Undernews is the online report of the Progressive Review, edited by Sam Smith, who has covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964. The Review has been on the web since 1995. See main page for full contents

January 24, 2009


Sam Smith

As a classic case
of what Barney Frank has called post-partisan stress syndrome, Barack Obama and the Democrats are putting inordinate faith in tax cuts as part of their stimulus program. This is not to say that some of the tax cuts are not wise and deserved, only that they do not have the economic effect that, until now at least, mostly conservatives have claimed.

They are, in fact, mainly a political rather than an economic stimulus in that while the economy isn't much affected, it makes the advocates more appealing to voters. Or in this case, it picks up some Republican votes.

Until now, Democrats have repeatedly stood up to rightwing tax cutters. But the fiscal crash panic that has swept the capital combined with Obama's desire to pal around with the right has changed all that. We have put away childish things like Democrats standing up for the little guy against the banks and major corporations. We have also put away history; no one seems to remember that the Bush tax rebates and came and went without a trace.

Part of the problem is who gets the benefits and how the money is spent. If, as in the case of the Bush tax rebate, a lot goes into buying foreign goods then it won't have much of an economic impact. If the benefits largely go to the wealthy who toss it into hedge funds or send it offshore, again the impact is less than one might hope.

Worthwhile alternatives that have gotten little or no attention, even from liberals, include printing - not borrowing - money for major public works programs; including in these programs projects that will have large spin off results such as giving American a decent rail system; nationalizing big banks that are in trouble, using revenue sharing to get bailout funds quickly to the state and local level; a shared equity program in which the government becomes a property partner with homeowners facing foreclosure; and handling foreclosure negotiations at the local court level, which now has the support of House Speaker Pelosi.

The following - from the Center for Budget & Policy Priorities and other sources - helps to recall how liberals used to think about the tax cut issue:

CBPP, 2004 - The Economic Policy Institute finds that the number of jobs created in the wake of the tax cuts has already fallen 2.7 million jobs short of Administration predictions made in 2003. EPI reports that through August, the economy has produced 1.6 million jobs since passage of the 2003 tax bill; this is just 38 percent of the 4.3 million jobs the Administration predicted would be generated over this period. . .

The assertion has been made that the CBO data show all taxpayers benefit from the tax cuts since all income groups are shown to receive at least some tax cuts. Such assertions, however, rest on the assumption that the tax cuts will never be paid for. This assumption is erroneous; eventually, the government must cover its bills, either by raising taxes or by cutting spending. Financial markets will not tolerate persistent large and unsustainable deficits. As Federal Reserve Board Chairman Alan Greenspan put it when testifying before Congress on September 8, "If you're going to lower taxes, you shouldn't be borrowing essentially the tax cut. And that over the long run is not a stable fiscal situation."

OMB Watch, 2006 - Attempting to justify the Congressional GOP's push to extend and make permanent President Bush's first term tax cuts, many Republican legislators and pundits, including the vice president, have recently claimed tax cuts pay for themselves by spurring economic growth. While this argument bolsters their call for tax cut permanence, the evidence shows the claim is more fiction than hard fact.

The first evidence pointing to the dubiousness of these claims is the tax cuts have yet to actually pay for themselves. The government has run massive, sustained deficits each year since the tax cuts were enacted and according to the president's own budget numbers, will continue to bring in insufficient revenue to close that gap. The Center on Budget and Policy Priorities has recently calculated that federal revenues in the three years following the president's tax cuts (2003 - 2005) have been $316 billion below what the administration had forecast before the cuts were adopted

In fact, the administration itself does not believe the tax cuts will recover enough revenues through stimulated economic growth, as its own budget forecasts have continuously shown revenue growth to be smaller than historical averages, causing sustained deficits in the decades to come. . .

Challenges to the administration's claims about its economic policies are nothing new. For years, prominent economists and analysts, some of whom have worked for the president, have called into question evidence to support the claim that tax cuts replace anywhere near the full amount of lost revenue. Ironically, the first group to cast doubt on such claims was the president's own Council of Economic Advisors. In 2003, during the debate over yet another round of huge tax cuts, Glenn Hubbard, then chairman of the CEA, maintained that less than half of the tax cuts would be replaced by increased economic growth, even in the best case scenario.

