Scott Spiegel

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A Tale of Two Pauls

August 11, 2010 By: Scott Spiegel Category: Economy

Paul Ryan, official portrait, 111th Congress
Image via Wikipedia

Liberals have generously treated us to a motley assortment of apologia for President Obama’s economy-wrecking fiscal policies over the past 19 months:

(1) The economy is doing fine (Ezra Klein)!  We should have expected the recovery to be agonizingly slow, and it is—hence, Obama’s policies worked.

(2) The economy isn’t doing well, but it would have been doing even worse without the stimulus bill (e.g., Mark Zandi, chief economist of Moody’s and bona fide boob).  Without a Keynesian spending orgy—or as Obama puts it, “moving the economy forward”—unemployment wouldn’t have stopped at 10% and might have risen to 12 or 13 or 15%.

(3) The economy is doing poorly, and it’s because the Democrats didn’t do enough (the ever-certifiable Paul Krugman).  The stimulus should have been much bigger, and financial regulations should have been much harsher.  To compensate we need “a second big stimulus, plus much more aggressive Fed policy.”

In contrast, conservatives have suggested the following interpretations of events:

(1) The economy is going to improve soon (Larry Kudlow).  We won’t experience a double-dip recession and growth is resuming, so we should be more optimistic.  Obama’s policies aren’t helping, but American ingenuity and entrepreneurial spirit are strong enough that we can recover anyway.

(2) The economy isn’t doing well, and Obama’s policies have made it worse (every other conservative on the planet).  Wasteful spending caused our debt to skyrocket and increased the chances of inflation; government takeover of private industries and burdensome financial regulations created an uncertain climate for investing and hiring that has prolonged the recession.

(3) The economy is doing poorly, and now is the time to discuss not only repealing Obama’s policies and ensuring that the likes of them never pass again, but undoing the policies liberals have inflicted on the nation since FDR under the pretense that once they were in place future generations would be too sheepish to touch them (Paul Ryan).  The impetus from the Tea Party movement should be used to revive talks about privatizing Social Security, Medicare, and Medicaid.

So liberals and conservatives are at a bit of a standoff over the fundamental economic principles behind their political strategies.  Who’s right?

Let’s see: economists have demonstrated, time and again, using common-sense reasoning, econometric modeling, and historical data, that increasing government spending yields less economic output than if government had left that money in the private sector to be spent, invested, or saved as those who generated it saw fit.

Economists have shown that increasing marginal tax rates counterintuitively decreases the gross domestic product, especially in the years immediately following tax increases.  Obama’s chief economic advisor, Christina Romer—who just retired over a conflict between her views and the administration’s—documented the effect of this negative tax “multiplier” using empirical data in a recently published economics article.

It doesn’t matter whether we accept Klein’s view that the economy is peachy, Zandi’s view that it’s doing badly but could be worse, or Krugman’s view that it’s doing badly and needs more Obamanomics.  All are based on the false premise that more government spending, taxation, and regulation are better for the economy than less.  (Hey—don’t Keynesians believe that spending lots of money on wars is a good way to revive the economy?  I guess Krugman will be admitting he was wrong about the Iraq and Afghanistan conflicts after all!)

People like Klein bemoan the fact that corporate profits are back up to 2006 levels while hiring remains slow.  Liberals present the question of our tepid recovery as an intractable metaphysical mystery incapable of being penetrated by mere humans; as Klein puts it: “That is the catch-22 of the recovery: Businesses will start hiring when the economy recovers. And the economy will start to recover when businesses start hiring.”  Answer: And both will improve when the government gets out of the way!

As for the varying conservative perspectives, which are the only ones remotely connected to reality and thus worth considering, Kudlow is right that the American economy is resilient.  Perhaps he’s slyly making the point that more optimism on the public’s part not only better reflects the state of our economy but may improve it via increased investment and hiring.  Kudlow’s perspective is largely predictive, rather than focusing on how lawmakers should bring about a faster and more permanent recovery (though he often discusses those issues as well).

Every other conservative in the world who believes that we shouldn’t stand for the “new normal” of high unemployment and unexceptional growth is correct that Democrats’ policies are making the recession worse.  Repealing ObamaCare, preventing cap-and-trade legislation, and stopping or reversing the scores of other nasty things Obama and Pelosi have planned for our economy are mandatory undertakings over the next six years.

But Paul Ryan hits the bullseye when he notes that it is desirable, necessary, and possible to go further.  Train wreck legislation like ObamaCare is worth repealing, but if Medicare and Medicaid are quickly running out of money, and Social Security is already in the red, why shouldn’t we go after every entitlement shibboleth?

What principle, applied consistently, would nudge us to nullify ObamaCare but leave Social Security, Medicare, and Medicaid shiny and intact?  Did our country survive and prosper before these programs were enacted?  Would we survive and prosper if we phased them out?  Might we prosper even more in their absence?

Ryan’s proposal is far from perfect—his main argument for the Roadmap to recovery is that it will keep our entitlement system solvent, and he doesn’t discuss eradicating entitlements once and for all.  Perhaps Ryan believes that talking about eliminating entitlements is too politically risky now, when even his Roadmap is audacious by today’s standards.  But Ryan deserves credit for having gone further than anyone else in Congress in working out the details of a plan that will help the country avoid a fatal insolvency.

