Supply side economics and tax policy

[Biochemist]

I noted in recent media reports that the federal deficit for the current fiscal year is now projected at about $350 million, down from the previously estimated $420 million.

 

This is one of many cases where the standard line of media pundits (that lowering tax rates "costs" money) is again refuted. Every major federal tax reduction in the US since 1960 (Kennedy, Reagan, Bush) has resulted in a revenue increase to the federal government.

 

It is not clear why commentators so frequently equate federal tax rate reduction with a decrease in federal revenue (and vice versa) when the evidence is so strong.

 

Thoughts anyone?

[Qfwfq]

One thing I gathered, it was a mainly foreign debt and they used the old standard trick of devaluation to help pay it off. Debts that were fixed in US$ were easier to pay when the US$ is worth less. The dollar his been rising back up lately.

 

Of course, it's always a complex system so the overall effects of changing taxes can't always be so trivial to work out.

[bumab]

While the federal revenue may not decrease, I was under the impression that during the Regan and Bush years the overall deficit (federal revenue vs. expenditures) rose by the highest amount during the Regan years and the Bush years. While revenue may not decrease, that doesn't mean we aren't borrowing the money from somewhere.

[UncleAl]

I noted in recent media reports that the federal deficit for the current fiscal year is now projected at about $350 million

$350 billion, not million. The real annual Federal deficit is closer to a full $trillion. Costs have been hidden, ignored, relabeled, embezzled, and deferred. The astounding cost of the Near East imbroglio will be made up with massive inflation, as with the Vietnam War. Taxation would penalize the rich. Inflation creates investment opportunities while imploding pension obligations, sucking value out of every savings account, and rendering off-shore investments in other currencies golden.

 

In 2002 the average debt per American household with at least one credit card was $8940 at 15-19% interest, a total of $750.9 billion in principle owed, and growing 14%/year. Banks pay savings interest of 0.1-0.5%. Total US personal debt of all kinds is almost $7 trillion. There is no elasticity remaining to allow for surviving hard times. 1929 was nothing compared to what is coming on fast.

 

It is not clear why commentators so frequently equate federal tax rate reduction with a decrease in federal revenue (and vice versa) when the evidence is so strong

Government is about taking not making.

[Biochemist]

$350 billion, not million.

Major whoops. Thanks for the correction, UA.

...The astounding cost of the Near East imbroglio will be made up with massive inflation, as with the Vietnam War.

That is pretty unlikely. We have a much more competent Federal Reserve now. Aggregate federal debt service (i.e., interest payments) are at something like 2.5% of GDP. This is not a particularly troublesome burden. The war interest/cost is not immaterial, but it is dwarfed by the impending liability for Social Security and (far more importantly) Medicare. But that is another topic.

 

It is also probably true that the war cost is relatively small compared to the cost of another terror attack. 9/11 cost the US economy well over a trillion dollars. Ergo, war or no war, we still have a cost problem to deal with in terms of the economic cost of terror.

Government is about taking not making.

No argument there.

[Biochemist]

While the federal revenue may not decrease, I was under the impression that during the Regan and Bush years the overall deficit (federal revenue vs. expenditures) rose by the highest amount during the Regan years and the Bush years. While revenue may not decrease, that doesn't mean we aren't borrowing the money from somewhere.

True. That is because federal SPENDING went up faster than the revenue increase. But revenue did go up dramatically. The feds just spent more than they got. Gee, what a surprise.

[Biochemist]

One thing I gathered, it was a mainly foreign debt and they used the old standard trick of devaluation to help pay it off. Debts that were fixed in US$ were easier to pay when the US$ is worth less....

I'm not quite sure what you mean, Q. US federal debt is denominated in dollars, and we pay interest in dollars. It is true that the internationaly currency markets will affet the trading prices of US bonds, but the aggregate debt burden remians the same in dollars.

 

The issue for the thread is the common media misconception that an increase in marginal tax rates (particularly in the higher breackets) increased revenue. It doesn't, and yet we still hear that drone from the usual media sources on a regular basis.