Hubbard's successor as chairman of the CEA had still harsher criticisms of the tax cuts. Greg Mankiw, who served as the chairman of the CEA from 2003 until 2005, wrote that there is "no credible evidence" that tax cuts pay for themselves and, in an often quoted line, an economist who makes such a claim is a "snake oil salesman who is trying to sell a miracle cure."

This sentiment was repeated in the CEA's Economic Report of the President in 2003 that stated, "Although the economy grows in response to tax reductions (because of higher consumption in the short run and improved incentives in the long run), it is unlikely to grow so much that lost tax revenue is completely recovered by a higher level of economic activity." . . .

If fact, when tax cuts are deficit-financed, they increase both the deficit and the national debt and could actually have a negative economic impact, lowering the national savings rate, increasing long-term interest rates, and dampening economic activity. Worried economists and analysts watched as the national savings rate plummeted from 1.8 percent throughout 2004 (already a historical low) to negative 0.5 percent in the third quarter of last year. Consumers have been propping up the economy by continuing to spend--helped in large part by quickly rising housing prices--yet if consumer behavior shifts and Americans begin saving more, the economy might move toward another recession. . .

All the evidence shows that any economic benefits of the cuts will not offset the cost to the government, particularly when the cuts add to the national debt and place an increasing burden on the economy. While such claims may serve ideological ends of the president and his supporters', they are political rhetoric far removed from the facts.

CBPP, 2006: -
A consistent finding in the academic literature about the effects of tax cuts on the economy is that these effects are typically modest. In the short run, well-designed tax cuts can help to boost an economy that is in a recession. In the longer run, well-designed tax cuts can have a modest positive impact if they are fully paid for. For example, the recent Treasury analysis found that if the President's tax cuts were made permanent and the costs of the tax cuts were paid for by reductions in programs, economic growth would increase by a few hundredths of one percentage point annually. Meanwhile, studies by economists at the Joint Committee on Taxation, the Congressional Budget Office, the Brookings Institution, and elsewhere have found that if tax cuts are not paid for with spending reductions, they are likely to have modest negative effects on the economy over time, because of the negative effects of the increased deficits. Tax-cut proponents often claim that the economy will be badly damaged if the tax cuts are not extended; these claims are without foundation.

"The main reason for our growing economy is that we cut taxes and left more money in the hands of families and workers and small business owners." — President Bush, November 4, 2006

Reality: The 2001-2007 economic expansion was sub-par overall, and job and wage growth were anemic. . . Growth rates of GDP, investment, and other key economic indicators during the 2001-2007 expansion were below the average for other post-World War II economic expansions. Growth in wages and salaries and non-residential investment was particularly slow relative to previous expansions, and, while the Administration boasts of its record on jobs, employment growth was weaker in the 2001-2007 period than in any previous post-World War II expansion.

Median income among working-age households, meanwhile, fell during the expansion. Census data show that among households headed by someone under age 65, median income in 2006, adjusted for inflation, was $1,300 below its level during the 2001 recession. Similarly, the poverty rate and the share of Americans lacking health insurance were higher in 2006 than during the recession.


Blogger MC Shalom said...

You Bail Them Out, We Opt Out.

Dear [May Be Too Much to my Taste, OK!, It will rather be:] Expensive Chairman Ben S. Bernanke,

All of Our Economic Problems Find They Root in the Existence of Credit.

Out of the $5,000,000,000,000 bail out money for the banks, that is $1,000 for every inhabitant of this planet, what is it exactly that WE, The People, got?

If my bank doesn't pay back its credits, how come I still must pay mines?

If my bank gets 0% Loans, how come I don't?

At the same time, everyday, some of us are losing our home or even our jobs.

Credit discriminates against people of lower economic classes, as such it is unconstitutional, isn't it? It is an supra national stealth weapon of class struggle.

Credit is a predatory practice. When the predator finishes up the preys he starves to death. What did you expect?

Where are you exactly in that food chain?

Credit gets in the way of All the Principles of Equal Opportunity and Free Market.

