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Supply Side Voodoo, or Trickle down Economics

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The elder Bush once aptly called "supply side" economics “voodoo economics.” But it's much worse then that. Few people understand that Supply Side Economics is a variant of Generational Theft. The best description of supply side or “trickle down” economics I ever heard was by JK Galbraith:

“trickle down economics is the idea that if you feed the horse enough oats eventually some will pass through to the road for the sparrows.”

There two main types of people (or more correctly oligarchy stooges  pretending to be economics; and stooges is the most polite work I can find -- more proper term would be intellectual prostitutes of financial oligarchy) in this camp:

In a perfect academic world of fairness, honesty and integrity, nobody should resort to calling opponents dishonest. Science is the search for truth and it is easy to chose a wrong road. But "supply-siders" are dishonest in a very exact meaning of this word: they deliberately ignore decades of important economic research because they did not like the fact that conclusions prevent them from getting money from financial oligarchy.

Usually critics of supply-side economics point to the lack of academic economics credentials by movement leaders such as Jude Wanniski and Robert Bartley to imply that the theories were bankrupt. But like in Lysenko case the key here are not economic credentials and level of absurdness of supply economics claims. The movement actually attracted several pretty bright, albeit corrupt people. The key is the usefulness of this pseudoscientific nonsense for the elite as a smoke screen for the brazen attempt of wealth redistribution.

One postulate of supply side economics is the existence of so called Laffer curve:

Laffer is best known for the Laffer curve, a curve illustrating tax elasticity which asserts that in certain situations, a decrease in tax rates could result in an increase in tax revenues. Although he does not claim to have invented this concept (Laffer, 2004), it was popularized with policy-makers following an afternoon meeting with Dick Cheney and Donald Rumsfeld in which he reportedly sketched the curve on a napkin [1] to illustrate his argument (Wanniski, 2005). The term "Laffer curve" was coined by Jude Wanniski (a writer for the Wall Street Journal), who was also present. The basic concept was not new: Laffer himself says he learned it from Ibn Khaldun and John Maynard Keynes.[1]

A simplified view of the theory is that tax revenues would be zero if tax rates were either 0% or 100%, and somewhere in between 0% and 100% is a tax rate which maximizes total revenue. Laffer's innovation was to conjecture that the tax rate that maximizes revenue was at a much lower level than previously believed: so low that current tax rates were above the level where revenue is maximized.

Bottom Line: Supply-side theory is nothing more than a rationale for unchecked greed, propaganda of the law of jungles in pseudoscientific packaging. And people who advocate it are very valuable for financial oligarchy. That's why it is very profitable to be a supply side economist. Intellectual trends, especially those closely related to an ideology, such as economics,are frequently, although not always, rationalizations of attempts by dominant groups to impose their goals on society and extirpate others.

Lee Iococca noted in the early 80's that Reaganomics was "picking our grandchildren's pockets." It is a classic case of generational theft. Initially planned as "gun instead of butter" it changed to "gun, butter and debt" after they encounter resistance in dismantling Social Programs. As one commenter (Erdgeist) to the article by Hale Bonddad Stewart Supply Side Economics and Generational Theft aptly put it:

This says it all about the Reagan years -- and the lingering schizophrenia that still lurks in the brains of most Republicans.

"Fiscal policy in the Reagan administration exhibited all the signs of schizophrenia that characterized most of its policies.

An expansionary fiscal policy, led by the militarization of the economy, was not the aim of the administration when it drafted its plan. The increases in national defense spending was supposed to be offset by reductions in the civilian sphere. Congress did not go along with the complete dismantling of the New Deal and the welfare state. Its resistance was bound to lead to trouble, for the administration did not have a mandate to eliminate all the social programs enacted in the past 50 years.

Reagan's victory led the conservatives to labor under the miscomprehension that the public was voting for a complete change in philosophy; what the public voted for was hope--hope that somehow there were easy answers to the economic woes that were besetting the nation. Reagan promised them that, and the voters responded."

Source: The Economy in the Reagan Years: The Economic Consequences of the Reagan Administrations by Anthony S. Campagna (1994).

Martin Wolf in his Jul 25, 2010 FT column (The political genius of supply-side economics) noted "The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party":

...My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts. In practice, then, nothing will be done. ...

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. ... It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?
How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives - for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the “starve the beast” theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.
In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective...
The ... theory that cuts would pay for themselves has proved altogether wrong. ... Indeed, Greg Mankiw ... has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”. ...
So, when Republicans assail the deficits under President Obama, are they to be taken seriously? ...[I]t is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military. ...
What conclusions should outsiders draw about the likely future of US fiscal policy? First, if Republicans win the mid-terms in November, as seems likely, they are surely going to come up with huge tax cut proposals (probably well beyond extending the already unaffordable Bush-era tax cuts).
Second, the White House will probably veto these cuts, making itself even more politically unpopular.
Third, some additional fiscal stimulus is, in fact, what the US needs, in the short term, even though across-the-board tax cuts are an extremely inefficient way of providing it.
Fourth, the Republican proposals would not, alas, be short term, but dangerously long term, in their impact.
Finally, with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programs, US fiscal policy is paralyzed. ...
This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic.
In sum, a great deal of trouble lies ahead, for the US and the world.
Where am I wrong, if at all?

The economist John Kenneth Galbraith noted that supply side economics was not a new theory. He wrote, "Mr. David Stockman has said that supply-side economics was merely a cover for the trickle-down approach to economic policy—what an older and less elegant generation called the horse-and-sparrow theory: If you feed the horse enough oats, some will pass through to the road for the sparrows."[39] Galbraith claimed that the horse and sparrow theory was partly to blame for the Panic of 1896.

See Supply-side economics - Wikipedia, the free encyclopedia

Here is a couple of comments from an excellent article by Barry Ritholtz NYT Blaming Bush for the Wrong Things The Big Picture

Bush has created a new hypertext linkage definition of kleptocracy* and massive US financial ponzi scheme to keep the bullshit US economy going where credit must flow like a raging river or America’s house of cards goes bust trumps everything else.

Mission accomplished and BOL to 98 or 99% of Americans for next ? years.

*government by those who seek chiefly status and personal gain at the expense of the governed.

===

As for Clinton, I never saw him as moral, and not even a true progressive. He was/is pure ego with few principles, IMO. As for the rest of the Democrats, many are in the same class as Clinton. In addition, many have been co-opted (like Schumer) by the 28 year long dominance of free-market philosophy; they and Clinton were too weak and too concerned with their own re-elections to stand firmly against that trend.

This situation was very beneficial to "deregulation criminals" like Greenspan


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[Sep 27, 2017] Restating the case against trickle down

Notable quotes:
"... Claim 1 is a restatement of the marginal productivity theory which is at the heart of neoclassical economics. In a general equilibrium model of a perfectly competitive economy with full employment, it can be deduced as a theorem. With constant returns to scale, ..."
"... The two propositions seem at odds. If people earn their marginal productivity (by #1), there should not be the externalities (in #2). The presence of the externalities suggests that incomes are not set according to marginal contributions to the economy. In turn, that calls into question the general equilibrium model. ..."
"... If, I repeat, If capital is invested, it is much more likely to be in automation. Which maintains or increases productivity while lowering labor costs. Demand is the only thing that can increase employment. But, that employment could be anywhere in the world. ..."
"... Alongside these two points I would add the (in econ-blogospheric terms, Sumnerian) point that Central Banks switched from targeting unemployment to targeting inflation; the result has been much longer periods of unemployment and underemployment, (arguably) artificially depressing wages, especially at the low end. (Hence wage stagnation). ..."
Sep 27, 2017 | crookedtimber.org

Restating the case against trickle down (updated in response to comments)

by John Quiggin on September 2, 2017 I've just given a couple of talks focusing on inequality, one for the Global Change Institute at UQ, following a presentation by Wayne Swan and the second at a conference organized by the TJ Ryan Foundation (including great talks by Peter Saunders, Sally McManus, and others), where I was responding to a paper by Jim Stanford from the Centre for Future Work. Because I was speaking second in both cases, I didn't prepare a paper or slides, but tailored my talk to complement the one before. That can be a high risk strategy, but in this case, I think it worked very well.

It led me to a new, and I hope improved, statement of the case against 'trickle down' theory. As always, the most important part of a refutation is a clear statement of the theory you propose to refute, so that it can be shown where it falls down. After the talks I wrote this up, and it's over the fold. Comments and constructive criticism much appreciated.

The case against trickle down, restated

The trickle down theory relies on the following claims*

  1. In the absence of taxes and other government interventions, high market incomes reflect, and elicit, high productivity, investment and effort.
  2. More effort from highly productive workers and investors increases the productivity of workers in general.

The trickle down argument then starts with the claim that reducing tax on high income earners will lead them to work harder and invest more. Since they are (by claim 1) the most productive members of the community, their efforts will (by claim 2) make everyone else more productive, and will benefit consumers. So, reducing taxes on high income groups will make everyone better off.

Claim 1 is a restatement of the marginal productivity theory which is at the heart of neoclassical economics. In a general equilibrium model of a perfectly competitive economy with full employment, it can be deduced as a theorem. With constant returns to scale,

Claim 2 is generally assumed to be true, although it's not usually spelt out. It is true either if there are external economies of scale such as information externalities (the most productive provide a model for others to copy) or complementarity in production (working with highly productive colleagues and managers makes people in general more productive). With economies of scale, Claim 1 needs to be interpreted carefully, The implication is not that everyone receives a payment equal to their marginal product, but that market incomes are (roughly) proportional to average and marginal productivity.

If Claim 2 doesn't hold then all the benefits of increased effort from highly productive workers and investors is captured by the workers and investors themselves. This means that the there is no 'trickle down' except through the tax system. The policy implication is that tax rates for high income earners should be set at or near the top of the 'Laffer curve' where revenue is maximized, estimated by Piketty, Saez and Stantcheva at around 80 per cent.

The neoclassical model that gives rise to Claim 1 has never been a fully accurate representation of the economy. But it is even less accurate now than in the past. The crucial recent developments, likely to continue in the absence of radical policy change, are:

These developments mean that cuts in the top rate of income tax will primarily reward ownership of capital, unproductive activity, or luck in choosing ones parents, rather than increasing productivity. They also undermine the second proposition underlying trickle down theory. The pursuit of monopoly profits ('rent-seeking' in the jargon of free-market economics) reduces rather than increases the productivity of the economy as a whole.

That's the theory. The empirical evidence, which was in dispute for a long time, is now clear-cut, at least for the United States. Decades of pro-rich policies have, unsurprisingly, made the rich much richer. Contrary to the predictions trickle down theory, the result has been to reduce, rather than increase, the productivity and dynamism of the economy. The combination of slower growth and increased inequality implies, as a matter of arithmetic, that the majority of the population must be worse off.

*There are some other versions of trickle down that can be dismissed more easily. Most notably, there's the idea that the spending of the rich will create employment. That's true, but more employment would be generated if income were redistributed to the poor, who save less of their income and consume more.

BruceJ 09.02.17 at 1:51 am ( 1 )

Claim 1 is a restatement of the marginal productivity theory which is at the heart of neoclassical economics. In a general equilibrium model of a perfectly competitive economy with full employment, it can be deduced as a theorem.

Honestly, this makes 'neoclassical economics' sound suspiciously like yet another perpetual motion scheme.

mclaren 09.02.17 at 2:02 am ( 3 )
We can also cite the exponential growth of share buybacks to boost stock prices and thus enrich CEOs + corporate officials with stock options. This now seems to be the main corporate use for profits, as opposed to investment. This trend would seem to short-circuit the whole argument in claim 1, since if businesses use profits to buy back shares instead of investing to increase productivity, claim 1 is entirely moot.

See "Profits Without Prosperity" by William Lazonick, Harvard Business Review, 2014.

https://hbr.org/2014/09/profits-without-prosperity

Wally 09.02.17 at 2:13 am ( 4 )
"2. More effort from highly productive workers and investors increases the productivity of workers in general."

What, people claim this? With a straight face? I work in a factory. I'd say the opposite is true, the harder I work, the more everyone else slacks off!

OldClark 09.02.17 at 2:48 am ( 5 )
Tinkle down theory: We must coddle the rich, because if we don't, then they will have a sad and won't work hard. But the poor? Anything they get makes them work less hard.

But maybe: Tax the rich harder and they work harder, because they still want more, more, more. And the poor? Anything they get empowers them, and further motivates them to escape poverty.

Ian Maitland 09.02.17 at 2:48 am
"The empirical evidence [against trickle down theory], which was in dispute for a long time, is now clear-cut, at least for the United States."

I wonder if the clause tacked on to that sentence -- "at least for the United States" -- isn't a dead giveway?

What about the rest of the world? True, globalization enriched corporations and created Third World billionaires, but the most striking development of the two or three decades up to 2007 was the transformation of the situation and prospects of the world's poor. 2015 economics Nobelist Angus Deaton has said: "Life is better now than at almost any time in history. More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die."

Between 1970 and 2006, the percentage of the world population in poverty has fallen by 80 percent from 27% to 5%. The corresponding total number of poor has fallen from 403 million in 1970 to 152 million in 2006. At the same time, various measures of global inequality have declined substantially and measures of global welfare increased by somewhere between 128% and 145% (Pinkovskiy.& Sala-i-Martin 2009; see also Kinley, 2009: 14-15).

It is amazing how we take for granted what in retrospect will be seen as a golden age. How quickly we have forgotten how, before globalization, much of the Third World had been written off by experts. In the 1960s and 1970s, for example, Peter Singer placed Bangladesh in the "hopeless" category. "We have no obligation to assist countries whose government make our aid ineffective," Singer wrote. Paul Ehrlich wrote in The Population Bomb that, "India couldn't possibly feed two hundred million more people by 1980." He endorsed a system of "triage" that would end food aid to "hopeless" countries such as India and Egypt. (India has gone from being an economic basket case to a bread basket). Garrett Hardin used the lifeboat earth metaphor to argue against helping the world's poorest. That help would lead to unsustainable population growth that would capsize the lifeboat, so they had to be thrown overboard.

Globalization was mostly about the lifting of barriers to trade and investment and liberalizing domestic economies. The era has been called "the age of Milton Friedman" by Andrei Shleifer (2009) because it marked a stride toward a global free market. The miracle of globalization was, accidentally or on purpose, the result of the unleashing of market forces. Instead of planners, foreign aid, high tariffs and import substitution, it was greater market openness that drove this transformation.

I don't know if this qualifies as "trickle down," but I think we should all give thanks for what has been accomplished. Sadly, the Great Recession and the populist revolt have put the brakes on the process.

John Quiggin 09.02.17 at 3:53 am ( 7 )
@6 I've responded to this point before, as follows:

In the wake of the GFC, some advocates of economic liberalism have sought to shift the ground of debate, arguing that, whatever the impact of financial globalisation on developed countries, it has been hugely beneficial for India and China which, between them, account for a third of the world's population.
There are all sorts of problems with this argument.

The relatively disappointing economic performance of China and India in the postwar decades certainly provides strong grounds for criticising the economic policies of Mao Zedong and Nehru. But even in the days when some observers saw these policies as providing an appropriate development path for the countries that adopted them, no one seriously proposed their adoption by developed countries. And as more attention has been focused on the irrational aspects of these policies (such as the Great Leap Forward, in which people were made to melt down their cooking pots to provide scrap for backyard smelters, which presumably produced new cooking pots, or the dozens of licenses required to undertake the simplest economic activity in India) it has become easier to understand why their removal or relaxation

At the same time, neither of these rapidly-growing economies come anywhere near meeting the standard description of a free-market economy. China still has a huge state-owned enterprise sector, a tightly restricted financial system and a closely managed exchange rate. India began its growth spurt before the main period of market liberalisation and also retains a large state sector. In both countries, as earlier in Japan and South-East Asia, the state has played a major role in promoting particular directions of development.

In summary, while the development success stories of China and India, and, before them of Japan and the East Asian tigers, may have some useful lessons for countries struggling to escape the poverty trap, they can tell us nothing about the relative merits of economic liberalism and social democracy.

Alex SL 09.02.17 at 4:43 am ( 8 )
I am not an economist (is IANAE a thing?), but it always seemed to me that the two main problems with trickle-down are the second to last paragraph – empirical disproof – and the idea that, say, lowering taxes from 35% to 25% is some kind of huge incentive that will make people who are affected by that change work harder. I do not find it a priori plausible that somebody would ever say:

"Hey, if I work harder to earn another $10,000 I will only actually get to take $6,500 home. If that is the case, then I will not work harder and rather lose out on the $6,500, even if I could really do with another $6,500. So there. But if you lower the tax rate so that I get to keep $7,500, now we are talking! Those 10% are so much more relevant than the other 65%." (Add zeroes at the end of those numbers as required.)

This is just not a reasoning that will ever make sense or occur to anybody in real life, i.e. outside of a libertarian think tank, unless we are indeed talking a tax rate of 95%.

Matt 09.02.17 at 5:56 am ( 9 )
I do not find it a priori plausible that somebody would ever say:

"Hey, if I work harder to earn another $10,000 I will only actually get to take $6,500 home. If that is the case, then I will not work harder and rather lose out on the $6,500, even if I could really do with another $6,500. So there. But if you lower the tax rate so that I get to keep $7,500, now we are talking! Those 10% are so much more relevant than the other 65%."

for what it's worth, I have thought things at least very similar to that several times, and even acted on them, when, for example, I was already teaching several classes, and I was asked if I'd like to teach one more. At that point, teaching one more would start to have significant impact on my quality of life and ability to do writing. I'd be unhappy. But, I could use the extra money. But each dollar cut off made a bit difference, considering that it would actually be a pretty significant impact on my happiness at that point to teach another class. Even if I could use the money, it had to be a fair amount of money before I'd take the class on. Now, I don't mean to draw any sort of general conclusion from this, or to suggest that it's a problem with the post, or to suggest that my situation suggests anything important about tax policy or whatnot. But, that things like this happens seems pretty clear to me, because they have happened to me.

Bill 09.02.17 at 9:47 am (
The two propositions seem at odds. If people earn their marginal productivity (by #1), there should not be the externalities (in #2). The presence of the externalities suggests that incomes are not set according to marginal contributions to the economy. In turn, that calls into question the general equilibrium model.
ccc 09.02.17 at 9:54 am ( 11 )
"So, reducing taxes on high income groups will make everyone better off."

Even if 1 and 2 hold that "better off" conclusion still does not follow. Or at minimum "better off" must be defined and qualified. How well off social animals like us are arguably depend on both absolute and relative factors. Even if 1 and 2 raise the economic floor for literally everyone they may also increase economic inequality, which can cause health worsening (spirit level type argument) and worse equality of opportunity for the children of those not earning most. Seeing one's child strive but not succeed because of a system of economic inequality is arguably a "being worse off" factor.

nastywoman 09.02.17 at 10:08 am ( 12 )
"Trickle down" never works if you don't have Rich dudes who don't trickle down enough. But it kind of works if you have a German Mittelstands-dude who has such a high social conscious with an empathetic responsibility for his workers and his community that he pays his workers excellent – insists on NOT firing -(or outsourcing) them and is in economical crisis even willing to sacrifice his own well being for the well being of his community and workers.

And this simple Kindergarten-wisdom (philosophy?) just doesn't apply (anymore?) in THE homeland – even supposedly – and to a certain extend applied when a dude called Ford made sure that his workers could afford the cars they build.

Collin Street 09.02.17 at 11:21 am ( 13 )
"Trickle down" never works if you don't have Rich dudes who don't trickle down enough.

It's better than that: even if trickle-down actually works the way it's supposed to the way it's supposed to work it'll make problems of equality worse, not better, long-term. See, you're giving the money to people with the expectation that they will use it to make "profitable investments". But a profitable investment -- definitionally -- returns more money to its maker than they spend: the result of "trickle down" is profitable investments made by the currently-rich that make them even richer .

Tim Worstall 09.02.17 at 11:23 am ( 14 )
"Claim 2 is generally assumed to be true, although it's not usually spelt out. It is true either if there are information externalities (the most productive provide a model for others to copy) or complementarily in production (working with highly productive colleagues and managers makes people in general more productive).

If Claim 2 doesn't hold then all the benefits of increased effort from highly productive workers and investors is captured by the workers and investors themselves. This means that the there is no 'trickle down' except through the tax system. The policy implication is that tax rates for high income earners should be set at or near the top of the 'Laffer curve' where revenue is maximized, estimated by Piketty, Saez and Stantcheva at around 80 per cent."

Well, no, not really. Imagine, just imagine for a moment, that the harder work and greater investment in pursuit of those higher incomes leads to something like that new leukemia drug just approved. $500k a treatment today, that being cheaper than the other treatment, bone marrow transplant. And in 10 or so years time the patent expires and it drops in price again. No, this is not an argument that drug patents are super, rather, do we think that people are incentivised to create new things by the prospects of gaining gazillions?

Are those 600 Americans likely to get this treatment each year made richer by its existence?

We're made richer by being able to consume the greater production of those more highly motivated high productivity people, aren't we?

As to the 80% peak, that suffers from the same problem that the very similar Diamond and Saez one does. It assumes that we've already closed off all avenues of avoidance (D&S using "allowances" to mean this). A residence based tax system, rather than a passport one, is just such an allowance. For you can avoid by leaving the country and we've even got a name for when this happened, the brain drain.

Further, the Staggers gets the NI situation wrong. D&S, certainly, talk about "taxes on income", not "income taxes". They specifically include employer paid taxes on employment income. Meaning adding employers' NI for the UK, not just the residual 2% employees'. At which point, with allowances like residence based, D&S give us something like 54% as the Peak. Or, given NI, somewhere around where we are with income tax alone right now, 45% or so.

bob mcmanus 09.02.17 at 12:03 pm ( 15 )
IANAE, and no longer reading as much economics as I used to, and this may belong to JQ's last paragraph about trivial trickle-down theories, but I was inspired to visit the Marx-Kalecki three-sector model. (Investment goods, wage goods, luxury goods/capitalist consumption.) Which as usual, approaches the problem from the production side. "Trickle-down" in this case depends on how capitalist spend their increased income, whether on investment or luxury goods.

John Bellamy Foster Monthly Review, 2013. One point here is to refute the "profit-squeeze" theory, which still endures in some Marxian economics. This may be a "what next after refuting trickle-down."

Only for those interested, I am not capable or enthused to defend the whole thing.

"For Kalecki, the power of labor to increase money wages!although present to a minor extent in the normal business upswing!was not a significant economic threat to capital even at full employment due primarily to the pricing power of firms. Hence, if the system neglected consistently to promote full-employment through the stimulation of government spending this was not to be attributed to economic reasons per se, but rather to the political threat that permanent full employment would represent to the capitalist class."

I buy this completely, and the "pricing power of firms" is the main reason I oppose any UBI job guarantee/ELR is much better. But state infrastructure is best. The taxes on capital and capitalists must go to government spending ( socialized worker consumption ) and investment (workers capital?) or it is counterproductive.

bob mcmanus 09.02.17 at 12:22 pm ( 16 )
Sorry. Two more things

1) The Meidner Plan is back in the news, see Jacobin.

2) Increased taxes on capitalists for redistribution will upset capitalists. You want to drive almost every economist nuts, start talking about state control of pricing . That can done indirectly in ways like gov't housing or Medicare-for-all. The problems with redistribution without socialized pricing are evident in the PPACA.

Alex SL 09.02.17 at 1:11 pm ( 17 )
Matt @9,

I may misunderstand, but the way you describe it it seems as if the concern to become overworked would have been the main factor. I must say that if the question is whether we want to lower top tax rates by 10% so that more people work themselves to death and get a heart attack in their 40s I'd say thanks but no thanks.

Maybe even phrasing it as "working harder", as I did in my first comment, is the wrong way of looking at trickle-down economics; the main argument seems to be that an investor or company owner would rather let their money sit around useless and earn a mere 1% in interest than invest in some 'job creating' activity that earns a return of 20% if they only get to keep 13%. Phrased like that I think it would be hard to argue that any even half-rational investor would ever reject the 13% ROI.

The problem might be that there just is no additional, unused opportunity for productive activity that earns a return of 20% on investment if the masses have seen stagnant wages for the last few decades. How would they afford to buy the new product that the investment would be in, except in the sense of a zero sum game where another investment elsewhere becomes less attractive to make up the difference? So if the investor's tax rate is lowered their choices are still money sitting around uselessly or inflating a bubble.

steven t johnson 09.02.17 at 1:38 pm
A man digging a ditch with a shovel is working much harder than the dude with a backhoe. It is not clear the guy working harder gets paid more. It's not clear the guy on the backhoe is getting more than minimum wage. The amount of profit expected from the ditch seems to me to depend on a lot more than how hard or productive either worker is. And the last I looked, economics doesn't have an agreed upon theory on the dynamics of the general rate of profit.

All that stuff about marginal revenue productivity etc. seems to me to be unlikely to be much more than ideology.

bob mcmanus 09.02.17 at 2:40 pm ( 19 )
Last one, because I would like this to be clearer. I am inverting is a little bit from "decreased taxes with increase growth" to "will increased taxes inhibit growth" using a 3-department model because:

Krugman on Taxing Rents yesterday

Krugzilla: "much corporate taxation probably doesn't fall on returns to physical capital, but rather on monopoly rents."

So question for Quiggin, leaving aside finance and rents

Are increased taxes on physical/fixed capital a good thing, growth and welfare enhancing?
Are increased taxes on corporate returns, profits, good?
Should we end all depreciation allowances?
De we want to tax productive investment?

It is about the framing. Too often this is argued as about capitalist income and capitalist consumption, as in Obama taxing private jets.

nastywoman 09.02.17 at 5:35 pm ( 20 )
@13
"See, you're giving the money to people with the expectation that they will use it to make "profitable investments".

Or to spend it for a really great watch? – as I happen to know -(and love) these great Swiss Watchmakers who love to have the dough of Rich US-dudes redistributed towards some real cool Craftsmen. -(wherever they are) – as I'm right now spending some time with some really cool US carpenter -(in Iceland) – who loves it too – when he get's flown to Iceland to do some "real cool" work here too.

And isn't that really "fascinating" that so many "Rich Dudes" -(of all nations) seem to have this "thing" about (only) making "profitable investments" in order to return more money to themselves – than they spend – in order to make them even richer BUT when it comes to pay for a "Craftsman" who manufactures a nice well done cabinet -(or a well working golden watch) a "Real Rich Dude" is even willing to throw in a first class airline ticket to Geneve?

Whassup?

John Quiggin 09.02.17 at 11:17 pm ( 21 )
Bill @10 This is a good point. I think (1) needs to be modified to say that incomes are proportional to marginal product. Then point (2) requires generalized external economies of scale, which is the central idea in endogenous growth theory. I'll work on this.

Tim @14 The example you give is precisely covered by point 2.

Ebenezer Scrooge 09.03.17 at 12:27 am ( 22 )
Trickle-down is popular because many people are happy to tug their forelock if they can look down on somebody else. This is more an American disease than a European one.
Collin Street 09.03.17 at 1:07 am ( 23 )
Phrased like that I think it would be hard to argue that any even half-rational investor would ever reject the 13% ROI.

You think other people are like you. Other people think other other people are like them. What this says about advocates of trickle-down economics is left as an exercise.

Gareth Wilson 09.03.17 at 7:00 am ( 24 )
There is a problem which is referred to in New Zealand as the three B's. Once people own a boat, a BMW, and a bach (holiday home), there's a tendancy to work less hard, maybe even retire early and sit around doing nothing. Margaret Thatcher herself harshly criticised the British equivalent of this. I share your skepticism that tax rates will help with this, but it is a problem.
nastywoman 09.03.17 at 7:45 am ( 25 )
– or let's blame it all on the "fashionable American-Anglo culture of "Disruption"?
While in sane and reasonable economical environments the words "trickle down" just don't exist BUT a culture of "Cooperation and Compromises or how do the Germans call it "Mitbestimmung" – and there is no need for "trickle down" in Mitbestimmung as everybody agrees that everybody should get her or his faire share of the "winnings".
bob mcmanus 09.03.17 at 10:19 am ( 26 )
Okay fine

"Capitalist income when directed by policy into productive actually job-creating investment is of general benefit and should be taxed at a lower marginal rate."

is the big trickle-down, the primal, universal trickle-down that enables all the others.

Not capitalist income vs labour income, not capital income share vs labour share, the problem is capital vs labour, " good to increase capital cause jobs " is an assumption so basic I don't even know how to quantify its adversary or opposition. Raw Number of workers? Capital's opposition is made invisible by mainstream economics. And looking at capitalist income or capitalist share of income or marginal productivity etc I think are means to ensure that capital quantity keeps increasing ("cause we can tax the profits or outflow") and capitalist political power (cause we don't want to lose the factory or sports stadium cause jobs) keeps increasing.

No, Marx didn't go here, but then Marx believed that increasing capital quantity would inevitably lead to proletarian revolution. We no longer have that excuse.

Tax not consumption, tax not income, tax capital directly so that we have less of it. The govt can use the income to create socialized investment and production.

CarlD 09.03.17 at 11:10 am ( 27 )
"In the absence of taxes and other government interventions,"

This is always the weasel out. There are always at least some taxes and government interventions on which to blame the failure of markets to work their magic.

bob mcmanus 09.03.17 at 12:25 pm (
Last one again. I may not respond if anyone bothers, because this is at least orthogonal to the OP.

How to tax capital? Simple, an example. Declare face value of equities at closing bell on April 15 and tax it. 50%, 10%, 0.1%. Forget realized capital gains or transaction taxes, tax face values. Yes indeed I understand what will happen to face values the day before and the day after. I want to drive NASDAQ to zero, how about Krugman? Why not? (Also bonds and bank assets, of course)

Yes, I know we do tax property at a local level and I spent some time looking for the tax incidence between business wealth and housing values but I suspect it varies wildly along with a maze of capital-protecting laws. I did notice that non- profits are taxed differently if at all, in other words, still looking at property under the lens of income. So the Clinton Foundation provides Chelsea economic security and political power in perpetuity.

Capital is a power relation that shows up in de-facto segregated communities and unequal education spending and outcomes and I would possibly tax houses as I would equities.

And of course all this can be incremental and marginal, we don't need to go fullbore expropriation from the start.

But private property is a socialized power relation, and we want to discourage private investment as much as possible. Otherwise, its still a trickle down economy.

faustusnotes 09.03.17 at 12:27 pm ( 29 )
I think it's important to take issue with comment 6, by Ian Maitland, which is a collection of despicable lies. I know it makes no difference to Ian Maitland, who is a lying shill, but it is important for people reading.

First Maitland says (contradictorily) that the proportion of the world population in poverty has fallen to 5%, and that only 152 million people live in poverty. This is untrue. The World Bank estimates that 10.7% of the world's population, or about 790 million people, live in poverty, and that the majority of poverty reduction has only occurred due to China and India (i.e. no change in Africa). Maitland is using dubious numbers from a single shonky 2009 analysis published in that dumpster for shit papers, the NBER.

Second, Peter Singer never wrote the phrase Maitland accuses him of, with respect to the Bangladesh famine. Singer's paper on the famine can be found here and is a discussion of the urgent need to increase aid to "East Bengal", as well as whether people in developed countries are justified in impoverishing themselves in support of starving people in East Bengal (he concludes that they should not impoverish themselves so much that their utility is lower than that of the Bangladeshis they want to help). He discusses and dismisses the idea that people in rich countries should not give aid to East Bengal because the real cause of its famine is population control, and aid without population control won't work: He recommends aid now, and then further aid for population control. He says people should be "working full time" to push both issues with their government, and sneers at the UK government for valuing concorde more than starving Bangladeshis.

The nearest quote to that which Maitland attributes to Singer comes from a later book, Practical Ethics , and is part of a discussion about whether rich people should give money to aid poor countries, and how to judge the best way to do this. Practical Ethics was written in 1979, about the time that now-independent Bangladesh was becoming a success story in health, population control and nutrition despite being much poorer than India. In the sentence before the sentence closest to that which Maitland cites, Singer states that we have an obligation to assist poor countries, but not to waste our money on ways that don't help. This sentence has nothing to do with Bangladesh, and nothing to do with abandoning poor countries to starve – in fact it concerns the best way to do precisely the opposite.

In short, what Maitland wrote here is entirely false, deliberately misleading, and malicious. I know most people on here are aware that Maitland is a lying liar, but just in case anyone is new here and thinks that the failure to challenge his lies is a sign that they're accepted by others as fact, here is the rebuttal: everything at comment 6 is a vicious lie, and people like Maitland should be deeply ashamed of themselves for the deliberate and mendacious lies they tell.

Layman 09.03.17 at 12:50 pm (
Garett Wilson: "There is a problem which is referred to in New Zealand as the three B's. Once people own a boat, a BMW, and a bach (holiday home), there's a tendancy to work less hard, maybe even retire early and sit around doing nothing. Margaret Thatcher herself harshly criticised the British equivalent of this. I share your skepticism that tax rates will help with this, but it is a problem."

Why is this a problem? Sure, it's an affront to Puritanism, but besides that?

Cranky Observer 09.03.17 at 1:03 pm ( 31 )

= = = Once people own a boat, a BMW, and a bach (holiday home), there's a tendancy to work less hard, maybe even retire early and sit around doing nothing. [ ] I share your skepticism that tax rates will help with this, but it is a problem. = = =

Why? Why is it a problem, that is?

I realize that many global cultures based on English, Scots, and closely-related Northern European cultures have adopted the neo-Puritan attitude that mankind deserves to be punished and that 60-100 hours/week of grinding labor from age 16 to 80 is a necessary part of that punishment. I'm less sure why the rest of us should accept that, particularly given the trend toward automation of production of the necessities of life.

some lurker 09.03.17 at 2:55 pm ( 32 )
The devil is, as always, in the details. These arguments always ignore the inconvenient facts of tax brackets (you mean the 90% tax rate for high earners doesn't apply to the first dollar earned?) or deductions/exemptions. My rule of thumb is that top earners pay an effective tax rate of around a third of the actual rate. George Romney was assessed a 70-90% rate in the 60s and paid something in the 30s: his son Willard would have been assessed a 39.6% rate and paid something in the teens, probably not too far off what most of the CT commentariat pay.

Economics is theoretical politics just as politics is applied economics: it all made more sense when it was called "political economy." Then you knew that economists were trying to write policy and that politicians were trying to hide their schemes behind some academic fig leaf.

And +1 to the "tinkle-down" variant I'll be sure to use that.

Tim Worstall 09.03.17 at 5:11 pm ( 33 )
"Tim @14 The example you give is precisely covered by point 2."

Umm, how? If there's a consumer surplus then the workers and inventors and capitalists etc simply aren't gaining all of he value. I don't we generally think that there is usually a consumer surplus?

RD 09.03.17 at 5:18 pm ( 34 )
GW @ 24

A rich guy on holiday at the beach notices a local fisherman sitting on the beach strumming a guitar and sipping a beer at 1400 hours. He inquires as to why he is not still at work.

Local; "I've caught enough fish for today!"

Rich Guy; "But if you work harder and longer, 6 or 7 days a week, 12 hours a day, you will be able to buy another fishing boat, employ more fisherman, buy 2 more boats, then 4 boats."

Local:" What for?"

Rich Guy: " So you can retire and sit on the beach strumming your guitar and drinking beer!"

bruce wilder 09.03.17 at 6:07 pm ( 35 )
. . . the marginal productivity theory . . . is at the heart of neoclassical economics. In a general equilibrium model of a perfectly competitive economy with full employment, it can be deduced as a theorem. . . . The neoclassical model . . . has never been a fully accurate representation of the economy.

Way to go out on a limb with classic understatement. Never a " fully accurate representation"!

It seems to me we are back in Lesson 1 / Lesson 2 economics, wondering whether Lesson 2 is going to be an explanation of how Lesson 1 is wrong and wrong in every conceivable respect and implication, . . . or an explanation of how Lesson 1 is right, but not quite right.

In some respects, you seem to want to turn the claims for trickle-down economics topsy-turvy and show how pretty much the opposite of what the advocates of trickle-down predicted and recommended has turned out to be true and ought to be recommended.

But, in other respects, you seem to want to defend neoclassical economics, as a merely imperfect representation, which has, perhaps become less accurate as the further development of the economic system has unfolded.

