game to go on a bit longer!
In real life because of savings leakage, and the shift of wealth upwards, the game has to collapse.
That said, the FED rate is not the rate of interest paid by main street. The main street historically has paid prime rate plus. So what happens if we plot the prime rate against nominal and real GDP growth rates.
You can see my plot, and let me know your views. I will then tell you of my observations.
.
"In other words, on the average, the interest has to be lower than the growth rate."
This topic is new to me. By coincidence I only just found The Slack Wire -- in his sidebar, under "Pages" the page "g and i" has graphs of growth rates versus interest rates; plus there was a post "Fiscal Arithmetic: The Blanchard Rule" which has been withdrawn for further work...
On your graph, the prime rate and nominal growth are *very* similar, except for this: GDP growth was higher on the upswing to peak, and lower on the post-peak downswing. Based on the relations you describe (which make sense to me, but they are not yet "mine"), growth would have minimized problems arising from interest before 1980, but not since.
Actually, the blue line (interest) encroaches on the red (GDP) even before 1980. Excellent. I should have expected it. This old graph show encroachment -- and uses the prime rate besides!
I can see that the yellow line, real GDP growth, quite possibly shows decline in the post-1980 period as a result of these problems. I do hold the costs associated with debt responsible for cost-push inflation and for economic decline.
This is good stuff.
Art,
The date of crossover happens to be around Jan 1979. So what happened around that time that could have led to this? It was not the first Oil Crisis, for that was well past, and we continued to have high nominal growth rates, and there was no destabilization of the prime rate. The second oil crisis had not yet occurred. In these graphs, I can see no signs of "the stagfaltion." So what was it that occurred that could have caused such a dramatic shift. Reaganism was not yet born. So what was it? It was obviously sudden. This to me is the key factor responsible for the ballooning federal deficits -- they suddenly became essential for the survival of the system.
So what was it? I am fairly sure that I have the culprit. What do you think?
Art,
The next step is to reintroduce the original topic of this discussion -- the purpose of high rates of taxation, the changes in income and wealth distribution, and the purpose of one other law that started the whole ball rolling.
Perhaps this:
"In 1978, Congress reduced capital gains tax rates by eliminating the minimum tax on excluded gains and increasing the exclusion to 60 percent..." (from Wikipedia)
??
Definitely, policy. Not oil.
That is one. But you missed out two very important ones. Marquette v Omaha SC decision, combined with the Carter administration deregulation of interest rates with the signing of the Depository Institutions Deregulation And Monetary Control Act of 1980, and the Volcker hikes that began right after the deregulation.
The first explains the increase in personal debt, and the second the rise in the prime rate.
This was combined with a continued reduction of taxation. One hand giveth to the deserving (the rich) and the other hand taketh away from the undeserving (the poor.)
Also think now of the MMT assertion that in a Fiat currency regime the natural rate of interest has to be zero. What happens if it is not - again we are talking Main Street interest and not the Fed Rate (Wall Street)
Another article, that is saying the same thing in a different way - by Lance Roberts Financial Profits Reduce Economic Prosperity
Quote:
America was once a country built on the solid foundation of the hard work, satisfaction and pride in the building of stuff. We aren't talking about "namby pamby" stuff; we're talking about real stuff
.
.
.
That was then. Beginning in 1980, our world changed as we discovered the world of financial engineering, easy money and the wealth creation ability of leverage. However, what we didn't realize, and are slowly coming to grips with today, is that financial engineering had a very negative side effect: It deteriorated our economic prosperity. As the use of leverage crept through the system, it slowly chipped away at the savings and productive investment.
Post hoc ergo procter hoc
Post a Comment