Is a real economic recovery underway? If so, do President Bush’s tax cuts deserve credit? These questions have been raised by Paul Krugman and others.
When I was a young economist working in the forecasting section of the Federal Reserve Board, one of my most memorable experiences was when Governor Lyle Gramley sat down at our table in the staff cafeteria (the only time I ever saw a Governor sit down in the cafeteria rather than the executive dining room) to dispute our forecast for a tepid economic recovery.
“When a recovery comes, it really comes,” Governor Gramley said, sternly. “You don’t see 1 or 2 percent growth. You see much stronger growth.” He turned out to be right.
My instinct is that the third quarter growth rate of GDP of 7.2 percent is an instance of recovery coming on strongly. I would bet that the recovery is real.
Krugman writes,
unless we start to see serious job growth — by which I mean increases in payroll employment of more than 200,000 a month — consumer spending will eventually slide, and bring growth down with it.
I do not often disagree with Krugman on matters of pure economic analysis, but on this point I will voice dissent. Strong GDP growth generates income with or without job growth. In the latter case, what it produces is strong increases in profits, which in turn will fuel stock prices and investment. Economic slowdowns are not triggered by high profits.
I think it is a mis-statement to say that continued economic growth depends on job increases. I expect employment to rise in the months ahead. However, if job gains fail to materialize, I would regard that as a symptom rather than as a cause of a stalled recovery.
On the second question of whether the Bush tax cuts deserve credit, I would say, “No.” I think it is very unlikely that a reliable macroeconomic model would show a far different economic trajectory with and without the tax cuts. While I think that the President’s policies do not deserve a bad grade, I caution against making the economic attribution error of giving the President too much credit or blame for economic performance.
For Discussion. If economic growth remains high but employment growth is sluggish, would this imply a need for policies that stimulate demand or that deal with structural issues in the labor market?
READER COMMENTS
Mcwop
Oct 31 2003 at 9:51am
Arnold writes:
“On the second question of whether the Bush tax cuts deserve credit, I would say, “No.” I think it is very unlikely that a reliable macroeconomic model would show a far different economic trajectory with and without the tax cuts. While I think that the President’s policies do not deserve a bad grade, I caution against making the economic attribution error of giving the President too much credit or blame for economic performance.”
Bingo! And the same goes for the president past. His policies were not responsible for the tech boom. Clinton also did nothing bad. His tax increases did not harm the economy. He did do a better job of holding spending in check than Bush is doing though. We give far too much credit to president’s control, or lack therof, over the direction of the economy. After all if they had that kind of control, wouldn’t they always push the “better economy button” come election time?
Ray Gardner
Oct 31 2003 at 9:59am
We all get tired of hearing about media bias but this recent news on the GDP has really shown the various outlets and punditry at their worst. The headline on the local paper this morning read “Economy Jumps, Where Are the Jobs.”
I have no doubt that under a more media friendly administration that the same papers writing such drivel would be taking a more pedantic line in informing the public on the lagging nature of unemployment measures.
Then we have people like Krugman, the former Enron advisor, who is indeed expertly qualified in his chosen field of economics. But his politically fueled opinions are so far off the scale though that one might as well be reading press releases off of the DNC website. Why even read anyone that you know you are going to have to edit for extreme personal biases. (No question mark, that was rhetorical as there is no logical reason.)
President Bush’s overall domestic policies have resulted in far too much spending and government growth and therefore his tepid tax cuts can only receive credit inasmuch that they inspired confidence in the core of the business community. This doesn’t take away from the salient fact that freeing up private money for private use, even in small amounts is always a boon to the economy, but the boost in confidence, in my opinion, outweighed the actual affect of the tax cuts themselves.
Essentially, businesses are more likely to take the necessary steps towards growth when they know the current political powers are on their side. So before dollar one of tax relief is felt, small and large businesses alike are reading the writing on the wall i.e. pro business and are not afraid to invest in their own growth.
Eric Krieg
Oct 31 2003 at 10:41am
Why does anyone think that, even with strong economic growth, there are going to be any improvement on the jobs front?
Historically, 6.1% unemployment is a very good number. It is only through the lens on 1999 that it looks weak. Does anyone really believe that the 1999 unemployment rate of the low 4s was sustainable?
Hiring may increase, and the unemployment rate may go down a little bit, to the high 5s. But the days of 4% unemployment are gone, because we are not now in a bubble, nor are we heading into another one.
Lawrance George Lux
Oct 31 2003 at 11:18am
I have always been in rebellion against the Supply-Side argument held by most Economists. My personal belief holds an economic boom can only be sustained, if and only if Business profits start to assume the Tax burden of Consumers, through paying a total real percentage of total Taxes by taxation of Profits. It is the only way to increase Consumer Discretionary Income without Wage Inflation, and limit Government deficits by Business opposition.