The rhetorical turn, "it is even less accurate now than in the past" leads to a narrative in which epiphenomena are transformed into their own causal forces, perhaps to avoid the contradiction in your analysis. Wage stagnation is an outcome that disproves the neoclassical economics that recommended the policies that created wage stagnation, but some instinct holds you back from saying that, so now wage stagnation is itself a reason to believe that neoclassical economics is "less accurate" a representation. Did wage stagnation cause itself? Did the recommendations or expectations of orthodox neoclassical economics have anything to do with it?

I guess we do not need to answer and we should not wonder if the recommendations themselves were innocent misunderstandings of the economy or a fraudulent apology for policy that in fact targeted the consequent upward redistribution of income and wealth.

Is neoclassical economics simply a rhetoric engine for generating these frauds or did neoclassical economists know what the powers-that-be were doing as well as how to sell what the powers-that-be were doing? It is a classic conundrum in economics. The doctrines of economics provide the styling for the outward apology and (importantly false) rationale (see the discussion of the allegedly Machiavellian roles of James M Buchanan and Milton Friedman in the other thread) for policy, but also the operating manual for policy. Somewhere, someone has to have some idea of what they are doing, in pulling the levers and operating the machinery of the economic system. Even granted that there might be important limits -- the serious people have been known to run the economy off the edge of a cliff. It is just hard to know even then -- when we are enveloped in a crisis of crisis capitalism -- if the powers-that-be are doing it by mistake (1930) or on purpose (2008).

I cannot tell from the OP whether you think economic theory and the intuitions it cultivates, for better and worse, should matter or not. Is neoclassical economics wrong? Or misused?

Howard Frant 09.03.17 at 7:55 pm ( 36 )
I sort of question whether it's even worth engaging with trickle-down at this level, as opposed to just saying "Well, it doesn't work." Are there still serious ecenomists who are saying it does?

JQ@7

The dramatic increase in income and reduction in poverty in the Third World go far beyond China and India. China is the most extreme, but it's pretty much everywhere, except Africa.

Alex SL@8

People are always tempted to respond to economists' assertions by saying,"Well, *I* wouldn't do that!" Unfortunately, introspection generally doesn't work, because the assertions usually are not about what a typical person would do, but about what people on the margin would do, i.e., people who are close to indifferent beween doing it and not doing it.

steven t johnson@18

Two things you can be sure of (both in line with neoclassical theory): 1) The guy operating the backhoe will be making more than the guy wielding the shovel 2) The guy operating the backhoe will be making (a lot) more than the minimum wage.

J-D 09.03.17 at 8:48 pm ( 37 )
Gareth Wilson
How is it a problem? a problem for whom?
F 09.03.17 at 9:30 pm ( 38 )
14 is also addressed quite well and in detail by Michael Pettis' latest .
Peter T 09.04.17 at 12:05 am ( 40 )
1) The guy operating the backhoe will be making more than the guy wielding the shovel 2) The guy operating the backhoe will be making (a lot) more than the minimum wage.

At the level of: a lot of guys wielding shovels will move less dirt than a lot of guys driving back-hoes, and so be less productive and have less to share, this is true.

At the level of the work-crew digging ditches it's not. Three guys dig a ditch – one marks the line, one drives the back-hoe, one shovels the odd bits that the back-hoe can't do. Every so often they change places, because they all know all the jobs, and shovelling is hard work. Or old Joe drives the back-how while young Dave does the shovel, because that's fairer given Joe's got a bad back. Joe gets paid a bit more because he's senior. And Ramjit gets paid most because he's in charge and is responsible for seeing that the ditch goes where it's supposed to.

You can't devolve cooperative production down to individual productivity.

Tabasco 09.04.17 at 12:20 am ( 41 )
"The dramatic increase in income and reduction in poverty in the Third World go far beyond China and India."

No one talks much about South Korea, but a generation ago they were very poor. Now they are as rich as Japan, with income distribution like the Scandinavians. Of course this all happened with a great deal of heavy handed government intervention, to the disapproval of free market fundamentalists in the West, but it was still capitalism.

Gareth Wilson 09.04.17 at 12:24 am ( 42 )
It's a problem because the man with the three B's could be producing more wealth and improving everyone's standard of living, but he isn't.
J-D 09.04.17 at 5:49 am ( 43 )
Gareth Wilson
Well, hypothetically he could be; but then again, hypothetically he could be hard at work grinding the faces of the poor, and it's a good thing, and not a problem, that he isn't. What he is actually doing is indulging himself with leisure, which at least contributes to his own standard of living. If everybody works less, everybody has more leisure, which is a contribution to everybody's standard of living.
Scott V 09.04.17 at 1:46 pm ( 44 )
"If Claim 2 doesn't hold then all the benefits of increased effort from highly productive workers and investors is captured by the workers and investors themselves. "

This statement does not seem accurate.

My restatement would be:

If Claim 2 doesn't hold then all the benefits of increased effort from highly productive workers and investors is captured by the workers, investors and their customers.

Encouraging a popular actor to take on another role, replacing someone less skilled, will not in and of itself increase anyone's productivity. It will however benefit those that consume the actors output.

Equally encouraging a highly paid person working to abandon their secure position and take the risk of starting a firm or joining a risky start-up, may in the short run only benefit those that consume the new product.

SMV

Jake Gibson 09.04.17 at 2:34 pm ( 45 )
If, I repeat, If capital is invested, it is much more likely to be in automation. Which maintains or increases productivity while lowering labor costs.
Demand is the only thing that can increase employment. But, that employment could be anywhere in the world.
otpup 09.04.17 at 6:01 pm ( 46 )
The old myth that acquisitiveness always and everywhere falls into the neat little channels that happen to make it socially productive rather than the opposite.
bruce wilder 09.04.17 at 9:47 pm ( 47 )
Howard Frant @ 69 (re: backhoe)
Peter T @ 40 (re: workcrew)

Yes to both of you.

Like Howard, I do not see what is gained here by linking the intuitions of "trickle-down" to marginal product theory of allocative efficiency. I have even used the "big shovel" theory myself to explain the concept of marginal product and its application to wages.

But, marginal product theory is an analysis arrested at a very early stage, with no uncertainty or strategic behavior, let alone such pre-requisites of practical production organization as science, engineering, energy and management -- all of them touched on in Peter T's sketch.

It seems particularly remarkable that JQ makes no mention of what I would take to be the biggest betrayal of "trickle-down": that lowering the marginal rates of income tax on super-high wage earners "incentivizes" (horrible word used here ironically) CEOs to direct the affairs of large enterprises in ways that transfer income upward, including but not limited to, control frauds.

If the economic system is organized primarily in hierarchical organization, then allowing those in charge to do well by predation and looting is probably a formula for increasing inequality. A wild and crazy idea I know, but there it is.

John Quiggin 09.05.17 at 12:30 am ( 48 )
BW @47 "It seems particularly remarkable that JQ makes no mention of what I would take to be the biggest betrayal of "trickle-down": that lowering the marginal rates of income tax on super-high wage earners "incentivizes" (horrible word used here ironically) CEOs to direct the affairs of large enterprises in ways that transfer income upward, including but not limited to, control frauds. "

That was the central point of the post (incentives reward unproductive rent-seeking), so either I've been very unclear or BW is reading uncharitably/with poor comprehension. If anyone is still reading the thread, could they help me work out which it is.

J-D 09.05.17 at 2:44 am ( 49 )
John Quiggin

That was the central point of the post (incentives reward unproductive rent-seeking), so either I've been very unclear or BW is reading uncharitably/with poor comprehension. If anyone is still reading the thread, could they help me work out which it is.

'I/you/they could have written that more clearly' is like a fortune-teller's cold reading, the kind of thing that is always or nearly always true, but in this case it seems to me you were clear enough (and as a cold reading obviously it applies to bruce wilder as much as it does to you; and to me as well, of course). It seems as if there was some reason (although I can't think of one) that it was important to bruce wilder to signal disagreement with you instead of, as could so easily have been done, signalling agreement, making the same point not as a correction of an omission on your part but as an amplification: 'One particularly important/striking example of what you're discussing is the behaviour of CEOs of large corporations transferring income upwards including, but not limited to, control frauds' (or something like that).

RD 09.05.17 at 2:44 am ( 50 )
No one ever said on their death bed, "I wish I had spent more time at the office."
bob mcmanus 09.05.17 at 11:46 am ( 51 )
(incentives reward unproductive rent-seeking)

Kodak vs Apple Janitors

"The smaller reminders can be just as telling. One former Apple contractor recalled spending months testing a new version of Apple's operating system. To celebrate the release, the Apple employees they'd worked closely with on the project were invited to a splashy party in San Francisco, while the contractors had beers among themselves in a neighborhood pub."

A large part of the Stormfront and Breitbart funding comes from Silicon Valley.

To tell the truth, I am not that interested in Tim Cook. I am not even interested in the Apple janitors.

I am interested in those employees that benefit from ultimate rent-seeking company Apple who went to the San Francisco party, and support either the libertarian right or the neoliberal center (and probably TPP). Whatever economic theory we come up with has to reach those folk and not threaten their livelihoods or it is politically as useless as Georgism.

CaptFamous 09.05.17 at 4:18 pm ( 52 )
Has anyone done a critique of trickle-down from the perspective of supply chain optimization? I'm a bit rusty on it, but a lot of the work that's been done on creating incentives for supply chain partners shows why just giving people money in the hopes that they spend it never pays back as well as just keeping the money (they reoptimize at a level that involves them just pocketing a higher percentage of the money than they otherwise would have), and that effective incentives demand the desired behavior before they pay out.
RD 09.05.17 at 4:41 pm ( 53 )
The air in Shanghai was breathable when everyone rode a bicycle. Plus exercise.
Procopius 09.06.17 at 9:21 am ( 54 )
@nastywoman -- I just had to inform you that Ford DID NOT make sure his workers could afford to buy the product they made. That was one of the most successful public relations frauds ever propagated. What Ford did was to announce a "plan." Like Trump he was a little short on the details. There were strings on the proposal. If the worker was thought to not bathe often enough, he didn't get the $5. If a worker's hair was considered too long, he did not get the $5. If the spies from the Service Department decided his lawn needed mowing, he didn't get the $5. If his neighbors said he didn't go to church on Sunday, he didn't get the $5. If the worker's English was thought to be deficient, he didn't get the $5. There were many, many more strings. Ford, in fact, paid his workers rather poorly, and his Service Department was very skilled at "talking with" anyone who was dissatisfied. Henry Ford (Old Henry) was a nasty, priggish, anti-Semitic, racist [bannable], and the world is a better place with him dead.
anon/portly 09.06.17 at 6:06 pm ( 55 )
That was the central point of the post (incentives reward unproductive rent-seeking)

Presumably that is here:

These developments [presumably points (i) to (iv) listed just above] mean that cuts in the top rate of income tax will primarily reward ownership of capital, unproductive activity, or luck in choosing ones parents, rather than increasing productivity. They also undermine the second proposition underlying trickle down theory. The pursuit of monopoly profits ('rent-seeking' in the jargon of free-market economics) reduces rather than increases the productivity of the economy as a whole.

If I was trying to convince someone of the desirability of higher marginal tax rates on high earners, I would certainly bring up some version of JQ's point (ii):

(ii) the increasing proportion of profits derived from monopoly power and financial sector speculation

But, even though in most ways I couldn't be farther from Bruce Wilder in terms of appreciation for the insights of neoclassical economic theory, alongside point (ii) I would have made a point that is more like what I think BW is suggesting: the remuneration of high(er) earners (seemingly increasingly, but perhaps this is really an old story) seems to be far more subject to manipulation and less the result of pure market forces than the remuneration of low(er) earners.

(Maybe BW would actually say that no one's remuneration has anything to do with any sort of market, but that the remuneration of higher earners especially has nothing to do with any sort of market).

(Also maybe this point is being made explicitly in the OP, and I just can't see it – as JQ didn't include an explicit version of this point alongside points (i) to (iv), it makes me wonder if he doesn't think there's been a significant change in this tendency).

Alongside these two points I would add the (in econ-blogospheric terms, Sumnerian) point that Central Banks switched from targeting unemployment to targeting inflation; the result has been much longer periods of unemployment and underemployment, (arguably) artificially depressing wages, especially at the low end. (Hence wage stagnation).

anon/portly 09.06.17 at 6:16 pm ( 56 )
As an addendum to my previous comment, is it obvious that lower marginal tax rates actually encourages unproductive rent-seeking among corporate executives? At first glance I would think it would just alter the form; labor income vs. stock options vs. perks and so on. At second glance I wonder if it couldn't go the other way, maybe the income effect would out-weigh the substitution effect. (I might not be thinking very clearly about this).

Anyway, after reading the following, I have never underestimated the intensity (insanity?) of people, no matter how well off they are, about maintaining their income at what they feel is the "necessary" level:

https://www.wsj.com/articles/SB866579346786280500

[Sep 27, 2017] The architect of supply-side economics is now a professor at Columbia University, former University of Chicago economist Robert Mundell is an academic charlatan

Notable quotes:
"... For the architect of the euro, taking macroeconomics away from elected politicians and forcing deregulation were part of the plan ..."
"... The idea that the euro has "failed" is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do. ..."
Jan 20, 2017 | economistsview.typepad.com
RC AKA Darryl, Ron :

Thanks to New Deal democrat, who made me curious about yesterday's "comment section in re Summers' piece." Then thanks to Ron Waller for his comment which closed with: (Good read: "Robert Mundell, evil genius of the euro".)

https://www.theguardian.com/commentisfree/2012/jun/26/robert-mundell-evil-genius-euro

Robert Mundell, evil genius of the euro

Greg Palast

For the architect of the euro, taking macroeconomics away from elected politicians and forcing deregulation were part of the plan

The idea that the euro has "failed" is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do.

That progenitor is former University of Chicago economist Robert Mundell. The architect of "supply-side economics" is now a professor at Columbia University, but I knew him through his connection to my Chicago professor, Milton Friedman, back before Mundell's research on currencies and exchange rates had produced the blueprint for European monetary union and a common European currency.

Mundell, then, was more concerned with his bathroom arrangements. Professor Mundell, who has both a Nobel Prize and an ancient villa in Tuscany, told me, incensed:

"They won't even let me have a toilet. They've got rules that tell me I can't have a toilet in this room! Can you imagine?"

As it happens, I can't. But I don't have an Italian villa, so I can't imagine the frustrations of bylaws governing commode placement.

But Mundell, a can-do Canadian-American, intended to do something about it: come up with a weapon that would blow away government rules and labor regulations. (He really hated the union plumbers who charged a bundle to move his throne.)

"It's very hard to fire workers in Europe," he complained. His answer: the euro.

The euro would really do its work when crises hit, Mundell explained. Removing a government's control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

"It puts monetary policy out of the reach of politicians," he said. "[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business."

He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away by the euro. Democracy would not be allowed to interfere with the marketplace – or the plumbing.

As another Nobelist, Paul Krugman, notes, the creation of the eurozone violated the basic economic rule known as "optimum currency area". This was a rule devised by Bob Mundell.

That doesn't bother Mundell. For him, the euro wasn't about turning Europe into a powerful, unified economic unit. It was about Reagan and Thatcher.

"Ronald Reagan would not have been elected president without Mundell's influence," once wrote Jude Wanniski in the Wall Street Journal. The supply-side economics pioneered by Mundell became the theoretical template for Reaganomics – or as George Bush the Elder called it, "voodoo economics": the magical belief in free-market nostrums that also inspired the policies of Mrs Thatcher.

Mundell explained to me that, in fact, the euro is of a piece with Reaganomics:

"Monetary discipline forces fiscal discipline on the politicians as well."

And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.

Thus, we see that (unelected) Prime Minister Mario Monti is demanding labor law "reform" in Italy to make it easier for employers like Mundell to fire those Tuscan plumbers. Mario Draghi, the (unelected) head of the European Central Bank, is calling for "structural reforms" – a euphemism for worker-crushing schemes. They cite the nebulous theory that this "internal devaluation" of each nation will make them all more competitive.

Monti and Draghi cannot credibly explain how, if every country in the Continent cheapens its workforce, any can gain a competitive advantage.
But they don't have to explain their policies; they just have to let the markets go to work on each nation's bonds. Hence, currency union is class war by other means.

The crisis in Europe and the flames of Greece have produced the warming glow of what the supply-siders' philosopher-king Joseph Schumpeter called "creative destruction". Schumpeter acolyte and free-market apologist Thomas Friedman flew to Athens to visit the "impromptu shrine" of the burnt-out bank where three people died after it was fire-bombed by anarchist protesters, and used the occasion to deliver a homily on globalization and Greek "irresponsibility".

The flames, the mass unemployment, the fire-sale of national assets, would bring about what Friedman called a "regeneration" of Greece and, ultimately, the entire eurozone. So that Mundell and those others with villas can put their toilets wherever they damn well want to.

Far from failing, the euro, which was Mundell's baby, has succeeded probably beyond its progenitor's wildest dreams.

[Needless to say, I am not a fan of Robert Mundell's.]

Peter K. -> RC AKA Darryl, Ron... , January 20, 2017 at 07:19 AM

Excellent article!

"It puts monetary policy out of the reach of politicians," he said. "[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business."

Reminded me of a point made by J.W. Mason:

http://jwmason.org/slackwire/what-does-crowding-out-even-mean/

"..It's quite reasonable to suppose that, thanks to dependence on imported inputs and/or demand for imported consumption goods, output can't rise without higher imports. And a country may well run out of foreign exchange before it runs out of domestic savings, finance or productive capacity. This is the idea behind multiple gap models in development economics, or balance of payments constrained growth. It also seems like the direction orthodoxy is heading in the eurozone, where competitiveness is bidding to replace inflation as the overriding concern of macro policy."

Peter K. -> RC AKA Darryl, Ron... , January 20, 2017 at 07:30 AM
I wonder how this fits with the national savings rate discussion of Miles Kimball and Brad Setser.

Like would they advise Greece to boost their national savings rate or doesn't it matter since Germany controls monetary policy?

RC AKA Darryl, Ron said in reply to Peter K.... , January 20, 2017 at 08:58 AM
"I wonder how this fits with the national savings rate discussion of Miles Kimball and Brad Setser."

[Don't know and it sounds like way too much work for me to try to figure out. Savings rate is not a problem for us and it is difficult to see how Greece could realistically increase theirs sufficient to change anything without some other intervention being made first to decrease unemployment and increase output.]

pgl -> RC AKA Darryl, Ron... , January 20, 2017 at 09:47 AM
It is also too much work for PeterK. If he can't cherry pick it, he don't bother.

But note our net national savings rate has been less than 2% for a long, long time.

[Apr 04, 2017] How Do We Reclaim Control Of Our Lives When the Economy Looms So Grim

Notable quotes:
"... he never lost his aversion for the 'economism' that presumes that matters of public policy, employment, ecology and culture can be interpreted mainly in terms of mathematical abstractions. ..."
"... Lean Logic: A Dictionary for the Future and How to Survive It ..."
"... Tomorrow's World ..."
"... So in an economy like ours, a technological advance that doubles the amount of useful work a person can do in a day becomes a problem rather than a benefit. It tends to put half the workers out of work, turning them into a potential drain on the state. ..."
"... Tomorrow's World ..."
"... Lean Logic ..."
"... Surviving the Future: Culture, Carnival and Capital in the Aftermath of the Market Economy ..."
"... Didn't residents keep on doing whatever they were doing when the Vesuvius erupted ..."
"... As a dispirited milennial myself, it seems that the best option for me is to cut loose, live somewhere cheap and warm, enjoy nature and some friendly neighbors and watch this apocalypse unfold. ..."
"... News from Nowhere ..."
"... Illegitimi non carborundum ..."
"... During my time as a retail worker it struck me how much of effective customer service was really an unpaid use of our spontaneous urge to give aid to other people, to respond to their needs as human beings. ..."
"... We were often in the position of spiking the SOP of the business to get them what they wanted. It hit me then how much the ostensible money economy is a free rider on the world of our human non-economic lives, or is like free clean water used in an industrial process. ..."
"... One Day in the Life of Ivan Denisovitch ..."
Apr 04, 2017 | www.nakedcapitalism.com
As my friend David Fleming once wrote, conventional economics 'puts the grim into reality.'

Something of a radical, back in the 1970s Fleming was involved in the early days of what is now the Green Party of England and Wales. Frustrated by the mainstream's limited engagement with ecological thinking, he urged his peers to learn the language and concepts of economics in order to confound the arguments of their opponents.

By the time I met Fleming in 2006, he had practised what he preached and earned himself a PhD in Economics. But he never lost his aversion for the 'economism' that presumes that matters of public policy, employment, ecology and culture can be interpreted mainly in terms of mathematical abstractions.

Worse, he noted that even the word ' economics' has the power to make these life-defining topics seem impenetrable, none-of-our-business and, of all things, boring . Fleming's work was all about returning them to their rightful owners-those whose lives are shaped by them, meaning all of us.

Fleming was a key influence on the birth of the New Economics Foundation and Transition Towns movement , but it was only in the aftermath of his sudden death in 2010 that I discovered the breadth of the powerfully-different vision of economics that underpinned his life. On his home computer I discovered a manuscript for the book he had been preparing to publish after thirty years' work entitled Lean Logic: A Dictionary for the Future and How to Survive It .

Reminding us that our present growth-based market economy has only been around for a couple of hundred years (and is already hitting the buffers), Fleming's lifework looks to the great majority of human history for insight: "We know what we need to do," he writes , "We need to build the sequel, to draw on inspiration which has lain dormant, like the seed beneath the snow."

What he found was that-in the absence of a perpetually-growing economy- community and culture are key. He quotes, for example, the historian Juliet Schor's view of working life in the Middle Ages:

"The medieval calendar was filled with holidays These were spent both in sober churchgoing and in feasting, drinking and merrymaking All told, holiday leisure time in medieval England took up probably about one third of the year. And the English were apparently working harder than their neighbors. The a ncien régime in France is reported to have guaranteed fifty-two Sundays, ninety rest days, and thirty-eight holidays. In Spain, travelers noted that holidays totaled five months per year."

Reading this took me back to a childhood fed by TV programmes like the BBC's Tomorrow's World , which had informed me that by now robots would be doing all the menial work, leaving humans free to relax and enjoy an abundance of leisure time. So it came as a shock to realise that the good folk of the Middle Ages were enjoying far more of it than we are in our technologically-advanced society. What gives? Fleming explains ,

"In a competitive market economy a large amount of roughly-equally-shared leisure time – say, a three-day working week, or less – is hard to sustain, because any individuals who decide to instead work a full week can produce for a lower price (by working longer hours than the competition they can produce a greater quantity of goods and services, and thus earn the same wage by selling each one more cheaply). These more competitive people would then be fully employed, and would put the more leisurely out of business completely. This is what puts the grim into reality."

So in an economy like ours, a technological advance that doubles the amount of useful work a person can do in a day becomes a problem rather than a benefit. It tends to put half the workers out of work, turning them into a potential drain on the state.

Of course, in theory all the workers could just work half-time and still produce all that is needed, much as Tomorrow's World predicted. But in practice they are often afraid of having their pay cut, or losing their jobs to a stranger who is willing to work longer hours, so they can't take the steps needed to solve their collective economic problems and enjoy more leisurely lives. Instead, people are kept busy partly through what anthropologist David Graeber memorably characterised as " bullshit jobs ."

How, then, can we feed, house and support ourselves without working as relentlessly as we do today? Fleming's work explores the answer, making a rigorous case that we need to get beyond mainstream economists' ideas of minimising 'spare labour' if we are to sustain a post-growth economy. This 'spare labour' is what most of us would call spare time-a welcome part of a life well lived rather than a 'problem of unemployment.'

He highlights that the holidays of former times were far from a product of laziness. Rather they were, in an important sense, what men and women lived for . 'Spare time' spent in feasting, performing, collaborating and merrymaking together formed the basis of community bonding and membership. Those shared cultural ties hold people together, even in the absence of economic growth and full-time employment. When productivity improves, as one of his readers put it , "in our system you have a problem, in Fleming's system you have a party."

Under the current economic paradigm, the only way to keep unemployment from rising to the point where the population can't be supported is through endless economic growth, which thus becomes an obligation. So we are damned if we grow and damned if we don't, since endless growth will eventually cross every conceivable biophysical boundary and destroy the planet's ability to support us. That's why, in practice, we just keep growing and cross our fingers that somehow it will all work out. As Fleming writes :

"The reduction of a society and culture to dependence on mathematical abstraction has infantilised a grown-up civilisation and is well on the way to destroying it. Civilisations self-destruct anyway, but it is reasonable to ask whether they have done so before with such enthusiasm, in obedience to such an acutely absurd superstition, while claiming with such insistence that they were beyond being seduced by the irrational promises of religion."

Technological fixes do not help, as we are all discovering to our cost. We are already working ever harder, and with ever more advanced technologies, yet the hope of a better future dwindles day-by-day. Take heart though, for when the current paradigm transparently provides nothing but a dead end, we can be sure that we are on the cusp of a fundamental shift.

Fleming provides a radical but historically-proven alternative: focusing neither on the growth or de-growth of the market economy, but the huge expansion of the 'informal' or non-monetary economy-the 'core economy' that allows our society to exist, even today. This is the economy of what we love: of the things we naturally do when not otherwise compelled, of music, play, family, volunteering, activism, friendship and home.

At present, this core non-monetary economy is much weakened, pushed out and wounded by the invasion of the market. Fleming's work demonstrates that nurturing it back to health is not just some quaint and obsolete sharing longing but an absolute practical priority.

The key challenge of today, for Fleming, is to repair the atrophied social structures on which most human cultures have been built; to rediscover how to rely on each other rather than on money alone. Then life after the painful yet inevitable end to the growth of the monetary economy will start to seem feasible again, and our technological progress can bring us the fruits it always promised.

Lean Logic finally reached posthumous publication with Chelsea Green Publishing in September 2016, alongside a paperback version edited by me called Surviving the Future: Culture, Carnival and Capital in the Aftermath of the Market Economy . Needless to say, both books are deeply controversial, overthrowing as they do the central paradigm of our economy. As the writer Jonathon Porritt said at a launch event for the books last month , "there is no conventional political party anywhere in the world that doesn't have economic growth as the underpinning foundation, but David Fleming developed unique, astonishing ideas about resilience and good lives for people without growth."

It's increasingly clear that this is the conversation we all need to have, and Fleming's compelling, grounded vision of a post-growth world is rare in its ability to inspire optimism in the creativity and intelligence of human beings to nurse our economy, ecology and culture back to health. I am proud to have played a part in bringing it to the world; in fact, it might just be the best thing I have done.

> habenicht , April 3, 2017 at 7:22 am

Great post.

I think about these themes a lot and this is a helpful way of framing the underlying concepts (and explaining them to others).

fresno dan , April 3, 2017 at 7:52 am

The thing of it is, we have had growth except for recessions every 10 years or so. But somewhere along the line, due to the fact that we can never speak of "DISTRIBUTION" of this growth, we get the completely artificial idea that the lower income can ONLY be helped by higher growth. Economics has a nice scam going – only if the rich get much richer can anything be done for the 90%.

And we're told (by the rich) that this is just "natural" – a law of nature .Yeah, back when the church owned everything the priests told us it was God who wanted it that way. Now the economic priests tell us its nature that wants it this way

https://fred.stlouisfed.org/series/GDPC1

Carla , April 3, 2017 at 8:16 am

Here's an antidote to fred: http://www.steadystate.org

The 15-page list of notables who have endorsed the imperative for a steady state economy includes E.O. Wilson, Jane Goodall, Maude Barlow, Herman Daly, and Wendell Berry (list available for download at http://www.steadystate.org/act/sign-the-position/endorsements-and-signatures/view-notable-signatures ).

Anyone can sign the Steady State Position Statement here:
http://www.steadystate.org/act/sign-the-position/read-the-position-statement/

Left in Wisconsin , April 3, 2017 at 11:02 am

I am increasingly of the view that we conflate two entirely different ideas, or that we don't emphasize enough that there are two fundamentally different critiques, when we challenge economists' reliance on "growth." I'm not opposed to the notion of 'steady-state' economics. But it seems presumptuous TSTL for Americans (famously 5% of the world's population using 25% of the world's resources), really 'first-world'ers in general, to say, "OK, no more growth and time to stay within in our limits, and by the way I'm good with what I've got." So I think there is a lot more work that has to be done to make that concept appropriate in a reality-based sense.

Whereas, even though Marxists have often tended toward productivist notions of economic growth that share many problematic features of capitalist growth, there is a deconstruction of capitalist, and neoclassical depictions of, economic growth that is not by definition anti-community or anti-planet. While the fundamental issues are power and control, they are perhaps most easily understood through measurement – specifically what capitalists and their economists choose to measure as growth and what they choose to ignore or take for granted. Why is paying someone else to take care of your kid considered 'economic activity,' a provider of 'jobs,' a contributor to economic growth, but raising your own kid is not? Actually, working at McDonald's while you pay someone to raise your kid counts as two jobs, while raising your own kid counts as no jobs, even though the second is in virtually all cases a socially superior outcome. (True, someone else might take that job at McD's, so the net might only be one job. But with less demand for that job, perhaps it would have to pay more and be a better job.) If you extend this line of thinking through elder care, and then family- and community-based health care ('health care' in the widest, not specifically industrial sense of the word), one could imagine substantially more healthy (in the widest sense) families, communities, and societies with substantially lower carbon footprints than our current predicament.

One question is, if one took current measures of paid 'care work' as a baseline for what counts as 'work,' and then provided similar levels of compensation to those currently performing similar unpaid work (and I would advocate for higher pay for carers with a closer social bond to those they care for, because in knowing the 'patient' better they are more 'skilled'), what implications would that have for 'the economy' and the society in general?

(Similarly, as many others have noted, we need new economic categories that allow us to identify negative economic activity (much finance, deforestation, pollution, waste, de-humanization, etc.) that subtracts from standard measures of well-being rather than being included in them.)

There are many different ways to think about this, not all positive. Commodification vs. de-commodification is a long-running discussion in Marxist circles, and one could imagine arguments in favor of extending the latter to many more spheres of society. I think many supporters of BIG are de-commifiers at heart. Even in our current context, massively improving and extending paid leave is a nod in this direction. OTOH, one could also easily imagine to make kids the one paying their parents to raise them, and going even deeper into debt, on the same logic of paying for college – your parents are working to improve your social capital and earning potential and so you should pay them out of your future earnings.

Relatedly, I am not opposed to alternative measures of social well-being, such as 'happiness indexes.' But until we are able to directly challenge capitalist and neoclassical hegemony over what counts as paid work (i.e. 'useful economic activity') and directly address the economic cost of social 'bads,' there will be no taking the foot off the accelerator of economic growth, even as we plunge Thelma-and-Louise-style over the cliff.

Carla , April 3, 2017 at 12:07 pm

Brilliant comment, LiW.

And I believe that at least several, if not all, of the "notable signers" listed in my comment above have actually done some of that challenging of capitalist and neoclassical hegemony for which you are calling.

I absolutely agree that "there is a lot more work that has to be done to make that [steady state economy] concept appropriate in a reality-based sense."

But we have to start somewhere, so I'm trying to spread the word about http://www.steadystate.org

OpenThePodBayDoorsHAL , April 3, 2017 at 3:58 pm

I think we can continue with "growth" maybe not indefinitely but certainly for a very long time to come. Just remove the giant parasitic vampire squid that drains away all of the blood, 8 guys holding 50% of the world's wealth, I mean gimme a break you don't have to be a dreaded pinko Commie to think that is just hideously wrong. The more we talk about that and the less we talk about how great it is for us all to cut back and move into Mom's basement the better. It's US versus THEM and there are very very few of THEM.

redleg , April 3, 2017 at 8:18 pm

Fantastic comment.

Piling on:
All of the artists that I personally know, and I know many, make their living doing something other than their art. Even the professional musicians get paid playing someone else's music so they can make their own.
So the thing that gives an artist's life meaning- creating art- and contributes to or even defines a local or regional culture doesn't count as work, but the day job does. The cost of making the art not only doesn't count as a job, it counts as a drain of resources in terms of both time and treasure.

HBE , April 3, 2017 at 7:55 am

I had never heard of the author or the book, I will definitely be ordering it. It's helpful to have a reminder now and again, that our society, and whole way of living and being is a historical aberration and there are many better options.

It also made me smile while reading to think about someone like Krugman reading this book and twisting themselves into pretzels to dispute it (reality).

I imagine it would be one very complex pretzel but if anything could manage it, it would be a serious of krugfacts.

Moneta , April 3, 2017 at 8:17 am

Didn't residents keep on doing whatever they were doing when the Vesuvius erupted?

Humans need a good dose of delusion to be mentally healthy. Perma-optimism is humanity's biggest challenge.

optimader , April 3, 2017 at 3:30 pm

Didn't residents keep on doing whatever they were doing when the Vesuvius erupted
Briefly

Steve H. , April 3, 2017 at 9:36 am

: What he found was that-in the absence of a perpetually-growing economy-community and culture are key.

There is a distinct difference from an ordinary pastoral in 'As You Like It' – the shepherds do not own their sheep, and specific reference is made to the rural displaced, set to walk and die on the roads. The policy was simply industrialized post-WWII, with tracts of suburbs in company towns, separated from the competing allegiances of extended family and culture.

The problem is an old one. The successful solutions are not well publicized. The equivocations of economicysts are now being revealed, and needs be drawn and quartered for the metastases they encourage.

jerry , April 3, 2017 at 10:21 am

Soo.. we're working more now than the middle ages. Great! Good job america!

As a dispirited milennial myself, it seems that the best option for me is to cut loose, live somewhere cheap and warm, enjoy nature and some friendly neighbors and watch this apocalypse unfold. I sure as hell am not grinding my life away in the corporate trenches for ever-diminishing purchasing power, give me a job at the grocer! What's that they've all been automated? Oh, damnit.

optimader , April 3, 2017 at 3:30 pm

As a dispirited milennial myself, it seems that the best option for me is to cut loose, live somewhere cheap and warm, enjoy nature and some friendly neighbors and watch this apocalypse unfold.

Also the case for a reasonably affluent babyboomer

james brown , April 3, 2017 at 4:46 pm

I actually did that. At 55, seven years ago now, I got disgusted and bailed out. I closed my business (I actually gave it to my last two employees who wanted to keep going), sold my couple of real estate holding in the city (my house and my business property) and moved out to the sticks to brood and live cheaply. Turns out the living is cheap but there's been no brooding. Although I had a ball in business, until the last two years, I've never had this much fun and contentment with life. I'm a two bit hobby farmer or homesteader, if you will. You say that flippantly, as I did, but bailing out and disconnecting from a Madison Ave determined lifestyle can actually be quite rewarding. It's not for everyone but it's been a very fulfilling experience for me. Good luck.

casino implosion , April 3, 2017 at 10:32 am

Here's a good blog that might appeal:

https://therealmovement.wordpress.com/2017/03/31/why-reducing-the-work-week-is-better-than-basic-income/

Susan the other , April 3, 2017 at 10:46 am

I had a weird dream about capitalism in reverse. Where we came to understand money as just another form of energy and distributed it to people regularly so nobody needed to sell their labor and the economy didn't need to grow to make profits. Instead of selling products/labor, everyone used their money to make things we need and then paid again to give their product to someone: "I'll give you the cost of making this naturally cured ham if you will please take it and enjoy it." And we gave our money back to the environment the same way: here, please take all of our energy and help to repair yourself. Or, we've spent our energy making these sustainable homes, and we can offer your family $20K to take one and live in it. Sounds so nutty. I guess it would still work to form a partnership, pool our money, and build a state of the art drug research lab. And pay people to use these excellent drugs. Never mind.

cocomaan , April 3, 2017 at 11:47 am

This is awesome. Please have more dreams like this.

Mel , April 3, 2017 at 12:26 pm

William Morris, News from Nowhere . Pleasant overview, not big on infrastructure, well-handled dream sequence. To clarify: I approve, but don't expect this book to give assembly instructions.

optimader , April 3, 2017 at 3:27 pm

How does that work for Hookers?

DolleyMadison , April 3, 2017 at 4:18 pm

Ich bin ein hookers now

OpenThePodBayDoorsHAL , April 3, 2017 at 4:03 pm

Hi Susan, related to your dream, see below. The guy concludes "Bitcoin" but it's very well worth a read anyway:
https://extranewsfeed.com/energy-money-and-the-destruction-of-equilibrium-da96f8a225d6

Anna Zimmerman , April 3, 2017 at 11:44 am

Thanks for this great post, more like it please! It's no good endlessly criticising the status quo we all need to spend more time discussing the alternatives and moving ourselves forward.

diptherio , April 3, 2017 at 12:40 pm

See here for much more like this:

http://www.geo.coop

Enquiring Mind , April 3, 2017 at 1:14 pm

Illegitimi non carborundum , one of my favorite Latinesque quotes.

