Posting Towards Gomorrah

[Tyrone Slothrop]

Originally posted by Hank Chinaski
like most of you, I am not economically educated. However, I would rather not repost crap that I've read somewhere else as my own thoughts (hi Ty!).

But, honest question, isn't the stock market going through the roof proof that something good has happened?

If you accept the statistically sampling involved -- perhaps likelier if you're inclined to accept the Lancet estimate of 600K dead in Iraq? -- then it suggests that good things have happened to stock prices, assuming that the delta in stock prices is meaningful if you control for inflation, etc. This might mean that good things haven't happened yet, but are so expected that stocks are trading on the basis of these expectations. Whether you think it means something wonderful about the state of the world or the country depends on whether you think stock prices are a good barometer of such things. If, e.g., stock prices are up because corporations are receiving the lion's share of productivity gains that used to be split between companies and workers, then maybe it doesn't suggest that everyone ought to be joyous.

[Tyrone Slothrop]

Originally posted by Secret_Agent_Man
If you're talking about a partial takeover (i.e. one House), I don't think so -- especially if it is by a narrow margin. I still have fond hopes that the process of forced compromise between our political parties on issues like this one which are crucial to our country may ultimately produce a better result.

[I suppose Ty would call this "Broderesque" of me, almost as if being like David Broder is an insult.]

I don't think that's Broderesque of you. In fact, I tend to agree. However, it would be Broderesque to fetishize bipartisanship -- e.g., if you felt that praising a Republican initiative means that you should also praise a Democratic one, in the interests of even-handedness.

[Hank Chinaski]

Originally posted by Tyrone Slothrop
If you accept the statistically sampling involved -- perhaps likelier if you're inclined to accept the Lancet estimate of 600K dead in Iraq? -- then it suggests that good things have happened to stock prices, assuming that the delta in stock prices is meaningful if you control for inflation, etc. This might mean that good things haven't happened yet, but are so expected that stocks are trading on the basis of these expectations. Whether you think it means something wonderful about the state of the world or the country depends on whether you think stock prices are a good barometer of such things. If, e.g., stock prices are up because corporations are receiving the lion's share of productivity gains that used to be split between companies and workers, then maybe it doesn't suggest that everyone ought to be joyous.

at long last, can you not even answer a sincere question politely?

[Mmmm, Burger (C.J.)]

Originally posted by Spanky
I just said that in a recession they both agree that taxes should be cut (as long as you are above the right point on the Laffer curve for the Supply Sider).

That's not saying much, because supply siders always say taxes should be cut.

BTW, if supplier siders made their argument only when taxes were above t* on the Laffer curve, they would never be making their argument.

Let me distill my point this way, because it would likely save us both some time:

You are making a political argument for lower taxes that has proven convincing to a sufficiently large percentage of US voters to keep republicans substantially in power for the last 25 years. That argument may or may not be based on mainstream economics arguments, which are the ones I am presenting in rebuttal, but that does not really matter, because americans don't vote on mainstream economics arguments but rather on pie-in-the-sky plans sold to them by both democrats and republicans.

You can keep up with the political salesmanship, and it will probably win some votes outside of this board. But it's not going to win a serious argument with anyone who has a decent understanding of actual economics, fiscal policy, and monetary policy.

[Mmmm, Burger (C.J.)]

Originally posted by Spanky
Growing out of the Deficit is the foundation of the logic behind the Laffer curve. Is it not?

No. I explained this last week. Laffer's curve hypothesized that there is a tax rate, t*, at which revenue is maximized. If the current tax rate is greater than t*, reducing the tax rate will increase revenue, through increased production/earning.

It is applicable regardless of whether there is a deficit--it goes only to revenue, and not to spending.

You are ascribing far more to Laffer than he himself claimed. "Growing out of the deficit" is a handy mantra that invokes principles of supply-side economics and the laffer curve, but is not, strictly speaking, necessarily supported by either of those approaches.