Government deficits are almost pure Inflation, and such impact remains to lesser degree when this Debt is rolled over. There is not much economic support for this view, but it is right.
George W. Bush gets a D for the Tax Cuts, which actually delayed the Period of Recovery, and lessens the impact of this Recovery. George W. Bush gets an F because of his Government deficits.
The Job market will only improve when and if American Consumers acquire more Discretionary Income, or when foreign countries import more American product. The former will only be achieved by reduction of Imports, reduction of Taxes, or Retailers selling at practically Wholesale levels. The latter is not a practical expectation, as the Dollar would have to lose one-third it’s value, or American statesmanship would have to overcome current rise of foreign Protectionism against American Product.
The Iraq War and it’s aftermath is a disaster for the American economy, concentrating American Taxes, Deficits, and Capitalization on production of basic non-productive product. George W. Bush gets and F for this.
I would like to state I am neither a Democrat or Republican. lgl
Mcwop
Oct 31 2003 at 11:26am
LGL writes:
“George W. Bush gets a D for the Tax Cuts, which actually delayed the Period of Recovery, and lessens the impact of this Recovery. George W. Bush gets an F because of his Government deficits.”
How?
you also write:
“My personal belief holds an economic boom can only be sustained, if and only if Business profits start to assume the Tax burden of Consumers, through paying a total real percentage of total Taxes by taxation of Profits.”
If profits are taxed more, then that gets added to the cost of goods sold, or through lower pay and incentives to employees, or lower share prices, hwich reduce capital raising potential. No? If Corporations fotted the entire tax bill, wouldn’t people simply demand more spending, because it does not come out of their pockets?
David Thomson
Oct 31 2003 at 11:48am
President Bush deserves credit for not spooking the markets. The investors feel confident that he won’t do anything really stupid. That alone is saying a lot. A Democrat president advocating liberal polices would have likely caused a tremendous amount of harm. In the real world, a lot of times people aren’t demanding that you be perfect. They just want to be sure that you at least modestly have your act together.
Anything Paul Krugman says about the Bush administration should be taken with a huge grain of salt. His visceral rage towards the President hinders his ability to think and follow a logical argument. The man needs to take a few months off and get his head back on straight. He is only making a fool of himself. I am not a professional economist and yet my predictions have turned out to be far more accurate than Krugman’s. Am I especially brilliant? Nope, I simply do a better job of keeping my emotions in check.
Ray Gardner
Oct 31 2003 at 12:00pm
LGL is something of a walking microcosm of every major economic myth current in our society. He actually came out in support of minimum wage laws as an incentive for people to seek employment in a recent thread.
This isn’t to demean the guy but to simply state the caveat of ‘consider the source.’
Corporate profits assuming more of a tax burden is one of the most widely held myths among the logic impaired. Such burdens on business are never absorbed by the businesses themselves as they are only passed on to the price of their products.
For LGL’s assumption to be correct, businesses would have to absorb a higher tax burden while subsequently shrinking their targeted profit margin. This just simply isn’t going to happen. This is also a powerful and proven argument against minimum wage laws.
For Bush’s tax cuts; true they should have been more but considering the current political climate of the last 3 years, what Bush has accomplished is actually amazing. The Florida debacle to start his governance, the inherited recession and post bubble economy, 911, corporate scandals (again an inherited problem) and the subsequent war on terror. All in all, Bush is passing with flying colors, domestic giveaways and all. In fact, in light of his buying off of so much of the electorate, you’d think LGL would be happy with the growth of discretionary spending.
And tax cuts of any size causing an economic slowdown/recovery is beyond rational argument. What are we supposed to do, completely reeducate this guy?
Eric Krieg
Oct 31 2003 at 12:28pm
So who is ready to place bets on what the GDP numbers are going to be for the next quarter?
I’m betting 3.1%. No way can we sustain 7.2%.
BTW, you all can thank me for the 7.2%. I am dropping some major bling-bling on my new garage. Home Depot is getting even more of my money than they normally do. This also bodes well for the 4th quarter.
And for what it is worth, my department is busier than it has ever been in anyone’s recent memory. The oil companies are spending, as you would expect after 3 quarters of record profits and relatively stable and high gas prices.
Of course, the rumor mill is that raises next year will be 1%, after no raises this year. God I hope the job market turns around soon.
Eric Krieg
Oct 31 2003 at 12:30pm
Read on National Review:
This quarters GDP numbers, brought to you by the number 7.2 and the letter W.