See also for some Dog Latin diversion.

Cat Burglar , April 3, 2017 at 2:00 pm

During my time as a retail worker it struck me how much of effective customer service was really an unpaid use of our spontaneous urge to give aid to other people, to respond to their needs as human beings.

We were often in the position of spiking the SOP of the business to get them what they wanted. It hit me then how much the ostensible money economy is a free rider on the world of our human non-economic lives, or is like free clean water used in an industrial process.

My co-workers and I sometimes became bitter about the low wages, and stopped paying attention to people, but we couldn't keep it up for long, because you couldn't feel good for long about taking it out on innocent people, and eventually even the bitterest co-workers would encounter someone they just had to respond to as another person. We all figured out, sooner or later, that the connection was the enduring value in the job.

This book, Lean Logic has twigged to this reality underlying the economy.

Mel , April 3, 2017 at 2:08 pm

Hmmm. Resonates strongly with the bricklaying scene in Solzhenitsyn's One Day in the Life of Ivan Denisovitch (about working in a prison camp.) I've got to see tomorrow if the bookstore can get Lean Logic .

Anon , April 3, 2017 at 2:03 pm

Something about this discussion reminds me of Stewart Brand and the "Whole Earth Catalog".

Tim , April 3, 2017 at 3:15 pm

In an Utopian world the hardest least desirable jobs pay the most. CEOs make minimum wage while the burger flippers being whipped by managers to hurry up are raking it in but do we have enough unambitious intelligent people to keep the world turning

Socialism will always have to be balanced by the carrot and stick to minimize the mis-allocation of resources.

Michael C. , April 3, 2017 at 4:36 pm

Thus we can see reasons behind the high priority capitalistic societies put on individualism, privatization, the self, the breaking down of "the commons," and fearing other groups, such as Hispanics, Jews, or Muslims, at one time Catholics too as in the US. The whole mode of social "we're all in this together" thinking is antithetical to it's reason for being. We need to think "bigly" with a whole new paradigm (or is it an ancient paradigm) on how we view the world, and we better do so quickly.

[Mar 25, 2017] What is Economism and why it is so damaging

Notable quotes:
"... Ugh what an awful display of pop economism. Globalization and technology are "impersonal forces." No mention of the rise of inequality or the SecStags. No mention of monetary policy fail in Europe. The biggest lies of economism are the lies of omission. ..."
"... Looks like this concept of "Economism" introduced by James Kwak in his book Economism is very important conceptual tool for understanding the tremendous effectiveness of neoliberal propaganda. ..."
"... When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy. ..."
"... For example, the basic Econ 101 theory of supply and demand is fine for some products, but it doesn't work very well for labor markets. It is incapable of simultaneously explaining both the small effect of minimum wage increases and the small impact of low-skilled immigration. Some more complicated, advanced theory is called for. ..."
"... But no matter how much evidence piles up, people keep talking about "the labor supply curve" and "the labor demand curve" as if these are real objects, and to analyze policies -- for example, overtime rules -- using the same old framework. ..."
"... An idea that we believe in despite all evidence to the contrary isn't a scientific theory -- it's an infectious meme. ..."
"... Academic economists are unsure about how to respond to the abuse of simplistic econ theories for political ends. On one hand, it gives them enormous prestige. The popularity of simplistic econ ideas has made economists the toast of America's intellectual classes. ..."
"... It has sustained enormous demand for the undergraduate econ major, which serves, in the words of writer Michael Lewis, as a "standardized test of general intelligence" for future businesspeople. But as Kwak points out, the simple theories promulgated by politicians and on the Wall Street Journal editorial page often bear little resemblance to the sophisticated theories used by real economists. ..."
"... And when things go wrong -- when the financial system crashes, or millions of workers displaced by Chinese imports fail to find new careers -- it's academic economists who often get blamed, not the blasé and misleading popularizers. ..."
Jan 20, 2017 | economistsview.typepad.com

Peter K. : January 20, 2017 at 04:35 AM

Noah Smith: The Ways That Pop Economics Hurt America - Noah Smith

"So I wonder if economism was really as unrealistic and useless as Kwak seems to imply. Did countries that resisted economism -- Japan, for example, or France [Germany?] -- do better for their poor and middle classes than the U.S.? Wages have stagnated in those countries, and inequality has increased, even as those countries remain poorer than the U.S. Did the U.S.'s problems really all come from economism, or did forces such as globalization and technological change play a part? Cross-country comparisons suggest that the deregulation and tax cuts of the 1980s and 1990s, although ultimately excessive, probably increased economic output somewhat."

Ugh what an awful display of pop economism. Globalization and technology are "impersonal forces." No mention of the rise of inequality or the SecStags. No mention of monetary policy fail in Europe. The biggest lies of economism are the lies of omission.

libezkova -> Peter K.... , -1
Thank you --

Looks like this concept of "Economism" introduced by James Kwak in his book Economism is very important conceptual tool for understanding the tremendous effectiveness of neoliberal propaganda.

I think it is proper to view Economism as a flavor of Lysenkoism. As such it is not very effective in acquiring the dominant position and suppressing of dissent, but it also can be very damaging.

https://www.bloomberg.com/view/articles/2017-01-19/the-ways-that-pop-economics-hurt-america

== quote ==

...When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy. For far too many years, free-marketers have gotten away with winning debates by just sitting back and saying "Oh yeah? Show me the market failure!" That deck-stacking has long forced public intellectuals on the left have to work twice as hard as those safely ensconced in think tanks on the free-market right, and given the latter a louder voice in public life than their ideas warrant.

It's also true that simple theories, especially those we learn in our formative years, can maintain an almost unshakeable grip on our thinking.

For example, the basic Econ 101 theory of supply and demand is fine for some products, but it doesn't work very well for labor markets. It is incapable of simultaneously explaining both the small effect of minimum wage increases and the small impact of low-skilled immigration. Some more complicated, advanced theory is called for.

But no matter how much evidence piles up, people keep talking about "the labor supply curve" and "the labor demand curve" as if these are real objects, and to analyze policies -- for example, overtime rules -- using the same old framework.

An idea that we believe in despite all evidence to the contrary isn't a scientific theory -- it's an infectious meme.

Academic economists are unsure about how to respond to the abuse of simplistic econ theories for political ends. On one hand, it gives them enormous prestige. The popularity of simplistic econ ideas has made economists the toast of America's intellectual classes.

It has sustained enormous demand for the undergraduate econ major, which serves, in the words of writer Michael Lewis, as a "standardized test of general intelligence" for future businesspeople. But as Kwak points out, the simple theories promulgated by politicians and on the Wall Street Journal editorial page often bear little resemblance to the sophisticated theories used by real economists.

And when things go wrong -- when the financial system crashes, or millions of workers displaced by Chinese imports fail to find new careers -- it's academic economists who often get blamed, not the blasé and misleading popularizers.

... ... ...

Russia and China have given up communism not because they stopped having working classes, but because it became obvious that their communist systems were keeping them in poverty. And Americans are now starting to question economism because of declining median income, spiraling inequality and a huge financial and economic crisis.

[Mar 25, 2017] Review of Economism: Bad Economics and the Rise of Inequality by James Kwak by Peter Dorman

Notable quotes:
"... Neoliberalism, which is essentially simplified pseudo-economics in action, is finally beginning to break down, but rather than yielding to a more rational politics it is giving us Brexit, Trump and similar delusionary movements. Required to choose between the stale cant of economism and authoritarian fairytales of denial, the public is opting for the second door. Unless economism is disposed of quickly, there won't be an opening for a more enlightened third option. ..."
"... The critical deconstructive move follows, in which Kwak surveys the empirical literature, showing that, in real economics, the conventional assumptions are either flat out wrong or at least seriously qualified. He then concludes by explaining the policy implications of a more informed approach. It gets to be a bit formulaic, but it is effective and easy to follow. ..."
"... I can imagine using a book like this in an introductory microeconomics class. (Except for a bit of macro here and there, the book's focus is micro.) It's exactly the right antidote for the tendency of introductory textbooks to oversell markets and undersupply critical thinking. I hope lots of faculty teaching Econ 101 adopt it. ..."
"... He would do well to distinguish between the normative and positive aspects of economism. In a policy context, both are usually entailed: the positive view that this is how the world works is given political salience by the normative view that demand curves represent "benefits" to society and the supply curve "costs". It's important to recognize that economism can fail on either account: either empirical work can show that this is not how the world works, or the assumptions about how markets represent social interests can be challenged, or both. ..."
"... the full-dress neoclassical trade model (Heckscher-Ohlin-Samuelson, although he doesn't identify it as such) recognizes losers as well as winners from trade liberalization and makes this the conceptual linchpin of his critique of economism in this area. ..."
"... the impacts of trade liberalization on employment may be worse than this, since the proposition that the trade balance is unaffected by changes in the degree of openness requires adjustments in exchange rates that, at the very least, are empirically unreliable. ..."
"... In practice it's entirely possible, likely even, that a major liberalization event like the US opening to trade with China at the time of its WTO accession has an effect on the aggregate trade balance and not just the composition of industries on each side of the ledger. I shouldn't make a big deal of this, because Kwak is no doubt eager to avoid criticism that he is unknowledgeable about economics, and most economists would regard my criticism as falling under that shadow-but I don't think I'm wrong about this. ..."
"... Economism is wrong about how labor markets work, how health care works, how international trade works and so on, not because money doesn't buy you love, but because its analysis is wrong . If we're looking for a common message that applies to all these topics and pokes a hole in the economistic world view, wouldn't we look for common elements in the arguments we've already made? ..."
"... At its best, Economism is feisty. It challenges sloppy thinking about how the economic system works and makes the case for progressive policies that would result in greater income equality and access to economic goods. Excellent! ..."
"... The unifying progressive message is not that economics doesn't matter so much; it's that the economics of knee-jerk libertarianism is doctrinaire, false and self-serving. Our message is that we reject the ideology of universal unlimited acquisitiveness as a reasonable way of organizing human affairs, and that the evidence is on our side. I'd love to see a hard-hitting conclusion replace the flabby one that's currently there. ..."
Mar 25, 2017 | econospeak.blogspot.com
There's economics, a field that has been renewing itself, shaking off theoretical rigidities through more attention to behavior and institutions and shifting its center of gravity toward empirical observation and testing. And then there's economics as it exists in standard political discourse, seeing the whole world as refracted through supply and demand diagrams where markets are always efficient and outcomes always socially optimal. This second, dumbed down, knee-jerk libertarian creed is the object of James Kwak's new book, Economism .

If ever a book arrived to fill a need, this one has. Neoliberalism, which is essentially simplified pseudo-economics in action, is finally beginning to break down, but rather than yielding to a more rational politics it is giving us Brexit, Trump and similar delusionary movements. Required to choose between the stale cant of economism and authoritarian fairytales of denial, the public is opting for the second door. Unless economism is disposed of quickly, there won't be an opening for a more enlightened third option.

In many ways, Kwak is an ideal person to take on the job. He's very, very smart. He generally knows his economics, but he's not in thrall to the profession. (He's actually a law professor.) He writes clearly and explains economic concepts with a minimum of lecture-itis. His book is short and to the point.

Most chapters follow the same general template. Kwak begins by laying out an area of policy and briefly explaining why it's important; topics include income distribution, taxes, health care, finance and trade. He then goes into a thorough exposition of the standard economistic analysis, usually based on casual assumptions concerning rational choice, competition, and the market as a cost-benefit device. His next step is to show this conceptual framework in action, as mouthed by politicians and journalists. The critical deconstructive move follows, in which Kwak surveys the empirical literature, showing that, in real economics, the conventional assumptions are either flat out wrong or at least seriously qualified. He then concludes by explaining the policy implications of a more informed approach. It gets to be a bit formulaic, but it is effective and easy to follow.

I can imagine using a book like this in an introductory microeconomics class. (Except for a bit of macro here and there, the book's focus is micro.) It's exactly the right antidote for the tendency of introductory textbooks to oversell markets and undersupply critical thinking. I hope lots of faculty teaching Econ 101 adopt it.

That said, I think it could have been even better than it is. In a future second edition-and I expect there will be one-Kwak should consider these improvements:

1. His adoption of the voice of economism is very extended. He will go on for several pages presenting the economistic worldview as if it were his. Yes, I know, academics like Kwak, myself and perhaps you are trained to cope with this. It's nothing for us to read a book in which the author takes on the personna of someone with a differnt point of view for many pages at a time. Most general readers are not familiar with this, however. I can say from personal experience that something like half my students would come away thinking that Kwak himself espouses economism and is contradicting himself when he criticizes it. What to do about this? Of course, it's important for Kwak to present economism in a neutral, even sympathetic voice, and to do so at the length it requires. Perhaps he considered adding, every paragraph or so, a qualifier like "from this point of view", but decided it was too clunky. In that case, an altered typeface, like italics, could have been used to set off his temporarily assumed voice as expositor of economism. One way or the other, markers are needed for readers unused to academic protocols.

2. He would do well to distinguish between the normative and positive aspects of economism. In a policy context, both are usually entailed: the positive view that this is how the world works is given political salience by the normative view that demand curves represent "benefits" to society and the supply curve "costs". It's important to recognize that economism can fail on either account: either empirical work can show that this is not how the world works, or the assumptions about how markets represent social interests can be challenged, or both. In practice, Kwak relies more on the first critique, and the book usefully draws together key empirical findings on topics like minimum wages, health costs, etc. But the market failure framework could have been given more of a workout than it received; in practice these arguments are effective.

3. The chapter on international trade is timid. Kwak points out that the full-dress neoclassical trade model (Heckscher-Ohlin-Samuelson, although he doesn't identify it as such) recognizes losers as well as winners from trade liberalization and makes this the conceptual linchpin of his critique of economism in this area. In this he has a lot of company; H-O-S with lots of friction has become the standard progressive position. However, the impacts of trade liberalization on employment may be worse than this, since the proposition that the trade balance is unaffected by changes in the degree of openness requires adjustments in exchange rates that, at the very least, are empirically unreliable. ( All exchange rate adjustments in response to anything are empirically unreliable.) In practice it's entirely possible, likely even, that a major liberalization event like the US opening to trade with China at the time of its WTO accession has an effect on the aggregate trade balance and not just the composition of industries on each side of the ledger. I shouldn't make a big deal of this, because Kwak is no doubt eager to avoid criticism that he is unknowledgeable about economics, and most economists would regard my criticism as falling under that shadow-but I don't think I'm wrong about this.

4. The very end of the book-the final four pages-are simply weak. To wrap up, Kwak points out that, whatever its faults, economism delivers by having a simple, all-purpose, easy-to-grasp message and then asks, "What's our message?" His answer is that wealthy economies don't need economic growth or even economic efficiency as they used to, and we should all turn away from economic concerns and embrace happiness instead. Huh? Now, before I launch into a critique of this view, I should make it clear that I agree with a lot of it on matters of substance: economic values, like income, are not the same as human values. One can live well on less money, and the pursuit of wealth should not be the primary goal either for individuals or societies. Yes, of course. But that doesn't mean that "downplay money" is the logical message to set against economism.

One obvious reason is that the difference between wealth and happiness played no role whatsoever in the chapters that led up to his conclusion. Economism is wrong about how labor markets work, how health care works, how international trade works and so on, not because money doesn't buy you love, but because its analysis is wrong . If we're looking for a common message that applies to all these topics and pokes a hole in the economistic world view, wouldn't we look for common elements in the arguments we've already made? It's always a mistake in a piece of writing to go off in a new direction at the point where we should be summing up; this should have occurred to Kwak or been pointed out to him by his reviewers.

The other reason is that downplaying economics-saying that income and other economic measures don't mean so much-violates the spirit of the book. At its best, Economism is feisty. It challenges sloppy thinking about how the economic system works and makes the case for progressive policies that would result in greater income equality and access to economic goods. Excellent! Why at the end turn around and say, in effect, OK, we'll give the conservatives economics, and we'll take happiness instead? No! Don't give them that! They don't deserve it! The unifying progressive message is not that economics doesn't matter so much; it's that the economics of knee-jerk libertarianism is doctrinaire, false and self-serving. Our message is that we reject the ideology of universal unlimited acquisitiveness as a reasonable way of organizing human affairs, and that the evidence is on our side. I'd love to see a hard-hitting conclusion replace the flabby one that's currently there.

It's in the nature of a review like this to dwell on the negative, but I don't want you to be dissuaded from buying and reading this book. Economism is an important work of popular education that needed to be written. Kwak has the skills to do it well-even better than he has this time out.

Posted by Peter Dorman at 5 comments: Links to this post

Bruce Wilder said...
I have not read Kwak's book, though I have read the chapter on minimum wage policy republished in the Atlantic in January. My comment reflects on your review and that Atlantic article.

Kwak is trying to do a very difficult thing in attacking "economism", the glib libertarian ideology derived from neoclassical economics, and he does not seem to grasp just how difficult or why it is so difficult. The Amazon page explains, " Economism: an ideology that distorts the valid principles and tools of introductory college economics, propagated by self-styled experts, zealous lobbyists, clueless politicians, and ignorant pundits." This is the basic rhetorical stance of the book: that the economics of Econ 101 has validity and economism is some distorted, illegitimate simplification. This rhetorical template will get reiterated as the notion that the actual economy is messy and complicated and economism is wrong because it is oversimplified (to serve interests).

On the minimum wage, Kwak concedes "The supply-and-demand diagram is a good conceptual starting point for thinking about the minimum wage. But on its own, it has limited predictive value in the much more complex real world." and then presents sophisticated economics as "it's complicated". "In short, whether the minimum wage should be increased (or eliminated) is a complicated question. The economic research is difficult to parse, and arguments often turn on sophisticated econometric details. Any change in the minimum wage would have different effects on different groups of people, and should also be compared with other policies . . . "

This is a hopelessly weak rhetorical position, because it depends on conceding -- indeed, confirming -- the validity of neoclassical economics, which still outlines introductory college economics textbooks. Economism is a fair distillation of neoclassical economics and, like it or not, mainstream economics nurtures neoclassical economics and demands commitment to the neoclassical framework. Even if the mainstream permits many other ideas to float around academia, neoclassical economics is the framework of indoctrination.

I do not think it is possible to win the argument against economism, if you are not willing to reject neoclassical economics wholesale. Neoclassical economics is the father and mother of economism, and neoclassical economics is wrong, fundamentally wrong, in a scientific (aka epistemological) sense. The world is not essentially or fundamentally as neoclassical economics says, which is provable logically and empirically; you can only sustain neoclassical economics as an academic doctrine by suppressing critical thinking (which economics pedagogy insists upon). We do not live in an economic system organized primarily by markets tending toward general equilibrium; the actual economy is organized primarily by bureaucracy and driven by disequilibrium dynamics. Most prices are not formed by competitive bidding; prices are administratively determined and managed. And so on.

March 18, 2017 at 4:42 PM
Bruce Wilder said...
The supply-and-demand diagram is NOT a good conceptual starting point for thinking about the minimum wage, and Kwak should never have conceded as much. There's no labor market. Most employers offer low-wage workers take-it-leave-it terms, constrained only by the rules and bureaucracy of state and Federal labor regulations, one of which, of course, is the statutory minimum wage. (Millions work for less than the minimum wage by the way -- as the Bureau of Labor Statistics regularly attests.) And, when people go to work, they are managed and supervised in systems that determine how productive they are; if they are paid their "marginal product" in some abstract sense, it is because their managers make it so. They work in bureaucracies controlling production and distribution processes by administrative and technological means, and the terms of their employment reflects this role as controller and controlled: they are paid a more or less fixed wage, subject to being fired. The threat of being fired is key to the willingness of employees to follow managerial direction.

Neoclassical economics does not admit economic hierarchy as central to the organization of the economy. But, when you reject neoclassical economics, you do not exclude all that might be relevant from mainstream economics. Indeed, economists have had many useful insights into "efficiency wages" and the relation of principals to their agents.

Useful and sophisticated ideas are still available after rejecting neoclassical economics, but I am not sure reputable economists are. I do not think Kwak would find his book jacket blurbed by quite such luminary figures, if he had rejected neoclassical economics as one big lie (which it is). He would have been in a stronger logical and rhetorical position to reject economism, but he might have lacked reputable allies. That's what makes the rejection of economism so difficult.

Economism is the ideology of right neoliberalism, but the neoliberal right is locked into a symbiotic relationship with left neoliberalism. Paul Krugman, Brad DeLong, John Quiggin, Noah Smith, Jared Bernstein -- these people seem to be opposed to economism, but they depend upon the legitimacy of neoclassical economics and the mainstream economics establishment too much to allow a winning argument premised on a rejection of the mother lode of economism, neoclassical economics.

It is an old story of "with friends like these who needs enemies". Economics is a thoroughly corrupt profession and all neoclassical economists are some mix of fraud and fool. We might like the fools better, but they are not that much help against the frauds. As Peter Dorman says, "Kwak is no doubt eager to avoid criticism that he is unknowledgeable about economics", but I suspect his eagerness to avoid such criticism is focused more on the sociological factor that mainstream economics nurtures neoclassical economics than on actual knowledge of economics qua knowledge of the economy. And, that's the core problem.

March 18, 2017 at 4:51 PM
Sandwichman said...
"the neoliberal right is locked into a symbiotic relationship with left neoliberalism"

I would have phrased it the other way round. It seems to me the neoliberal right would be content without the left but the neoliberal left desperately needs the neoliberal right for legitimization in its relentless crusade against the heterodox infidels -- the right is what makes Krugman, DeLong et al. "the lefter of two neoliberalisms."

March 18, 2017 at 7:41 PM
George H. Blackford said...
With regard to:

"In practice it's entirely possible, likely even, that a major liberalization event like the US opening to trade with China at the time of its WTO accession has an effect on the aggregate trade balance and not just the composition of industries on each side of the ledger. I shouldn't make a big deal of this, because Kwak is no doubt eager to avoid criticism that he is unknowledgeable about economics, and most economists would regard my criticism as falling under that shadow-but I don't think I'm wrong about this."

Hobson made a very big deal about this when it comes to China more than 100 years ago:

"It is here enough to repeat that Free Trade can nowise guarantee the maintenance of industry, or of an industrial population upon any particular country, and there is no consideration, theoretic or practical, to prevent British capital from transferring itself to China, provided it can find there a cheaper or more efficient supply of labour, or even to prevent Chinese capital with Chinese labour from ousting British produce in neutral markets of the world. What applies to Great Britain applies equally to the other industrial nations which have driven their economic suckers into China. It is at least conceivable that China might so turn the tables upon the Western industrial nations, and, either by adopting their capital and organisers or, as is more probable, by substituting her own, might flood their markets with her cheaper manufactures, and refusing their imports in exchange might TAKE HER PAYMENTS IN LIENS UPON THEIR CAPITAL, REVERSING THE EARLIER PROCESS OF INVESTMENT UNTIL SHE GRADUALLY OBTAINED FINANCIAL CONTROL OVER HER QUONDAM PATRONS AND CIVILISERS. This is no idle speculation. If China in very truth possesses those industrial and business capacities with which she is commonly accredited, and the Western Powers are able to have their will in developing her upon Western lines, it seems extremely likely that this reaction will result." John Atkinson Hobson, Imperialism, A Study, 1902."

March 19, 2017 at 12:19 PM
AXEC / E.K-H said...
Bad economics, futile critique, and illusive new thinking
Comment on Peter Dorman on 'Review of Economism: Bad Economics and the Rise of Inequality by James Kwak'

Economics claims since Adam Smith/Karl Marx to be a science. Yet, everybody who looks closer into the matter comes to the conclusion that economics is a failed science. The four main approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, materially/formally inconsistent, and all got the pivotal concept of the subject matter, i.e. profit, wrong.

In this hopeless situation, critique is futile: "There is another alternative: to formulate a completely new research program and conceptual approach. As we have seen, this is often spoken of, but there is still no indication of what it might mean." (Ingrao et al., 1990)

James Kwak, too, has not the slightest idea what a paradigm shift means: "To wrap up, Kwak points out that, whatever its faults, economism delivers by having a simple, all-purpose, easy-to-grasp message and then asks, 'What's our message?' His answer is that wealthy economies don't need economic growth or even economic efficiency as they used to, and we should all turn away from economic concerns and embrace happiness instead."*

Instead of coming up with a 'completely new research program and conceptual approach' as replacement for the standard approach, which is known to be false on all methodological counts, Kwak dishes out cheap advice from the self-help workshop: don't worry, be happy. To top it all, this abortive pseudo-critical exercise is advertised as new economic thinking.

Egmont Kakarot-Handtke

* See also 'The economist's pick: liar, moron or what?'
http://axecorg.blogspot.de/2016/12/the-economists-pick-liar-moron-or-what.html

March 20, 2017 at 4:27 PM

[Mar 24, 2017] Economism vs neoliberalism

Notable quotes:
"... Facts are always presented via lens of some underling theory and if the theory is wrong, facts can lie, even when the figures are more or less correct, or within the margin of error. ..."
"... Technocratic neoliberal economists well represented here actually serve as a fifth column of financial oligarchy, and always were. ..."
"... Simplistic and wrong supply-and-demand theory fed a market fundamentalism ideology. As a result we have a financial crash, a dysfunctional health-care system, spiraling inequality and a deficient, inadequate for a modern society social-safety net. ..."
"... When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy. Government programs and regulations start to seem dangerous and inefficient, while inequality begins to feel like the natural and just order of things. ..."
"... The Amazon page to Kwak book explains, "Economism: an ideology that distorts the valid principles and tools of introductory college economics, propagated by self-styled experts, zealous lobbyists, clueless politicians, and ignorant pundits." ..."
"... Economism is reduction of all social facts to economic dimensions. The term is often used to criticize economics as an ideology, in which supply and demand are the only important factors in decisions, and outstrip or permit ignoring all other factors. ..."
"... It is believed to be a side effect of neoclassical economics and blind faith in an "invisible hand" or "laissez-faire" means of making decisions, extended far beyond controlled and regulated markets, and used to make political and military decisions. ..."
"... Conventional ethics would play no role in decisions under pure economism, except insofar as supply would be withheld, demand curtailed, by moral choices of individuals. Thus, critics of economism insist on political and other cultural dimensions in society. ..."
Mar 24, 2017 | economistsview.typepad.com

libezkova : Friday, March 24, 2017 at 08:38 AM

Re: Facts or EconoFacts? - Noahpinion

Facts are always presented via lens of some underling theory and if the theory is wrong, facts can lie, even when the figures are more or less correct, or within the margin of error.

Technocratic neoliberal economists well represented here actually serve as a fifth column of financial oligarchy, and always were.

Rehashing Noah Smith thoughts we can say:

  1. Simplistic and wrong supply-and-demand theory fed a market fundamentalism ideology. As a result we have a financial crash, a dysfunctional health-care system, spiraling inequality and a deficient, inadequate for a modern society social-safety net.
  2. So when people like Krugman are now expressing their rage about Trump social policies they should understand that they created Trump.
  3. When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy. Government programs and regulations start to seem dangerous and inefficient, while inequality begins to feel like the natural and just order of things.
  4. Neoliberalism with its set of myth, sold as economic theory maintains an almost unshakeable grip on thinking of most people in the USA. It is the USA civil religion, national ideology that displaced Christianity. So they now somebody claims the this is one nation under God, they factually incorrect if we mean Jesus ;-) It is a newly-born nation which rejected Christianity, adopted neoliberalism instead and now prays to the altar of "free market".
  5. Because those myths when shared by most people, they obtained its own dynamics. In this sense too we can say that most people in the USA are totally and possibly irrevocably "neoliberally-brainwashed". That means that neoliberalism has huge staying power and it is unclear when and how and into what it collapses.
  6. That might well mean that like Bolsheviks who used to hold the same ideological grip on the people of the USSR people of the USA will march toward the cliff without much thinking.
  7. The abuse of simplistic econ theories for political ends gives neoliberal economists enormous prestige. It also sustains the enormous demand for the undergraduate econ major and corresponding courses and textbooks (look at Mankiw ;-). Passing economic courses with high grade now serves like SAT for those who want to go into business or management. The mark of indoctrination. Look at disdain with which "economists" here treat the people who does not know or does not want to know all this neoclassic nonsense.
  8. The worldview neoliberalism promulgates is too simplistic, and inevitably ends up hurting the many to benefit the few.

There one additional notion that is more general then neoliberalism and that is applicable here. It is called "economism" (please read Kwak book, it is really worth reading).

This is the reduction of all social facts to economic dimensions which is at the core of mental model that most "economists" here use. Unlike mathiness, it is a very old term which was use since late 19th century.

The Amazon page to Kwak book explains, "Economism: an ideology that distorts the valid principles and tools of introductory college economics, propagated by self-styled experts, zealous lobbyists, clueless politicians, and ignorant pundits."

Here is a relevant quote from Wikipedia

== quote ==

Economism is reduction of all social facts to economic dimensions. The term is often used to criticize economics as an ideology, in which supply and demand are the only important factors in decisions, and outstrip or permit ignoring all other factors.

It is believed to be a side effect of neoclassical economics and blind faith in an "invisible hand" or "laissez-faire" means of making decisions, extended far beyond controlled and regulated markets, and used to make political and military decisions.

Conventional ethics would play no role in decisions under pure economism, except insofar as supply would be withheld, demand curtailed, by moral choices of individuals. Thus, critics of economism insist on political and other cultural dimensions in society.

Old Right social critic Albert Jay Nock used the term more broadly, denoting a moral and social philosophy "which interprets the whole sum of human life in terms of the production, acquisition, and distribution of wealth". He went on to say "I have sometimes thought that here may be the rock on which Western civilization will finally shatter itself. Economism can build a society which is rich, prosperous, powerful, even one which has a reasonably wide diffusion of material well-being.

It can not build one which is lovely, one which has savor and depth, and which exercises the irresistible power of attraction that loveliness wields.

Perhaps by the time economism has run its course the society it has built may be tired of itself, bored of its own hideousness, and may despairingly consent to annihilation, aware that it is too ugly to be let live any longer."[1]

libezkova -> libezkova... , -1
"It is a newly-born nation which rejected Christianity, adopted neoliberalism instead and now prays to the altar of "free market"."

Neoliberalism explicitly rejects the key ideas of Christianity -- the idea of ultimate justice for all sinners. Like Marxism this is an atheistic philosophy which asserts that "each individual is his or her own god and there is no room for any other God. "

Here is Pope Francis thought of the subject (Evangelii Gaudium, Apostolic Exhortation of Pope Francis, 2013):

... Such an [neoliberal] economy kills. How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality. Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. As a consequence, masses of people find themselves excluded and marginalized: without work, without possibilities, without any means of escape.

Human beings are themselves considered consumer goods to be used and then discarded. We have created a "disposable" culture which is now spreading. It is no longer simply about exploitation and oppression, but something new. Exclusion ultimately has to do with what it means to be a part of the society in which we live; those excluded are no longer society's underside or its fringes or its disenfranchised – they are no longer even a part of it. The excluded are not the "exploited" but the outcast, the "leftovers".

54. In this context, some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting. To sustain a lifestyle which excludes others, or to sustain enthusiasm for that selfish ideal, a globalization of indifference has developed.

Almost without being aware of it, we end up being incapable of feeling compassion at the outcry of the poor, weeping for other people's pain, and feeling a need to help them, as though all this were someone else's responsibility and not our own. The culture of prosperity deadens us; we are thrilled if the market offers us something new to purchase; and in the meantime all those lives stunted for lack of opportunity seem a mere spectacle; they fail to move us.

No to the new idolatry of money

55. One cause of this situation is found in our relationship with money, since we calmly accept its dominion over ourselves and our societies. The current financial crisis can make us overlook the fact that it originated in a profound human crisis: the denial of the primacy of the human person! We have created new idols. The worship of the ancient golden calf (cf. Ex 32:1-35) has returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose. The worldwide crisis affecting finance and the economy lays bare their imbalances and, above all, their lack of real concern for human beings; man is reduced to one of his needs alone: consumption.

56. While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules. Debt and the accumulation of interest also make it difficult for countries to realize the potential of their own economies and keep citizens from enjoying their real purchasing power. To all this we can add widespread corruption and self-serving tax evasion, which have taken on worldwide dimensions. The thirst for power and possessions knows no limits. In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenseless before the interests of a deified market, which become the only rule.

No to a financial system which rules rather than serves

57. Behind this attitude lurks a rejection of ethics and a rejection of God. Ethics has come to be viewed with a certain scornful derision. It is seen as counterproductive, too human, because it makes money and power relative. It is felt to be a threat, since it condemns the manipulation and debasement of the person. In effect, ethics leads to a God who calls for a committed response which is outside of the categories of the marketplace. When these latter are absolutized, God can only be seen as uncontrollable, unmanageable, even dangerous, since he calls human beings to their full realization and to freedom from all forms of enslavement. Ethics – a non-ideological ethics – would make it possible to bring about balance and a more humane social order. With this in mind, I encourage financial experts and political leaders to ponder the words of one of the sages of antiquity: "Not to share one's wealth with the poor is to steal from them and to take away their livelihood. It is not our own goods which we hold, but theirs".[55]

58. A financial reform open to such ethical considerations would require a vigorous change of approach on the part of political leaders. I urge them to face this challenge with determination and an eye to the future, while not ignoring, of course, the specifics of each case. Money must serve, not rule! The Pope loves everyone, rich and poor alike, but he is obliged in the name of Christ to remind all that the rich must help, respect and promote the poor. I exhort you to generous solidarity and a return of economics and finance to an ethical approach which favours human beings.

No to the inequality which spawns violence

59. Today in many places we hear a call for greater security. But until exclusion and inequality in society and between peoples is reversed, it will be impossible to eliminate violence. The poor and the poorer peoples are accused of violence, yet without equal opportunities the different forms of aggression and conflict will find a fertile terrain for growth and eventually explode. When a society – whether local, national or global – is willing to leave a part of itself on the fringes, no political programmes or resources spent on law enforcement or surveillance systems can indefinitely guarantee tranquility. This is not the case simply because inequality provokes a violent reaction from those excluded from the system, but because the socioeconomic system is unjust at its root. Just as goodness tends to spread, the toleration of evil, which is injustice, tends to expand its baneful influence and quietly to undermine any political and social system, no matter how solid it may appear. If every action has its consequences, an evil embedded in the structures of a society has a constant potential for disintegration and death.

It is evil crystallized in unjust social structures, which cannot be the basis of hope for a better future. We are far from the so-called "end of history", since the conditions for a sustainable and peaceful development have not yet been adequately articulated and realized.

60. Today's economic mechanisms promote inordinate consumption, yet it is evident that unbridled consumerism combined with inequality proves doubly damaging to the social fabric. Inequality eventually engenders a violence which recourse to arms cannot and never will be able to resolve. This serves only to offer false hopes to those clamouring for heightened security, even though nowadays we know that weapons and violence, rather than providing solutions, create new and more serious conflicts. Some simply content themselves with blaming the poor and the poorer countries themselves for their troubles; indulging in unwarranted generalizations, they claim that the solution is an "education" that would tranquilize them, making them tame and harmless.

All this becomes even more exasperating for the marginalized in the light of the widespread and deeply rooted corruption found in many countries – in their governments, businesses and institutions – whatever the political ideology of their leaders.

RC AKA Darryl, Ron -> libezkova... March 24, 2017 at 11:34 AM
An excellent set of comment posts. THANKS!
RGC -> libezkova... March 24, 2017 at 11:47 AM
"It is a newly-born nation which rejected Christianity, adopted neoliberalism instead and now prays to the altar of "free market"."