[Sidd Finch]

Originally posted by Spanky
Growing out of the Deficit is the foundation of the logic behind the Laffer curve. Is it not?

It is. But one should be wary of relying on the logic of anything drawn on a cocktail napkin. Particularly when reality has, time and time again, demonstrated it to be wrong.


eta: Burger says it is not, but my recollection of the cocktail napkin is different.

[Tyrone Slothrop]

Originally posted by Hank Chinaski
at long last, can you not even answer a sincere question politely?

Was I impolite? I meant no such thing.

[Tyrone Slothrop]

Originally posted by Sidd Finch
It is. But one should be wary of relying on the logic of anything drawn on a cocktail napkin. Particularly when reality has, time and time again, demonstrated it to be wrong.


eta: Burger says it is not, but my recollection of the cocktail napkin is different.

As Burger said, it went to revenues, not to spending. The Republicans of the 1980s had economic snake oil to justify cutting taxes, but they didn't think about the possibility that you might cut taxes without also cutting spending. It's going to take an economic snake oil for the new millenium to also explain how you can cut taxes, spend more, and watch deficits disappear.

[Spanky]

Originally posted by Greedy,Greedy,Greedy
Okay, I know I'm going to regret this, but since you've built a house of cards on this statement, without listening to Ty or reading the blurb he's now posted twice, let me break this down.

Say, for simplicity's sake, that there is an economy with GNP of $1,000,000 (add zeros if the assumption is too much for you), and the government runs on tax revenues of $200,000. There is a 20% tax rate. The economy grows at 1% per year, so it adds $1,000 per year in growth.

Now say you cut taxes to 10%, so now the Government has $100,000 in revenues, and this results in the economy growing at 5% per year - a 5x increase in growth! With a tax rate of 10%, you are now collecting a whopping $105,000 instead of $101,000.

Fast forward ten years. With 5% growth per year, you will have an economy of roughly $1,600,000 rather than an economy of $1,100,000. You will still not have made up the revenue. You will have had to either run the Government on half the revenues, or have cut Government programs. Your cuts have not paid for themselves. Moreover, the gap between what the 20% would have raised with 1% growth and what the 10% raises with 5% growth is now over $200,000 per year, and there is either a $1.5 million debt or there have been severe cuts in government service, cuts which may, for example, undermine growth.

All this is simply meant to illustrate, a tax cut that results in growth will not always pay for itself. Cuts, like expenditures, must be managed in a reasonable and balanced way. But, if the fundamental basis of your economic theories are all based on the simplistic statement I've quoted above, you may want to think about them just a little more.

The simplistic statment that growth is good and is what you are looking for is not wrong. If you cut the taxes there is no way that the effects will probably kick in the first year. So it will take a while for you to increase to the 5%. In addition, the point you are leaving out is the deficit or spending. If you cut spending, and you cut spending on transportation and education (or law enforcement), then you will decrease growth. If you don't cut spending, but increase the deficit then there will be crowding out. The government will borrow a lot of money to pay the deficit, and that money won't be available to investors for buying factorys and such. That will also decrease growth.

Some tax cuts don't encourage growth. If you cut the capital gains tax, that won't stimulate the economy (in my opinion). So the key is to cut taxes in such a way to stimulate growth, but at the same time not hamper government programs that help growth and not increase the deficit to the extent that it will hurt growth (or that it will hamper growth more than the tax cut growth brings in).

But in the end if you can cut taxes and sustain five percent growth for a long period of time it will be worth it. Growth means everyone will be wealthier, you will have more revenue for schools and infrastructure and you can have lower tax rates.

So over the long run you do whatever you can to maximise growth. You avoid deficits not to be fiscally prudent, but because deficits hamper growth. Everything is done to maximise growth.

[Spanky]

Originally posted by Greedy,Greedy,Greedy
Cite please.

Burger has it exactly right. And it has been true for most of our nation's history - from the Continental Congress on.