I agree, it’s Dubya’s tax cut at work. Supply Side works again.
Now if we can only avoid another war, or terrorist attack, or computer virus outbreak, or …
tom
Oct 31 2003 at 12:41pm
I would like to correct the fallacy that increased corporate taxes (or any kind of business expense) are automatically passed along to consumers in the form of higher prices. Prices are affected by supply and demand, and if one corporation decides to accept lower profits in exchange for higher market share, they can absorb the cost of a tax cut and oblige their competitors to do the same. Executives and stockholders who rely on large profits to fatten their own wallets cannot admit this of course.
tom
Oct 31 2003 at 12:42pm
oops: I meant “absorb the cost of a tax increase.” (must remember to use “preview” mode).
Ray Gardner
Oct 31 2003 at 1:41pm
The assumption is made that only executives and share holders are seeking to fatten their wallets. This implies that everyone else is working to accomplish what?
This kind of assumption is indicative of a lack of rational thinking, the kind of irrational thinking that assumes businesses will shrink their margins instead of passing on non-market induced costs i.e. taxes.
And this gets to the point of Tom’s confusion of market induced price (supply and demand) and external or unnatural influences on price; taxes, regulations and so on. When a tax is placed on a product, it becomes more expensive to make because the natural market has not increased its real demand. So the company can choose to absorb the tax and sell the same amount of items at a lower margin or raise the price to reflect that unnatural increase.
If there is a high amount of competition, an aggressive company with enough capital to withstand the erosion of their margin may indeed choose to absorb the tax, temporarily. This drives out the smaller companies without the capital security of the more aggressive and/or larger companies. Thus the tax increase will eventually be passed on via higher prices while simultaneously making that particular segment of the market less competitive.
What is more common however is that such unnatural increases in the price of production are automatically passed on to the consumer. This is because the kind of dynamic environs described above happen only at the margins of our business community; developing technologies, smaller service companies etc.
So this is, in essence, a correction to the fallacy that anyone works for anything other than profit.
Boonton
Oct 31 2003 at 1:55pm
“And tax cuts of any size causing an economic slowdown/recovery is beyond rational argument. What are we supposed to do, completely reeducate this guy? ”
Beyond rational argument? Perhaps if you mean tax cuts causing the business cycle but if your position is that tax cuts cannot slow down the economy then you need a fact check. What mechanism exists to prevent reducing taxes to 0% without changing spending? If tax cuts could never cause economic harm then logic would demand running the entire budget in deficit.
Ray Gardner
Oct 31 2003 at 3:12pm
Leave it to Boon to take otherwise sensible positions to illogical extremes.
Make your case within reasonable bounds please. Debating with you requires a rewriting of entire textbooks just to cut through your irrational declamations.
Boonton
Oct 31 2003 at 3:25pm
Illogical extremes can serve a useful purpose. Clearly if cutting tax rates to 0% would be economically harmful then there must be a point between the status quoe and 0% where tax cuts move from being positive to negative. It’s also possible that if you are on the wrong side of that inflection point, then a tax increase would actually become a positive.
I’m going to point out that the 90’s boom started in full after a tax increase. The 90’s put a serious crimp in the supply side position, IMO…
Eric Krieg
Oct 31 2003 at 3:45pm
>>I’m going to point out that the 90’s boom started in full after a tax increase. The 90’s put a serious crimp in the supply side position, IMO…
… and you’d be wrong.
The entire Clinton “economic policy” (tax increases included) was not a positive for the economy.
http://www.nationalreview.com/lowry/lowry200310151115.asp
Ray Gardner
Oct 31 2003 at 4:15pm
Illogical extremes only serve to distract from the real point when your own position is invalid.
The 90s boom was not a stand alone economic event or trend. Read something besides the DNC website and you’ll easily find that our economy took off on a sharp upward trend in 1982, after Reagan’s tax cuts came into effect. Note that our most recent skyrocketing GDP numbers are the highest since when? That’s right, the early 80s.
Regardless of this little Clintonian aside, your original position was that tax cuts might actually be bad for the economy. Leaving out the puerile and vacuous notion of reducing our taxes to 0%, please expound upon the theory and evidence of higher taxes improving our economy.
Ray Gardner
Oct 31 2003 at 4:34pm
Since Boon’s first position is completely untenable, we’ll entertain his strawman for grins and giggles. (I’m broker of the day so I have to stay in the office anyway – might as well abuse the riff raff while I’m here.)