Credit is a Stealth Weapon of Mass Destruction.

Credit is Mathematically Inept, Morally Unacceptable.

You Bail Them Out, We Opt Out

Opting Out Is Both Free and Strictly Anonymous.

My Solution: The Credit Free, Free Market Economy.

Is Both Dynamic on the Short Run & Stable on the Long Run, The Only Available Short Run Solution.

I Am, Hence, Leading The Exit Out of Credit:

Let me Outline for You my Proposed Strategy:

My Prescription to Preserve Our Belongings.

Our Property Title: Our Free, Strictly Anonymous Right to Opt Out of Credit.

Our Credit Free Money: The Dinar-Shekel AKA The DaSh, Symbol: - .

Asset Transfer - Our Right Grant Operation - Our Wealth Multiplier.

A Specific Application of Employment, Interest and Money.
[A Tract Intended For my Fellows Economists].

If Risk Free Interest Rates Are at 0.00% Doesn't That Mean That Credit is Worthless Already?

Since credit based currencies are managed by setting short-term interest rates, on which you have lost all control, can we still say that they are managed?

We Need, Hence, Cancel All Interest Bearing Debt and Abolish Interest Bearing Credit.

In This Age of Turbulence The People Wants an Exit Out of Credit: An Adventure in a New World Economic Order.

The only other option would be to wait till most of the productive assets of the economy get physically destroyed either by war or by rust.

It will be either awfully deadly or dramatically long.

A price none of us can afford to pay.

“The current crisis can be overcome only by developing a sense of common purpose. The alternative to a new international order is chaos.”

- Henry A. Kissinger

What Else?

Until We Succeed the Economy Will Sink Into a Deeper and Deeper Depression

You Bail Them Out, Let's Opt Out!

Check Out How Many of Us Are Already on Their Way to Opt Out of Credit.

Let me provide you with a link to my press release for my open letter to you:

Chairman Ben S. Bernanke, Quantitative [Ooops! I Meant Credit] Easing Can't Work!

I am, Mr Chairman, Yours Sincerely [Like do I have really the choice?],

Shalom P. Hamou AKA 'MC-Shalom'
Chief Economist - Master Conductor
1 7 7 6 - Annuit Cœptis
Tel: +972 54 441-7640
Fax: +972 3 741-0824

January 24, 2009 3:30 PM  
Anonymous Anonymous said...

Every disaster- 9/11, Katrina, economic downturn- has been used by gov't. as a pretext to funnel public funds to favored cronies. After the US basically said,"fuck you" to the people of New Orleans, I can't believe anyone trusts them to help.

January 25, 2009 10:17 AM  
Anonymous Anonymous said...

Try as I might, I cannot connect to OMB Watch. Tried clicking on Sam's link, googling to OMB Watch home, and even clicking on LINK from fedspending.org site.

Anybody else have any luck?

January 25, 2009 1:39 PM  
Blogger m said...

Tax cuts worked for Kennedy because the top tax rate was 92%. At that point it was 12.5 times as productive to save a dollar from taxation as it was to make a dollar. Taxes continued to be a major issue through the Reagan administration when marginal tax rates were still over 66%.

But current rates are more than reasonable. Just about the lowest amongst the industrial world. In fact they should probably go up a bit. Not too much -- that would be counter productive. But the idea that you can gain endless riches by continually cutting tax rates is as rational as the idea that you can gain endless riches by endlessly increasing tax rates.

January 25, 2009 3:26 PM  
Anonymous wellbasically said...

m is right on some counts.
m, however you don't differentiate between income taxes and taxes on capital investment. Obama promised to reverse Bush's investment tax cuts, so the investment climate is shrinking in expectation.

Some sources of income can take on taxes and some can't. The risk of investment is compounded by the taxes, so investors don't take the risk, and invest instead in some luxury good. Whereas there is very little risk in what happens to the money in a high salary.

Notice that this is not what Republicans say.

The error of Sam is the same as about 98% of economic commentary -- relying on consumption to measure economic activity. Attending to the productive side of the economy, the side that makes things and services, is a much surer method to growth.

January 26, 2009 11:57 AM  

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