[bumab]

It is also probably true that the war cost is relatively small compared to the cost of another terror attack. 9/11 cost the US economy well over a trillion dollars. Ergo, war or no war, we still have a cost problem to deal with in terms of the economic cost of terror.No argument there.

 

How did you calculate this number? I assume this number also includes costs which were not exactly "caused" by the terror attack. The dubious Homeland Security Admin. (for one) has cost a fortune, for example. That was a response to the attack, there were alternatives. Is that included? Is the "war on terror" included? Just curious.

[Biochemist]

How did you calculate this number? I assume this number also includes costs which were not exactly "caused" by the terror attack. ...

Good question. I saw a couple different numbers in the Wall Street Journal. A significant portion of direct costs were related to insurance loss and reconstruction related to the structures in lower Manhattan. Ther is also (undeniably) a much larger hit that the overall economy took in the following quarter. I think most of the number is that component. Keep in mind that a decrease in GDP is functionally very similar to a tax increase from the point of view of an individual.

 

Let me check around a bit and get back to you.

[Biochemist]

How did you calculate this number? ...

Bumab- I poked around and this is the best summary I could find:

 

http://www.ccc.nps.navy.mil/si/aug02/homeland.asp

 

The largest element (and really the only one I was talking about) is the impact of a reduction of GDP. This report has the estimated impact of that element at about $500 billion as of the end of 2003. The impact on New York (in terms of direct damage repair) is variously estmated from $60 billion to over $100 billion, depending what one might include.

 

None of the above includes the cost of homeland security outside of New York, or the direct cost of the war itself.

 

I did not intend to suggest that the war is cost effective, but only that the cost of war should be considered in light of the cost of another attack. It also might be considered in light of the potential for incremental increases in the homeland security budget if another attack succeds.

[bumab]

The largest element (and really the only one I was talking about) is the impact of a reduction of GDP. This report has the estimated impact of that element at about $500 billion as of the end of 2003. The impact on New York (in terms of direct damage repair) is variously estmated from $60 billion to over $100 billion, depending what one might include.

 

Good point, I was forgetting that. Ascribing it to the terrorists may be a little misleading (really it was the US's paranoia), but I guess it's not all that unfounded.

 

None of the above includes the cost of homeland security outside of New York, or the direct cost of the war itself.

 

Good. That was my concern.

 

I did not intend to suggest that the war is cost effective, but only that the cost of war should be considered in light of the cost of another attack.

 

A valid point. Thanks for the info.

[Qfwfq]

I'm not quite sure what you mean, Q. US federal debt is denominated in dollars, and we pay interest in dollars. It is true that the internationaly currency markets will affet the trading prices of US bonds, but the aggregate debt burden remians the same in dollars.

I meant that I was talking about foreign debt which I understood to be the greatest part of that trillion dollars. We all know why they held the US$ low for quite a while!

 

I also quite agree with Bumab, how do you estimate the cost of 911, or iow the damage it caused? I tend to think the damage was very much inflated, and the estimates of it even more. I think this because I'm not an economist. The economist I agree with is Hume, I say that money is nothing but paper, it only represents actual values, especially as many investments are speculative and not productive. Suppose one day you put a bomb right smack in Wall Street, destroying exactly the NYSE and nothing else, what would you estimate the damage as being?

 

IMV, in such cases most of the damage to the economy is what people make it to be. That bomb would totally disrupt the system and cause all kinds of consequences even though it hadn't really touched much. What I mean is, most of the consequences are due to how things are organized and the nature of the market based economy, and I consider this to be so concerning 911. It should be a lesson. This is how I see it, now hang me... :shrug:

[Biochemist]

I meant that I was talking about foreign debt which I understood to be the greatest part of that trillion dollars. We all know why they held the US$ low for quite a while!

I must be thick, but I still don't know what you mean, Q.

I also quite agree with Bumab, how do you estimate the cost of 911, or iow the damage it caused? I tend to think the damage was very much inflated

Maybe. But the estimates are reasonable. Did you get a chance to glance at the link that I posted above?