Quoting from the Cato Institute:
“Yes, Bill Clinton deserves some credit for keeping the expansion moving. Along with Robert Rubin, his strong dollar and hands-off-the-Fed policies extended disinflation, creating an economy wide tax cut effect that offset his mistaken 1993 tax increase. Free trade measures during the mid-1990s also constituted a tax-cut stimulus effect. Importantly, the Republican Congress forced Clinton into swallowing his opposition and signing into law key measures such as welfare reform, the balanced budget bill, capital gains tax cuts and expanded savings accounts.”
Ray Gardner
Oct 31 2003 at 4:58pm
Another important factor to note about the 90s is that much of the “boom” wasn’t real. The real zip came in the late 90s when technology was driving investment much as the railroads did the century before. Also the corporate malfeasance that gave us our recent scandals was in full bloom during this time as well so much of what people saw as boom times was indeed an illusion.
So looking at the economy on a graph, there is a steady line of growth starting in 1982 with this upward spike in the late 90s. That spike being comprised of speculative investing and corporate accounting shenanigans, we experienced a correction (God bless capitalism and its self-restorative powers) and now here we are with 3rd qtr GDP growth of 7%.
While President Bush’s tax cuts should have been larger and the GOP on a whole as spent way too much in discretionary spending, the overall pro business stance of this administration has given our business sector the confidence to expand.
Mcwop
Oct 31 2003 at 5:19pm
Boonton writes:
“Illogical extremes can serve a useful purpose. Clearly if cutting tax rates to 0% would be economically harmful then there must be a point between the status quoe and 0% where tax cuts move from being positive to negative. It’s also possible that if you are on the wrong side of that inflection point, then a tax increase would actually become a positive.”
There is, and you have posted about it before: The Laffer Curve
I think it is somewhat safe to say the the past four presidents (maybe except for Reagan that presided over significant structural tax changes), have moved taxes within the part of the Laffer curve, where changes in tax revenues are small. The primary driver in revenue changes has been incomes, or other monies subject to taxes (amount of capital gains, stock options excercise). The CBO and others have plenty of data to support this hypothesis.
Boonton
Oct 31 2003 at 5:21pm
“Leaving out the puerile and vacuous notion of reducing our taxes to 0%, please expound upon the theory and evidence of higher taxes improving our economy.”
Ok, so your assertion is that cutting taxes to 1% would be great for the economy…but clearly not 0%? Or is your position that a cut to 2% would be great, but not 1%?
“The 90s boom was not a stand alone economic event or trend. Read something besides the DNC website and you’ll easily find that our economy took off on a sharp upward trend in 1982, after Reagan’s tax cuts came into effect. Note that our most recent skyrocketing GDP numbers are the highest since when? That’s right, the early 80s. ”
How about I read Bush’s 2003 Economic Report to the President? Look at http://w3.access.gpo.gov/usbudget/fy2004/sheets/b2.xls
Average Yearly Growth Rate of Real GDP
1960-2000 3.437%
1960-69 4.426%
1970-79 3.268%
1980-89 3.014%
1990-99 3.010%
There is no ‘sharp upward trend’ post 1982. The economy barely meet the 40 yr average in the 80’s and the 90’s were almost exactly the same. Do the averages based on the Official Presidential Terms:
Carter 1977-1981 3.112%
Reagan 1981-1989 3.374%
Bush I 1989-1993 2.101%
Clinton 1993-2001 3.307%
There is no magic uptrend in the 80’s. You have a normal economic recovery, period. The difference between Clinton years and Reagans is within the margin of error but Clinton comes out ahead if you factor in inflation and unemployment.
Eric’s National Review piece hardly deserves a response. The crux of its thesis lies on the claim that the deficit is not connected to interest rates. We’ve covered this on another thread but if you accept that statement you have basically announced there is no mechanism that would prevent a gov’t from running their budgets 100% in the red (i.e. 0% taxes). If Eric thinks the idea of 0% taxes is too absurd to even discuss then let him explain what would happen if 0% taxes were attempted.
Boonton
Oct 31 2003 at 5:25pm
I agree with you Mcwop however the Laffer Curve had to do with maximizing tax revenue, not maximizing economic growth. The Laffer point may be a 50% tax rate but all that tells you is that the gov’t would collect more tax revenue at 50% than either 49% or 51%. It doesn’t tell you that 50% is the best rate for overall economic performance. That point would almost certainly be less than the Laffer point.
Mcwop
Oct 31 2003 at 5:30pm
Here is some good satire from Scrappleface:
Clinton-Gore Economic Boom Continues
(2003-10-31) — The latest figures on decreased jobless claims and a huge increase in third-quarter Gross Domestic Product (GDP) signal a continuation of the Clinton-Gore economic boom, according to an expert.