How about "Mammon"

Mammon /ˈmæmən/ in the New Testament of the Bible is commonly thought to mean money, material wealth, or any entity that promises wealth, and is associated with the greedy pursuit of gain. "You cannot serve both God and mammon."

https://en.wikipedia.org/wiki/Mammon

[Mar 24, 2017] The Mechanical Turn in Economics and Its Consequences

Notable quotes:
"... In the same way, neoliberals are no different. They aren't bad people – they just see their policies as right and just because those policies are working well for them and the people in their class, and I don't think they really understand why it doesn't work for others – maybe, like Adam Smith, they think that is the "natural state" .. ..."
"... Read the first sentence of the Theory of Moral Sentiments – it makes an assumption which is the foundation of all of Adam Smith. He asserted that all men are moral. Morality in economics is the invisible hand creating order like gravity in astronomy. Unfortunately, Adam Smith's assumption is false or at least not true enough to form a sound foundation for useful economic theory. ..."
"... But "morality" means different things to different people. Smith only saw the morality of his own class. For example, I am sure a wealthy man would consider it very moral to accumulate as much money as he could so that he would be seen by his peers as a good and worthy man who cares for his future generations and the well being of his class – he doesn't see this accumulation as amoral – whilst a poor man may think that kind of accumulation is amoral because he thinks that money could be better used provide for those without the basic needs to survive ..."
"... "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." ..."
"... Another I remember from Smith was something like, "The law exists to protect those who have much from those who have little." Sounds about right. ..."
"... One of Steve Keen's favourite analogies is astronomy. Neoclassical economics is like Ptolemy's epicycles; assume the Earth is at the centre, and that the planets orbit in circles and simply by adding little circles-epicycles-you can accurately describe the observed motion of the planets. The right epicycles in the right places can describe any motion. But they can't explain anything, they add nothing to understanding, they subtract from it, because they are false but give the illusion of knowledge. Drop the assumptions and you can begin to get somewhere. ..."
"... Steve Keen seems to have latched onto this in the last year or so, pointing out that all production is driven by energy. And the energy comes ultimately from the sun. Either it is turned into production via feeding workers, or by fueling machinery (by burning hydrocarbons extracted from plant and animal remains). ..."
"... I have a question about a similar thing. Simon Kuznetz is credited as someone who has invented modern concept of GDP and he revolutionized the field of economics with statistical method (econometrics). However, Kuznets , in the same report in which he presented modern concept of GDP to US congress, wrote following(from wikipedia): ..."
"... "The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. ..."
"... All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above. Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what." ..."
"... "So , my question is why economists keep treating GDP as some scared metric when its creator himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most of the economists nowadays?"@Vedant ..."
"... That is your explanation right there. Large abstract numbers such as GDP obscure social issues such as "the personal distribution of income." and the effort that goes into creating that income. Large abstract numbers obscure the moral dimension that must be a part of all economic discussion and are obscured by statistics and sciencism. As the genius of Mark Twain put it, "There are lies, damned lies and statistics." Beware the credentialed classes! ..."
"... Interesting. There is a great book by John Dupré called 'Human Nature and the Limits of Science (2001)", which tackles this subject in a general way: the facts that taking a mechanistic model as a paradigm for diverse areas of science is problematic and leads to myopia. ..."
"... He describes it as a form of 'scientific imperialism', stretching the use of concepts from one area of science to other areas and leading to bad results (because there are, you know, relevant differences). As a prime example, he mentions economics. (When reading EConned;s chapter of the science ( 'science') of economics, I was struck by the similar argument.) ..."
"... Soddy was a scientist. He should have written as a scientist with definitions, logic and rigour, but he wrote like a philosopher, full of waffle and unsubstantiated assertions like other economists. It is unscientific to apply universal laws discovered in physics and chemistry to economics without proving by observations that those laws also apply to economics. ..."
"... I get irritated by radical free-marketeers who when presented with a social problem tend to dogmatically assert that "The free market wills it," as if that ended all discussion. It is as if the free market was their God who must always be obeyed. Unlike Abraham, we do not need to obey if we feel that the answer is unjust. ..."
"... Gibbon's Decline and Fall of the Roman Empire ..."
"... The moralistic explanations for the disintegration of the (Western) Roman Empire were long ago discarded by all serious analysis of late antiquity. More practical explanations, especially the loss of the North African bread basket to the Vandals, are presented in the scholarly work these days. ..."
"... That book of Gibbon's is an incredible achievement. If it is not read by historians today, it is their loss. Its moral explanations, out of fashion today, are actually quite compelling. They become more so when read with de Tocqueville's views of the moral foundations of American township democracy and their transmission into the behavior, and assumptions, of New Englanders, whose views formed the basis of the federal republican constitution. ..."
"... The loss of the breadbasket was problematical, too. And it may be that no civilization, however young and virile, could withstand the migrations forever, as they withstood or absorbed them, with a few exceptions, for eight hundred years. But the progressive losses to the migratory tribes may have been a symptom of the real, "moral," cause of the decline. ..."
"... From 536-539AD the entire planet suffered a staggering holocaust. Krakatoa blew up - ejecting so much dust that it triggered a 'nuclear winter' that lasted through those years. ..."
"... It was this period that ended agriculture in North Africa. ( Algeria-Tunisia ) The drought blew all of the top soil into the Med. It was an irreversible tragedy. ..."
"... Economics is not science, simply because economics does not take facts seriously enough to modify flawed theories. ..."
"... In college I couldn't help but notice the similarities between modern economic theory and the control theory taught in engineering. Not such a great fit though, society is not a mechanical governor. ..."
"... " ..."
Mar 21, 2017 | www.nakedcapitalism.com
Yves here. This post takes what I see as an inconsistent, indeed, inaccurate stance on Adam Smith, since it depicts him as advocating laissez faire and also not being concerned about "emotions, sentiment, human relations and community." Smith was fiercely opposed to monopolies as well as businessmen colluding to lower the wages paid to workers. He also saw The Theory of Moral Sentiments as his most important work and wanted it inscribed on his gravestone.

Nor is it true that Smith advocated government not intervening in business. From Mark Thoma , quoting Gavin Kennedy :

Jacob Viner addressed the laissez-faire attribution to Adam Smith in 1928 ..Here is a list extracted from Wealth Of Nations:

"Viner concluded, unsurprisingly, that 'Adam Smith was not a doctrinaire advocate of laissez-faire'.

By Douglass Carmichael, perviously a Professor at University of California at Santa Cruz and a Washington DC based consultant, which clients including Hewlett-Packard, World Bank, Bell laboratories, The White House and the State Department. For the last ten years he has focused on the broad social science issues relevant to rethinking humanity's relationship to nature. Cross posted from the Institute for New Economic Thinking website

With Adam Smith, and hints before in Ricardo and others, economics took the path of treating the economy as a natural object that should not be interfered with by the state. This fit the Newtonian ethos of the age: science was great, science was mathematics; science was true, right and good.

But along the way the discussion in, for example, Montaigne and Machiavelli - about the powers of imagination, myth, emotions, sentiment, human relations and community - was abandoned by the economists. (Adam Smith had written his Theory of Moral Sentiments 20 years earlier and sort of left it behind, though the Wealth of Nations is still concerned with human well-being.) Gibbon's Decline and Fall of the Roman Empire was published in 1776, the same year as Smith's Wealth , but hardly read today by most economists.

In philosophy and the arts (romanticism among others) there was great engagement in these issues economics was trying to avoid. But that philosophy and art criticism have not been widely read for many years.

The effect of ignoring the human side of lives was to undermine the social perspective of the "political," by merging it with the individually focused "interest." So, instead of exploring the inner structure of interest (or later utility or preference), or community feeling and the impact of culture, these were assumed to be irrelevant to the mechanics of the market. Politics, having to do with interest groups and power arrangements, is more vague and harder to model than economic activity.

Those who wanted economics to be a science were motivated by the perception that "being scientific" was appreciated by the society of the time, and was the path to rock-solid truth. But the move towards economics as a science also happened to align with a view of the landed and the wealthy that the economy was working for them, so don't touch it. We get the equation, embracing science = conservative. This is still with us because of the implication that the market is made by god or nature rather than being socially constructed. Since economics is the attempt at a description of the economy, it was more or less locked in to the naturalist approach, which ignores things like class and ownership and treated capital as part of economic flow rather than as a possession that was useable for social and political power.

Even now, economics still continues as if it were part of the age of Descartes and avoids most social, historical and philosophical thought about the nature of man and society. Names like Shaftesbury and Puffendorf, very much read in their time, are far less known now than Hobbes, Descartes, Ricardo, Mill and Keynes. Karl Polanyi is much less well known than Hayek. We do not learn of the social history such as the complex interplay in Viennese society among those who were classmates and colleagues such as Hayek, Gombrich, Popper and Drucker. The impact of Viennese culture is not known to many economists.

The result is an economics that supports an economy that is out of control because the feedback loops through society and its impact of the quality of life - and resentment - are not recognized in a dehumanized economics, and so can't have a feedback correcting effect.

The solution, however, is not to look for simplicity, but to embrace a kind of complexity that honors nature, humans, politics, and the way they are dealt with in philosophy, arts, investigative reporting, anthropology and history. Because the way forward cannot be a simple projection of the past. We are in more danger than that.

Anthony Pagden, in Why the Enlightenment is Still Important , writes that before the enlightenment, late feudalism and the Renaissance, "The scholastics had made their version of the natural law the basis for a universal moral and political code that demanded that all human beings be regarded in the same way, no matter what their culture or their beliefs. It also demanded that human beings respect each other because they share a common urge to 'come together,' and it required them to offer to each other, even to total strangers, help in times of need, to recognize 'that amity among men is part of the natural law.' Finally, while Hobbes and Grotius had accepted the existence of only one natural right - the right to self-preservation - the scholastics had allowed for a wide range of them." -

Pagen also writes, "The Enlightenment, and in particular that portion with which I am concerned, was in part, as we shall now see, an attempt to recover something of this vision of a unified and essentially benign humanity, of a potentially cosmopolitan world, without also being obliged to accept the theologians' claim that this could only make sense as part of the larger plan of a well-meaning, if deeply inscrutable, deity."

But as Pagen shows, that effort was overcome by market, technical and financial interests.

The reason this is so important is that the simple and ethical view in Smith (and many other classical economists if we were to read them) that it was wrong to let the poor starve because of manipulated grain prices, was replaced by a more mechanical view of society that denied human intelligence except as calculators of self interest. This is a return to the Hobbesian world leading to a destructive society: climate, inequality, corruption. Today, the poor are hemmed in by so many regulations and procedures (real estate, education, police) that people are now starved. Not having no food, but having bad food, which along with all the new forms of privation add up to a seriously starved life, is not perceived by a blinded society to be suffering. Economics in its current form - most economics papers and college courses - do not touch the third rail of class, or such pain.

HeadShaker , March 21, 2017 at 11:13 am

Interesting. I've been reading (thanks to an intro from NC) Mark Blyth's "Austerity" and, thus far, seems to imply, if not outright state, that Adam Smith was quite suspicious of government intervention in the economy. The "can't live with it, can't live without it, don't want to pay for it" perspective. The bullet points you've listed above seem to refute that notion.

justanotherprogressive , March 21, 2017 at 11:39 am

Adam Smith tried to make a moral science out of what his class wanted to hear. If he had actually gone into those factories of his time, he might have had a different opinion of what labour was and how there was no "natural state" for wages, but only what was imposed on people who couldn't fight back. If he had gotten out of his ivory tower for a while, he might have had a different opinion of what those owners of stock were doing. He also might have had different views on trade if he could have seen what was happening to the labourers in the textile industries in France. And I could go on. But instead he created a fantasy that has been the basis for all economic thinking since.

In the same way, neoliberals are no different. They aren't bad people – they just see their policies as right and just because those policies are working well for them and the people in their class, and I don't think they really understand why it doesn't work for others – maybe, like Adam Smith, they think that is the "natural state" ..

Sorry, but there needs to be a Copernican Revolution in Economics just as there was in science. We have to realize that maybe Adam Smith was wrong – and I know that will be hard – just as it was hard for people to realize that the Earth wasn't the center of the universe.

Since I am retired, maybe I will go back to school, hold my nose and cover my lying eyes long enough to finish that Economics degree, so that I can get good access to all the other windows in Economics. I can't really believe I am the only person thinking this way – there must be some bright people out there who have come to similar conclusions and I would dearly love to know who they are.

Lyonwiss , March 21, 2017 at 2:49 pm

Read the first sentence of the Theory of Moral Sentiments – it makes an assumption which is the foundation of all of Adam Smith. He asserted that all men are moral. Morality in economics is the invisible hand creating order like gravity in astronomy. Unfortunately, Adam Smith's assumption is false or at least not true enough to form a sound foundation for useful economic theory.

justanotherprogressive , March 21, 2017 at 3:18 pm

But "morality" means different things to different people. Smith only saw the morality of his own class. For example, I am sure a wealthy man would consider it very moral to accumulate as much money as he could so that he would be seen by his peers as a good and worthy man who cares for his future generations and the well being of his class – he doesn't see this accumulation as amoral – whilst a poor man may think that kind of accumulation is amoral because he thinks that money could be better used provide for those without the basic needs to survive

Lyonwiss , March 22, 2017 at 2:29 am

You have not read the first sentence of the book, where he stated what he meant – to me, it is his general statement of universal morality.

lyman alpha blob , March 21, 2017 at 3:03 pm

I've read a fair amount of Wealth of Nations although far from all of it and my take was that Smith was describing the economic system of his time as it was , not necessarily as it should or must be. Smith gets a bad rap from the left due to many people over the last 200+ years hearing what they wanted to hear from him to justify their own actions rather than what he actually said.

I'm cherry picking a bit here since I don't have the time to go through several hundred pages, but I think Smith might actually agree with you about the plight of labor and he was well aware of what the ownership class was up to –

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

Adam Smith – Wealth of Nations

diptherio , March 21, 2017 at 7:00 pm

Yup, wish I would have had that one handy in my intro to micro course

Another I remember from Smith was something like, "The law exists to protect those who have much from those who have little." Sounds about right.

Grebo , March 21, 2017 at 4:58 pm

there needs to be a Copernican Revolution in Economics

One of Steve Keen's favourite analogies is astronomy. Neoclassical economics is like Ptolemy's epicycles; assume the Earth is at the centre, and that the planets orbit in circles and simply by adding little circles-epicycles-you can accurately describe the observed motion of the planets. The right epicycles in the right places can describe any motion. But they can't explain anything, they add nothing to understanding, they subtract from it, because they are false but give the illusion of knowledge. Drop the assumptions and you can begin to get somewhere.

digi_owl , March 22, 2017 at 1:36 pm

And that is exactly what Marx did, but then got himself sidetracked by trying to find (or create) support for his labor theory of value.

Actually most of what he writes in Capital basically refutes said theory, instead hinting at energy being the core source of value (how much food/fuel is needed to produce one unit, basically).

Steve Keen seems to have latched onto this in the last year or so, pointing out that all production is driven by energy. And the energy comes ultimately from the sun. Either it is turned into production via feeding workers, or by fueling machinery (by burning hydrocarbons extracted from plant and animal remains).

mejimenez , March 21, 2017 at 1:41 pm

Since words have somewhat flexible boundaries, it's hard to tell from what perspective this response is looking at the history of science. Characterizing cybernetics as mechanistic would require an unusually broad definition of "mechanistic". Even a superficial reading of Norbert Wiener, Warren McCulloch, W. Ross Ashby, or any of the other early contributors to the discipline will make one aware that they were explicitly trying to address the limitations of simplistic mechanistic thinking.

In the related discipline, General Systems Theory, von Bertalanffy expressly argued that we should take our cues from the organic living world to understand complex systems. With the introduction of Second Order Cybernetics by Heinz von Foerster, Margaret Mead, Gregory Bateson and others, the role of a sentient observer in describing the system in which he/she is embedded becomes the focus of attention. Bateson was an original participant with many of the people mentioned above in the Macy conferences where cybernetics was first introduced. The bulk of his work was a direct attack on the mechanistic view of the natural world.

Of course, many writers treat cybernetics, General Systems Theory, and their related disciplines as pseudoscientific. But those are typically people who are firmly committed to mechanistic explanations.

Vedant , March 21, 2017 at 1:02 pm

Yves,

I have a question about a similar thing. Simon Kuznetz is credited as someone who has invented modern concept of GDP and he revolutionized the field of economics with statistical method (econometrics). However, Kuznets , in the same report in which he presented modern concept of GDP to US congress, wrote following(from wikipedia):-

"The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification.

All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.
Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what."

So , my question is why economists keep treating GDP as some scared metric when its creator himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most of the economists nowadays?

Allegorio , March 21, 2017 at 2:48 pm

"So , my question is why economists keep treating GDP as some scared metric when its creator himself deems it not reliable? Why all qualifications about GDP by Kuznetz is ignored by most of the economists nowadays?"@Vedant

" Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income."

That is your explanation right there. Large abstract numbers such as GDP obscure social issues such as "the personal distribution of income." and the effort that goes into creating that income. Large abstract numbers obscure the moral dimension that must be a part of all economic discussion and are obscured by statistics and sciencism. As the genius of Mark Twain put it, "There are lies, damned lies and statistics." Beware the credentialed classes!

Mucho , March 21, 2017 at 1:20 pm

Interesting. There is a great book by John Dupré called 'Human Nature and the Limits of Science (2001)", which tackles this subject in a general way: the facts that taking a mechanistic model as a paradigm for diverse areas of science is problematic and leads to myopia.

He describes it as a form of 'scientific imperialism', stretching the use of concepts from one area of science to other areas and leading to bad results (because there are, you know, relevant differences). As a prime example, he mentions economics. (When reading EConned;s chapter of the science ( 'science') of economics, I was struck by the similar argument.)

Lyonwiss , March 21, 2017 at 2:31 pm

Science does not imply only mechanistic models, which may be appropriate for physics, but not economics. Science is a method of obtaining sound knowledge by iterative interaction between facts and theory.

http://www.asepp.com/what-is-science/

UserFriendly , March 22, 2017 at 1:37 am

Just because equilibrium is shitty mechanistic model to try and stamp onto economics doesn't mean that all scientific modeling of economics futile. Soddy just about derived MMT from the conservation of energy in 1921.

http://habitat.aq.upm.es/boletin/n37/afsod.en.html?iframe=true&width=100%&height=100%

And refined it in a book in 1923.

http://dspace.gipe.ac.in/xmlui/bitstream/handle/10973/21274/GIPE-009596.pdf?sequence=3&isAllowed=y

UserFriendly , March 22, 2017 at 2:00 am

excellent job with the prepositions there. sigh. WAKE UP!

Lyonwiss , March 23, 2017 at 2:50 am

Soddy was a scientist. He should have written as a scientist with definitions, logic and rigour, but he wrote like a philosopher, full of waffle and unsubstantiated assertions like other economists. It is unscientific to apply universal laws discovered in physics and chemistry to economics without proving by observations that those laws also apply to economics.

Soddy needed to have developed a scientific methodology for economics first, before stating his opinions which are scientifically unproven like most economic propositions.

http://www.asepp.com/methodology/

Jim A. , March 21, 2017 at 1:36 pm

I get irritated by radical free-marketeers who when presented with a social problem tend to dogmatically assert that "The free market wills it," as if that ended all discussion. It is as if the free market was their God who must always be obeyed. Unlike Abraham, we do not need to obey if we feel that the answer is unjust.

PKMKII , March 21, 2017 at 1:57 pm

Gibbon's Decline and Fall of the Roman Empire was published in 1776, the same year as Smith's Wealth, but hardly read today by most economists.

Other than as a reflection of the sentiments of the time Gibbon was writing in, historians don't spend much time reading it either. The moralistic explanations for the disintegration of the (Western) Roman Empire were long ago discarded by all serious analysis of late antiquity. More practical explanations, especially the loss of the North African bread basket to the Vandals, are presented in the scholarly work these days.

PhilM , March 21, 2017 at 5:07 pm

That book of Gibbon's is an incredible achievement. If it is not read by historians today, it is their loss. Its moral explanations, out of fashion today, are actually quite compelling. They become more so when read with de Tocqueville's views of the moral foundations of American township democracy and their transmission into the behavior, and assumptions, of New Englanders, whose views formed the basis of the federal republican constitution.

The loss of the breadbasket was problematical, too. And it may be that no civilization, however young and virile, could withstand the migrations forever, as they withstood or absorbed them, with a few exceptions, for eight hundred years. But the progressive losses to the migratory tribes may have been a symptom of the real, "moral," cause of the decline.

After all, the Romans did not always have that breadbasket; indeed, they had to conquer it to get it, along with the rest of the mighty and ancient civilizations of the Mediterranean and beyond, using the strengths derived from the mores of their martial republic. The story of the Punic Wars is a morality play in history, as much as anything else. But the main problem was the dilution of the Roman republican mores into a provincial stew.

And after that nice detached remark, about which historians can surely natter on in the abstract, I'll toss in this completely anti-historicist piece of nonsense: I think it's actually much the same problem the Americans are having today, as the mores of the founders have dissolved into the idea that the nation is about national government, centralized administration, world leadership, global domination through military might, and imperialist capitalism. That is not a national ethic that leads to lasting nobility of purpose and moral strength-as George Washington and Ike Eisenhower both pointed out.

blert , March 21, 2017 at 6:48 pm

Dendrochronology ( tree ring dating & organic history ) has established a wholly new rationale for the termination of the Roman Empire the re-boot of the Chinese and Japanese cultures and the death of a slew of Meso-American cultures.

From 536-539AD the entire planet suffered a staggering holocaust. Krakatoa blew up - ejecting so much dust that it triggered a 'nuclear winter' that lasted through those years.

The Orientals actually heard the blasts recognized that they emminated from the Indonesian islands. ( Well, at least to the south. ) The erruption and the weather was duly recorded by Court scribes.

Roman accounts assert that 90% of the population of Constantinople died or fled. ( mostly died ) The Emperor and his wife were at the dockside ready to flee - when she talked him back off the boat. Her reasoning was sound: it's Hell everywhere. He won't have any authority once he leaves his imperial guard.

It was this period that ended agriculture in North Africa. ( Algeria-Tunisia ) The drought blew all of the top soil into the Med. It was an irreversible tragedy.

This super drought triggered the events in Beowulf - and the exodus of the Petrans from Petra. They marched off to Mecca and Medina both locations long known to have mountain springs with deep water. The entire Arabian population congregated there.

This was the founding population amongst which Mohammed was raised many years later.

The true reason that Islam swept through Araby and North Africa was that both lands were still largely de-populated. The die-off was so staggering that one can't wrap ones mind around it.

Period art is so bleak that modern historians discounted it until the tree ring record established that this trauma happened on a global scale.

Lyonwiss , March 21, 2017 at 2:21 pm

Economics is not science, simply because economics does not take facts seriously enough to modify flawed theories.

http://www.asepp.com/facts-and-economic-science/

justanotherprogressive , March 21, 2017 at 3:00 pm

Or throw them out! I remember the very first thing I was taught in Economics 101 about supply and demand and how they would balance at an equilibrium price. It didn't take much thinking to realize that there is no equilibrium price and that an equilibrium price was exactly the last thing suppliers or demanders wanted, and that the price of a good depended on who had the most power to set the price. Yet, we had to accept the "supply and demand theory" as coming directly from God. It's as if we were taught in Chemistry that the only acceptable theory of bonding possible was the hydrogen-oxygen bond and even though we could see with our own eyes that hydrogen also bonds to carbon, we should throw that out because it is an aberration from "acceptable theory" ..

PhilM , March 21, 2017 at 4:44 pm

Yes, coming from God; Platonic, like a Form. Economics is written in Forms, like "homo economicus" and "the efficient market." But we live in the Cave, where the markets that humans actually make are sad imitations of the Forms in the textbooks.

There's a lot good in the post, I think; noting the important philosophical underpinnings and challenges to Economics, and particularly in making it a moral, and therefore political and "social" science. But it's great to see where people's use of "incantatory names from the past" is called out by the curator. It's a pet peeve.

digi_owl , March 22, 2017 at 1:45 pm

Economics is the last "science" to hold onto the notion of equilibrium. The rest has moved on to complex systems/chaos theory, first demonstrated in meteorology. Trying to apply complex systems to economics have been the goal of Steve Keen's work for several decades now.

Rosario , March 21, 2017 at 2:38 pm

In college I couldn't help but notice the similarities between modern economic theory and the control theory taught in engineering. Not such a great fit though, society is not a mechanical governor.

craazyboy , March 22, 2017 at 7:20 am

Ha. That's the same thing that got economists so excited. Things is, an engineering student attempting to model a simple system with two moving parts cares a great deal about whether the moving parts are connected by a spring, or ball screw, or shock absorber, or lever, or even invisible stuff like a temperature gradient when coming up with the system math model. Economists seem to think wtf is the difference?

Next, if the math gets a bit unwieldy as the number of moving parts increase, which it does in a hurry, they decide to simplify the math. Next, assume they have perfect sensors for everything and system lag can assumed to be zero for talking purposes, and in research papers too. Next, hysteresis effects due to bent parts, leaky valves and stretched springs are assumed not to exist. Congress has the "Highway Bill" thingy to address that.

Next, the guy with the control knob will do the "right thing". Or better yet, a "market" is doing the control knob. There could be "intermediaries", but these are modeled as zero loss pieces of golden wire and gold plated connectors.

Finally, money comes from batteries and there is no such thing in the real world like "shorts", "open circuits", or "semiconductors" with their quantum tunneling properties.

Other than that, it's all good!

knowbuddhau , March 21, 2017 at 5:23 pm

Thanks for this, and especially the heads up about the author's take on Smith. This is exactly what I'm on about. Not only are there more ways of knowing than the infamous mechanical, it itself should've died long ago.

I learned that from this Chomsky lecture I found last year: Noam Chomsky: The machine, the ghost and the limits of understanding; Newton´s contribution to the study of mind" . (Quotes are from Science, Mind, and Limits of Understanding , an essay that seems to me to be the basis of the lecture.) Pretty sure I mentioned it in comments somewhere.

The author stresses economics is stuck in the age of Descartes. The history of Newton's refutation of Descartes's mechanical philosophy is very interesting. Yes, refutation. Descartes's mechanical philosophy is as dead as a dodo. So why does it still plague us? Obviously, because thinking of and acting on nature as if it were all just one great big machine works at getting you paid, much better than that wishy-washy humanism crap. /f (facetious).

I used to go on and on against reducing everything to mechanisms, and I largely blamed Newton. I was wrong.

I've spent an hour trying to boil this down. Ain't happenin. Apologies for the length.

The background is the so-called "mechanical philosophy" – mechanical science in modern terminology. This doctrine, originating with Galileo and his contemporaries, held that the world is a machine, operating by mechanical principles, much like the remarkable devices that were being constructed by skilled artisans of the day and that stimulated the scientific imagination much as computers do today; devices with gears, levers, and other mechanical components, interacting through direct contact with no mysterious forces relating them. The doctrine held that the entire world is similar: it could in principle be constructed by a skilled artisan, and was in fact created by a super-skilled artisan. The doctrine was intended to replace the resort to "occult properties" on the part of the neoscholastics: their appeal to mysterious sympathies and antipathies, to forms flitting through the air as the means of perception, the idea that rocks fall and steam rises because they are moving to their natural place, and similar notions that were mocked by the new science.

The mechanical philosophy provided the very criterion for intelligibility in the sciences. Galileo insisted that theories are intelligible, in his words, only if we can "duplicate [their posits] by means of appropriate artificial devices." The same conception, which became the reigning orthodoxy, was maintained and developed by the other leading figures of the scientific revolution: Descartes, Leibniz, Huygens, Newton, and others.

Today Descartes is remembered mainly for his philosophical reflections, but he was primarily a working scientist and presumably thought of himself that way, as his contemporaries did. His great achievement, he believed, was to have firmly established the mechanical philosophy, to have shown that the world is indeed a machine, that the phenomena of nature could be accounted for in mechanical terms in the sense of the science of the day. But he discovered phenomena that appeared to escape the reach of mechanical science. Primary among them, for Descartes, was the creative aspect of language use, a capacity unique to humans that cannot be duplicated by machines and does not exist among animals, which in fact were a variety of machines, in his conception.

As a serious and honest scientist, Descartes therefore invoked a new principle to accommodate these non-mechanical phenomena, a kind of creative principle. In the substance philosophy of the day, this was a new substance, res cogitans, which stood alongside of res extensa. This dichotomy constitutes the mind-body theory in its scientific version. Then followed further tasks: to explain how the two substances interact and to devise experimental tests to determine whether some other creature has a mind like ours. These tasks were undertaken by Descartes and his followers, notably Géraud de Cordemoy; and in the domain of language, by the logician-grammarians of Port Royal and the tradition of rational and philosophical grammar that succeeded them, not strictly Cartesian but influenced by Cartesian ideas.

All of this is normal science, and like much normal science, it was soon shown to be incorrect. Newton demonstrated that one of the two substances does not exist: res extensa. The properties of matter, Newton showed, escape the bounds of the mechanical philosophy. To account for them it is necessary to resort to interaction without contact. Not surprisingly, Newton was condemned by the great physicists of the day for invoking the despised occult properties of the neo-scholastics. Newton largely agreed. He regarded action at a distance, in his words, as "so great an Absurdity, that I believe no Man who has in philosophical matters a competent Faculty of thinking, can ever fall into it." Newton however argued that these ideas, though absurd, were not "occult" in the traditional despised sense. Nevertheless, by invoking this absurdity, we concede that we do not understand the phenomena of the material world. To quote one standard scholarly source, "By `understand' Newton still meant what his critics meant: `understand in mechanical terms of contact action'."

It is commonly believed that Newton showed that the world is a machine, following mechanical principles, and that we can therefore dismiss "the ghost in the machine," the mind, with appropriate ridicule. The facts are the opposite: Newton exorcised the machine, leaving the ghost intact. The mind-body problem in its scientific form did indeed vanish as unformulable, because one of its terms, body, does not exist in any intelligible form. Newton knew this very well, and so did his great contemporaries.

And later:

Similar conclusions are commonplace in the history of science. In the mid-twentieth century, Alexander Koyré observed that Newton demonstrated that "a purely materialistic pattern of nature is utterly impossible (and a purely materialistic or mechanistic physics, such as that of Lucretius or of Descartes, is utterly impossible, too)"; his mathematical physics required the "admission into the body of science of incomprehensible and inexplicable `facts' imposed up on us by empiricism," by what is observed and our conclusions from these observations.

So the wrong guy was declared the winner of Descartes vs. Newton, and we've been living with the resultant Frankenstein's monster of an economy running rampant all this time. And the mad "scientists" who keep it alive, who think themselves so "realistic" and "pragmatic" in fact are atavists ignorant of the last few centuries of science. But they do get paid, whereas I (relatively) don't.

Vatch , March 21, 2017 at 5:40 pm

Alexander Koyré observed that Newton demonstrated that "a purely materialistic pattern of nature is utterly impossible (and a purely materialistic or mechanistic physics, such as that of Lucretius or of Descartes, is utterly impossible, too)"

I think that Newton considered phenomena like gravity, magnetism, and optics to be non-material, perhaps even spiritual, and separate from matter. Modern physicists would disagree, and would consider gravity and electro-magnetism to be purely material phenomena. Newton didn't prove that the world is non-mechanical; he showed that objects do not need to touch for them to have influence on each other.

It is still quite possible that there are non-material phenomena, but those would be separate from gravity and electro-magnetism, which Newton considered non-material.

diptherio , March 21, 2017 at 7:10 pm

It is still quite possible that there are non-material phenomena

Like love, courage, hope, fear, greed and compassion?

Vatch , March 21, 2017 at 7:37 pm

Sure! The existence of souls is another possibility (even for Buddhists, although I suppose they would have to be pudgalavadins to believe in this).

Plenue , March 22, 2017 at 1:54 pm

Are all products of the brain. I don't see how the results of the interaction of electrical impulses and chemicals are non-material. Magic is not an explanation for anything.

M Quinlan , March 21, 2017 at 7:50 pm

So Newton formulated his theories because of his belief in Alchemy and not, as I had thought, despite it. Discussions like this are what make this site so great.

blert , March 21, 2017 at 7:08 pm

All modern economic thought ( 1900+ ) has been corrupted by the arrogance of Taylor's Time & Motion Studies. The essence of which is that bean counters can revolutionize economic output by statistics and basic accounting.

AKA Taylorism.

Big Government is Taylorism as practiced.

At bottom, it arrogantly assumes that if you can count it, you can optimise it.

The fact is that 'things' are too complicated.

Taylor's principles only work in a micro environment. His work started in machine shops, and at that level of simplicity, still applies.

Its abstractions and assumptions break down elsewhere.

MOST economic models in use today are the grandsons of Taylorism.

They are also the analytic engines that have driven the global economy to the edge of the cliff.

RBHoughton , March 21, 2017 at 7:24 pm

For my penny's worth the sentence "Today, the poor are hemmed in by so many regulations and procedures (real estate, education, police) that people are now starved" reveals the main problem.

Too many of the most lucrative parts of every national economy have been closed off by politicians and reserved for their friends.

Peter L. , March 23, 2017 at 9:55 pm

The introductory remarks on Adam Smith reminded me of a funny exchange between David Barsamian and Noam Chomsky. Barsamian complements Chomsky on his research on Adam Smith :

DAVID BARSAMIAN: One of the heroes of the current right-wing revival is Adam Smith. You've done some pretty impressive research on Smith that has excavated a lot of information that's not coming out. You've often quoted him describing the "vile maxim of the masters of mankind: all for ourselves and nothing for other people."

NOAM CHOMSKY: I didn't do any research at all on Smith. I just read him. There's no research. Just read it. He's pre-capitalist, a figure of the Enlightenment. What we would call capitalism he despised.

People read snippets of Adam Smith, the few phrases they teach in school. Everybody reads the first paragraph of The Wealth of Nations where he talks about how wonderful the division of labor is. But not many people get to the point hundreds of pages later, where he says that division of labor will destroy human beings and turn people into creatures as stupid and ignorant as it is possible for a human being to be.

And therefore in any civilized society the government is going to have to take some measures to prevent division of labor from proceeding to its limits.

And here is a link to Adam Smith's poignant denunciation of division of labour:

http://www.econlib.org/library/Smith/smWN20.html#V.1.178

This mention of division of labor is, as Chomsky points out, left out of the index of the University of Chicago scholarly edition! Of George Stigler's introduction Chomsky claims, "It's likely he never opened The Wealth of Nations. Just about everything he said about the book was completely false."

I recommend reading the entire paragraph at the link above. Smith writes:

"The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it. "

[Feb 01, 2017] Its time to bury supply-side economics by Howard Gold

Jun 08, 2012 | marketwatch.com

It's been the prevailing economic philosophy of the Republican Party since Ronald Reagan was elected president in 1980.

Supply-side economics held that reducing marginal tax rates would spur economic growth, create jobs and even generate tax revenue for the government.

Reuters A statue of former U.S. President Ronald Reagan near the American Embassy in Budapest, Hungary.

And it makes sense in theory: If people keep more of what they make, they would logically work harder, spend more and hire more people, right?

When you listen to supply-siders like Arthur Laffer, Stephen Moore and Larry Kudlow, they always extol the Kennedy-Johnson tax cut of the 1960s and especially President Reagan's tax cuts of the 1980s.

But they rarely mention the 1990s or the 2000s.

Maybe that's because those two decades were almost a perfect controlled experiment that shattered their pet theories: President Bill Clinton raised marginal tax rates and the economy boomed and jobs were plentiful. President George W. Bush cut them and we got only modest job growth.

In fact, there's more and more evidence suggesting that lowering marginal tax rates doesn't create many jobs at all.

Read Howard Gold's earlier take on the failed Bush tax cuts on MoneyShow.com.

For years I've tried to find any economist - left, right, or center - who could estimate the number of jobs created by the Bush tax cuts, but without success.

So, I'm taking a crack at it myself.

Tax hikes vs. tax cuts

Using data from the Bureau of Labor Statistics CES survey, I compared the number of jobs created in the years following the balanced budget bill signed by President Clinton in August 1993 and after the second round of Bush tax cuts, which went into effect in May 2003. (Supply-siders think that was the real deal, not the earlier 2001 cuts.)

Nearly 20 million private sector jobs were created from the August 1993 tax increase until the end of the Clinton administration in December 2000. The number following the Bush tax cuts, in a shorter time period (May 2003 to December 2007, when the Great Recession began), was above seven million.

But when I actually counted the jobs created in various industries and eliminated those that clearly had nothing to do with lower marginal tax rates, I was left with a much smaller number: two million at most, a dreadful performance by any measurement.

This isn't an academic exercise. A 20% cut in marginal tax rates, including reducing the top tax rate to 28% from 35%, is a key plank of Republican presidential candidate Mitt Romney's economic growth plan (along with cuts in business taxes and reduced regulation, which I won't cover in this column).