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I Guess Tax Cuts Stimulate the Economy After All

July 28, 2010 By: Scott Spiegel Category: Economy

The IRS Has My Money
Image by scott*eric via Flickr

Conservatives have been pounding their fists and screaming for decades that tax cuts stimulate the economy.  With lower taxes, investors and business owners can provide more capital for new ventures and engage in more hiring, because they know less of their profits will be confiscated to pay for things like solar panels at the White House.

Tax cuts don’t revive the economy the second they’re passed—no one, not even Rick Santelli, ever said they did.  They don’t do so a few weeks later; they don’t always do so in time for the next election.  But eventually they do.

Tax cuts trim government revenue temporarily, but soon increased growth from lower tax rates results in net revenue increases.

In contrast, tax increases—which is what the impending reversal of the 2001 and 2003 Bush tax cuts would amount to—shrink the economy by decreasing hiring and investment.  Regarding the Bush tax cuts, that’d be a combined tax increase to the tune of half a trillion dollars over the next decade.  (Pop quiz: If Rhode Island and Massachusetts’ tax structures were switched, would John Kerry still take the trouble to dock his yacht in another state, even though it would cost him half a million dollars a year in taxes?)

It’s really not that complicated.

Imagine that you run a lemonade stand and make $100 profit a day, and the Obama administration taxes you at 50%, for a government revenue total of $50.

Now imagine that the incoming Christie administration slashes that rate to 20%.  Instead of worrying about paying your bills and staying afloat, and resenting the government’s punishing your entrepreneurship, you hire more workers and eventually expand to five franchises.  At $20 in taxes per stand, you are now sending twice as much revenue to the government as before.

Leftists refuse to see the economy as dynamic and capable of expansion; they view it as a fixed pot that must be redistributed from oppressors to oppressed.

The 1990s were prosperous, not because Bill Clinton was a laissez-faire capitalist extraordinaire—though he was forced into the role of pseudo-free-marketer by Republican Congressional majorities after 1994—but because of the cumulative effect of Reagan’s policies throughout the 1980s.  Reagan campaigned on the idea of permanent tax cuts across the board and enacted them while in office; they remain largely in effect to this day.  The degree of certainty, stability, and flexibility that this consistent posture afforded investors and business owners over the next two decades should not be underestimated.

Reagan steadfastly resisted the call of Congressional Democrats and some Republicans to ramp up government spending during the early 80s recession.  Under his administration, deficit as a percentage of GDP never rose above 6.0%.  By 1987 it was down to 3.2%.

In contrast, the Office of Management and Budget expects the deficit-GDP ratio to be 10.0% in 2010 under Obama, and to barely decline in 2011.

During his presidential campaign, Obama was not shy about promising to let Bush’s tax cuts expire in 2011 if elected.  When Charles Gibson asked Obama why he would support an increase in capital gains taxes, even though raising them in the 1980s decreased revenue and lowering them in the 1990s and 2000s increased revenue, Obama insisted he would do it “for purposes of fairness.”  In other words, Obama feels obligated to make rich people suffer for the sin of being productive, even if that means poor people will suffer more in the long run.

In the spring of 2009, Obama and Congressional Democrats passed their poorly designed, massively irresponsible stimulus spending bill.  Before passage, Obama warned that without the $787 (now $862) billion bill, the unemployment rate might rise to 8.0%.

When unemployment hit 10.0% in 2010, Obama’s new tagline became, “Yes, but it’s not 12 or 13, or 15.”

Democrats’ halting efforts to offer targeted tax cuts to special interest groups as part of the stimulus bill were not convincing.  Giving a tax break to a “green” company that wouldn’t survive on its own does not create the wealth that a tax break for an independent, self-sufficient, productive company would.

Now that it’s become obvious to everyone except Paul Krugman that runaway government spending does not mysteriously create wealth, Federal Reserve Chairman Ben Bernanke has been caught admitting to the House Financial Services Committee last Thursday, 18 months after the stimulus bill has had a chance to work but failed, that extending the Bush tax cuts will strengthen the economy.

Bernanke was quick to walk back his statement and claim that extending the tax cuts is just one way to stimulate the economy.  (One way that works, he did not say in so many words, but give him credit for letting the genie out of the bottle.)

Since the end of last Thursday, the Dow Jones has rallied some 200 points to 10,500, after have troughed earlier in the week at just above 10,000.

Last month Obama economic advisor Christina Romer and her husband published a paper in The American Economic Review demonstrating that tax hikes hurt economic growth.  Their article included the following takeaway: “Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by nearly 3 percent.  The effect is highly significant.”

Over the weekend, Republican senators revived the idea of extending the Bush tax cuts.  Now even some Democratic senators are talking up the idea, including Evan Bayh, Kent Conrad, and Ben Nelson.

So I guess tax cuts stimulate the economy after all, according to our liberal president’s Federal Reserve chairman, his economic advisor, and multiple Democratic senators.  It used to be newsworthy when we discovered that Obama’s associates and cabinet nominees were terrorists, communists, and Maoists.  Lately the scoop seems to be that a few of his cronies, if allowed to speak freely, occasionally have some sane ideas about how to run the country.

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