“After a brief two year ‘hiccup’ the wisdom of Clinton-Gore still shines through,” said one unnamed itinerant professor who has taught at the University of California Los Angeles, Columbia University, Fisk University and Middle Tennessee State University. “Any time economic indicators are this good, you can take it as an article of faith that it’s the legacy of the two best men ever elected President — Bill Clinton and Al Gore.”
http://www.scrappleface.com/MT/archives/001307.html#001307
Ray Gardner
Oct 31 2003 at 6:22pm
The basic premise of your original stance is so irrational precisely because you leave the implied and accepted parameters of the existing conversation. If someone makes an argument for smaller government, you counter with why anarchy is such a bad idea. It’s silly and disingenuous.
I believe my exact words were something to the effect of “any tax cuts” which is admittedly a broad statement but not in the context of the existing conversation. Your pattern of debate is to avoid the actual point at hand and attempt to distort and magnify the semantics of those with whom you disagree. Two or three posts later and the original point is completely forgotten and you ramble on as if you’ve actually said something substantial.
Ray Gardner
Oct 31 2003 at 6:38pm
The Cato Institute came out with a great study in 1996 covering Reaganomics versus pre-Reagan and post-Reagan administrations (including Bush the elder). What is particularly interesting about this study is that is was made before the illusory “boom” of the late 90s when Clinton was forced to abandon his tax and spend methods and go along with the Republican revolution (highlights of which I’ve already listed).
http://www.cato.org/pubs/pas/pa-261.html
“Real economic growth averaged 3.2 percent during the Reagan years versus 2.8 percent during the Ford-Carter years and 2.1 percent during the Bush-Clinton years.
* Real median family income grew by $4,000 during the Reagan period after experiencing no growth in the pre-Reagan years; it experienced a loss of almost $1,500 in the post-Reagan years.
* Interest rates, inflation, and unemployment fell faster under Reagan than they did immediately before or after his presidency.
* The only economic variable that was worse in the Reagan period than in both the pre- and post-Reagan years was the savings rate, which fell rapidly in the 1980s. The productivity rate was higher in the pre-Reagan years but much lower in the post-Reagan years.”
Ray Gardner
Oct 31 2003 at 6:55pm
Real GDP (chained 1992 dollars)
Annual Percentage Change (with a one year policy lag)
1974 – 1981 2.8%
1981 – 1989 3.2%
1989 – 1995 2.1%
This is a little more accurate a reflection of Clinton’s tax hike that Boon had touted as an economic benefit. Especially keeping in mind that Reagan’s numbers include the wrecked economy he inherited from Carter whereas the recession of Bush the elder was relatively mild at its worst and over before Clinton had even announced his candidacy.
Also, the study takes in account more than just Carter’s famous economic malaise. The bear market of 73 did no one any favors but things were definitely worse under Carter alone. Thus the study’s point isn’t to focus on presidents of certain parties but to show how the so called Reaganomics performed in context to other policies, both GOP and Dem.
Ray Gardner
Oct 31 2003 at 7:25pm
Breaking down the real economic growth to particular administrations, based on the Economic Report of the President for 1996:
Nixon/Ford 3.0%
Carter 2.5%
Reagan 3.2%
Bush 1 1.3%
Clinton (1st term) 2.6%
Again, Boon had touted Clinton’s tax hikes as economically beneficial so along those lines, it is entirely accurate to isolate his first term in light of the GOP revolution of 94 and their affect on Clinton’s own positions.
Mcwop
Oct 31 2003 at 8:31pm
Boonton your point os correct in my comparison. It might be cool if there is a similar curve (Laffer) that has economic growth on the Y axis. Google search may be in order.
Boonton
Oct 31 2003 at 9:12pm
“This is a little more accurate a reflection of Clinton’s tax hike that Boon had touted as an economic benefit….”
Why are we restricting the analysis to Clinton’s first term? The tax hike was not repealed in Clinton’s 2nd term. If it harmed or helped growth, the effect would exist in 97 as much as it existed in 95. Otherwise you include both of Reagan’s terms in your analysis even though he partially raised taxes after his first cuts.
My points are:
1. Tax increases, depending on the circumstances, can either be positive or negative or irrelevant.
2. Your assertion that the tax cuts of ’82 created a fundamentally different economy is false.
It is silly to try to measure President’s economic policies by crudely comparing growth rates. But you can disprove propositions using analysis such as this. That the 80’s DID NOT see economic growth that was on average above the last 40 year average can be shown by looking at the numbers.
If you are also asserting the supply sider line that tax cuts are the magic formula for economic growth and tax increases the opposite, we can also disprove such assertions by looking at the numbers.
