Saturday, March 16, 2013

Laughing at the Laffer Curve: Sequestration and the tragedy of Trickle-Down economics

GDP Growth 1991 through 2010 (Source: Wikipedia)

I was raised during the Reagan years. I remembered all of the tough-talkers in the media, who sounded like they were talking about, spouted "Supply Side Economics," tax cuts and the Laffer Curve.

I sort of believed them. Until  I took university economics.

I was shocked. My profs -- and everyone knows the economics professors are among the most conservative members of any faculty -- scoffed at those ideas.

I mean, I thought those tough talkers were economists. Or knew what they were talking about.

Well, it turns out they weren't economists  And didn;t understand what they were talking about. And most of their ideas would never pass academic "muster." And thus, few would pass on to legitimate peer-reviewed journals.

And, years later, I have to agree with my professors. But for today, let's look at just one aspect of the current "tough talking -- but hollow -- economics, the Laffer Curve.

Basically, the Laffer Curve states when taxes are TOO high, then decreasing taxes would cause an increase in economic growth. And that increase in economic growth would bring more money in taxe revenue. 
Fine. That is a plausible position. But it turns out to be pure bunk.

But  how can I state this so clearly? How do we test my assertions? After all, experimentation is impossible in macro economics....

The Bush tax cuts of 2001 give us a great look into the effectiveness of Tax Cuts. They are an abrupt shift from Clinton's policies. And answer the question: "Are our tax rates too high?"

The results give an emphatic. "No." In fact, tax appeared to hurt both tax revenue and economic growth. So here we go.

Clinton vs. W. Bush. or Keynesian vs. Trickle Down Economics. 

In constant dollars, the average Federal revenue under ...
Federal Tax Revenues vs. Expenditures: 1990 - 2012
Federal Revenues vs. Expenditures: 1990 - 2012 (Source: Wikipedia)

  • Clinton:  $1.90 T. 
  • W. Bush:$1.76 T 
  • => Difference: -($0.14 T), a 7% decrease

When comparing level of economic growth, measure in average GDP growth and new jobs added, the

  • Clinton:  3.6% GDP growth/ 22.7 M new jobs.
  • W. Bush: 2.6% GDP growth/  3.0 M new jobs.
  • => Difference GDP:  -28%  (off of Clinton's mark of 3.6%)
  • => Difference Jobs: -19.7 million which is -87% worse than Clinton

So it does appear that the Laffer Curve did not apply to the situation in America in 2001.  And that tax cuts under W. Bush hurt the economy more than it helped. And, incidentally, the same dynamic works if we compare George HW Bush to Clinton. And one of the major struggles that Obama is facing is that we are in an economic jam, and have no money to pay for necessary (according to like 90% of economists) stimulus.


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