Do we have to give you a lesson in economic history, too?

I am pretty sure, and someone correct me if I am wrong, but during most of the nineteenth century we had high tariffs that brought in a lot of revenue and the Federal government was not spending a lot of money. So unless we were at war we were running surpluses. It wasn't until WWI that we started running deficits consistently.

Am I wrong?

[Spanky]

Originally posted by Tyrone Slothrop
If you accept the statistically sampling involved -- perhaps likelier if you're inclined to accept the Lancet estimate of 600K dead in Iraq? -- then it suggests that good things have happened to stock prices, assuming that the delta in stock prices is meaningful if you control for inflation, etc. This might mean that good things haven't happened yet, but are so expected that stocks are trading on the basis of these expectations. Whether you think it means something wonderful about the state of the world or the country depends on whether you think stock prices are a good barometer of such things. If, e.g., stock prices are up because corporations are receiving the lion's share of productivity gains that used to be split between companies and workers, then maybe it doesn't suggest that everyone ought to be joyous.

When it comes to Macroeconomic theory and the stock market I get completely lost. I think a lot of psychology comes into play there (as Ty referenced)but I really don't know. I do know that economic growth is good, but sometimes we have a good stock market when the economy is not growing and visa versa. Why that is I have no idea.

When the economy is growing, generally everyone is better off, when the stock market is growing not everyone is better off. Although that is chaning now that everyone seems to have pension funds that are some how tied to the market.

The best barometer for determining the health of the economy, in my opinion, is growth. But of course, that could just be because I have a better understanding of the Macroeconomics of growth and not of the stock market.

[Hank Chinaski]

Originally posted by Tyrone Slothrop
Was I impolite? I meant no such thing.

you were snarky and presumed that I meant my question as a front to crow.

Seriously, the highest level ever, and it is probably just inflation or the fact that corporations have gotten better at screwing the employees? I thought CEOs were raping the coprorations. shouldn't that hurt the stock prices?

[Mmmm, Burger (C.J.)]

Originally posted by Spanky
I am pretty sure, and someone correct me if I am wrong, but during most of the nineteenth century we had high tariffs that brought in a lot of revenue and the Federal government was not spending a lot of money. So unless we were at war we were running surpluses. It wasn't until WWI that we started running deficits consistently.

Am I wrong?

You are correct that until WWI, the country generally was spending less than revenue, and paying down debt built up during wars (revolutionary, civil, etc.).

But I think we've gone long enough with persistent deficits to give high relevance to the recent historical practice, and not excuse it based on the first century of thecountry's existence.

[Greedy,Greedy,Greedy]

Originally posted by Spanky
I am pretty sure, and someone correct me if I am wrong, but during most of the nineteenth century we had high tariffs that brought in a lot of revenue and the Federal government was not spending a lot of money. So unless we were at war we were running surpluses. It wasn't until WWI that we started running deficits consistently.

Am I wrong?

Yes, you are wrong. Also, through the 19th century, much of the government's income was also from land sales.

If you want to understand the 19th century's economic history better, besides a quick read through of some material on Alexander Hamilton and on the debt from the Revolutionary War, you may want to look up "American System" and "National Bank", since much of the debate in the first half of the century focused on these terms.

[Tyrone Slothrop]

Originally posted by Hank Chinaski
you were snarky and presumed that I meant my question as a front to crow.

Seriously, the highest level ever, and it is probably just inflation or the fact that corporations have gotten better at screwing the employees? I thought CEOs were raping the coprorations. shouldn't that hurt the stock prices?

If the business cycle weren't, well, cyclical, you'd expect that market to be setting new highs constantly.

I don't know about the CEOs raping stuff -- kinda outside my areas of expertise, such as they are.

The point about inflation is just that if you want to look at the Dow's gain over time, you have to also consider how much your money would have been gainining in an alternative investment, and how much it lost to inflation, etc.