Boonton
Oct 31 2003 at 9:24pm
“…Especially keeping in mind that Reagan’s numbers include the wrecked economy he inherited from Carter whereas the recession of Bush the elder was relatively mild at its worst and over before Clinton had even announced his candidacy.”
Getting really technical we could note that Carter’s monetary policy was being set by Paul Volker. Volker went after inflation with approval of Republicans, especially Reagan. While most agree his high interest rates wrung inflation out of the economy, the ‘trashed economy’ before 1982 was a direct result of that policy.
In many ways, Carter’s late economic policies only differed from Reagan’s by a matter of degree…not direction. Increased defense spending, hawkish inflation stance by the Fed, deregulation etc. began to gather momentum before Reagan took office, not after.
Boonton
Oct 31 2003 at 9:27pm
A ‘Laffer Growth Curve’ mcwop can only exist in theory IMO. It’s a useful concept but there are so many variables that we could never simply map tax rates to GDP growth.
Lawrance George Lux
Nov 1 2003 at 11:39am
It is amusing to see Supply-Side Economists always claim Republican Presidents like Reagan and George W. Bush always inherited economic debacles from Democratic policies, but they always pass on such effective economic measures.
McWop and Ray,
Study of Tax Policy clearly expresses there is a three-year delay past Tax Policy implementation for effects to be realized. It takes this long for resilency to be regained by the Economy from bad Tax Policy, or diress to be realized by the Economy from implementation of bad Tax policy.
Let Us look at the Economy from this view. The 1963 Tax Cuts brought the Inflation and Government deficits of the late 1960s. The 1982 Tax Cut brought the S&L Bailout, the huge Government deficits of the 1980s, and actual average loss of Standard of Living. The Clinton Tax increases of 1993 brought the boom of the mid and late 1990s. Alteration of that Tax Policy in the late 1990s brought the disaster of the early Bush years. The Bush Tax Cuts are creating ballooning Government deficits, poor economic performance (don’t let the 7 in growth fool you–you are talking only about expressable Inflation here), and a lack of hard capital construction.
We can argue about numbers until the end of time, but why does the average Standard of Living always seem to fall with Supply-Side Tax Policy? lgl
Eric Krieg
Nov 1 2003 at 2:10pm
From Econopundit. More good news for Dubya…
From the Forecast Memo:
Real Growth and the Unemployment Rate: The predicted growth rates for the next four quarters are 4.1, 3.6, 3.5, and 3.4 percent, respectively. The unemployment rate is predicted to fall to 5.6 percent by the middle of 2004.
Inflation: Inflation as measured by the growth of the GDP deflator (GDPD) is predicted to rise to 2.5 percent by the middle of 2004.
Monetary Policy: The [model] is predicting…the three month bill rate…will rise to 2.3 percent by the middle of 2004.
Other Variables: The federal government is now running a large budget deficit, and the model is predicting that the deficit will continue to be large throughout the forecast period (see the predicted values for SGP). By the end of 2004 the deficit is about $400 billion (remember this is the deficit as measured in the NIPA accounts). This $400 billion is smaller than the federal government is projecting the deficit to be, and so the model is more optimistic about the government’s budget than is the government.
The U.S. current account deficit (variable -SR in the model) is forecast to be extremely large throughout the period (between $595.0 and $744.9 billion).
Eduardo
Nov 2 2003 at 1:32am
Staying on the issue of economic recovery, isn’t it premature to expect such a recovery based on third-quarter GDP figures?
After reading the initial article and all of the postings thus far, I’ll only say that whatever the political persuasions coloring the economic points-of-view on this thread, the issue isn’t, at root, the prevailing economic school of thought, but rather the social and thereby political (not the other way around) importance of jobs.
The staff writers at the Washington Post contradict themselves and, I suppose unwittingly, pull the wool over many people’s eyes when they write that “[t]he U.S. economy, firing on all cylinders, grew this summer at the fastest pace in nearly two decades, even as it was losing jobs.” How can an economy be firing on all cylinders when one of them, labor, is sputtering?
Unless labor isn’t, in fact, seen as an integral part of the economic machinery. Is this where the real philosophical bone of contention lies? Do I smell an Adam Smith/Karl Marx smackdown coming on? There was a Jeremy Rifkin book titled THE END OF WORK that delved into these issues. It would be interesting to comment on Rifkin’s, and anyone else’s, views concerning work, in light of the current worry about jobs and economic recovery leading up to November ’04.
Economic theories and schools of thought come after the popular hue-and-cry. I don’t know that one is caused by the other; probably not. Still, as cool and intellectually stimulating as it is to look at statistics, play with probabilities, and calculate projections, one can’t overlook the human factor.
