Tuesday, October 16, 2012

Things Left Out

Mike Kimel shows Percent Change in Real Growth

Graph #1: Kimel's Graph

Kimel writes:

The so-called Kennedy tax cuts occurred in 1964, the year following JFK's assassination, and were pushed through by Lyndon Johnson. Now take a look at 1964, and consider the likely outcomes when people who think events in 1964 "increased growth" determine tax policy.

Jazzbumpa evaluates:

[I]nflation adjusted GDP growth quickly peaked after the Kennedy-Johnson tax cut, reaching a maximum value of 8.5% in Q4 of '65 and Q1 of '66. It then dropped dramatically for the next four years.

If tax cuts were good for the economy, then GDP growth would be increasing... The data is not consistent with this notion.

But I'm thinkin, there might be other things going on. There might be reasons that growth dropped off. There might be things interfering, so that the graph does not show the "natural" response of the economy to a tax cut (whatever that may be).

In 1967, there was almost a recession. In 1971, Rowland Evans and Robert D. Novak wrote:

The recond of the Federal Reserve Board in controlling the nation's money supply in the second half of the 1960s was a sorry one. Having choked off the money supply as an anti-inflation device in 1966 so tightly that it produced a serious slump in housing and construction (called by some a "mini-recession"), the central bank started pouring out money too quickly and generously in 1967 and thereby spoon-fed a new inflation.

I'm not impressed that Evans and Novak blame the Fed for everything. They leave out all the economic effects of Congressional policy, like the Kennedy-Johnson tax cuts. From the Evans and Novak quote, take this: The Fed, concerned about inflation in 1966, reacted so strongly that it almost created a recession.

Graph #2: Kimel's graph (blue) and Inflation (red)

So if the Kennedy-Johnson tax cut did not boost real growth, as Kimel's graph shows, perhaps the reason is that the Fed undermined growth.

Stop. Before you curse the Fed for doing that: It was the Fed's job to do that. Still is.

The problem is not that the Fed was doing its job. The problem is that what Congress was doing, with its tax cuts and all, created a situation that forced the Fed to respond. The policies were in conflict. Still are.

That's a pretty big thing to leave out of the picture.


Clonal said...


The Johnson cuts were on the top tax brackets. The top earners have a much lower marginal propensity to consume. So the most of the increased income was likely saved. The incentive for charitable contributions also correspondingly decreased. So net aggregate demand probably dropped significantly as the rich juggled their savings.

There is a flawed thought process going around, which is as follows.

*Increased savings are good.

*Banks will lend out these savings resulting in higher investment.

*Increased investment leads to increased growth.

In actual fact banks do not lend out savings. They create new money from scratch.

The need for new loans on part of business arises when there is an increased demand for their products. In other words, banks respond to the borrowers need, and not the borrower to the money in the bank vaults.

Consumer borrowing on the other hand occurs when wages are low, along with savings, and it is difficult to meet ongoing needs.

In general, for society, consumer borrowing is "bad" while business borrowing for investment is "good."

Real estate loans could be good or bad. Borrowing to build a new house is "good" Borrowing to purchase an existing house could be "good" or "bad" depending on whether or not the result is an inflationary "bubble."

Jazzbumpa said...

Art -

Of course there are other factors that influence growth. Mike's point - and mine - is the opposite: to indicate that there is no causal relationship between tax cuts and economic growth.

In post WW II America, tax cuts have never boosted the economy. This simple fact applies irrespective of tax rates and other economic conditions.

The chances of any positive benefit with tax rates already low is so vanishingly small as to be laughable.

Romney and Ryan are liars, and very simple data analysis makes their lies obvious.

That is the point.


Dan Lynch said...

It's called sectoral balances.

The private sector generally desires to save 3% - 4%. It was only saving 2% at the time of the 1964 tax cuts, so it's not surprising that it chose to save some of the tax cuts rather than spend them.

A rough rule of thumb is that the deficit needs to be equal to the trade deficit plus another 4% GDP to allow for savings -- and that's just to tread water.

If the goal is to stimulate the economy and grow GDP, deficit spending targeting the working class is more reliable than deficit tax cuts targeting the upper class.

I'm not at all opposed to tax cuts for the working class as a stimulus, just bear in mind that a portion of the tax cuts will be saved or used to pay down debts, reducing the stimulus effect.