Read Howard Gold's analysis of what Mitt Romney really did at Bain Capital in the Independent Agenda.

One of former Gov. Romney's top economic advisers, Glenn Hubbard, the dean of the Columbia Business School, wasn't available for an interview, nor could the Romney campaign provide another adviser by deadline. Top Bush economist Lawrence Lindsey also wasn't available.

Yet Hubbard, along with former Sen. Phil Gramm (Mr. Banking Deregulation of the late 1990s), penned an op-ed Thursday in the Wall Street Journal comparing the current recession with "the superior job creation and income growth" of - wait for it - the 1980s.

Again, no mention of the Clinton 1990s or the Bush tax cuts, of which Hubbard was a prime architect as chairman of the president's Council of Economic Advisers.

Isn't it curious how so many smart people have such complete amnesia about the last 20 years?

The Clinton delivery

Yet there's a growing consensus that cuts in marginal income-tax rates don't deliver the goods:

Robert Moffitt and Mark Wilhelm found "no evidence" that high-income U.S. taxpayers increased their work hours in response to the 1986 Reagan tax cuts. This undercuts a central premise of supply-side economics, that cutting taxes gives people incentives to work more.

A 2010 report by the nonpartisan Congressional Budget Office found that cutting income taxes produced the least bang for the buck among 11 proposed policy options aimed at boosting employment. David and Christina Romer, economists at the University of California-Berkeley (she was President Obama's CEA chairman), found that changes in marginal tax rates had little effect on U.S. economic growth in the 1920s and 1930s, either.

But the most striking evidence is the glaring contrast between the 1990s and 2000s.

A 2008 study by the liberal Center for American Progress and Economic Policy Institute showed that private investment, GDP, wages, household income, employment and federal revenue all grew faster - sometimes much faster - during the high-tax Clinton years than they did during the low-tax Reagan and Bush eras.

In August 1993, President Clinton signed a law that boosted the top personal income tax rate dramatically, to 39.6% from 31%.

But rather than die out, the nascent economic recovery picked up speed and never looked back. By the time this giant boom ended, the U.S. economy had added nearly 20 million private-sector jobs in every sector from manufacturing to retail trade to finance to information technology.

Marginalizing marginal tax rates

Of course, higher taxes didn't cause this boom. That's the whole point: other economic forces were so powerful that marginal tax rates didn't matter.

And they didn't matter a decade later when President Bush signed the second of two tax cuts in May 2003, accelerating the 2001 act's provisions, reducing the top rate to 35%, and cutting capital gains and dividend tax rates.

But something else was brewing: In July 2003, the Federal Reserve cut the federal funds rate to 1% and kept it there for a year.

By doing so, the Fed pumped hot air into a speculative real estate bubble, with far-flung effects. As Martin N. Baily, Susan Lund and Charles Atkins wrote in a 2010 paper for the McKinsey Global Institute:

"From 2003 through the third quarter of 2008, U.S. households extracted $2.3 trillion of equity from their homes in the form of home-equity loans and cash-out refinancings. Nearly 40% of this - $897 billion, an amount bigger than the 2008 U.S. government stimulus package - went directly to finance home improvement or personal consumption." (Italics added.)

The two Bush tax cuts caused an estimated $1 trillion loss of federal tax revenues - and each year the revenue shortfall is an additional $100 billion. It's the gift that keeps on giving.

So, here's how I'm calculating the jobs created by these cuts.

First, to the 7.33 million net new private-sector jobs, I'm adding back a million jobs lost in manufacturing and technology, for about 8.3 million new jobs created.

Job growth under Bill Clinton and George W. Bush
After Clinton tax hike Aug. 1993-Dec. 2000 After Bush tax cut May 2003-Dec. 2007
Total private employment (thousands) 19,586 7,333
Manufacturing 437 (812)
Information 1,031 (169)
Retail Trade 2,321.4 674
Wholesale Trade 812.9 422.1
Leisure & Hospitality 2,201 1,458
Transportation 887.9 372.1
Finance (incl. real estate finance) 1,008 236
Professional & Business Services 5,300 2,131
Construction 1,986 784
Residential Construction 214.4 295.3
Health & Education Services 2,925 1,971
(Selected categories, may not add up)
Source: Bureau of Labor Statistics, CES

Then I'd subtract the two million new jobs in health and education, which grew steadily in both the Clinton and Bush years with no impact from tax policy.

I'd also remove the 400,000 jobs added in residential real estate and home building, obviously a result of lower interest rates and the housing bubble.

Then, I'd subtract two million new jobs in professional and business services, also the result of a structural move to a service economy. Five million of those jobs were added under President Clinton.

That leaves us with four million jobs added in cyclical industries like retail and wholesale trade, leisure and hospitality, transportation and securities, as well as nonresidential construction.

My best guess is that half of those jobs were the result of the housing bubble, cash-out refinancing and rock-bottom interest rates while the rest may have come from the additional animal spirits and cash in consumers' pockets as a result of the Bush tax cuts.

My unscientific estimate, then, is that the Bush tax cuts were responsible for maybe two million jobs at most. Pathetic is an understatement.

I welcome your input and would be glad to revise this number in a future column if you provide a better estimate.

Supply-side economics is not the only economic philosophy that has come up short in the Great Recession. As I wrote here last year, Keynesian stimulus and Friedmanesque monetary policy both haven't done the job.

Read Howard Gold's take on Keynes and Friedman, the economics gods that failed, in MoneyShow.com.

Surely supply-side economics worked better when the top tax rate was slashed from 70% to 28% under President Reagan. It might be more justified at the state level, where crippling tax burdens have made some states uncompetitive. And raising taxes too high would likely hurt growth, so it may work better in reverse.

But clearly this is a theory with diminishing returns that has outlived its usefulness.

Because after the last two decades, believing that cuts in marginal personal tax rates will create jobs and revive our economy is like still believing the sun orbits the earth.

Howard R. Gold is a columnist at MarketWatch and editor at large for MoneyShow.com. Follow him on Twitter @howardrgold and read his commentary on politics and economics at www.independentagenda.com.

[Feb 01, 2017] Selling the Supply-Side Myth

Notable quotes:
"... "I worked with Ronald Reagan to develop supply-side economics in the late '70s, along with Jack Kemp and Art Laffer and Jude Wanniski and others," Gingrich declared at a recent town hall event. "We ended up passing it into law in '81. At the time it was very bold. People called it 'voodoo economics.' It had one great virtue: it worked." ..."
"... Their second key advantage was that nobody could say for sure what the results of the "supply-side" experiment would be. There was little empirical data to assess how radical tax cuts would play out in the modern economy. One could make common-sense judgments, as George H.W. Bush had done with his "voodoo" remark, but you couldn't see the future. ..."
"... Now, however, with three decades of experience with the experiment, the fallacies of "supply-side" economics are no longer a mystery. For instance, a major obstacle to today's economic recovery has been the absence of "demand-side" consumers, not the availability of money to build more productive capacity. ..."
"... And the reasons for this dilemma are now well-known: first, when companies have expanded in recent years, the modern factories have relied on robotics with few humans required; second, the companies put many manufacturing sites offshore so they can exploit cheap labor; and third, the shrinking middle class has meant fewer customers, leaving corporations little motivation to build more factories. ..."
"... Blessed with a talented pitch man named Ronald Reagan, "supply-side" became the new product to sell. After taking office, Reagan pressed for a sharp reduction in the marginal tax rates, slashing the top rates for the wealthy from around 70 percent to 28 percent. Along with the tax cuts, Reagan also initiated an aggressive military buildup. ..."
"... After George W. Bush claimed the White House in 2001, "supply-side" dogma was back in vogue. Bush pushed through more tax cuts mostly for the rich, reducing the top marginal rate to 35 percent and creating an even bigger tax break for investors, cutting the capital gains rate to 15 percent. Combined with Bush's two wars and other policies, the surplus soon disappeared and was replaced by another yawning deficit. ..."
"... The Right also has worked diligently to create false narratives to convince many Americans that their hatred of a strong federal government links them to the Founders. Many Tea Partiers have bought into the historical lie that the Founders wrote the Constitution to limit the power of the federal government and to promote "states' rights" the near opposite of what the framers actually were doing. ..."
Jan 27, 2012 | consortiumnews.com

Exclusive: Any rational assessment of America's economic troubles would identify Ronald Reagan's reckless "supply-side" economics as a chief culprit, but that hasn't stopped Republican presidential hopefuls, led by Newt Gingrich, from selling this discredited theory to a gullible GOP base, reports Robert Parry.

Despite Newt Gingrich's claim that "supply-side" economic theories have "worked," the truth is that America's three-decade experiment with low tax rates on the rich, lax regulation of corporations and "free trade" has been a catastrophic failure, creating massive federal debt, devastating the middle class and off-shoring millions of American jobs.

It has "worked" almost exclusively for the very rich, yet the former House speaker and the three other Republican presidential hopefuls are urging the country to double-down on this losing gamble, often to the cheers of their audiences - like one Florida woman who said she had lost her job and medical insurance but still applauded the idea of more "free-market" solutions.

Former House Speaker Newt Gingrich posing with his third wife, Callista

Gingrich even boasts of his role in pioneering these theories of massive tax cuts favoring the rich, combined with sharp reductions in the role of government. That approach, once famously mocked by George H.W. Bush as "voodoo economics," was supposed to spur businesses to expand production (the "supply side"), thus creating jobs and boosting revenues from all the commercial activity.

"I worked with Ronald Reagan to develop supply-side economics in the late '70s, along with Jack Kemp and Art Laffer and Jude Wanniski and others," Gingrich declared at a recent town hall event. "We ended up passing it into law in '81. At the time it was very bold. People called it 'voodoo economics.' It had one great virtue: it worked."

But that is not what the historical record really shows.

In 1980, I was working as an Associated Press correspondent covering budget and economic issues on Capitol Hill and at the time, the "supply-siders" had two key arguments in their favor: first, the economy had stagnated in the 1970s largely due to oil price shocks, inflation and an aging industrial base.

Their second key advantage was that nobody could say for sure what the results of the "supply-side" experiment would be. There was little empirical data to assess how radical tax cuts would play out in the modern economy. One could make common-sense judgments, as George H.W. Bush had done with his "voodoo" remark, but you couldn't see the future.

No More Mystery

Now, however, with three decades of experience with the experiment, the fallacies of "supply-side" economics are no longer a mystery. For instance, a major obstacle to today's economic recovery has been the absence of "demand-side" consumers, not the availability of money to build more productive capacity.

And the reason that there are fewer consumers is that the Great American Middle Class, which the federal government helped build and nourish from the New Deal through the GI Bill to investments in infrastructure and technology in the Sixties and Seventies, has been savaged over the past three decades.

Though many Americans were able to cover up for their declining economic prospects with excessive borrowing for a while, the Wall Street crash of 2008 exposed the hollowing out of the middle class. So today, businesses are sitting on vast sums of cash some estimates put the amount at about $2 trillion.

And the reasons for this dilemma are now well-known: first, when companies have expanded in recent years, the modern factories have relied on robotics with few humans required; second, the companies put many manufacturing sites offshore so they can exploit cheap labor; and third, the shrinking middle class has meant fewer customers, leaving corporations little motivation to build more factories.

For Americans, this has represented a downward spiral with no end in sight. American workers, whether blue- or white-collar, know that computers and other technological advancements have made many of their old jobs obsolete. And modern communications have allowed even expert service jobs, like computer tech advice, to go to places like India.

While painful to millions of Americans who find their talents treated as surplus, these developments do not by themselves have to be negative. After all, humans have dreamed for centuries about technology freeing them from the grind of tedious work and freeing up society to invest in a higher quality of life, for today's citizens and for posterity.

The problem is that the only practical way for a democratic society to achieve that goal is to have a vibrant government using the tax structure to divert a significant amount of the super-profits from the rich into the public coffers for investments in everything from infrastructure to education to arts and sciences, including research and development for future generations, even possibly Gingrich's "big idea" of a colony on the moon.

In fact, that kind of virtuous cycle was the experience of the United States from the 1930s through the 1970s, with the federal government taxing the top tranches of wealth at up to 90 percent and using those funds to build major electrification projects like the Hoover Dam and the Tennessee Valley Authority, to educate World War II veterans through the GI Bill, to connect the nation through the Interstate Highway system, to launch the Space Program, and to create today's Internet.

Out of those efforts emerged robust economic growth as private corporations took advantage of the nation's modern infrastructure and the technological advancements. Millions of good-paying jobs were created for the world's best-trained work force, giving rise to the Great American Middle Class. The obvious answer was to keep this up, with the government investing in new productive areas, like renewable energy.

Demonizing 'Guv-mint'

Instead, facing economic headwinds in the 1970s, caused in part by rising energy costs, Americans grew anxious about their futures, making them ripe for a new right-wing propaganda campaign demonizing "guv-mint" and telling white men, in particular, that the "free market" was their friend.

Blessed with a talented pitch man named Ronald Reagan, "supply-side" became the new product to sell. After taking office, Reagan pressed for a sharp reduction in the marginal tax rates, slashing the top rates for the wealthy from around 70 percent to 28 percent. Along with the tax cuts, Reagan also initiated an aggressive military buildup.

The results were devastating to the U.S. fiscal position. The federal debt soared, quadrupling during the 12 years of Reagan and Bush Sr. As a percentage of the gross domestic product, federal debt was actually declining in the 1970s, dropping to 26 percent of GDP, before exploding under Reagan, rising to 41 percent by the end of the 1980s. The shared wealth of the country also diverged, with the rich claiming a bigger and bigger piece of the national economic pie.

The nation's debt crisis only began to subside after tax increases were enacted under President George H.W. Bush and President Bill Clinton, with Clinton's tax hike pushing the top marginal rate back up to 39.6 percent. At the time, Gingrich warned that the Clinton tax hike would lead to an economic catastrophe.

The actual result was a booming economy, spurred strongly by the federal government's new "information super-highway," the Internet. The Clinton years also saw low unemployment and a balanced budget by the late 1990s. The debt-to-GDP measure declined from about 43 percent to 33 percent and was on course toward zero within a decade.

Ironically Gingrich also claims credit for that because as House speaker he worked with Clinton on some cost-cutting measures, but Clinton credits the 1993 tax increase, which passed without a single Republican vote, as the key factor in the budget turnaround.

After George W. Bush claimed the White House in 2001, "supply-side" dogma was back in vogue. Bush pushed through more tax cuts mostly for the rich, reducing the top marginal rate to 35 percent and creating an even bigger tax break for investors, cutting the capital gains rate to 15 percent. Combined with Bush's two wars and other policies, the surplus soon disappeared and was replaced by another yawning deficit.

Even as most Americans struggled to hold a job and pay their bills, America's super-rich lived a life of unparalleled luxury. With this concentration of money also had come a concentration of power, as right-wing operatives were hired to build a sophisticated media apparatus and think tanks to push often with populist rhetoric the policies that were dividing the country along the lines of a pampered one percent and a pressured 99 percent.

Many Americans, especially white men, heard their personal grievances echoed in the angry voices of Rush Limbaugh, Sean Hannity, Michael Savage and Glenn Beck all well-compensated propagandists for "the one percent."

Lesson Unlearned

Now, looking back over the economic and fiscal history of the past three decades, you might think that few Americans would be fooled again by this sucker bet on "supply-side." But the Tea Partiers and many rank-and-file Republicans seem ready to put what's left of their money back down on the gambling table.

All four remaining Republican hopefuls Mitt Romney, Rick Santorum, Ron Paul and Gingrich have proposed lower tax rates especially on the rich with the same enduring but fanciful faith in "supply-side" economics.

Gingrich has gone so far as to advocate eliminating the capital gains tax entirely. It's already down to 15 percent, meaning that many super-rich, from financier Warren Buffett to Mitt Romney, can live off their investments and pay a lower tax rate than what many middle-class Americans pay on their wages and salaries. In a recent Florida debate, Romney noted he would pay virtually no federal income tax under Gingrich's plan.

The Republicans seem to be counting on the parallel propaganda campaign of demonizing "guv-mint." They're pinning their hopes on an ill-informed electorate (especially white men) siding with "the one percent" over their own working- and middle-class interests.

The GOP hopes also may hinge significantly on how determined some whites are to get the country's first black president out of the White House. Historically, demagogic U.S. politicians have had great success in exploiting racial resentments, although these days often with coded language like Gingrich calling Barack Obama "the food-stamp president."

The Right also has worked diligently to create false narratives to convince many Americans that their hatred of a strong federal government links them to the Founders. Many Tea Partiers have bought into the historical lie that the Founders wrote the Constitution to limit the power of the federal government and to promote "states' rights" the near opposite of what the framers actually were doing.

Led by Virginians Gen. George Washington and James Madison, the Constitutional Convention in 1787 threw out the Articles of Confederation, which had made the states supreme and the federal government a supplicant.

The Constitution reversed that situation, eliminating state "independence" and bestowing national sovereignty onto the federal Republic representing "we the people of the United States." Contrary to the Tea Party's false narrative, the Constitution represented the single biggest assertion of federal power in U.S. history.

When the Tea Partiers dress up in Revolutionary War costumes, they apparently don't know that their notion of a weak central government and state "sovereignty" was anathema to the key framers of the Constitution, especially to Washington who had watched his soldiers suffer under the ineffectual Articles of Confederation.

And, when the Tea Partiers wave their "Don't Tread on Me" flags of a coiled snake, they don't seem to know that the warning was directed at the British Empire and that the banner aimed at fellow Americans was Benjamin Franklin's image of a snake severed into various pieces representing the colonies/states with the admonishment "Join, or Die."

Nevertheless, false narratives and false arguments can be as effective as real ones to a thoroughly misinformed population. Thus, many middle- and working-class Americans still cheer when Newt Gingrich references Ronald Reagan and his "supply-side" economics.

But the failure of Reagan's economic strategy should be obvious to anyone who is not fully deluded by right-wing propaganda. Not only has the national debt skyrocketed over the past three decades, but whatever economic benefits that have been produced have gone overwhelmingly to the wealthy while the nation as a whole has suffered.

[For more on related topics, see Robert Parry's Lost History, Secrecy & Privilege and Neck Deep , now available in a three-book set for the discount price of only $29. For details, click here .]

Robert Parry broke many of the Iran-Contra stories in the 1980s for the Associated Press and Newsweek. His latest book, Neck Deep: The Disastrous Presidency of George W. Bush, was written with two of his sons, Sam and Nat, and can be ordered at neckdeepbook.com . His two previous books, Secrecy & Privilege: The Rise of the Bush Dynasty from Watergate to Iraq and Lost History: Contras, Cocaine, the Press & 'Project Truth' are also available there.

[Feb 01, 2017] George H. W. Bush and Voodoo Economics Stan Collenders Capital Gains and Games

Notable quotes:
"... He [Bush] signaled the shift [in strategy] in a speech here [in Pittsburgh] last week when he charged that Reagan had made 'a list of phony promises' on defense, energy and economic policy. And he labeled Reagan's tax cut proposal 'voodoo economic policy' and 'economic madness.'" ..."
"... Let me just emphasize that the words "voodoo economic policy" are Bush's words. The source is a reputable one that is easily available even at second-tier universities, so I think this counts as pretty strong evidence to anyone with a reasonably open mind. I think even someone with a Ph.D. in history from Harvard might concede that it is at least a scrap of evidence. ..."
Dec 21, 2010 | capitalgainsandgames.com

Sam Houston State University historian, writing on the Forbes web site, has a very odd blog post this morning. He criticizes MIT economist Simon Johnson for attributing the term "voodoo economics" to George H.W. Bush. Domitrovic calls it a "myth" that the elder Bush ever uttered those words. "You'd think there'd be a scrap of evidence dating from 1980 in support of this claim. In fact there is none," he says.

Perhaps down in Texas they don't have access to the Los Angeles Times. If one goes to the April 14, 1980 issue and turns to page 20, one will find an articled by Times staff reporter Robert Shogan, entitled, "Bush Ends His Waiting Game, Attacks Reagan." Following is the 4th paragraph from that news report:

"He [Bush] signaled the shift [in strategy] in a speech here [in Pittsburgh] last week when he charged that Reagan had made 'a list of phony promises' on defense, energy and economic policy. And he labeled Reagan's tax cut proposal 'voodoo economic policy' and 'economic madness.'"

I've attached a PDF file of the Times article to this post for the benefit of the skeptical.

Let me just emphasize that the words "voodoo economic policy" are Bush's words. The source is a reputable one that is easily available even at second-tier universities, so I think this counts as pretty strong evidence to anyone with a reasonably open mind. I think even someone with a Ph.D. in history from Harvard might concede that it is at least a scrap of evidence.

I suppose that is one wanted to be pedantic, one could continue to argue that Bush never said the precise words "voodoo economics," that somehow or other "voodoo economic policy" is something completely different. I will allow others to debate the point.

[Dec 31, 2016] Greed Springs Eternal

Notable quotes:
"... You can't go all Ayn Rand/Gordon Gekko on the importance of greed as a motivator while claiming that wealth insulates ... from temptation. ... ..."
"... And this is telling us something significant: namely, that supply-side economic theory is and always was a sham. It was never about the incentives; it was just another excuse to make the rich richer. ..."
"... "The modern conservative is engaged in one of man's oldest exercises in moral philosophy: that is, the search for a superior moral justification for selfishness." ..."
"... choosing a cabinet of billionaires, because rich men are incorruptible"...kind of like showering ZIRP on the Wall Street banking cartel and letting them how to ration credit to the rest of economy...mostly their wealthy clientele, who use it for stock buy-backs and asset speculation. ..."
"... Of course, 'liberal' economists see nothing wrong with trickle down, supply side economics, as long as it's the Wall Street banking cartel who's in charge of it... ..."
"... Stiglitz: "I've always said that current monetary policy is not going to work because quantitative easing is based on a variant of trickle-down economics. The lower interest rates have led to a stock-market bubble – to increases in stock-market prices and huge increases in wealth. But relatively little of that's been translated into increased and broad consumer spending." ..."
"... But pgl and many other '[neo[liberal' economists just can't get enough of the trickle down monetary policy...all the while they vehemently condemn trickle down tax policy. ..."
"... You all think Trump can do worse than the sitting cabal adding $660B from Sep 2015 to the federal debt quietly keeping the economy going for the incumbent party? ..."
"... The losers think the winners are as crooked as they! ..."
Dec 31, 2016 | economistsview.typepad.com

To belabor what should be obvious: either the wealthy care about having more money or they don't. If lower marginal tax rates are an incentive to produce more, the prospect of personal gain is an incentive to engage in corrupt practices. You can't go all Ayn Rand/Gordon Gekko on the importance of greed as a motivator while claiming that wealth insulates ... from temptation. ...

And this is telling us something significant: namely, that supply-side economic theory is and always was a sham. It was never about the incentives; it was just another excuse to make the rich richer.

Anomalous Cowherd : , December 29, 2016 at 11:35 AM
In one sentence, you still can't beat John Kenneth Galbraith's assessment: "The modern conservative is engaged in one of man's oldest exercises in moral philosophy: that is, the search for a superior moral justification for selfishness."

Nothing is more admirable than the fortitude with which millionaires tolerate the disadvantages of their wealth. -- Nero Wolfe

DrDick -> Anomalous Cowherd... , December 29, 2016 at 12:31 PM
You need to know nothing else to understand the entirety of the conservative edifice.
JohnH :
"choosing a cabinet of billionaires, because rich men are incorruptible"...kind of like showering ZIRP on the Wall Street banking cartel and letting them how to ration credit to the rest of economy...mostly their wealthy clientele, who use it for stock buy-backs and asset speculation.

Of course, 'liberal' economists see nothing wrong with trickle down, supply side economics, as long as it's the Wall Street banking cartel who's in charge of it...

Gibbon1 : , December 29, 2016 at 12:29 PM
Why do we need Krugman to tell us this?
DrDick -> Gibbon1... , -1
*We* do not, but our pandering press does and I think that is Krugman's intended target.
JohnH -> pgl...
Stiglitz: "I've always said that current monetary policy is not going to work because quantitative easing is based on a variant of trickle-down economics. The lower interest rates have led to a stock-market bubble – to increases in stock-market prices and huge increases in wealth. But relatively little of that's been translated into increased and broad consumer spending."
http://www.theglobeandmail.com/opinion/munk-debates/joseph-stiglitz-current-monetary-policy-is-not-going-to-work/article24346548/

But pgl and many other '[neo[liberal' economists just can't get enough of the trickle down monetary policy...all the while they vehemently condemn trickle down tax policy.

yuan -> JohnH...
and few liberal economists have been more skeptical of QE's economic impact than Krugman.

http://www.marketwatch.com/story/krugman-meh-is-grade-fed-gets-on-qe-2015-11-09

PS: bernie, please save me from your bros.

ilsm :
You all think Trump can do worse than the sitting cabal adding $660B from Sep 2015 to the federal debt quietly keeping the economy going for the incumbent party?

The losers think the winners are as crooked as they!

yuan -> ilsm...
when we can borrow over the long-term at 3% and have truly massive infrastructure and clean energy needs we should be borrowing like military Keynesian republicans...

[Dec 31, 2016] Supply-side economic theory is and always was a sham

Notable quotes:
"... And this is telling us something significant: namely, that supply-side economic theory is and always was a sham. ..."
"... That it is and always a sham is irrelevant. It is THE NARRATIVE that matters! They had a compelling story and they stuck to it. That's how you sell politics in this country. ..."
Dec 31, 2016 | www.nytimes.com

Chris G said... > And this is telling us something significant: namely, that supply-side economic theory is and always was a sham.

Urgh. That it is and always a sham is irrelevant. It is THE NARRATIVE that matters! They had a compelling story and they stuck to it. That's how you sell politics in this country.

Trump told a significant fraction of the population that he understood their problems and that he would fix them. He told enough people what they wanted to hear - and did so with a convincing tone - that he got himself elected. That's how you win. You sell people on your vision. If you tell a good story most people aren't going to reality-check it. Sad but true.

On the importance of narrative: Drew Westen, "What Happened to Obama?" - http://www.nytimes.com/2011/08/07/opinion/sunday/what-happened-to-obamas-passion.html

Jesse's Café Américain Why the Fed's Policy Actions Are Not Working

"Trickle-down theory - the less than elegant metaphor that if one feeds the horse enough oats, some will pass through to the road for the sparrows."

John Kenneth Galbraith

As I said earlier today in a reaction to the FOMC announcement:
"This is all a bit moot really, because except for the betting parlors it doesn't matter whether the Fed raises 25 basis points or not. You can print money and give it to the banking system and the very wealthy for their personal gambling and asset acquisitions activities all day long.

The system is broken, the real product of the nation has been hijacked by financialization, the international monetary exchange is in chaos, and almost all of the gains are going to the top.

And the Fed and the government are doing virtually nothing to change this."

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be an sustainable recovery.

And keep the financial system on life support while the rest of the economy languishes, the poor suffer, and the middle class deteriorates is not coherent, except for a narrow band of beneficiaries.

Let us be reminded that the Fed is also a primary regulator of the financial system as well as an interest rate joystick operator.

And the mainstream media and the politicians wonder why the public is not doing what they expect.

This chart below is from Bloomberg News, The Richest Americans Are Winning the Economic Recovery.

"U.S. Census Bureau data out Wednesday underscore just how lousy the recovery has been if you aren't rich.
Looking at eight groups of household income selected by Census, only those whose incomes are already high to begin with have seen improvement since 2006, the last full year of expansion before the recession. Households at the 95th and 90th percentiles had larger earnings through 2014, the latest year for which data are available.

Income for all others was below 2006 levels, indicating they're still clawing their way out of the hole caused by the deepest recession in the post-World War II era."

And this result, after eight years of some of the biggest expansion of a central bank balance sheet in US history!

[Jul 06, 2011] The political genius of supply-side economics by Martin Wolf

"...The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch? "
"...How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives – for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the "starve the beast" theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state. "
"...Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows: "I did not find such a claim credible, based on the available evidence. I never have, and I still don't." Indeed, he has referred to those who believe this as "charlatans and cranks". Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas, "
"...Its worth delineating the other Big Lie of Republican political strategy, the the USA is so powerful that it can do anything it wants on the international stage. Add in consistent appeals to racial and religious bigotry (from which the personally decent Mr. Reagan was not immune) and you have almost the whole Republican political strategy of the last 30 years. Very successful and almost all of it based on deception and appeals to the electorate's worst tendencies. "
"...The problem is encapsulated in the comments, notably the one that simply will not accept what you said, that "supply side" tax cuts did not generate big revenues. People refuse to believe that. You can beat them with sticks but they will not believe the truth. They ignore the years of tax increases after the Reagan 1981 tax cuts. They ignore whatever facts don't fit their world view. "
July 25, 2010 | FT.com

The political genius of supply-side economics July 25, 2010 4:18 pm 1142 284

The future of fiscal policy was intensely debated in the FT last week. In this Exchange, I want to examine what is going on in the US and, in particular, what is going on inside the Republican party. This matters for the US and, because the US remains the world's most important economy, it also matters greatly for the world.

My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era's successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts. In practice, then, nothing will be done.

Indeed, nothing may be done even if a genuine fiscal crisis were to emerge. According to my friend, Bruce Bartlett, a highly informed, if jaundiced, observer, some "conservatives" (in truth, extreme radicals) think a federal default would be an effective way to bring public spending they detest under control. It should be noted, in passing, that a federal default would surely create the biggest financial crisis in world economic history.

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: "supply-side economics". Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.

The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?

How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives – for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the "starve the beast" theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.

In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective, consistently putting the Democrats at a political disadvantage. It also made the Republicans de facto Keynesians in a de facto Keynesian nation. Whatever the rhetoric, I have long considered the US the advanced world's most Keynesian nation – the one in which government (including the Federal Reserve) is most expected to generate healthy demand at all times, largely because jobs are, in the US, the only safety net for those of working age.

True, the theory that cuts would pay for themselves has proved altogether wrong. That this might well be the case was evident: cutting tax rates from, say, 30 per cent to zero would unambiguously reduce revenue to zero. This is not to argue there were no incentive effects. But they were not large enough to offset the fiscal impact of the cuts (see, on this, Wikipedia and a nice chart from Paul Krugman).

Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows: "I did not find such a claim credible, based on the available evidence. I never have, and I still don't." Indeed, he has referred to those who believe this as "charlatans and cranks". Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas,

Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center on Budget and Policy Priorities).

Today's extremely high deficits are also an inheritance from Bush-era tax-and-spending policies and the financial crisis, also, of course, inherited by the present administration. Thus, according to the International Monetary Fund, the impact of discretionary stimulus on the US fiscal deficit amounts to a cumulative total of 4.7 per cent of GDP in 2009 and 2010, while the cumulative deficit over these years is forecast at 23.5 per cent of GDP. In any case, the stimulus was certainly too small, not too large.

The evidence shows, then, that contemporary conservatives (unlike those of old) simply do not think deficits matter, as former vice-president Richard Cheney is reported to have told former treasury secretary Paul O'Neill. But this is not because the supply-side theory of self-financing tax cuts, on which Reagan era tax cuts were justified, has worked, but despite the fact it has not. The faith has outlived its economic (though not its political) rationale.

So, when Republicans assail the deficits under President Obama, are they to be taken seriously? Yes and no. Yes, they are politically interested in blaming Mr Obama for deficits, since all is viewed fair in love and partisan politics. And yes, they are, indeed, rhetorically opposed to deficits created by extra spending (although that did not prevent them from enacting the unfunded prescription drug benefit, under President Bush). But no, it is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military.

Indeed, this is precisely what Jon Kyl (Arizona), a senior Republican senator, has just said:

"[Y]ou should never raise taxes in order to cut taxes. Surely Congress has the authority, and it would be right to - if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that's what Republicans object to. But you should never have to offset the cost of a deliberate decision to reduce tax rates on Americans"

What conclusions should outsiders draw about the likely future of US fiscal policy?

  1. First, if Republicans win the mid-terms in November, as seems likely, they are surely going to come up with huge tax cut proposals (probably well beyond extending the already unaffordable Bush-era tax cuts).
  2. Second, the White House will probably veto these cuts, making itself even more politically unpopular.
  3. Third, some additional fiscal stimulus is, in fact, what the US needs, in the short term, even though across-the-board tax cuts are an extremely inefficient way of providing it.
  4. Fourth, the Republican proposals would not, alas, be short term, but dangerously long term, in their impact.

Finally, with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programmes, US fiscal policy is paralysed. I may think the policies of the UK government dangerously austere, but at least it can act.

This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic.

In sum, a great deal of trouble lies ahead, for the US and the world.

Where am I wrong, if at all?

Martin Wolf's first response:

Bruce Bartlett writes "I think my friend Martin is a bit too hard on Reagan, who did try to cut spending and signed 11 major tax increases into law to bring down the deficit. And Bush 41 initiated a budget deal in 1990 that eventually led to budget surpluses. It was Bush 43 and his willing accomplices among the Republicans who controlled Congress that deserve the vast bulk of the blame."

Martin Wolf on Americans being entitled to make their own choices:

A number of commentators assume that I am a European socialist (not true) and am attacking the Republicans for this reason (also not true). I believe Americans are entitled to make their own choices. But then make it an honest choice.

Martin Wolf asks whether the US government can default:

The answer, in part, depends on what one means by default.

Martin Wolf writes about the importance of the attitudes of conservatives:

I am interested, as an outsider, in what is likely to happen to US fiscal policy, in the long run. The answer definitely depends on the attitude of conservatives who, historically, one expected to be the party of fiscal prudence, at least: that is, one would have expected them to argue that tax cuts need to be paid for by equivalent spending cuts.

Martin Wolf:

What I object to is trying to destroy the modern state by trying to bankrupt it deliberately. That is simply politically dishonest.

Martin Wolf:

By the way, I find it astounding that in 2009, the total revenue from the income tax, at 6.4 per cent of GDP was almost identical to the revenue from social security receipts, at 6.3 per cent. If this were my country, I would find that scandalous, given the latter are so much more regressive (and job destroying) than the former. But it is not. I merely point it out.

Supply-side tax cuts did not sustain revenues relative to GDP. That is the truth.

Martin Wolf:

I see supply-side economics having a strong form and a weak form. The strong form of supply-side economics says that tax cuts pay for themselves. The weak form says incentives matter.

Martin Wolf:

On estate tax, I think this is a question of political values.

Martin Wolf | July 25 5:04pm

Bruce Bartlett writes "I think my friend Martin is a bit too hard on Reagan, who did try to cut spending and signed 11 major tax increases into law to bring down the deficit. And Bush 41 initiated a budget deal in 1990 that eventually led to budget surpluses. It was Bush 43 and his willing accomplices among the Republicans who controlled Congress that deserve the vast bulk of the blame."

This is my response: "Fair comment. But, as you have often noted, his followers have repudiated president Reagan's willingness to raise taxes. Nor are they making any credible commitments to large-scale cuts in public spending. It is also the case that, despite a boom in the 1980s, the end of the Reagan and George H. Bush era saw much higher public debt ratios than the beginning. I think you have to recognise that today's Republicans are Reagan's children and, as is often the case, are more uncompromising than their parents."

ralbin
6:59pm Mr. Wolf - Your comment is entirely correct though perhaps incomplete. Implicit, and sometimes explicit, in the supply-side argument was that low taxes wouldn't involve any public sacrifices. The Republicans promised the benefits of the liberal state while arguing that the needed tax revenues wouldn't be needed. This is what made it and continues to make it a successful political strategy. This is an actual Big Lie.

Its worth delineating the other Big Lie of Republican political strategy, the the USA is so powerful that it can do anything it wants on the international stage. Add in consistent appeals to racial and religious bigotry (from which the personally decent Mr. Reagan was not immune) and you have almost the whole Republican political strategy of the last 30 years. Very successful and almost all of it based on deception and appeals to the electorate's worst tendencies.

Kent Willard
7:06pm Running up the debt in order to default and cut spending is like having a heart attack in order to get serious about diet and exercise. It is crazy, but they will do it, and then blame it on someone else.

Any bets on a gov't shutdown attempt next year? Report Dana Houle | July 25 7:09pm I think you're assuming a lot about the results of the November elections that are far from certain. In fact, it's highly, highly unlikely that the Republicans will win the Senate, and not particularly likely they'll win the House. They will certainly pick up seats in the House, maybe a lot, but there are only a handful of Dem-held Senate seats that I would say today are pretty much lost for the Democrats (North Dakota, Arkansas), while there are also up to 8 Republican-held seats that could be in play. Democrats would have to lose 10 seats that they currently hold and not win any seats currently held by Republicans (even though 5 of those are open and Vitter in Louisiana is so scandal-plagued he may not survive). It's just about implausible the Democrats will lose a net of 10 or more seats.