An anecdote to that effect is the one about Karl Marx ranting about the stupidity of English folk, who resisted rising up in revolution; the fact was that popular revolt was forestalled by a very responsive politico-economic culture, which saved the day for classical economic thought (at least until the end of the century).
IMO, this is why a Paul Krugman is interesting to listen to: like John Stuart Mill in the mid-19th century, he keeps all would-be pundits snarling and wrestling with the PEOPLE factor in all this. Why should I give a darn if our economy is chugging along robustly at 7.2 percent annual growth rate if I don’t have a new 20-dollar bill to play with on a monthly basis?
Having said that, I’ll just wait around for the next three quarterly reports before I make up my mind about Bush II on the economic front. I have to give him that; by July 2004 three years of executive work and a couple of expensive little wars should be ready for a good-faith interpretation.
Eduardo
Nov 2 2003 at 1:34am
Staying on the issue of economic recovery, isn’t it premature to expect such a recovery based on third-quarter GDP figures?
After reading the initial article and all of the postings thus far, I’ll only say that whatever the political persuasions coloring the economic points-of-view on this thread, the issue isn’t, at root, the prevailing economic school of thought, but rather the social and thereby political (not the other way around) importance of jobs.
The staff writers at the Washington Post contradict themselves and, I suppose unwittingly, pull the wool over many people’s eyes when they write that “[t]he U.S. economy, firing on all cylinders, grew this summer at the fastest pace in nearly two decades, even as it was losing jobs.” How can an economy be firing on all cylinders when one of them, labor, is sputtering?
Unless labor isn’t, in fact, seen as an integral part of the economic machinery. Is this where the real philosophical bone of contention lies? Do I smell an Adam Smith/Karl Marx smackdown coming on? There was a Jeremy Rifkin book titled THE END OF WORK that delved into these issues. It would be interesting to comment on Rifkin’s, and anyone else’s, views concerning work, in light of the current worry about jobs and economic recovery leading up to November ’04.
Economic theories and schools of thought come after the popular hue-and-cry. I don’t know that one is caused by the other; probably not. Still, as cool and intellectually stimulating as it is to look at statistics, play with probabilities, and calculate projections, one can’t overlook the human factor.
An anecdote to that effect is the one about Karl Marx ranting about the stupidity of English folk, who resisted rising up in revolution; the fact was that popular revolt was forestalled by a very responsive politico-economic culture, which saved the day for classical economic thought (at least until the end of the century).
IMO, this is why a Paul Krugman is interesting to listen to: like John Stuart Mill in the mid-19th century, he keeps all would-be pundits snarling and wrestling with the PEOPLE factor in all this. Why should I give a darn if our economy is chugging along robustly at 7.2 percent annual growth rate if I don’t have a new 20-dollar bill to play with on a monthly basis?
Having said that, I’ll just wait around for the next three quarterly reports before I make up my mind about Bush II on the economic front. I have to give him that; by July 2004 three years of executive work and a couple of expensive little wars should be ready for a good-faith interpretation.
Mcwop
Nov 2 2003 at 10:18am
LGL – you give far too much credit to tax policies. My opinion is that tax policies of the past 15 years have had little effect on the economy. During the 1990’s the economy was driven by technology, and not tax policy. In the early 1990’s corporate America businesses large and small had no, zero, nada web servers. A lot of web servers were purchased through the decade. Same goes for a laundry list of other items: software, consumer electronics, ISP access etc…
Tax policy had little or nothing to do with the innovations that occured.
Secondarily, just because A happened after B does not mean A is automatically the cause.
Lawrance George Lux
Nov 2 2003 at 12:28pm
Mcwop,
I have a terrible time with memory issue upon occasion, but there was a Study in the 1960s whose name I cannot remember or cite; which states technological innovation can only be treated as a varaible Fixed Cost of Production, and not a propellent of Production. Can Anyone help me out here, with the name of the Study?
Technology is a product of the Production cycle. It’s rate of use is a function of capitalization expense. Production Cycle Managers will always maximize the use of Technology as long as it is Cost-effective; it lowers Production Costs, or raises Production Profits.
Introduction of technology resides inside the Production cycle, and therefore, cannot be a Propellent control of Production. Tax policy is the leading supervisory control of Production development. It is Tax policy which governs the rate of growth, or the rate of retardation, of the Economy. lgl
Eric Krieg
Nov 2 2003 at 2:12pm
The economy IS firing on all cylinders. Jobs are being created. By December of THIS YEAR Dubya will be able to claim a NET increase in jobs during his administration (see http://www.econopundit.com).