IMV, in such cases most of the damage to the economy is what people make it to be.

This is absolutely true. But this is REAL damage, not theoretical damage. If all US consumers stopped spending completely for three months, it would be an economic crisis. This is not theoretical. Ergo, the impact of consumer behavior on the market is real. The difficulty lies in establishing causality. There is little doubt that the post 9/11 economy was worse than the pre 9/11 economy. The magic is determining how much of that decline was due to 9/11.

This is how I see it, now hang me..

I am much more in favor of floggings. So much more public fervor. And still an opportunity for a repeat performance.

[Qfwfq]

I must be thick, but I still don't know what you mean, Q.

Hmmmm, surprising. It's a well known monetary policy manoeuvre, that countries have often used for a temporary benefit.

 

Maybe. But the estimates are reasonable. Did you get a chance to glance at the link that I posted above?

Uhm, sorry, I didn't look at it because I don't doubt the content being what you said.

But this is REAL damage, not theoretical damage.

I did not say it's theoretical rather than real. Sure, the impact of consumer behavior on the market is real, and that's a great part of post 911 just like in other times. This time, like the Great Depression, it was triggered by a stock market crash, although the causes of that in '29 were different. There isn't much difficulty in establishing causality and determining how much of that decline was due to 9/11, there's no doubt that the twin towers were the cause.

 

What, then, was my point??? :rant:

 

Actually, it isn't all that hard.

 

I am much more in favor of floggings. So much more public fervor. And still an opportunity for a repeat performance.

:shrug:

[Biochemist]

Hmmmm, surprising. It's a well known monetary policy manoeuvre, that countries have often used for a temporary benefit...

I am not sure what you meant when you said "they" held the US currency low. Were you talking about US central bankers or foreigners?

 

The US Federal Reserve manages US monetary policy by targeting US inflation. This is only slightly impacted by foreign reserves. Foreigner investment in US securities (or direct foreign purchase of US currency) takes some money out of circulation and hence tends to put downward pressure on money supply. The US Federal Reserve would respond by increasing money supply (mostly by buying back US denominated bonds with US dollars). But the greater drivers for money supply intervention are inflation metrics and the quantities of economic activity in the US.

 

The exchange rate of the US dollar is established in the foreign exchange markets. It does not have too much direct effect on US inflation. However, a protracted drop in US dollar value (as at present) does increase exports, since US denominated products are relatively cheaper overseas. But this short term gain is offset by the tendency of investors to stop buying dollar denominated investments when the currency is dropping. Essentially, foreigners stop buying bonds (denominated in dollars) to buy goods (denominated in dollars).

 

Overall, things work better (for everybody) if the currency relationships are stbale over the long term. We just can't figure out yet how to make the world work that way.

[bumab]

I tend to think the damage was very much inflated, and the estimates of it even more. I think this because I'm not an economist. The economist I agree with is Hume, I say that money is nothing but paper, it only represents actual values, especially as many investments are speculative and not productive. Suppose one day you put a bomb right smack in Wall Street, destroying exactly the NYSE and nothing else, what would you estimate the damage as being?

 

I completely agree. While Bio makes a good point- this imaginary monetary damage does get translated into real economic damage through people buying less, traveling less, etc., it's almost like it gives the terrorists too much credit. "Terrorists caused us a trillion dollars with their attack! It's their fault!" While it's true that damage would not have been done if there was no 9/11 attack, the cause was us. Shifting the blame simply lets us feel OK about the damage, since it wasn't our fault. It's an idealistic position, to be sure, however...

 

What I mean is, most of the consequences are due to how things are organized and the nature of the market based economy, and I consider this to be so concerning 911. It should be a lesson. This is how I see it, now hang me... :shrug:

 

True.

[Biochemist]

I really wanted to get back to the original question in post #1:

 

Why do you suppose that the media rejects the notion reducing tax rates (at least for the upper brackets) actually increases federal revenue? This appears to be true, in spite of the overwhelming evidence including the current windfall from the most recent US tax rate reductions.