Even in the House, Democrats will have to lose almost all the contested seats, at a time when the most recent generic ballot from Gallup shows Democrats nationally with an 8 point advantage and most of the vulnerable Democratic incumbents have huge cash advantages over their Republican challengers.

I agree with your interpretation of the political appeal of supply side economics, but I think you're greatly overestimating the ability of the Republicans to win enough seats in November to fully enact their fiscal will on the White House.

toweypat
7:42pm "Second, the White House will probably veto these cuts"

I wish I could agree. Given what we have seem from President Obama this past year and a half, I think he is just as likely to go along with them as part of some nebulous plan to angle for concessions from the other side, or simply to burnish his bipartisan credentials.

JoelS
8:24pm Thanks for saying out loud what has been apparent: that Republicanism has become fundamentally destructive. I don't think there's any doubt that the empire is coming to an end, as all empires do, with the unwillingness of the populace to bear the costs and burdens. The tax revolt is, at its heart, a cancer destroying American power and prosperity.

This is doubly unhealthy because the United States needs a healthy opposition. In its absence, the Democrats are also becoming corrupt. Their electoral appeal has increasingly become: "Vote for us. We're not insane." That's necessary, of course, but hardly sufficient. So we end up with a health care bill with no cost containment, a financial regulatory bill that does not address the speculation and institutional giantism that was at the heart of the collapse, and a stimulus bill half the size that it should have been and heavily tilted against hiring the unemployed in favor of tax cuts. The Republicans would have done worse, but that is small comfort.

Where are you wrong? If anywhere, in having any doubts that we are on the path to destruction, will no reason to think that we will turn back.

Till Schreiber
9:02pm A wild card in the events you outline could be the report of the bipartisan commission on reducing the long-term budget deficit. Larry Summers mentioned it in his contribution to the austerity debate. If, and it's a big if, this report is substantive enough, it might provide cover for Republicans, Democrats, and the White House to tackle long-term deficits.

In addition, I also feel you are a bit generous in labeling the Democrats relatively fiscally responsible. Certainly, the president's budget had rather high projected deficits over the next decade (and beyond).

Ultimately, according to the CBO a lot comes down to health care costs, particularly Medicare. Reforming Medicare and controlling the explosion of costs currently projected for it is the key. Everything else is secondary.

Edward Hatfield
At last you have it spot on. There will have to be a crisis because Weston democracies will not vote for wage cuts. May be it could be done if the elite took a big cut first but that will not happen as most of the elite do not see the problem as their fault.

You recently replied to one of my emails about thestateBritainis in with the words

"I also don't understand this masochism" Well you surely must now

Barry Thompson
9:24pm James Galbraith says you are wrong:

"So long as U.S. banks are required to accept U.S. government checks - which is to say so long as the Republic exists - then the government can and does spend without borrowing, if it chooses to do so … Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system."

The only real risk to the system is inflation. The need for any sovereign government that can issue its own currency to balance its budget is merely a useful fiction, of political importance but not a real economic constraint.

Otherwise, keep up the great work!

Richard W
Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic. '

That prospect holds no fear for the majority of contemporary Republican thinking in the party and throughout the conservative base. Withdrawal from NATO, UN and the global stage is precisely the plan. The contemporary Republican party is now more than ever aligned with the populist, reactionary and isolationist sentiments of conservative small town America. It will take many years, but I suspect America is on a long slide to an ungovernable failed state and eventual break-up of the union.

Born2ThinkLogically
Straw men are fun to set up and attack. No doubt. So what percentage of Republicans want to default the Government? 10%? 5%? 0.000001%? I also do not believe that cutting taxes increases revenue, but, clearly the multiplier between reduced tax rates and reduced revenue is less than one. Any research on what is might be? Your example of reducing tax rates from 30% to 0% is as appropriate as the Republicans argument of increasing taxes from 30% to 100%. Does everybody look at issues through a political filter today? If so, we are truly doomed to failure. Maybe a short history lesson is in order.

The evolution of the Republican Party from fiscal responsibility to fiscal irresponsibility had its roots in the Clinton presidency. It is a tale of the impossibility of separating the effects of fiscal environment from fiscal policies.

Clinton presided over the largest increase in high-tech corporate efficiency since the industrial revolution. The infiltration of computers and narrow focus software produced twin boons in information and analysis. Technology companies began by using increases in efficiency to raise salaries of their reduced workforce. The massive efficiency increases kept inflation pressures in check. Other companies not driven by technology profited from the computer to a lesser extent. Slowly, the increased profitability was siphoned off by the elite to fund runaway salaries at the top. For seven years, the fiscal environment and fiscal policies together allowed Clinton to both offer more to the working poor and keep a budget surplus. For Republicans, getting the presidency back meant promising even more to the people (balanced budget and lower taxes). It was the only way they could figure out how to get back in the game.

The end of the booming economy along with 9/11 pushed Bush into deficit spending. He was trapped by the Republican mantra that deficit spending was not evil. The lessons of Reagan and Bush (41) were lost. Their goal was lower taxes through smaller government, not just lower taxes. The Tea Party was ten years too late. Putting the brakes on deficit spending may have cost Bush the election in 2004 but would have prevented the financial meltdown at the end of 2008.

At this instant in time, escaping the fiscal swamp will only be accomplished through an increase in the efficiency of both the public and private corporate machines. An obvious place to start is the most politically difficult to tackle. Any money spent to minimize the trade deficit goes to increasing our local workforce utilization. Balancing the trade deficit could create more than 10,000,000 jobs at the average US salary without any change in US consumption. With the government representing 44% of GDP in spending, there is clearly leverage available here that is not being tapped. Still, it would require political fortitude that nobody seems to have now.

Equivocation
@Martin Wolf,

Dear Martin,

You are indeed correct. The US is a Keynesian nation, but given it is also the defacto reserve currency this means that it "exports" its Keynesian expansionary policy around the world. (in reality the only government issued currency against all others trade). The European wealthfare state has largely been subsidized by this policy. In reality the monetary markets are fully integrated, so it is a bit useless to point fingers at which nation is more Keynesian than the next. At issue is the system, not the fiscal policy of any one nation

Like Keynesianism, supply-side economics obviates the role of government; it is fully concerned at how to "maximize" government within a more limited tax intake. It failed because the role of government was not explicitly questioned (though some of the proponents believed that starving the giant would lead to this). The result is that the deficit was taken off-balance sheet and/or monetized through a deelply political Chairman of the Federal Reserve

The issue should not be on "how" to pay for government; rather it should center on what is the role of government. Ultimately, these question boil down to values. Should we live in a consumption based society? Does the concept of "social justice" exist? If so, how do we define it? What are the limits to economic freedom? How does it impact political/human freedom? And a very long list of etc's...

Until these issues are addressed it is almost pointless to talk about tax policy and its effect on production. We first must decide "what" government must provide, before we decide "how" we are going to pay for it.

I hold this would be a much more reduced role, so next would be selling this idea to the public. After years of overspending based mostly on political considerations, this will not be easy. The wealthfare state is now enshrined as a right in many countries, it is political suicide to vote against it. (this is why some of your Republican friends want the system to crash; you cannot really defuse it unless its true bankruptcy becomes self-evident).

As it stands, the Western economic model gained primacy through the application of a relatively small government system with a hard currency standard. Through the years, social values have changed and we have migrated to a larger government with a malleable currency standard. Is this new system sustainable? I think these past 3 years have answered that question.

We are not debating economics anymore, we are arguing nation building, ethics, and the meaning of life itself.

Regards,

Equivocation

sernoff
Options To this Republican, Mr. Wolf's concerns seem a bit overdone and many of the comments seem much overdone. A few thoughts: First, a ruling majority of Americans don't like to wander too far from the middle. The Republicans wandered too far off the middle and suffered memorable losses. The Democrats are facing quick, and likely significant, losses because they wandered farther off the middle than many who voted for them could countenance. Second, Republican executives at the state level are showing signs they know how to govern; e.g., Daniels, Pawlenty and Christie. Come November, a number of additional Republicans are likely to have the opportunity to show they also have a clue as to effective governance. Happily, the Republicans are likely also going to learn that candidates with big mouths and small ideas can lose races that should have been won. Fourth, the Republicans are.....very slowly.....learning that agendas have to be updated every generation or so. Who knows? Maybe the Democrats can get around to updating their agendas someday. The departure of David Obey is a start.
David Goldsby
10:37pm Equivocation | July 25 10:05pm

"Should we live in a consumption based society? Does the concept of "social justice" exist?"

This amounts to the question the concluding chapters of Keynes General Theory puts. Is it in the 'vested interests' own interests to fix interest rates?

They have made their decision, which is why we are bombarded with the words 'community' and 'sustainability'. They should have listened to Keynes, because usury is a geometric progression to hell.

Kevin A P Kirchman

Supply-side economics was not just a political trick.

The idea you've failed to state is that when taxes are cut, there is more money available for people to spend, which increases economic activity, which then obviously produces more tax revenues. There is no "free lunch" involved. That it actually worked that when implemented was the reason "Supply-side economics transformed Republicans from a minority party into a majority party."

Because it worked, the conservatives gained political credibility. Not that they are fundamentally any better at managing a government than incompetent socialists or Keynesians.

Governments should also look at how the velocity of a society's money can be increased. Reducing taxes has this affect by providing more disposable incomes, which produce revenues, which result in turn in more spending, etc.

I think we all see where socialists are going with this. Mass stagnation and lower living standards, made acceptable by claiming environmental precedence. It won't work, as poorer societies cannot take care of their environments as well. Cleaning up costs money, too.

Ignoring history and basic economics will likely be very expensive on all fronts.

sheriffad
This shows not only the failure of supply side economics but the misunderstood theory behind it still lurking in the minds of republicans most notably the misinformed John Kyle.

Alexander Hamilton

Options For those that doubt that a significant group in the Republican Party want to crash the US Federal government through a debt default they should look back to recent history. A Republican controlled Congress was responsible for shutting down Federal Government twice in 1995 due to its failure to pass a budget. This was the policy of the Republican Party leadership - such as House majority leader Dick Armey and House Speaker Newt Gingrich. They ultimately failed as the Democratic Treasury Secretary found a way around their refusal to raise the limit on the national debt. Will the Republicans try again? Given the ignorance of current leaders of the Republican Party - Sarah Palin is reputed to have a gained a D in macroecomics - you betcha!

jomiku
The problem is encapsulated in the comments, notably the one that simply will not accept what you said, that "supply side" tax cuts did not generate big revenues. People refuse to believe that. You can beat them with sticks but they will not believe the truth. They ignore the years of tax increases after the Reagan 1981 tax cuts. They ignore whatever facts don't fit their world view.

One hopes that eventually belief will run into reality.

Report Lawrence the Librarian

All governments promise a quart from a pint pot, with a dollop of cream for all. This is true of both the supply side and demand side vistas. Fiscal multipliers only exist in the library, beyond fiction.

Kevin A P Kirchman
The "theory that cuts would pay for themselves has proved altogether wrong"-- is that supply-side economics?

From the web: "Supply-side economics, ... is an economic theory that states that a reduction in taxes will stimulate the economy through increased consumer spending."

That part of the theory is valid.

"Some supply-side proponents even argue that, over time, the original lost tax revenue will be recouped through greater tax receipts from a booming economy."

This part of the theory is not. That is, not all proponents of tax cuts argue that the revenue generated by tax cuts will pay for themselves.

During Reagan and Bush I's tenure, had they additionally reduced defence budgets, instead of their massive increase, to ultimately reduce the cost of governing, then you would have a viable solution. But no, they did not, and conservatives showed their irresponsible, imbecilic hand.

Today there's a $700 billion hole that must be filled for a defence department that could probably do with $200 billion, which would still put it at the largest defence budget on Earth, managed by one of the most corrupt congresses.

It is not as if during Reagan's time rational economists weren't screaming for his bozo camp to reduce defence spending. They didn't. Supply-side was their excuse, and gave tax cuts a bad name.

Jon Meldrum

A good rebuttal of Republican claims to fiscal responsibility.

Perhaps it's time the world found new nations or blocs to act as 'demand engines' - given shortcomings in that area, would seem to be the most serious global consequences of long-term US contraction.

Equivocation

@David Goldsby

Agreed. Politicians will act as politicians do. They will stall and prolong taking the hard decisions until, the system itself implodes under mounting debt. It is inevitable. It is human nature.

alpha

Martin is spot on-the Republicans are not serious custodians of the US economy.

Mitchell Hirsch

What Dana Houle said.

John Kenneth
The US government cannot default on its national debt. It does not have the legal power to, as the US Constitution says otherwise.

Section 4 of the Fourteenth Amendment: "The validity of the public debt of the United States, authorized by law,... shall not be questioned." Explaining this section, the Supreme Court said in 1935 in PERRY v. UNITED STATES, 294 U.S. 330: "... the government is not at liberty to alter or repudiate its obligations".

If an insane Congress tried to default on a bond, say by not raising the debt limit, and a spineless President irrationally knuckled under instead of defying clearly unconstitutional congressional demands, any federal judge would be bound to order the Executive to pay, which of course just amounts to typing some numbers into a computer.

ubergroov
I find this constant battle over federal tax rates to be incredibly frustrating. Republicans eternally claim lower taxes will increase revenues, while Democrats perpetually insist that higher taxes are necessary to cover necessary spending. Both sides base their claims on little more than personal beliefs that resemble religious faith a good deal more than scientifically-based opinion. And the ideological windbaggery never seems to grow stale for political class and those who report on it.

Now consider that the U.S. government has spent billions of dollars designing and creating bleeding edge simulators and supercomputers for such activities as wargaming, nuclear research, climate change and particle physics. Surely, it couldn't be any harder to create an economic simulator that would finally address once and for all what level of taxation is appropriate for a given economic climate. If nothing else a little science on the issue would give politicians an informed base upon which to construct policy. We can put a man on the moon, but we can't come up with a good tax plan.

Cutting taxes to zero will result in zero revenue. A tax rate of 100% would result in zero revenue. Clearly there is some ideal system of taxation that will create the most revenue for government for a given set of circumstances. For God's sake let's figure it out already.

joebhed
While the notes on political and economic chicanery aimed at shorting the big bad Guv is somewhat interesting, I don't see the success of any attempt at either causing or allowing a sovereign default. In order for the government to default, it would need to be incapable of creating the circulating medium in the form of the currency. And the government always has that authority and capability, even though it is remotely held at the moment. But that is a mere correction away from ensuring that a sovereign default is incapable of happening with any debt instruments denominated in the currency of issue. And it is certainly true that the government does not need to borrow, and if and when it does borrow, it should never see a debt denominated in any other country. And that's the funny part. Neither of the political parties is capable of seeing the need for fixing the financial instability and money system insolvency by resort to a new money system, where the government restores its own right to create the nation's circulating medium. It's called monetary sovereignty. Got anything else?

Report RW:

Reagan, Bush 1 and 2, all embarked on ambitious military campaigns, huge military spending and out right wars.

So of course the theory of cutting taxes doesn't work.

But to validate your argument you'd need to produce some real fiscal figures from all 3 administrations spanning 20 years of Repub. Govt.

It never ceases to amaze me how much people like to discuss Govt. Finances and Tax without actually getting out an excel spreadsheet.

Its a bit like discussing Geography without a map !. Report RW | July 26 2:41am Here you go, here is some real information, which seems to invalidate Wolf's article entirely.

http://en.wikipedi...rt_1993_-_2008.png

As you can see although tax cuts initially led to a drop in revenue, it soon bounced back to pre cut levels..... even exceeded it.

In fact it would be easy to argue that 3 terms of Repubs. Reagan, Reagan, Bush, tax cuts..... actually caused the Clinton era boom.... just as its certain that Tony Blair and Gordon Brown benefited from 20 years of conservative Govt. before them in the UK.

You cut taxes you make people interested in being intrepreneurial, you incentivise them to start and continue and expand business.

Any taxes over 20% is frankly moving towards communism.

bbriley:

I agree with what Mr. Wolf said - but the problem is much bigger than the "party of no." It is the nature of our U.S. capitalism (now with global tentacles) itself. That system is based upon building increased demand and maximum profits (a god unto themselves) and garnering natural resources from around the world, instead of SERVING the people AND preserving the ecological system upon which our physical life depends. The income gap between rich and poor in the U.S. has been escalating since around 1975, and the income gap between the U.S. and the poorest 25% of the world has been increasing over the same period. We have a soulless system heading for a collision course with social needs of human beings and the health of our ecosystems. There are many current books on this topic. The best brief book I have seen so far on this is: "Right Relationship: Building a Whole Earth Economy," by Peter G Brown et al. This is a call for a citizen's movement and an international consensus to radically reform and subordinate our financial system to a globally-administered, international federal system to support humankind's common good and to protect and preserve our natural environment. We need a citizen's movement to advocate for this around the world. The seeds are already there. Violence isn't called for (our existing system is VERY violent in its effects), but a national "change of heart" about our goals and the nature of our economic system.

colin grant:

Unfortunately you are not wrong. The political climate here is such that events will unfold as you fear. It may be worse. For reasons that are not clear to me President Obama is increasingly unpopular with the white majority and it will cost him control of congress.

The republican visceral hatred of the President will result in 2 years of gridlock. In the meantime the deficit will grow unheeded. The republicans lack a credible candidate for 2012 and some maverick will run promising tax cuts and stimuli that will reduce unemployment and expand the economy quickly. I cannot see any way that consensus on a way to reduce the deficit can be reached and the situation will go from bad to worse. The dollar will fall dramatically, funding the deficit will become increasingly difficult, and real depression looms. Please tell me i am wrong!

jay_beaulieu
You are absolutely correct in everything you wrote but there are two things that you may not be fully aware of that are game changers:

The first is "Home Star" and financing through PACE bonds this program should be signed on Memorial Day and has the estimated potential to be over .5 trillion of additional stimulus through homeowners and businesses not government or deficit spending.

The second is Comparative Research for Health care that was part of the Stimulus Package and Health Care Reform Bill, the determination of which, constitutes "Best Medical Practices" is huge. The only piece currently missing is how to implement from an IT perspective nation wide. This can be easily done using Darwin Informational Typing Architecture (DITA) which is currently being used by the DOD, IBM, Cisco and many others for the exact same reason it would pertain to the Health care field. The potential is to save 1.2 trillion a year by medical providers using an IPhone and automation based on "Best Medical Practices".

So now we have "Recovery through Retrofit" to pull us out of the Depression and "Best Medical Practices" to eliminate both Health care inflation, the long term deficit of Medicare through IT automation and standardization.

elephantsandmules
3:10am Brilliant piece!! I agree about the Republicans not reaping gains this fall. All the mainstream media "punditry" goes on and on about how Obama's polling numbers are down and that Republicans are poised to take over the House at least. What they're not telling the American public is that at this time in his first administration, the exalted President Reagan had much lower ratings. The second most important story is that the mainstream *corporate* media is not telling the American people that Republicans have abysmal ratings as well. Sure, people don't like the Democrats, but they really dislike the Republicans!!
MS
I believe it is long overdue for Americans to state and push a concept of EMPLOYMENT-SIDE [ANTI-DEFICIT] ECONOMICS which maintains that one should always aggressively achieve near full employment because it will: 1. eliminate or rapidly cure the primary cause of deficits -- recessions and depressions, 2. increase the efficiency of the economy by such measures as replacing and upgrading our crumbling infra-structure, 3. avoid or greatly reduce the misery and deaths due to recessions and depressions, 4. reduce the giving away of America to foreign countries by developing homeland energy sources thus cutting oil imports and reducing funding flowing to terrorists, 5. result in higher GNP and income and revenues. 6. result in faster long-term GNP growth, 7. result in balanced budgets and surpluses and declining debt/GNP ratios, 8. reduce Social Security and Medical cost problems due to increasing revenue.
jay_beaulieu
One other point I'd like to make is that it's not about tax cuts or spending but creating a market that pulls a country out of a depression. And here is a link on how the government can create a market, Biden's Middle Class Task Force has come up with a plan to enable a retrofit process for businesses and homeowners in http://pacenow.org...t_Final_Report.pdf that precisely spells out both the public and private roles that creates a market through which private sector jobs are created. Further information on PACE bonds http://www.pacenow.org/."
Equivocation
@MS

Full-employment is the result of an efficient economy where all labor is able to be efficiently allocated. It is not a government sponsored policy. Indeed it is the anti-thesis for public policy.

Public policy requires government allocation of resources, this necessarily implies some degree of inefficiency. These frictions essentially mandate some degree of unemployment.

Incidentally, if you eliminate all safety nets full employment results immediately. It is not pretty though, because those that are emplyed below the marginal cost of living would slowly starve.

This is precisely where criteria must be used to balance economic efficiency with human social values.

Regards,

Equivocation

mregor532
Where am I wrong, if at all?

You may be right you may be wrong. I think you are too dismissive of supply side economics and the effects of tax policy on gdp. For your amusement and possible edification I provide this url.

http://www.nber.or.../mar08/w13264.html

I could comment but I won't. I do urge you to read the posting and the underlying report.

jay_beaulieu
One other thing, as far as bipartisan support even republicans can surprise you some time http://www.grist.o...oad-coalition-rule. But I do agree supply-side economics in a global economy is bunk.
Connor Donegan
This is a response to Barry Thompson's thoughtful comment:

"So long as U.S. banks are required to accept U.S. government checks - which is to say so long as the Republic exists - then the government can and does spend without borrowing, if it chooses to do so … Insolvency, bankruptcy, or even higher real interest rates are not among the actual risks to this system."

Instead, he writes, "the only real risk to the system is inflation." Its clear enough that balancing the budget is of little importance. But I find a big problem with the above comment. While U.S. banks will accept U.S. government checks so long as the Republic exists (we can at least assume this to be true for now) much of the U.S. debt is held by foreign investors, especially in China and Japan. Can the same be said of the Communist Party of China as of U.S. banks? I do not believe so.

One of the consequences of neoliberal globalization (the much broader political project that followed the supply-side project/rhetoric) is that governments - even the U.S. - no longer have ultimate control over their currencies. This March Moody's warned that if the U.S Government does not improve the ratio of interest payments to federal revenue then it will lose its AAA rating.

The New York Times writes, "A downgrade would affect more than American pride. The bigger risk would be to the country's ability to keep borrowing money on extremely favorable terms, and therefore to keep spending more money than it takes in from tax revenue." http://www.nytimes...obal/16rating.html

Inflation certainly could become a pressing problem; but as the Euro crisis shows, government debt poses a major threat to global economic stability. (Though as Marx and Schumpeter both taught, crisis and restructuring are the essence of capitalism, providing the foundation for future growth). Even the U.S. Government is not immune to the disciplinary powers of global capital. But perhaps it is more prescient to point out that the crisis that precipitated in the financial sector was shifted onto the public.

I agree with Wolf's analysis, and I do not think that Thompson's qualification is entirely valid.

christianecon
@RW, who blustered: "Here you go, here is some real information, which seems to invalidate Wolf's article entirely.

http://en.wikipedi...93_-_2008.png";

That chart compares spending to revenues (not sure to what end), not tax policy to revenues.

pastgone
OK--just suppose we agree: "big trouble ahead". OK: the US as we know it is going down, and there's going to be a lot of economic and political turmoil as it goes down. All right: then what?

You see, the US is going down. And there's nothing harder than lots of people who define themselves by their ability to consume suddenly being unable to do so quite so stupidly and outrageously. Honestly, people are going to be messed up. And there's a ready-set system of propaganda -- Fox News and the like--prepared to steer that population down dark roads -- roads like Germany started down in 1933.

That's the real danger here. And if we want to do something about it, we'd better understand that danger now.

Dwight Cramer
Yes, I think that circumstances are putting the politics back into political economics. And you're properly on the track of the dialectic, in my humble opinion. It is an open question whether the dialectic is Marxist or Hegelian. My sense is that you believe it's the latter, since the drivers you're focusing on are ideological, rather than grounded in materialism.

An interesting tell tail is Ecuador's recent de facto default. It's of no great significance in itself--dwarfed by the ruthless defaults of various U.S. domestic commercial real estate investment vehicles sponsored by entities bailed out by the federal authorities. But it's interesting nonetheless as a sovereign default by an entity quite capable of having met its payment obligations as they came do.

Perhaps we'll all find ourselves in the Mitad del Mundo. Perhaps Kyle of Arizona will find Spanish a useful

John Kenneth
You are right, sir! I saw this problem as the financial meltdown unfolded and have decided to do something about it. I'm running against Mr. McCain, Mr. Kyle's comrade. http://www.joslynf...ancial-crisis.html
Bad Boy
MARTIN reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power

AA

Martin Wolf is extremely biased and has zero credibility in my eyes. It is the Democrats who push endless spending, particularly in the areas where the government should not interfere at all. There shouldn't be much government spending except on defense, police, courts of law and consulates. 99% of the rest can be taken care of by priva

ubergroov
a time when the US was like this and it was a growing to become the richest country in the world. Wolf has already contributed to making Europe the economic museum. Now, he wants the US to go the same way.
Terry Ott
A school of thought tells us the stimulus as implemented was not large enough (not right-sized). I am not qualified to evaluate that. But I DO wonder whether the stimulus was the "right kind".

I come with a business owner background. If we have a client project falling short in midstream and decide to add 5 people to the team it matters greatly what capabilities those people bring, and what their contributions have been in similar situations. The right mix might be 2 junior eager beavers, 2 seasoned subject matter experts, and one world-class strategist who is good at client relationship management. If, instead, we add 4 eager beavers and a subject matter expert, we might help the project somewhat, but it would be far from optimal.

A reason I am skeptical about more stimulus spending is that I don't know how and if that stimulus might be more effective, or "most" effective in the circumstances. Does Washington know that? Will it matter? Or will it be more of the same kind of trickle down spending passing through multiple bureaucratic levels in and outside of the federal government? Report kfunk | July 26

joebhed
tions Where you're (completely and utterly) wrong is that the US can default on its debt. Every penny that our government owes is denominated in dollars--which we can print at will. Inflation? Possibly, sure. But then inflation changes the deficit burden projections downward anyway. Hyperinflation? Not possible unless the government completely loses its ability to tax.

Otherwise, good article in terms of analyzing the Republican position/strategy on deficits.

The only other comment I'd make is that underneath your whole article you imply the premise that our projected deficits are unsustainable. The problem with the "large deficits are unsustainable" crowd is that that claim is never backed by logical and analytically-driven proof. It's always put forward as if it's just a given. And most irritatingly you deficits-are-unsustainable people NEVER define what actually IS sustainable, or exactly how the government could logistically go about balancing its budget over the business/credit cycles with the inherent wildly-varying tax revenues they produce.

The reality is that the particular amount of the deficit at any given time doesn't matter. What matters is the state of the underlying economy. The federal government can run inflation-free deficits as long as they want when unemployment is high.

Both parties just use the deficits as a political football to be harped on when out of power. They both know the government can print money at will, and if it got inflationary they could raise taxes and/or interest rates to siphon out the excess money.

Let's talk about real problems like unemployment and not boogeymen deficit fears.

Oregon Resident
Who has recommendations for how to oppose the supply side economic/drive the US into a fiscal crisis political wing of the United States?

Dr Guido Prettyfeet

You are not wrong at all. The only thing one might add, however, is that the Republican party's social base is less secure than you seem to assume. Dubya barely won his elections even though the Democrats seemed out to help him rather than themselves. And the crisis made things worse by pushing a lot of working class Republicans towards Obama. It is still possible that the Tea Party's high decibel levels are a function not of their strength but of the right's political weakness.

You make an excellent point about the US being the Keynesian nation par excellence, something people do not seem to understand here is Britain. The policy divide which exists today between Obama and Cameron has deeper roots - Thatcher was more masochistically (or should we say sadistically?) Monetarist than Reagan ever was.

However, the reason has not to do with jobs being a safety net at all. In 1946 the US congress passed the Employment Act requiring the government to pursue 'maximum employment, production and purchasing power'. It's rationale was certainly Keynesian but the aims were as much to maintain the US's' relative productive superiority in the world (which as you know was massive at the time) as to provide employment or any form of welfare. That is why, with the possible exception of Eisenhower, Republicans have been as enthusiastic demand managers - with their Military Keynesianism and Credit Keynesianism - as the Democrats, almost more so.

Terry Ott
"The problem with the 'large deficits are unsustainable' crowd is that that claim is never backed by logical and analytically-driven proof. It's always put forward as if it's just a given. And most irritatingly you deficits-are-unsustainable people NEVER define what actually IS sustainable...."

Am I mistaken in saying that both Orszag and the OMB have said the current fiscal course is "unsustainable"? Maybe that's semantics; maybe large deficits are sustainable if they are not growing ever larger. Is that what you mean?

It seems to me, layman that I am, that when your cost of borrowing exceeds the tax revenue you can realistically project as future government income --- that's unsustainable in the extreme. And if your legislated financial obligations to individual citizens consume all the revenue you can squeeze out of the public, that's unsustainable, too. I guess you can retract the obligations and let it become survival of the (financially) fittest, and you can print money to the point where it is nearly worthless .... but are those not the likely "end games"? No comments yet To report this comment for the attention of our moderation team please enter the two words you see below. This helps us fight spam. Sending report

[Dec 23, 2010] George H. W. Bush and Voodoo Economics by Bruce Bartlett

The discussion below provides nice examples of sophistry supply side jerks use to justify their position.
Dec 21, 2010 | Capital Gains and Games

Sam Houston State University historian, writing on the Forbes web site, has a very odd blog post this morning. He criticizes MIT economist Simon Johnson for attributing the term "voodoo economics" to George H.W. Bush. Domitrovic calls it a "myth" that the elder Bush ever uttered those words. "You'd think there'd be a scrap of evidence dating from 1980 in support of this claim. In fact there is none," he says.

Perhaps down in Texas they don't have access to the Los Angeles Times. If one goes to the April 14, 1980 issue and turns to page 20, one will find an articled by Times staff reporter Robert Shogan, entitled, "Bush Ends His Waiting Game, Attacks Reagan." Following is the 4th paragraph from that news report:

"He [Bush] signaled the shift [in strategy] in a speech here [in Pittsburgh] last week when he charged that Reagan had made 'a list of phony promises' on defense, energy and economic policy. And he labeled Reagan's tax cut proposal 'voodoo economic policy' and 'economic madness.'"

I've attached a PDF file of the Times article to this post for the benefit of the skeptical.

Let me just emphasize that the words "voodoo economic policy" are Bush's words. The source is a reputable one that is easily available even at second-tier universities, so I think this counts as pretty strong evidence to anyone with a reasonably open mind. I think even someone with a Ph.D. in history from Harvard might concede that it is at least a scrap of evidence.

I suppose that is one wanted to be pedantic, one could continue to argue that Bush never said the precise words "voodoo economics," that somehow or other "voodoo economic policy" is something completely different. I will allow others to debate the point.

Bush-Voodoo.pdf 83.62 KB

Dec 21, 2010 | http://capitalgainsandgames.com/files/Bush-Voodoo.pdf

Bruce Bartlett's blog

Or watch him

Or you could just watch Bush, Sr say those words. Around 1:29

http://www.youtube.com/watch?v=DYNWztgHQtI


Posted by cce on Dec 21st, 2010 at 10:22 am.

Bruce, you must not have read the whole thing...

From the sixth paragraph of that blog post:

Bush used the term "voodoo economics" in 1980 as an epithet against the Reagan economic plan, to be sure. But the further step of calling supply-side economics voodoo economics never happened. This is because in 1980, Bush was fully on board with so-called "supply-side" tax changes aimed at getting business to produce more, such things as accelerated depreciation and investment tax credits (along the lines of what President Obama approved of in a part of his own law last week).

But keep going, you're one of the few people in the world making sense these days.


Posted by Yet Another Budget Wonk on Dec 21st, 2010 at 10:32 am.
We're in the era of fact-free

We're in the era of fact-free arguments. News media, politicians, historians. It's one of the main reasons we are where we are these days.


Posted by foosion on Dec 21st, 2010 at 10:33 am.
insandgames.com/comment/reply/2083/10087">reply Video evidence

This is all the proof I need: http://www.youtube.com/watch?v=dxPVyieptwA


Posted by Dan Daoust on Dec 21st, 2010 at 10:50 am.
reply cahuenga Not exactly

It appears that he isn't saying that Bush never said the words, he is saying that Bush never called supply-side voodoo economics.

Unless that story has been reedited.

Nobody In Particular I think you've misquoted Bush somewhat

"One of the sturdiest myths about supply-side economics is that George H.W. Bush called it 'voodoo economics' on the campaign trail in 1980. You'd think there'd be a scrap of evidence dating from 1980 in support of this claim. In fact there is none."

While I can see how you could view this as Domitrovic claiming that Bush never uttered those words, to stand on that point demonstrates that the rest of the posting went unread, as other posters here have pointed out.

We don't do ourselves any favors by letting outrage over a single passage in a longer piece prevent us from reading the rest of it, and making sure that we understand the context of what we are reading. What Domitrovic is pointing out is that just because a particular reading of an event has become dogma among a certain group of people doesn't mean that it's true - and in this, you have demonstrated yourself to be in the group of people he is criticizing: opponents of supply-side economics are dogmatic to the point of not carefully looking at the facts.

Just because candidate Reagan termed himself a supply-sider doesn't make it so. Therefore, the charge that Reaganomics was labeled "Voodoo Economics" by Bush doesn't mean that he was referring to supply-side economics in general.

Vivian Darkbloom A Very Odd Blog Post Indeed

Sorry, but this is a shameless misinterpretation of what the historian actually said as demonstrated by the quote set forth in the second comment, above. The blogger definitely did acknowledge those words were uttered---he simply took issue with the assertion by Johnson that the words were specifically targetted to what is called "supply side economics".

Mr. Bartlett, it is your post that is bizarre. Either you did not read the original article, or you are intentionally distorting what was written. I suspect it is the latter, which frankly doesn't speak very well of your integrity here. It's time for a correction, or better yet, a retraction.

In Hell's Kitchen who cares ?

"supply side economics" is the most successful con job to ever hit this country.

Just look at any economic indicator and what do you see ? you see a turn for the
worse in the early eighties. What did the great communicator tell us ? he told us
that it was time to reawaken the industrial giant and proceeded to start nailing
the coffin of our manufacturing sector while the credulous public clapped.

goodrich4bk We'll Never Know

We'll never know if supply-side would have worked better for Americans had the productive capacity of the Russian and Chinese populations remained bottled up behind the Iron Curtain. But the evidence is clear that freeing both capital and labor from previously arbitrary national boundaries created enormous wealth for the financiers of wage arbitrage. Today we call it "globalism" as if it some sort of ideology or belief system. It is not. It is simply the logical result of very specific and intentional changes in the regulation of western capital, tariffs and foreign policy by those who understood the tremendous profits to be "earned" from such changes.

Yet Another Budget Wonk Please reread the article and revise your post

Bruce - I don't usually post just to repeat what others have said, but this is a really egregious distortion of the article that you site and, if left unrevised, severely damages your reputation. Brian Domitrovic's article clearly states that "Bush used the term 'voodoo economics'..." His argument is that Bush never called "supply-side economics voodoo economics...Bush was fully on board with so-called 'supply-side' tax changes..."

If you disagree and believe that Bush's use of "voodoo economics" was directed towards supply-side principles, I would be interested in reading that discussion, but the article you cite does not advance that sort of argument at all.

Comrade PhysioProf Capital Gains and Games is an

Capital Gains and Games is an excellent blog, representing as it does the views of rational reality-based political economists who consider themselves "conservative". However, the thing that continues to amaze me about CGG is that the authors themselves seem to invariably be shocked that those politicians and commentators who currently call themselves "conservative" are utterly morally and pragmatically bankrupt, and represent nothing more than the greedy desires of the wealthiest vanishingly small fraction of Americans. Bruce, Stan, et al, you really need to accept the fact that what you call "conservative" has nothing whatsoever to do with the on-the-ground reality of American right-wing "conservative" politics and economics today.

Yet Another Budget Wonk The article is still

The article is still incorrect. The historian says:

"Voodoo" referred exclusively to Bush's dubiousness about Reagan's claim that his plan would combat inflation."