Mcwop
Nov 3 2003 at 12:12am
LGL writes: “Introduction of technology resides inside the Production cycle, and therefore, cannot be a Propellent control of Production. Tax policy is the leading supervisory control of Production development. It is Tax policy which governs the rate of growth, or the rate of retardation, of the Economy.”
Jibberish. As a major purchaser of technology, I can assure you that tax policy has nothing to do with it. I sit around waiting for new technologies that are a result of better designed software, faster processor speeds, etc. I evaluate them and decide what gets put in place and what does not. Intel has never stopped introducing new technologies, and this goes for countless other companies. They have moved along this path through many different tax policies. Bush I, Bush II, nor Clinton has moved tax rates enough for most to even notice.
Boonton
Nov 3 2003 at 10:50am
“The economy IS firing on all cylinders. Jobs are being created. By December of THIS YEAR Dubya will be able to claim a NET increase in jobs during his administration (see http://www.econopundit.com).”
This does not indicate an economy ‘firing on all cylinders’. It is normal for a growing economy to have a net increase in jobs every 4 years.
“Historically, 6.1% unemployment is a very good number. It is only through the lens on 1999 that it looks weak. Does anyone really believe that the 1999 unemployment rate of the low 4s was sustainable?
Hiring may increase, and the unemployment rate may go down a little bit, to the high 5s. But the days of 4% unemployment are gone, because we are not now in a bubble, nor are we heading into another one.”
There’s a difference between saying there was a bubble in the 1990’s and the 1990’s were a bubble. As we saw with the attempts to compare Clinton’s 90’s to Reagan’s 80’s, neither decade saw economic growth that was above the 40 year average. While the late 90’s had many bubble stories and there was a real bubble in the Internet/tech sector the overall economy was not in a bubble. Look at GDP during the recession compared to GDP in 99 or 2000. The economy has slide back production at all.
Boonton
Nov 3 2003 at 11:20am
Keeping that can of worms open, I just noticed Ray’s Cato talking points on Reagan:
“* Interest rates, inflation, and unemployment fell faster under Reagan than they did immediately before or after his presidency. ”
Talk about a myoptic point of view. Yea, inflation, unemployment and interest rates did fall pretty fast during Reagan. Rates on the 30 year Treasury note hit 15% under Reagan, unemployment hit, likewise unemployment spiked in the recession from the first half of Reagan’s first term. Of course these stats are going to fall pretty fast when you are counting from their highest points.
David Thomson
Nov 3 2003 at 12:58pm
“They have moved along this path through many different tax policies. Bush I, Bush II, nor Clinton has moved tax rates enough for most to even notice.”
In other words, these presidents may have made a few mistakes—but none of them did something really stupid. Sometimes it’s all that really matters. The cardinal rule may merely be: “Thou shalt not put a serious damper on the animal spirits of the economic visionaries.” Anything positive is just a nice bonus.
Lawrance George Lux
Nov 3 2003 at 1:09pm
Mcwop,
You have proven my point exactly! Technological development remains relatively unaffected by any tax policy which was imposed. Technology is nothing but the product of the Production cycle, being introduced as it becomes available at a Cost-effective rate. It alters the Profitability of Production within the Economy, but has no impact on Economic health or viability. You would say Technology pushes the Economy, it simply makes expanded Production possible; it does not establish the buying conditions necessary to obtain Sale of this additional Product, or raise anything except potential Business profits.
Later comments observe the Reagan years as high viability potentials. They also state current Unemployment rates are actually the more common rates. The growth rates of the Reagan era were an effect of the growth in numbers of Households, not a reflection of the economic health of those Households. Anyone who lived through that Period understands there is a vast difference. Many Parents functionally had to underwrite their grown children’s Households through the entire Period.
The second point made of the Unemployment rate must be examined. Jobs are being created, but of what type? The loss of real pay in these Jobs–health benefits, retirement benefits, actual total real Takehome pay–all state the Job market is losing real pay overall. Study of buying patterns of Households clearly show restrictions of Consumption under conditions of loss of real pay. This a far more important impact to the Economy, than is a nominal loss of Jobs under the Bush administration. lgl
Boonton
Nov 3 2003 at 1:32pm
Anyone have a good source for GDP per capita? I think that would be a better indicator of economic growth than the unemployment rate
Ana
Nov 5 2003 at 4:10pm
I agree with Kling in that economic growth does not depend on job increases. Unemployment causes a decrease in spending, but many of the people losing their jobs are of low income, and their spendintures or lack-there-of won’t make a huge dent in our economic growth. That’s just my opinion.
Eric Krieg
Nov 9 2003 at 10:55pm
>>Anyone have a good source for GDP per capita?
http://www.odci.gov/cia/publications/factbook/index.html
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