According to the PDF file (mid 2nd full paragraph on the far right column), Bush criticizes Reagan's claim that he can "cut 210 billion in taxes and still balance the budget."

Bush called Reaganomics voodoo because Reagan claimed that tax cuts increase tax revenue. It wasn't exclusively due to a claim about combating inflation via a tax cut.

The Forbes article also fails to mention Volcker's interest rate hike and what effect it had on inflation. He seems to give all the credit to Reagan's tax cut which is absurd.

Brian Domitrovic Bush's point was arcane

Hi all -- Brian Domitrovic here, author of the Forbes post. The budget deficit politics of 1980 were weird, much different from today's. The chief contentions were over how deficits mattered -- and if they mattered at all. Reagan said that he wasn't going to have a budget deficit, but if he did, inflation would still vanish. Bush said that Reagan was going to have a deficit, and when he did, inflation would hit 30%. It was this specific disagreement that led Bush, in April 1980, to ride to victory in Pennsylvania characterizing the RR plan (but certainly not "supply-side economics") as "voodoo."

It was a savvy move, in the short term, because at that point the public was particularly exercised about the inflation rate -- 1979's whopping 11% was going to be succeeded by 19% in 1980 if the Jan-March trend held. But the study Bush used here was campaign-issue grade. A 30% inflation would lead to something like a 50% increase in federal receipts (on account of the un-indexed nature of the tax code), eliminating any prospect of a budget deficit. Therefore, if deficits caused inflation, the inflation would in turn cancel the deficit and thus any further inflation. So Bush went out on a limb and implied that the Kemp-Roth cut inherently would cause inflation, irrespective of its budget-deficit effects.

This arcane debate (such as it was) was the essence of the "voodoo" charge. That "voodoo economics" has become a general stand-in for "supply-side economics" is to have fun with the historical record.

Now if Bruce does not want us to gum up his board, we can go over these issues at my site on Forbes too.

keivite Still supply economics can rightly be called woodoo

I think Brian Domitrovic post is just a smoke screen.

This excessive digging into who said what and did really Bush mean the supply side economy is junk it is should not distract us from the fact that supply side economic in reality *is* voodoo economics. Like voodoo healers supporters of supply side economics actually made the patient much worse.

Similar to Lysenkoism it was created with explicit goal of supporting particular ideology. Academic supporter of supply side economics actually are pretty close to Trofim Lysenko supporters in all dimensions except one: they are much, much better paid.

Econiminium Exegesis and Economics

It amazes me how the comments here relate to my personal specialty, Early New Testament and apologists. You see, what they do is come to a subject from a preordained path, and then argue and find fault with others interpretations, and here is the kicker, no matter what the text plainly says. Thus you'll get all sorts of ridiculous explanations as to why Jesus really didn't just quote the Greek version of the Jewish Bible to Pharasitic Hebrew-speaking Jerusalemites, when the text, you know, plainly says he did because that translation isn't allowed in the original Hebrew.

And so here. Now as someone who reads the text with no ideological slant, as a historian (honest) would, it plainly calls Reagan's policies "vodoo economics". That is the plain intent (and as someone who lived through it, it was meant to distance Bush from the economic sideshow going on at the time to improve his electability) no matter how you twist and turn a phrase or parse the text so it suits your needs.

Faith-based economics indeed! It seems the same sleight-of-hand is at word here as when apologists analyze text. This will make economics, one day, no better and certainly not allow it to be labeled "science" any longer.

Yet Another Budget Wonk Ah, Memories! I worked at EPI

Ah, Memories! I worked at EPI back during Bush I and wrote a paper on the cuts in the capital gain tax that were on the table then. The paper was forgettable, but it was my favorite title ever: "Deja Voodoo Economics."

Sorry, wingers, Bruce and Simon are right, and you are wrong

Apparently you have infuriated some of your old pals. Too bad they are only proving how desperate they are to defend their latest misinformation campaign.

I see that the quote from the paper is this :"He [Bush] signaled the shift [in strategy] in a speech here [in Pittsburgh] last week when he charged that Reagan had made 'a list of phony promises' on defense, energy and economic policy. And he labeled Reagan's tax cut proposal 'voodoo economic policy' and 'economic madness.'"

Reagan's tax cut proposal is voodoo economics. In other almost identical words: Reagan's supply-side tax argument is voodoo economics. or even better yet: for all you dimwits who still refuse the truth:

REAGAN'S SUPPLY-SIDE ECONOMICS IS VOODOO ECONOMICS!!!

So simple, a kindergardener would see it.

You right-wingers are looking dumber by the day.


Posted by Republicans are idiots on Dec 22nd, 2010 at 6:23 pm. Faith based economics

Econiminium has got it exactly right, as Domitrovic evidently was too young to remember the situation, and must parse old texts to divine their meaning.

As an economist at the time, voodoo economics referred to the Reagan and Laffer fairy tales of how tax cuts would lead to an explosion of effort that would bring in more than enough revenue to pay for the cuts, and as well be non-inflationary in a very inflationary environment. Domitrovic really ought to do some oral history rather than just try to divine the news record.

The phrase is of course not a technical economics term, and therefore cannot to said to include one idea and conveniently exclude the others that were clearly part of the discussions of the day.

For me this marks the beginning of the continuing Republican now long record of faith based economics and continued and calculated mendacity.


Posted by Econ Prof. on Dec 22nd, 2010 at 7:47 pm. "Therefore, if deficits

"Therefore, if deficits caused inflation, the inflation would in turn cancel the deficit and thus any further inflation. So Bush went out on a limb and implied that the Kemp-Roth cut inherently would cause inflation, irrespective of its budget-deficit effects."

Inflating away the deficit will cure inflation? Where did that idea come from? I have never heard of that theory before.

I don't recall deficits being of major concern until Reagan's huge deficits caused the federal debt to top a trillion, then it was non-stop deficit stories. However, in 79, inflation, oil, excessive taxation were the economic issues. Working class people were in the top tax bracket due to bracket creep. It seemed like Proposition 13 in 1978 starting a nationwide tax revolt. Concern about the deficit though wasn't the problem (as I recall, I could be wrong), it was high taxes. Debt as a percentage of GDP went from 36% to 33% under Carter.

[Nov 26, 2010] Jared Bernstein- Trickle Down...R.I.P.

August 27, 2008 | http://delong.typepad.com/reading_economics/2008/08/jared-bernstein.html
TPMCafe | Talking Points Memo | Trickle Down...R.I.P.: Look for this obituary in tomorrow's paper:

Trickle-down economics died yesterday morning at 10AM. The cause of death was a data release from the US Census Bureau, but trickle-down had been ailing from lack of empirical support for decades. Also known as "supply-side economics," trickle-down was the love child of Ronald Reagan, Arthur Laffer, and Jude Wanniski. It is survived by Larry Kudlow and Co., and the editorial page of the Wall St. Journal.

That's what you should see, but you probably won't. Let me explain. The Census Bureau released some new data on Tuesday that strongly contradicts supply-side, trickle-down economics, but the truth is that if this brand of hucksterism could be brought down by evidence, it would have died long ago.

First, the new data. Every year the Census Bureau releases info on middle-class incomes and poverty for the prior year. So today's release refers to last year's data. Median household income, inflation-adjusted, was up slightly in 2007, but poverty rose too.

But the annual data are not of great interest here. Since 2007 was the last year of an economic expansion that began in 2001, that makes it an economic peak: the last year of a cycle. Which means we can now, for the first time, compare the results from this peak to the peak of the prior cycle: 2000.

Economists like such comparisons because they evaluate a given outcome across similar years in the cycle. If you were to compare, say, trough to peak, you'd expect things to improve. But peak-to-peak is considered the legit way to compare like-to-like.

So here are some key peak-to-peak comparisons:

Real (inflation-adjusted) median household income was essentially unchanged between 2000 and 2007 (it was $300 lower last year than in 2000, but the difference is not statistically significant).

This is the first cycle on record where the real median household income failed to surpass its prior peak.

For working-age households, real median income is $2,000 below its 2000 level.

Poverty rates were 1.2% higher in 2007 than in 2000, up from 11.3% to 12.5%, an addition of 5.7 million to the poverty rolls. This is the worst cycle for poverty on record. The second worse was 1979-89, a decade also dominated by trickle-down economics.

What is trickle-down? It's the set of economic policies based on the notion that if you provide economic incentives to the wealthy by cutting their taxes (or, as the supply-siders put it, "letting us keep our money") while deregulating industry, you'll unleash a tsunami of economic activities that will enrich even the least advantaged among us.

The theory doesn't make sense even on its face. Why would people work harder only if you cut their taxes? After all, their after-tax income goes up, so they might decide they can work less and still be as well off. Or, if you raise their taxes, they might decide to work harder to make up the after-tax losses.

No matter...this stuff is not based on logic. It's largely a rationale for upward redistribution that's been kept alive by the vested interests who benefit from it. Reagan put this stuff on the map, but GW Bush brought it back with a vengeance, and McCain goes even further. He extends the supply-side Bush tax cuts, and lards on about $75 billion more in corporate tax cuts on top of that.

The evidence from the 1980s and the 2000s shows that trickle-down works fine, if by "down" they mean "up." But is there any counter-evidence that shows the impact of a different policy regime on middle-class and low-incomes?

Exhibit A is the 1990s. When he came into office, Clinton eschewed supply-side, cutting taxes on lower-income households and raising them at the top end. Obama takes a similar approach.

Now, take a look at Figures 5 and 6, and especially Table 2 in this document, drawing on today's report from the Census. There you will see evidence of the strong real growth in median incomes and sharp declines in poverty that occurred over the 1990s, contrasted with the opposite trends in the 2000s.

Remember those working-age households that lost a couple of grand in the 2000s? Their income was up 10%, or $5,200 in the 1990s (1989-2000). Had this growth rate prevailed in the 2000s, their median income would have gone up $3,600 instead of falling $2,000.

Note that these results are strongest for minorities. The median household income of African-American households grew 22% in the 1990s and fell 5% in the 2000s. Note also the poverty results from black children (Table 2 from the above link). If evidence were bullets, trickle-down would perish in a pool of blood.

Yet, its obit is premature. It lives on in the Republican platform, the right-wing think tanks, and conservative media (really, in the mainstream media...you may recall that during a Democratic primary debate on ABC, Charles Gibson claimed that due to the magic of supply-side, capital gains tax cuts pay for themselves).

Frankly, I'm not sure how to kill it, and am earnestly interested in any ideas you might have for exposing and discrediting this deeply damaging ruse. In the meantime, the best we can hope for is to throw its practitioners out of the White House and Congress.

[Sep 25, 2010] Neoconomy: George Bush's Revolutionary Gamble with America's Future

E. David Swan:

"Neoconomy', along with `What's the Matter with Kansas' are probably the two most influential books I've read in the last five years. Forget all you know about Supply-Side Economics and Trickle Down Theory, Daniel Altman has written an easy to understand book on what the heck the Bush Administration is attempting with all those tax cuts and why they target the wealthy.

In a nutshell the Neoconomy is about reducing taxes on unearned income and savings in order to increase the accumulation of capital. This capital could be used to modernize, increase productivity and raise the holy grail of economics, the GDP. The country would theoretically attain more wealth, higher standards of living and a happy future for all. It's not an insane plan and it has the support of many well respected economists. The first problem with the plan is that it seems rather self serving. George W. Bush assembled a cabinet with an almost unprecedented cache of wealth. The author estimates their combined assets at between 3 and 30 times the value of the second Clinton administration. These are exactly the people who will benefit most from tax cuts on unearned income. They are also people who can afford to take considerable risks with our economy and still come out fine if things go sour.

The other larger problem is in the very nature of the leadership of George W. Bush. He surrounds himself with like minded people and gathered an economics team consisting almost entirely of supply-side adherents creating an echo chamber of ideas. These are people who have taken economics beyond mere theory into the realm of religious dogma. Unfortunately when tax cuts and growth are the only path to salvation everything else tends to get shortchanged. It has occurred to business owners that some of the things holding back growth include employee benefits, high American wages, regulations and assistance for the poor. The obsession with growth sometimes seems to reach the level of pathological and government finds itself ripping away at society's foundation in order to raise the tower higher. The author also points out that capital accumulation on its own is useless. You also need an educated society in order to both develop and use new technologies. Meanwhile the administration has consistently under funded education programs, worked to cut college grants and shown disdain for the scientific process (Read `The Republican War on Science' by Chris Mooney to see how bad it has gotten).

The last problem is that the Neoconomy may just flat out fail. Like the weather, economics can be affected dramatically by small unexpected perturbations. It's difficult to predict what will happen in six months or next month much less decades in the future. The Bush administration is treating economics like a hard science when in reality it's based on difficult to predictable human psychology. Changing the tax codes may have exactly the opposite intended effect. By reducing taxes on dividends people may actually begin to save less rather than more if they have specific retirement goals. Unfortunately Bush's extreme tax cuts are intended to handcuff lawmakers and force us down one path. The Republican groupthink is also the likely cause of the wildly optimistic (bordering on obscene) predictions about job creation that rivaled anything made in the run up to the Iraqi war. People forget now but the numbers being offered by the administration weren't just wrong they were `we have no idea what we are talking about' wrong. The scary thing is that these same people who were as wrong as wrong could be on job creation numbers seem to have absolutely confidence that they can precisely predict the effect of Social Security privatization decades in the future.

`Neoconomy' is Daniel Altman's first effort and he smacked this one out of the ballpark. Economics can be a rather dry and confusing subject but Mr. Altman manages to write a book that is lucid, informative and engaging. I would highly recommend this book to anyone interested in the direction the United States is traveling.

Dennis Littrell

In this modest volume, economic journalist and Harvard-trained economist Daniel Altman attempts to explain what the so-called neoconservatives, who are directing President Bush's economic policies, are up to. Altman calls it a revolution that will greatly increase the chasm between the rich and the poor and create a new kind of society based not on merit but on inherited wealth and advantage.

The neocon's main idea is to abolish taxes on capital and earnings from capital. Their rationale is that untaxed capital will be more readily invested leading to a rising tide of economic prosperity that will lift all segments of society. Yes, the rich will get richer, but through "trickle down" and a booming economy, the poor and the middle class will also gain.

Such is the theory. Because such theories cannot be adequately tested on models, we can only find out if they work by testing them in the actual economy (which may be the real reason economics is called "the dismal science"). The problem--as Altman advises--is that if they fail the consequences may be horrific. If the rich get too rich and the poor too poor and the middle class disappears--well, such is the stuff of revolutions, witness Europe in the 19th and 20th centuries.

Here are the taxes the neocons want abolished: the estate tax; taxes on interest, dividends and capital gains; and the corporate income tax. Here's what famed investor Warren Buffet thinks about the abolition of the estate tax:

"Without the estate tax, you in effect will have an aristocracy of wealth, which means you pass down the ability to command the resources of the nation based on heredity rather than merit." (p. 250) Clearly he's agin it. I might add that the ironic example of the very mediocre George W. Bush as president of the United States is perhaps an early example of what Buffet is afraid of.

Feeling much the same way is Thomas Piketty, director of the School for Advanced Studies in the Social Sciences, whom Altman quotes as saying: "These new high-income tax cuts, together with all the previous tax cuts (including the repeal of the estate tax), will eventually contribute to rebuild a class of rentiers in the US, whereby a small group of wealthy but untalented children controls vast segments of the US economy and penniless, talented children simply can't compete... If such a tax policy is maintained, there is a decent probability that the US will look like Old Europe prior to 1914 in a couple of generations." (p. 241)

I don't have any doubt that people like George W. Bush are partially motivated by a desire to create sharp class distinctions and to increase the privilege of their friends and relatives. But there is more to the lopsided tax cuts than that. As Altman explains on pages 166-167, one of the effects of the huge tax cuts by the Bush administration is to tie the hands of his successors. "Forced to deal with deficits...they would [read: will] be hard-pressed to spend money on...social programs... They might even have to raise taxes just to avoid cutting spending." To put it bluntly: Bush 43 is spending not only our children's and our grandchildren's money, but the money of future administrations.

As Altman notes, this strategy was employed before by Ronald Reagan. Only trouble was, "his successor was not a Democrat, but his own vice president, George H. W. Bush." (p. 167) And, as you'll recall, Bush 41 turned out to be a one-term president, giving way to Bill Clinton.

Okay, is Altman's critique correct? Or are the neocons really working to take the nation to an economic heaven on earth?

I'm not sure, and the economists I have read are in disagreement. This book does not prove anything one way or the other of course. What Altman does, and he does it admirably with a calm voice and verbal restraint (too much restraint for my taste, by the way) is chronicle what has happened and point to what we can expect in the future if the neocons get their way. Obviously, he doesn't like the potential consequences, and neither do I.

Bottom line: a nice primer on Bush's economy policies, a bit too leisurely developed, but all told a kind of eye-popping indictment.

Roger Levy

Daniel Altman has the gift that I've been searching for: he lifts the curtain of economic jargon and exposes the major ideas of macroeconomic policy in all their simplicity. Why is there a controversy over the effect of income tax cuts on federal government revenues? It's really very simple. Some people think that if you can bring home more dough for an hour of work, you'll work more hours and bring home more. Others think that you'll work fewer hours, bring home the same amount, and use the extra hours on friends, family, and leisure. Voila, I give you the basis of Republican and Democratic economic policy, respectively.

This book introduces the neoconomists: the economic advisers to Republican presidents since Reagan -- I'm talking about Martin Feldstein, Glenn Hubbard, and Larry Lindsey -- and introduces the core ideas behind their economic policies in simple, understandable terms. The author actually studied under Feldstein at Harvard, and is pain-stakingly fair-minded about giving the neoconomists' ideas a sympathetic look. This makes the subsequent critique of Bush Junior's economic policies all the more devastating. The Bush administration has taken advantage of economic recession, 9/11, and Enron to dogmatically institute a host of dramatic tax cuts -- a classic bait and switch, selling a long-term economic policy as a short-term cure. What's worse, it has done so in the face of short-term economic data that seriously calls into question the validity of neoeconomic theory in this day and age. Even Martin Feldstein isn't thrilled.

[Jul 25, 2010] "Trickle Down Meanness"

Maxine Udall:

Trickle Down Meanness, by Maxine Udall: Linda Beale ... had a really excellent post a few days ago about a study by Sreedhari Desai, Arthur Brief, and Jennifer George that examines

...a heretofore ignored consequence of rising executive compensation. Specifically, we claim that higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers. We present findings from two studies - an archival study and a laboratory experiment – that show that increasing executive compensation results in executives behaving meanly toward those lower down the hierarchy.

The study conclusions are consistent with my own conjectures that there are ethical as well as economic consequences that result from dysfunctional financial markets and the dysfunctional labor markets they induce. The economic consequences include gross misallocations of financial, physical and human capital, away from activities that would promote long run economic growth and well being and to activities that will promote rising income inequality. The ethical consequences are erosion of trust and compassion, both prerequisites to fairness in rewarding contributions to long run growth and prosperity. If the above study is right, we can add frank meanness to the list of ethical consequences. ...

Causal relationships are always difficult to establish in non-experimental settings. Desai, Brief and George provide results from a small experiment that lend support to their conclusion that increased wage disparity engenders meanness or as Smith might call it "lack of sympathy" among those at the top for those at the middle and bottom of the wage pyramid. Nevertheless, it remains difficult at the societal level to determine to what extent economics shapes ethics and to what extent ethics shapes economics and economic systems.

I would be willing to bet that just as disparity between worker and CEO pay has produced "meanness," so has growing US income inequality produced similar disruption of fellow feeling in the population generally. As the "distance" between the wage rates at the top of the US income distribution and the middle and bottom of the distribution has increased, so has grown the "distance" in sympathy one for the other.

This is not an argument for income equality. There is every reason to believe that most people in the US approve of income differences based on rewards for greater productivity or other merit. I happen to share those views. However, the current disproportionate increase in the percent of national output going to the top 1% of the population, despite increasing productivity among those of us still employed and those who were employed up until 2 years ago, suggests that merit is no longer the trait that is being rewarded.

The conclusion seems self-evident. There is more at stake here than our economy. We must, as a nation, decide whether we want to continue on the path we have been on since roughly 1980. Do we want to continue to reward disproportionately a small fraction of the population that (based on recent performance) seems better at misallocating financial, physical, and human capital through speculative endeavors? Do we want to continue the trickle down of meanness? Shall we live in a society in which trust and fellow feeling are lost, replaced by mindless (not rational, not productive) winner-take-all competition that favors one group disproportionately? If the answers to these questions are all "yes," then the social fabric may already be torn beyond repair and I fear we are about to learn firsthand how empires crumble.

[Jul 25, 2010] The political genius of supply-side economics, by Martin Wolf

When you listen to U.S. Senate Republican Leader Mitch McConnell impression that you are listening to an aged Politburo member is way too strong to ignore. Extremes meet.

...My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era's successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts. In practice, then, nothing will be done. ...

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: "supply-side economics". Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. ... It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?
How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives - for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the "starve the beast" theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.
In this way, the Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective...
The ... theory that cuts would pay for themselves has proved altogether wrong. ... Indeed, Greg Mankiw ... has responded to the view that broad-based tax cuts would pay for themselves, as follows: "I did not find such a claim credible, based on the available evidence. I never have, and I still don't." Indeed, he has referred to those who believe this as "charlatans and cranks". ...
So, when Republicans assail the deficits under President Obama, are they to be taken seriously? ...[I]t is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military. ...
What conclusions should outsiders draw about the likely future of US fiscal policy? First, if Republicans win the mid-terms in November, as seems likely, they are surely going to come up with huge tax cut proposals (probably well beyond extending the already unaffordable Bush-era tax cuts).
Second, the White House will probably veto these cuts, making itself even more politically unpopular.
Third, some additional fiscal stimulus is, in fact, what the US needs, in the short term, even though across-the-board tax cuts are an extremely inefficient way of providing it.
Fourth, the Republican proposals would not, alas, be short term, but dangerously long term, in their impact.
Finally, with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programs, US fiscal policy is paralyzed. ...
This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic.
In sum, a great deal of trouble lies ahead, for the US and the world.
Where am I wrong, if at all?

[Jul 25, 2010] GOP wants to extend tax cuts, not jobless aid 07-18-2010

Are Repugs bent on emulating Bolsheviks using suppy-side voodoo instead of Marx ?
Philadelphia Inquirer

Republicans almost unanimously oppose spending $33.9 billion for extended unemployment benefits for the approximately 2.5 million people who've lost them, because they say it would increase federal budget deficits.

At the same time, they're pushing a permanent extension of Bush administration tax cuts, especially for the wealthy, which could increase deficits by trillions of dollars over the next 10 years.

How do they justify this?

"Tax policy is dynamic. If you have the right kind of tax reform, it helps generate a more dynamic economy," said Sen. Mike Crapo (R., Idaho), a member of the Senate Finance Committee, which writes tax law. While that may be true, even the Bush Treasury Department concluded that its tax cuts increased budget deficits.

Besides, wouldn't providing $33.9 billion to extend unemployment benefits to 2.5 million people help the economy?

"There's a distinction between taxes and spending," Crapo said. "We have a huge problem with a lack of spending restraint."

In addition, said Iowa Sen. Charles Grassley, the committee's top Republican, "this is a tax increase if you don't extend, and it's not a tax cut if you do."

Democrats howl at what they see as hypocrisy.

The GOP argument, said Sen. Tom Harkin (D., Iowa), is "that we should cut off some of the most desperate people in our economy, take away their last meager lifeline, because we're concerned about the deficit.

"Yet those very same senators are demanding that we extend hundreds of billions of dollars in tax breaks for the wealthiest Americans in our society."

The money for jobless benefits is expected to win approval early this week after weeks of Republican-led debate.

The next big economic-policy fight in Congress will involve the tax cuts, the 2001 and 2003 cornerstones of former President George W. Bush's economic program. Most are set to expire Dec. 31, meaning that taxes on income, capital gains, dividends, and estates would go up next year and the child care-credit would be cut in half, to $500 per child.

President Obama would reinstate the top two pre-Bush marginal income-tax rates of 36 and 39.6 percent, starting with adjusted gross incomes of more than $250,000 for joint filers and $200,000 for individuals. The current top rates are 33 and 35 percent.

Obama would retain the Bush-era rates ranging from 10 to 28 percent for those who earn less.

Congressional Democrats are weighing whether acting on taxes before the Nov. 2 midterm elections would give them a political boost or give constituents troubled by record federal deficits more cause for concern.

"We haven't determined the timetable" for considering tax cuts, House Majority Leader Steny Hoyer (D., Md.) said.

Asked whether it could be done in a postelection lame-duck session, he said, "The goal was to get it done before they expire."

Conservatives contend that tax policy should be considered differently from spending. Cutting taxes spurs the economy, their thinking goes, because the more consumers spend and invest, the more businesses will hire and the more the economy will grow. Reducing tax revenue, they contend, will force spending restraint on Congress.

On the other hand, they say extending unemployment benefits without offsetting revenue doesn't appreciably boost the economy and could weaken the incentive to seek new employment.

Liberals, boosted by a report this year from the nonpartisan Congressional Budget Office, maintain that the jobless benefits go to those who need them most and are likely to spend them quickly, and say that multiplies their economic effect.

The CBO and Congress' Joint Committee on Taxation said this year that extending the Bush-era tax cuts would increase budget deficits by $2.56 trillion this decade. Deficits under Obama's budget plan are expected to total about $9.75 trillion over the next 10 years.

Other tax experts say the government should tax wealthy people at higher rates so that some wealth can be redistributed to those who may need aid - the traditional progressive taxation principle that guides U.S. tax law.

"I believe it would be a serious mistake to make any of the tax cuts permanent now," said Leonard Burman, a professor of public affairs at Syracuse University's Maxwell School. But not all the tax cuts should expire, he said, since "low- and middle-income households are facing serious cash-flow constraints."

Douglas Holtz-Eakin, who in 2001-02 was chief economist for Bush's Council of Economic Advisers, warned against letting any tax rates rise.

"The prospect of a large tax increase," he said, "would force households to undertake even more balance-sheet repair."

DwightinDC

The Republicans are just determined to destroy this country. Common sense and human decency mean nothing to a party on a kamikaze mission.

elpel

The "trickle-down" idea doesn't work for a pretty simple reason: the GOP philsophy is that, in economically-depressed times, tax cuts for wealthy people will increase investment and business expansion, which will in turn create more jobs and the money will filter down to new workers.

The one obvious flaw there is that the tax cuts will not lead to business expansion because the only reason to expand business is high DEMAND, not a few extra bucks in your account. And since the consumers are still broke, the business owners getting tax cuts would never use it to expand their business, because there's still no consumer base with disposable income to justify it. Can you imagine a business owner, in the middle of a recession where no one's buying anything, getting a big tax cut and thinking, "Now I can open two new stores that no one can afford to shop at!" Of course not.

[Jul 25, 2010] "The Monumental Hypocrisy of the Republican Party"

Tax cut bent Repug kamikadze are winning politically.
Economist's View
Six questions for Bruce Bartlett, The Economist:
Furthermore, Republicans have a completely indefensible position on taxes. In their view, deficits cannot arise from tax cuts. No matter how much taxes are cut, no matter how low revenues go as a share of GDP, tax cuts are never a cause of deficits; they result ONLY AND EXCLUSIVELY from spending - and never from spending put in place by Republicans, such as Medicare Part D, TARP, two unfunded wars, bridges to nowhere, etc - but ONLY from Democratic efforts to stimulate growth, help the unemployed, provide health insurance for those without it, etc.

The monumental hypocrisy of the Republican Party is something amazing to behold. And their dimwitted accomplices in the tea-party movement are not much better. They know that Republicans, far more than Democrats, are responsible for our fiscal mess, but they won't say so. And they adamantly refuse to put on the table any meaningful programme that would actually reduce spending. Judging by polls, most of them seem to think that all we have to do is cut foreign aid, which represents well less than 1% of the budget.

[Oct 25, 2009] "Supply-Side Economics, R.I.P."?

Economist's View
Bruce Bartlett says supply-side economics should "should declare victory and then go out of existence.":
Supply-Side Economics, R.I.P., by Bruce Bartlett: Today is the official publication date of my latest book, The New American Economy. In this post I'd like to explain a little bit about why I wrote it and how I arrived at my present state of mind, which seems to be confusing to many of my friends.
The book grew out of an op-ed I had in the New York Times back in 2007. In it I argued that supply-side economics (SSE) should declare victory and then go out of existence. Everything that was true about it had by then been fully incorporated into mainstream economic thinking and all that was left was a caricature. Continuing to maintain a separate identity for SSE only created unnecessary conflict with mainstream economists, I argued.
As a member of Jack Kemp's congressional staff back in the late 1970s, I had a front-row seat to the creation of SSE. ... I was the person on Kemp's staff whose job it was to actually draft and promote the Kemp-Roth tax bill, which was adopted by Ronald Reagan during the 1980 campaign and enacted into law in August 1981. It brought the top marginal income tax rate down from 70 percent to 50 percent, among other things. ...
I continue to believe that what the supply-siders did was good for the economy, good for the country and good for the advancement of economic science. The best economists in the country were pretty clueless about our economic problems during the Carter years. It was widely asserted that the money supply had no meaningful effect on inflation, that marginal tax rates had no incentive effects, and that it would take decades or another Great Depression to break the back of inflation.
As all economists now know, these ideas were wrong. All economists today accept the importance of the money supply--perhaps too much; during the recent crisis many asserted that fiscal stimulus was unnecessary because an increase in the money supply was the only thing necessary to restore growth. (How this would have been accomplished when interest rates were close to zero was never explained.) All economists now accept the importance of marginal tax rates to economic decisionmaking...
During the George W. Bush years, however, I think SSE became distorted into something that is, frankly, nuts--the ideas that there is no economic problem that cannot be cured with more and bigger tax cuts, that all tax cuts are equally beneficial, and that all tax cuts raise revenue.
These incorrect ideas led to the enactment of many tax cuts that had no meaningful effect on economic performance. Many were just give-aways to favored Republican constituencies, little different, substantively, from government spending. What, after all, is the difference between a direct spending program and a refundable tax credit? Nothing, really, except that Republicans oppose the first because it represents Big Government while they support the latter because it is a "tax cut." I think these sorts of semantic differences cloud economic decisionmaking rather than contributing to it. As a consequence, we now have a tax code riddled with ... schemes of dubious merit...
The supply-siders are to a large extent responsible for this mess, myself included. We opened Pandora's Box when we got the Republican Party to abandon the balanced budget as its signature economic policy and adopt tax cuts as its raison d'être. In particular, the idea that tax cuts will "starve the beast" and automatically shrink the size of government is extremely pernicious.
Indeed, by destroying the balanced budget constraint, starve-the-beast theory actually opened the flood gates of spending. ...[I]f, as Republicans now maintain, taxes must never be increased at any time for any reason then there is never any political cost to raising spending and cutting taxes at the same time, as the Bush 43 administration and a Republican Congress did year after year.
My book is an effort to close Pandora's Box and explain to people why I believe that SSE should go out of business--or declare victory and go home, if that makes the idea easier to accept. To the extent that it has any valid insights left to inform policymaking they should be used to design a tax system capable of raising considerably more revenue at the least possible economic cost. Going forward, I believe that financing an aging society and a permanent welfare state is the biggest economic problem we face. ...
As I thought about the cycle that SSE had gone through from a response to the failure of Keynesian economics in the 1970s to triumph in the 1980s to caricature in the 2000s, it occurred to me that SSE and Keynesian economics had a lot in common. Each had been developed in response to serious economic problems that the existing orthodoxy was incapable of dealing with, both struggled for acceptance but were ultimately implemented to great success, both were then misapplied in inappropriate circumstances, thus leading to them becoming discredited.
So basically the book is about the rise and fall of Keynesian economics followed by the rise and fall of SSE. Although the Keynesian part of the book was originally intended to flesh out my model of the rise and fall of economic theories, it turned out to have very valuable lessons for today. Indeed, the circle appears to have come around to where Keynesian theories are now the best ones we have for dealing with today's economic crisis. ...
The General Theory, I think, was really just Keynes' way of making some relatively simple ideas look scientific in order to make them more acceptable to policymakers. The first idea is that deflation was the central economic problem. Second is that it was impractical to cut money wages to reduce unemployment and restore equilibrium. And third is that monetary policy was impotent because the economy was in a liquidity trap. ...
Economist Irving Fisher added an additional component ... by showing that the zero-bound problem is a very serious impediment to monetary policy... Fisher also explained that deflation magnified the real value of debt, which became a crushing burden on both households and businesses that reduced spending and growth.
What both Keynes and Fisher said was that when the economy is in a deflationary depression the collapse of private spending had to be compensated for by public spending, because that was the only way to get money circulating and make monetary policy effective. While monetary policy would drive the recovery it needed fiscal policy in order to work.
When the economic crisis hit in the fall of last year, I was very grateful for having studied the Great Depression and absorbed the work of great thinkers like Keynes and Fisher because, as Yogi Berra might have said, it was déjà vu all over again.
It seemed obvious to me right from the beginning that there was a close parallel between the causes of the Great Depression and the current crisis. The principal difference is that the former was caused by a collapse of the money supply resulting from the closure of many banks and the disappearance of their deposits, while the latter was caused by a fall in velocity resulting from a sharp decline in consumer spending following bursting of the housing bubble. (Because GDP equals the money supply times velocity, a decline in velocity has exactly the same effect as a decline in the money supply--nominal GDP must shrink, which causes both prices and output to fall.) ...
[M]y ... analysis led me to support a large fiscal stimulus. Without public spending on goods and services I didn't see any way for monetary policy to be effective... I was disappointed that so little of the February stimulus package went to the purchase of goods and services, which drives spending, and so much into economically ineffective transfers, which don't. But I understood that time was of the essence and that taking the time to design a better package would have required even more effort to overcome the economy's inertia, not to mention the political obstacles.
In researching my book I saw many points early in the Great Depression when a little bit of the right monetary and fiscal stimulus might have turned things around and made it just a run-of-the-mill recession. But as effective action was delayed year after year, more and more effort was needed to get the economy off a dead stop. It was only when all constraints on spending and money growth were cast aside during World War II that the Great Depression really ended.
I believe that relatively modest action early last year could have forestalled the current crisis or at least mitigated it substantially. I think the tax rebate was wrongheaded and a complete waste of money, and that the money would have been better spent cleaning up the housing mess. ...[B]ut the Bush administration's obsession with tax cuts as the sole cure for every economic problem--even when they involved nothing more than mailing out government checks--blinded it to alternative policies that might have nipped the housing problem in the bud and prevented the banking system from imploding.
By September, it was obvious to me that substantial government funds would be necessary to bail-out the financial system and prevent a systemic collapse that would have cost vastly more and imposed vastly greater economic hardship. I thought this argument was pretty straightforward and been well accepted by economists ever since the time of Walter Bagehot in the late 18th century. ...
I remain incredulous that serious economists not only opposed TARP, but also argued that tax cuts were the only fiscal stimulus the government should have engaged in--if it did anything at all. ... I really don't understand how tax cuts would have done the slightest bit of good when millions of people had no income because they were unemployed, when businesses had no profits to tax, and investors had huge capital losses that will offset all of their gains for years to come. Given such economic conditions--resulting from a lack of demand, not supply--it's nonsensical to think that tax cuts would have helped. Indeed, one can make a case that the tax cuts included in the stimulus bill were its least effective element.
Many of my friends believe I have abandoned supply side economics and become a Keynesian. ... But as I try to explain in my book, my views haven't changed at all; it's circumstances that have changed. I believe that my friends are still stuck in the 1970s when tax rates were considerably higher and excessive demand (i.e., inflation) was our biggest economic problem. Today, tax rates are much lower and a lack of demand (i.e., deflation) is the central problem. I really don't understand why conservatives insist on a one-size-fits-all economic policy consisting of more and bigger tax cuts no matter what the economic circumstances are; it's simply become dogma totally disconnected from reality.
Nor do I understand the conservative antipathy for Keynes, who was in fact deeply conservative. He developed his theories primarily for the purpose of saving capitalism from some form of socialism. Same goes for Franklin D. Roosevelt, whose biggest economic mistake, I believe, was not that he ran big budget deficits, as all conservatives believe, but that he didn't run deficits nearly large enough until the war forced his hand. ... People can judge for themselves if I prove my case. ...

I'm between classes so I don't have time to add much, but the op-ed linked above that Bartlett says motivated him to write the book sparked a long, detailed, and intense discussion here when it was first published among Bruce Bartlett, Paul Krugman, Brad DeLong, Jamie Galbraith, and Lawrence White among others (I weigh in too, but I would not write it the same way today). See:

[Sep 29, 2009] The Side He Picked in Economics was an Odd One

Economist's View
David Warsh on Irving Kristol:
The Straw That Stirred the Drink, by David Warsh: Irving Kristol, who died earlier this month at 89, meant many different things to many different people. One way to remember him is as the editor who, with his friend and City College of New York classmate Daniel Bell, founded The Public Interest in 1965, at just the moment the phenomenon known as "the counterculture" was beginning to grip the popular imagination of the West.

... ... ....

The side he picked in economics was an odd one. A 1975 issue featured a pair of articles: "The Social Pork Barrel" launched the career of a young Michigan Congressman, David Stockman, who would become budget director for Ronald Reagan; and "The Mundell-Laffer Hypothesis – a New View of the World Economy," by Wall Street Journal editorial writer Jude Wanniski, introduced the world to economists Arthur Laffer and Robert Mundell, and their newly-invented brand of "supply side economics."
The striking thing about Wanniski's article was its anti-establishment tone, anti-Chicago as well as anti-Cambridge, Mass. The new hypothesis might be as transformative as the Copernican Revolution, he averred – or at least that of John Maynard Keynes. Mundell and Laffer's enthusiasms for a gold standard, fixed exchange rates, large tax cuts and tight money were picked up and greatly amplified by the editorial page of The Wall Street Journal. The Republican Party was divided – insouciant economic populists in one wing, sober technocrats in another.
In the neo-conservative firmament, the stars of ordinarily first-magnitude conservatives Milton Friedman and Martin Feldstein dimmed, while Laffer and Wanniski brightened. The success of The Way the World Works, Wanniski's 1979 book for editor Midge Decter, nearly ripped apart the boutique social science publisher Basic Books, where Kristol worked as an editor as well.
By then The Public Interest was losing its force. As James Q. Wilson wrote the other day in The Wall Street Journal, "It began to speak more in one voice and the number of liberals who wrote for it declined." Daniel Bell quietly resigned, in 1980. It didn't matter. The Republicans were in power; and Kristol was ready for a second act. He would become widely known as "the Godfather" of neo-conservatism, dispensing favors and advice as a political activist operating out of the American Enterprise Institute in Washington.
In its obituary last week, The Economist summed up this second act of Kristol's career: "American conservatism, before he began to shake it up, was dour, backward-looking, anti-intellectual and isolationist, especially when viewed from the east coast. By the time Mr. Kristol … had finished with it, it was modern and outward looking, plumped up with business-funded fellowships and think tanks and taking the lead in all policy debates."

Success profoundly changed the game. The Cold War ended. The discipline and sense of fair play seemed to go out of civic life. There hasn't been anything like The Public Interest since. But for fifteen crucial years in the late '60s and '70s, Kristol's editing was the straw that stirred the drink.

I'm running short on time, so I'll leave the commentary to all of you, but I will note this:

Irving Kristol explains where the economics articles he published in The Public Interest came from:

Among the core social scientists around The Public Interest there were no economists.... This explains my own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems. The task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority - so political effectiveness was the priority, not the accounting deficiencies of government...

Comments

prufrock:

The final quote is to remind that the stuff has been a pure ideological deal made by no-idea much-smartmoney people? Why could they go ahead?

ken melvin:

I think slimeball the more fitting.

bakho:

What is so odd about it? It takes a lot of money to enrich the publisher of a publication that has a very small readership. There is always a synergy with the Sugar Daddies. Free lunch- low taxes and government dole are what the monied special interests wanted and those Sugar Daddies on K Street are willing to bankroll a political party that delivers those favors.

bakho:

"economics is above all the science of limits, a great nay-saying enterprise."

As in "Nay free lunch"?

As in support for the public interest means saying nay to the special interests?

Modern US conservatism is all about benefitting the special established interests against the public interests.

[Sep 28, 2009] Is Arthur Laffer Setting Up Another Debt Bomb by One Eyed Guide

Seeking Alpha

Arthur Laffer, the primary architect of Reagan's debt bomb that we are currently trying to defuse, has now executed a complete 180° turn from his monetary policies that gutted the Midwest industrial base in the 1980s. In a WSJ article on September 22, 2009, he claims the problems of the Great Depression are not caused primarily by tight monetary policy but rather tariffs and taxes. While he gets the facts he mentions right, he ignores the timing of taxes and deficits, tariffs and balance of trade.

He's right that talk of tariffs may have been the trigger that started the Great Depression. However, we are in a recession now so new trade restrictions are obviously not going to cause it, which was his first timing error. As the actual tariffs were relatively modest by historical standards and did not apply to most products, the tariffs are not considered the most important factor in the collapse of trade during the Great Depression. Laffer's characterizing tariffs as tax increases is obviously self-serving as they were not intended to primarily generate revenue but to protect domestic industry.

The situation with the balance of trade is what makes restrictions in trade acceptable today when it was stupid in 1929. In 1929 the USA was a net exporter of manufactured goods while today we are net importers (even excluding oil). The fact that our trading partners exercise unfair trading practices is long established and the United States will continue to decline if nothing is done about it.

Laffer is also correct that increases in taxes made the Great Depression worse. However he leaves out the factor of timing to make his point that we should have no tax increases to balance the budget. The budget was balanced by tax increases from 1929 to 1932 while the economy was declining that so that there was no net stimulus from government spending increases during this period. The conservative economist and icon Murray Rothbard detailed these mistakes in his America's Great Depression.

Hoover's mistake was in balancing the budget during a time of economic decline. Rothbard claims that without the distortion of this government reallocation things would have been better but there still would've been a significant recession and unemployment. Keynes proved that during times of recession the government can run deficits that will minimize the decline in the economy and employment. A key tenet of Keynesian thinking is that during times of full employment the government must not run deficits or it will cause inflation. This is accomplished by a cutback in government stimulus spending and tax increases. The tax increases of the 1990s showed that careful tax policy can increase taxes without slowing growth.

Below is a chart of the budget deficit and GDP growth from 1929 to 1940. From 1929 to 1931 the budget was basically balanced and the economy continued to decline. Recovery started once a significant deficit was started in 1932. In 1938 the budget was again balanced, primarily through the reduction in stimulus spending and the economy dipped into a short but severe contraction. During the Great Depression, tax policy had relatively little effect on overall economy activity as long as a deficit and loose fiscal policy was maintained .
1929 to 40 Deficit and Growth

Laffer also makes the claim that there was significant inflation during the middle of the Great Depression, though this appears to be simply to allow him to tip his hat to Friedman by once more stating that "inflation was strictly a monetary phenomenon." I'm sure Laffer's numbers on inflation from 1933 to 37 were correct (though I couldn't figure out exactly where they came from, all of mine are from US Government sources) but they ignore the fact that prices had declined below the cost of production from 1929 to 1932 and had to recover. Below is a chart on Inflation versus GDP Growth. While there was some inflation after growth started in 1932 it did not begin to offset the deflation that occurred from 1929 to 1932.
1929 to 40 Inflation vs Growth

Finally, Laffer made some comments on gold buying that ignored the fact that banks were collapsing due to the deflation in asset prices. Rothbart recognized this and concluded that Roosevelt had no choice in closing the banks. Gold was nationalized after trust in banks was reestablished by the introduction of FDIC. Gold was taken out of circulation and then increased in price to devalue the currency versus other nations and reestablish international trade. Because gold was no longer used in domestic exchange there was minimal inflationary impact inside the United States.

Mr. Laffer's final statement: "My fear is that they will misinterpret the evidence (of the Great Depression) and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits" seems to imply that taxes should never be raised to balance a deficit. Running deficits during times of full employment is what got us into this mess and will simply lead into another debt bomb.

Perhaps he's just not able to say that the current Democratic administration is correct in trying to hold off budget balancing until after the economy is fully recovered. If this is the case, Mr. Laffer is correct in being concerned because a key lesson of the Great Depression is that balancing the budget during a time of economic downturn will have serious negative consequences.

Disclosures: none for this article

[Sep 23, 2009] Hale Bonddad Stewart Supply Side Economics and Generational Theft

"Republicans are wrong to talk about generational theft since they are big generational thieves."
February 23, 2009
Sometime over the last few weeks Republicans started to use the phrase "generational theft" to describe the stimulus bill. I found this particularly interesting considering supply-side economics started the idea of massive government debt issuance.

Let's start with Reagan. According to the Congressional Budget Office, he never balanced a budget -- despite the fact he was a "fiscal conservative." As a result, total debt outstanding increased from $1.2 trillion in 1981 to a little under $3 trillion in 1989 (the year of his last budget). Here's a graph of total debt outstanding under Reagan's leadership:

Photobucket

Bush I continued the trend. He was a "fiscally responsible" Republican. He never balanced a budget. And total debt outstanding also continued to increase. It increased from 3.2 trillion to 4.4 trillion at the end of fiscal 1993 (the last Bush I budget). Here's a graph of total debt outstanding under Bush I's leadership:

Photobucket

And then there is Bush II -- another "fiscally responsible" Republican. He never balanced a budget. And according to the Bureau of Public Debt, total debt outstanding increased by $500 billion/year starting in fiscal 2003:

09/30/2008 $10,024,724,896,912.49
09/30/2007 $9,007,653,372,262.48
09/30/2006 $8,506,973,899,215.23
09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/30/2001 $5,807,463,412,200.06
09/30/2000 $5,674,178,209,886.86

So when we hear Republicans talk about generational theft, well, they know of what they speak.

Read more at: http://www.huffingtonpost.com/hale-stewart/supply-side-economics-and_b_169054.html

Matthew Yglesias " Supply-Side Weirdness From Greg Mankiw

Gren Mankiv is very clever and extremely disingenuous
David Leonhardt and Geraldine Fabrikant write:

In the three decades after World War II, when the incomes of the rich grew more slowly than those of the middle class, the top marginal rate ranged from 70 to 91 percent. Mr. Piketty, one of the economists who analyzed the I.R.S. data, argues that these high rates did not affect merely post-tax income. They also helped hold down the pretax incomes of the wealthy, he says, by giving them less incentive to make many millions of dollars.

Greg Mankiw links to this approvingly under the banner "We Are All Supply-Siders Now." And it's true that this is Piketty pointing to a "supply side" effect. On the other hand, the distinctive contention of the supply-siders is that lower taxes on the rich are the key to economic growth. In reality, economic growth was much stronger in the 30 postwar years than in the past 30 years of the low-tax era.

Selected Comments

  1. Mattyoung Says:

    Government supplies stuff also, a problem that supply siders have never grappled with. So they have a very difficult time being taken seriously when they only do studies on 65% of the economy, the private sector. It is like adding a 35% uncertainty in all their economics from the get go

Refuted economic doctrines #5: Trickle down By jquiggin

February 1, 2009

The idea that policies favorable to the wealthy, such as financial deregulation and favorable tax treatment of capital income, will ultimately benefit everybody has been described, pejoratively, as 'trickle down' economics.

The same idea been summed up, more positively, in the aphorism 'a rising tide lifts all boats' attributed to John F Kennedy, and a favorite of Clinton advisers such as Gene Sperling and Robert Rubin. (It should be noted that this phrase is also used in the context of debates over free trade and over the effects of macroeconomic expansion. While it generally implies that we should focus on expanding aggregate income without too much concern over distribution, it is less sharply focused than the 'trickle down' pejorative.

Whatever you call it, trickle down economics is one of the casualties of the financial crisis. I'm he first to point this out, and I'm sure I won't be the last, but here's a piece summing up my thoughts.

US experience during the decades of neoliberalism gives little support for this view. In the period since the economic crisis of the early 1970s, US GDP has grown strongly, and the incomes and wealth of the richest Americans has grown spectacularly.

By contrast, the gains to households in the middle of the income distribution have been much more modest. Between 1973 (the last year of the long postwar expansion) and 2007, median household income rose from $44 000 to just over $50 000, an annual rate of increase of 0.4 per cent. (More on this here and here)

Household size has decreased, mainly due to declining birth rates. The most appropriate measure of household size for the purpose of assessing living standards is the number of "equivalent adults" derived from a formula that takes account of the fact that children cost less to feed and clothe than adults and that two or more adults living together can do so more cheaply than adults in separate households. The average household contained 1.86 equivalent adults in 1974 and 1.68 equivalent adults in 2007 (my calculations on US census data). Income per equivalent adult rose at an annual rate of 0.7 per cent over this period.

For those at the bottom of the income distribution, there have been no gains at all. Unlike the situation in Australia and other countries where a poverty line is defined in relative terms, as a proportion of average income, the US has a poverty line fixed in real terms, and based on an assessment of a poverty-line standard of living undertaken in 1963.

The proportion of Americans below this fixed poverty line fell from 25 per cent in the late 1950s to 11 per cent in 1974. Since then it has fluctuated, reaching 12.5 per cent in 2007, a level that is certain to rise as a result of the financial crisis and recession now taking place. Since the poverty line has remained unchanged, this means that the incomes accruing to the poorest 10 per cent of Americans have actually fallen over the last 30 years.

Other measures yield similar conclusions. Median earnings for full-time year-round male workers have not grown since 1974. Women have done a little better, with median earnings for full-time year-round workers rising by about 0.9 per year over this period.

Overall, the main factors sustaining growth in living standards for American households outside the top 20 per cent have been an increase in the labour force participation of women and a decline in household savings. Over the period since 1999, consumption financed by borrowing against home equity has been the main factor offsetting stagnant or declining median household incomes.

Thus, in statistical terms the US offers little support to the trickle down theory. It is equally important, however, to look at how the theory is supposed to work. The general idea is that, the more highly owners of capital and highly-skilled managers are rewarded, the more productive they will be. This will lead both to the provision of goods and services at lower cost and to higher demand for the services of less-skilled workers who will therefore earn higher wages.

The financial sector is the obvious test case for this theory. Incomes in the financial sector have risen more rapidly than in any other part of the economy, and have played a major role in bidding up the incomes of senior managers and professionals in related fields such as law and accounting. According to the trickle-down theory, the growth in income accruing to the financial sector benefitted the US population as a whole in three main ways.

First, the facilitation of takeovers, mergers and buyouts by private equity firms offered the opportunity to increase the efficiency with which capital was used, and the productivity of the economy as a whole.

Second, expanded provision of credit to households allowed higher standards of living to be enjoyed, as households could ride out fluctuations in income, bring forward the benefits of future income growth, and draw on the capital gains associated with rising prices for stocks, real estate and other assets.

Finally, there is the classic 'trickle-down' effect in which the wealth of the financial sector generates demands for luxury goods and services of all kinds, thereby benefitting workers in general, or at least those in cities with high concentrations of financial centre activity such as London and New York.

The bubble years from the early 1990s to 2007 gave some support to all of these claims. Measured US productivity grew strongly in the 1990s, and moderately in the years after 2000. Household consumption also grew strongly, and inequality in consumption was much less than inequality in income or wealth. And, although income growth was weak for most households, rates of unemployment were low, at least by post-1970 standards for most of this period.

Very little of this is likely to survive the financial crisis. At its peak, the financial sector (finance, insurance and real estate) accounted for around 18 per cent of GDP and a much larger share of GDP growth. With professional and business services included, the total share was over 30 per cent.[1] The finance and business services sector is now contracting, and it is clear that a significant part of the output measured in the bubble years was illusory. Many investments and financial transactions made during this period have already proved disastrous, and many more seem likely to do so in coming years. In the process, the apparent productivity gains generated through the expansion of the financial sector will be lost.

The failure of the trickle-down approach has been even more severe in relation to consumer finance. The idea that increasing income inequality was unimportant when households could borrow to finance growing consumption was never defensible. The gap between income and consumption had to be filled by a massive increase in debt. With sufficiently optimistic assumptions about social mobility (that low-income households were in that state only temporarily) and asset appreciation (that the stagnation of median incomes would be offset by capital gains on houses and other investments) these increases in debt could be made to appear manageable, but once asset prices stopped rising they were shown to be unsustainable.

In the US context, these contradictions have been resolved for individual households by a massive increase in financial breakdowns. Until 2005, this mainly took the form of a steady increase in bankruptcy, to the point where Americans were more likely to go bankrupt than to get divorced. Restrictive reforms introduced at the behest of the credit card industry produced a dramatic drop in bankruptcy (in part, the lagged counterpart a massive upsurge in 2003 and 2004 as people rushed to get in under the old rules). From 2006, onwards, bankruptcy rates resumed their upward trend, reaching 1.1 million per year in 2008

This trend attracted little attention as bankruptcies were rapidly overshadowed by foreclosures on home mortgages. During the boom, when overstretched householders could normally sell at a profit and repay their debts, foreclosures were rare. From 2007 onwards, however, they increased dramatically, initially among low-income 'subprime' borrowers but spreading ever more broadly. 2.3 million houses were affected by foreclosure action in 2008. In hard-hit areas of California, more than 5 per cent of houses went into foreclosure in a single year

As in other respects, the longer-run implications of the crisis have yet to be fully comprehended. Even when economic activity recovers, consumer credit will be far more restricted than in past decades. As a result, there will be no escape from the implications of decades of stagnant wages for workers at the median and below.

Politically, the failure of the trickle-down theory seems likely to produce a resurgence of the class-based politics pronounced dead in the era of economic liberalism. The contrast between the enforced austerity of any recovery period, and the massive, and massively unjustified, excesses of the financial elite during the boom period, will produce a political environment where phrases like "malefactors of great wealth" no longer seem quaint and old fashioned. (Just after writing this, I Googled it, and found it as the title of a piece in Time Magazine's Swampland by Joe Klein, among the most reliable indicators of the political zeitgeist_

fn1. Here I'm measuring the ratio of gross FBS output to gross domestic product, which is the figure most relevant to the argument. The value-added in FRB (which nets out inputs purchased by the FRB sector) is smaller, around 20 per cent, but still indicates a highly financialised economy.

[March 26, 2008] A Political Comeback- Supply-Side Economics By LOUIS UCHITELLE

March 26, 2008 | New York Times

When Ronald Reagan ran for president in 1980, he promised to cut taxes in what seemed, at the time, a magical way. Tax revenue would go up, not down, he said, as the economy boomed in response to lower rates.

Alex Wong/Getty Images. President Bush, at right, meeting with Martin Feldstein, a Harvard economist, in 2003.

Associated Press

David Stockman, left, Donald Regan and Mr. Feldstein before testifying on President Reagan's budget in 1984.

Readers' Comments
"Bottom Line: Supply-side theory is nothing more than a rationale for greed."
Stefan, California

Since then, supply-side economics, as it was called - first with derision but then as a label embraced by its supporters - has become a central tenet of Republican political and economic thinking. That's despite the fact that the big supply-side tax cuts of the 1980s and the 2000s did not work out as advertised, as even most supporters acknowledge.

But advocates see broader economic benefits from lowering tax rates, which is one of the reasons the concept has reappeared as a point of contention in this year's election campaign, in an amended form.

"What really happens is that the economy grows more vigorously when you lower tax rates," said Kevin Hassett, an adviser to the presumptive Republican nominee, John McCain, and the director for economic policy studies at the conservative American Enterprise Institute. "It is beyond the reach of economic science to explain precisely why that happens, but it does."

Even with a growing economy, however, the promised boon in tax revenue never materialized. Arthur B. Laffer, the renowned proponent of supply-side economics, still holds that tax revenues "rise dramatically" when tax rates are cut.

In the 1980s, though, during the initial era of supply-side tax cuts, per capita revenue from personal income taxes, adjusted for inflation, rose an average of just 0.7 percent annually throughout the Reagan presidency, according to the White House Office of Management and Budget.

That was far below what turned out to be an average annual increase of 6.5 percent in the eight years of the Clinton administration, when tax rates at the high end of the income ladder were raised.

Since 2001, the annual per capita revenue from income taxes fell 1 percent under President Bush even though tax collections picked up sharply starting in 2005. The budget surplus Mr. Bush inherited turned into a deficit.

"If you are cutting taxes without offsetting the cuts through reductions in spending, then all you are doing is increasing the debt and postponing the taxes," said Jason Furman, director of the Hamilton Project at the Brookings Institution, and also a policy adviser to the Democratic presidential candidates.

Circumstances vary across the decades, of course, and it is difficult to sort out all the various influences on the economy and tax revenues. But when Mr. Reagan and his supply-side advisers first pushed through a range of tax cuts, they applied their logic to the broad mass of taxpaying workers. They argued that the incentive from lower rates on additional increments of income would prompt people to work that extra day or get more education to qualify for a better job.

Similarly, a spouse might take a new job, encouraged to do so by the promise of more take-home pay. The family's taxable income, and the nation's, would grow, the theory suggested, producing more tax revenue even at the lower rate.

That was before so much more of the national income flowed to upper-end households, and before the actual tax collections of the last three decades undercut the supply-side argument. Now the supply-siders single out the wealthiest Americans and argue that because they have so many ways to shelter their money from taxes, the incentive to declare more taxable income is much greater when tax rates are lowered than it is for the less well-to-do.

"The supply-side argument these days really applies to upper-income people," said Robert M. Solow, a Nobel laureate in economics who served in the Kennedy administration. "They are portrayed as the golden geese, and you don't want to discourage them from laying their eggs."

By contrast, Mr. Solow says, "the Democrats are convinced they'll lay their eggs anyway, without tax cuts as an incentive."

Senators Hillary Rodham Clinton and Barack Obama, contending for the Democratic presidential nomination, reflect that point of view. They say that they have no intention of undoing the Bush tax cuts on families earning less than $250,000 a year. Married couples with incomes above that level, however, would once again be taxed by either candidate at up to 39.6 percent - the top rate reached during Bill Clinton's presidency.

President Bush pushed through legislation in 2003 that cut the top rate to 35 percent, but only until 2011. Senator McCain wants to extend the 35 percent rate indefinitely and his camp increasingly cites as justification the supply-side effect on upper-income families.

Having once voted against the Bush cuts, Mr. McCain has reversed position and now has even enlisted Mr. Laffer as a special adviser. "McCain is on the right track," Mr. Laffer said.

While Mr. Laffer insists that tax revenue will rise when tax rates are cut, other supply-siders are less categorical. Martin Feldstein, a Harvard economist who was the first chairman of President Reagan's Council of Economic Advisers and now supports Senator McCain, estimates that a 10 percent tax cut would in fact reduce tax revenue - but only by 3 to 5 percent.

"It is not that you get more revenue by lowering tax rates, it is that you don't lose as much," he said.

Not since Mr. Reagan ran in 1980 have supply-side tax cuts been so central a campaign issue. George H. W. Bush and Bill Clinton each ended up raising taxes, ignoring the supply-side thesis, which the elder Mr. Bush once called "voodoo economics."

Now his son argues that his tax cuts strengthened the economy. Growth resumed after Mr. Bush pushed his tax cuts through Congress, but that position, critics say, is harder to maintain now, given that the election campaign is unfolding in the midst of a credit crisis and an incipient recession.

Patrick Andrade for The New York Times

Jason Furman of the Hamilton Project, advises Democrats.

Arthur B. Laffer helped establish supply-side economics.

"Bottom Line: Supply-side theory is nothing more than a rationale for greed."
Stefan, California

Still, even in hard times, the incentive from a tax cut is particularly strong among the wealthy, supply-siders say. A drop of four or five percentage points in the top tax rate of these households saves them tens of millions of dollars. Above all, the supply-siders say, less money will be wasted on accountants and lawyers hired to find ways to dodge taxes when the rates were higher. These outlays will be put to more productive use.

The supply-siders also argue that at the corporate level, lower tax rates, which Senator McCain favors, prompt companies to hire more workers and to invest in new equipment, generating more output and more taxable income.

The Democrats, and many economists who describe themselves as nonpartisan, have a different perspective. Tax incentives might indeed increase labor supply and output, they acknowledge, but what good is that if there is insufficient demand for the additional labor and for the goods and services that are produced?

The Democrats are quick, as a result, to support the $160 billion stimulus package, with its rebate checks that millions of Americans will be encouraged to spend, supporting demand. They also are prepared to raise taxes to introduce more equity into the tax system and as a means of shrinking or eliminating a large budget deficit.

The excessive borrowing required to finance the deficit, they say, acts as a drag on the economy, pushing interest rates higher than they otherwise would be, adding to the cost of business investment.

Gene Sperling, an economic adviser to Bill Clinton during his administration and now to Mrs. Clinton as a candidate, said that supply-siders vastly exaggerate the incentive effect of relatively small changes in tax rates while ignoring the benefits of bringing government revenue more closely in line with spending.

"The supply-siders predicted in the 1990s that raising rates, even for deficit reduction, would lead us to recession," Mr. Sperling said. "What followed instead was the longest recovery in history, and the people whose tax rates went up had exceptional income gains."

The tax issue, for all its importance, does not yet have a prominent place in the campaign. That is mainly because Senators Clinton and Obama are still struggling with each other on issues other than taxes, on which they generally agree. A winner has not emerged to cross swords with Senator McCain.

"When there is finally a candidate," said Austan D. Goolsbee, chief economic adviser to Senator Obama, "then we'll debate taxes and the flaws in the supply-side argument."

Supply side clown

Lawrence Kudlow is a former Reagan economic advisor, a syndicated columnist, and the host of CNBC's Kudlow & Company.

Does any editor at National Review read Larry Kudlow's columns? Does Larry Kudlow read Larry Kudlow's columns?

Does Larry Kudlow even remember that three months ago he was treating two-month short-term movements in monetarist indicators as dire warning signs of the utmost seriousness?

And has he forgotten that monetary policy is carried out not by the U.S. Treasury but by the Federal Reserve?

October 21, 2003: Some economic research services have stirred up the worry pot over recently sluggish money-supply growth.... But this monetarist view hugely overstates the issue and misinforms the analysis.... Far more important than short-term swings in money measures like MZM is the recent and honest statement by Treasury Secretary John Snow that rising economic growth will bring higher interest rates during the next year or two. Not only did he seize the political high ground by linking an expected interest-rate rise to stronger capital formation -- rather than budget deficits -- he is also signalling acceptance of a stable or even stronger U.S. dollar as part of economic recovery...

July 27, 2003: What we needed from the Fed this week was shock-and-awe-level accommodation - in the form of a 50-basis-point cut of the fed funds rate.... We didn't get it.... Overall monetary trends remain disappointing.... The monetary base -- the basic money-supply measure controlled by the Fed through its net purchases of U.S. Treasury securities -- has increased over the past two months by about 5½ percent at an annual rate. But that's way down from the 11 percent base-money growth we were enjoying in the two months ending in April...

The most likely scenario is that neither Larry Kudlow nor the editors of National Review care about looking like real idiots to whatever small number of National Review readers know that monetary and interest rate policy is made by the Federal Reserve's Federal Open Market Committee in the Eccles Building rather than by the Treasury Secretary and his staff in the... why doesn't it have a better name than "Main Treasury" anyway?

Posted by DeLong at October 21, 2003 03:34 PM | TrackBack

[May 05, 2006] Kudlow's Money Politic$ Economic Boom Continues

According to Action Economics, daily data from the U.S. Treasury for April show that the booming economy produced soaring tax receipts that came in 15 percent above a year ago.

Spending was only 2 percent ahead of last year. So, the FY 2006 budget gap should come in around $270 billion dollars. That's much lower than the CBO estimate of $337 billion dollars, and vastly lower than the OMB prediction of $423 billion dollars.

As a share of GDP, this year's gap will be only 2.1 percent, and could be only 1.6 percent next year, since state and local governments are actually running surpluses. The combined budget gap will be even smaller.

Is it possible that with lower tax rates the booming economy is throwing off ever-greater tax revenues? Didn't someone once call that the Laffer Curve?

It's the American economic boom.

The greatest story never told.

Kudlow's Money Politic$

Reality Check on Taxes from Steve Moore

From today's Wall Street Journal:

"With the House and Senate preparing to vote on extending George W. Bush's investment tax cuts, it's no surprise the cries against "tax giveaways to the rich" grow increasingly shrill. Just yesterday Senate Minority Leader Harry Reid charged that the Bush tax plan "offers next to nothing to average Americans while giving away the store to multi-millionaires" and then fumed that it will "do much more for ExxonMobil board members than it will do for ExxonMobil customers."

Oh really. New IRS data released last month tell a very different story: In the aftermath of the Bush investment tax cuts, the federal income tax burden has substantially shifted onto the backs of the wealthy. Between 2002 and 2004, tax payments by those with adjusted gross incomes (AGI) of more than $200,000 a year, which is roughly 3% of taxpayers, increased by 19.4% -- more than double the 9.3% increase for all other taxpayers.

Between 2001 and 2004 (the most recent data), the percentage of federal income taxes paid by those with $200,000 incomes and above has risen to 46.6% from 40.5%. In other words, out of every 100 Americans, the wealthiest three are now paying close to the same amount in taxes as the other 97 combined. (Emphasis added). The richest income group pays a larger share of the tax burden than at anytime in the last 30 years with the exception of the late 1990s -- right before the artificially inflated high tech bubble burst..."

Enough of the class warfare nonsense.

As my old friend Steve Moore points out, facts are facts.

President Bush delivered a spot-on, bang-up speech promoting tax cuts and economic growth today, following his strong news conference last Friday. One key line: "The Democrats are consistent, they are consistently pessimistic."

May 27, 2006 Will Somebody Please Stop the Insanity!!!!

Over at National Review, Larry Kudlow writes:

Larry Kudlow on Enron, Morals, and Adam Smith on National Review Online: Capitalism in this country has been under assault ever since FDR's New Deal 1930s, a time when a number of alphabet agencies attempted to control America's industrial and farming sectors. The experiment soon proved a dismal failure, with unemployment running 20 to 25 percent up until WWII...

Ummm... The implication that Roosevelt's New Deal pushed the unemployment rate up is, of course, false. The U.S. unemployment rate in the Great Depression peaked at 24.9% in 1933--before any of Roosevelt's policies had time to have any impact--and was below 20% by the end of 1935. By Pearl Harbor day the unemployment rate was 9%--still very disappointingly high, but a far cry from Kudlow's "The [New Deal] experiment... dismal failure... unemployment running 20 to 25 percent up until World War II."

He goes on:

Still, the American welfare state would grow. In the 1960s and 1970s, the murderer's row of economic morons -- LBJ, Nixon, Ford, and Carter -- in allegiance with their liberal Keynesian advisors, concocted a socialist policy mix that ultimately led to wealth-destroying big-government stagflation. Providentially, Ronald Reagan changed all that in the 1980s. The Gipper slashed tax rates, deregulated industries, and rescued the dollar, unleashing the forces of entrepreneurial capitalism...

Real deregulators will tell you that the Reagan administration helped, but that the heavy lifting on deregulation was done under the Carter administration by Alfred Kahn and company. Real international economists will point out that the strong dollar of the early 1980s was driven by Paul Volcker's high interest rate policies, which Kudlow and company strongly condemned. Slashing tax rates and creating big budget deficits, that Reagan did do--with results that weren't that great, for whatever supply-side benefits were generated by lower tax rates were more than offset by the crowding-out drag imposed on investment by the Reagan deficits. Real median hourly wages rose at 2.5% per year on average under the "murderer's row of economic morons" (booming under LBJ and Nixon, and then stagnating under Ford and Carter). They then grew at 0.5% per year under Reagan, 0.2% per year under Bush I, 1.2% per year under Clinton, and now 0.2% per year again under Bush II.

As a result, for the first time since the post-Civil War period (but for the brief Coolidge-Melon period in the 1920s), the American economic system became the envy of the world...

The Reagan years (and the years since) have been great for the overclass. But it was during the period 1942-1973 that the American economy performed best for the rest of us, and was genuinely the envy of the world.

As I've said before, the country is full with lots of excellent, thoughtful right-wing economists who would love to write for National Review. But something goes very wrong--and not just on the right. We do live in a very strange world, in which Gregg Easterbrook is Slate's "Mr. Science."

THE NEW ECONOMICS VIEW - FROM THE SUPPLY SIDE - NYTimes.com

By KAREN W. ARENSON
Published: March 5, 1981

As recently as a year or so ago, supply-side economics was a subject for derision among mainstream economists. Now, with President Reagan as its champion, this newly articulated economic theory is both the basis of national economic policy and a topic of respectful attention in academic circles.

The logic of the approach as Mr. Reagan sees it was detailed in his economic address to the nation last month. ''In the past we've tried to fight inflation one year and then when unemployment increased turn the next year to fighting unemployment with more deficit spending as a pump primer,'' he said. ''It hasn't worked. It's time to try something different and that's what we're going to do.''

Nonetheless, the supply-side theory's promises for a quick, noninflationarysolution to economic problems continue to arouse debate.

What is involved here is not so much a revised view of how the economy works, but an effort to look at the economy's problems and solutions from a different angle.

Economic policy for decades has focused attention on the demand for goods and services, or consumption. The new theorists emphasize the supply of goods; they want to stimulate private enterprise on the theory that increased production would cause the whole economy to expand. Supply and demand are the concern of all economists. The question is whether adjusting supply will right the problems that adjusting demand have failed to solve.

The supply-side economists did not set out to invent a new branch of economics. They were not even a united school. Rather, they were a group of mostly conservative theorists, like Arthur B. Laffer, Robert Mundell and Norman B. Ture, working independently of one another to figure out how to cope with the combination of slow growth and high inflation in the 1970's, known as stagflation.

They started with the belief that this malady could not be cured with the traditional Keynesian approach of stimulating demand - a view shared by economists of many persuasions. It was in the face of the Depression of the 1930's, when demand for goods was moribund, that the British economist John Maynard Keynes developed his revolutionary theory calling for government to increase spending to reactivate the economy, even if it meant a large deficit. The theory was that greater demand for goods would stimulate business to expand production, thus bolstering output. Greater demand could also be stimulated by a tax cut, which would reduce government revenues and also create a deficit.

The supply-side economists want to reduce the role of government rather than expand it. They talk of stimulating the supply side - the production processes - of the economy to accomplish general economic growth. Since laggard demand has not been the problem it was during the Depression, few people seem concerned about whether demand will keep pace with expanded supply. The measures they advocate, such as deregulation and tax cuts, are aimed simultaneously at reducing government and stimulating the private sector.

Budget cuts, while fundamental to the Reagan package, are not, strictly speaking, part of the supply-side program because they are not directly intended to stimulate production. But many see them as necessary to hold down inflationary pressures that could result if the efforts to increase output are successful.

In fact, the term ''supply side'' was not an invention of the supply-siders but of one of their early critics, Herbert Stein, chairman of the Council of Economic Advisers under President Nixon. He used the expression somewhat derisively in a speech on budget balancing in the spring of 1976.

''I referred to the supply-side fiscalists, meaning the people who believed that budget decisions affected the supply of output but not demand for output,'' Mr. Stein recalled. ''They said demand was affected only by the money supply.'' About two weeks after his address, The Wall Street Journal used the term in an editorial, and it was on its way to becoming widely used. Journal editorials have campaigned for the theory ever since.

What is confusing to some is that the program encompasses the very same policy measures, particularly tax cuts, long used by Keynesian economists.

Differing Expectations

Indeed, where the supply-siders differ from their liberal, largely Democratic predecessors is in the explanation of what the measures will achieve. The supply-siders seem to be saying that their program, though a compendium of many measures tried before, will do nothing less than turn the economy upside down, both quenching inflation and expanding economic activity. Economists have generally believed that expansion, particularly rapid expansion, can encourage price inflation.

''We were practicing supply-side economics in the early 1960's, without having the wit to call it that,'' said Walter Heller, chairman of the Council of Economic Advisers under Presidents Kennedy and Johnson. ''We called it stimulating investment in plant and equipment in order to promote modernization and growth in capacity. But the notion that slashing taxes across the board will release such torrents of work effort that it will fuel tremendous growth and almost pay for itself - that is their point of departure.''

It is these predictions by supply-side economists that seem less rooted in economic evidence. Indeed, one of the most controversial aspects of the program is the work of Mr. Laffer, a 40-year-old professor at the University of Southern California, who is widely credited with setting the supplyside movement in motion. He developed a simple mathematical model of tax revenues, labeled the Laffer curve, showing that cutting tax rates would so revitalize the economy that tax revenues would remain constant or even rise. It was an idea promising inflation-free growth that captured the imagination of some conservative Republican Congressmen, who introduced the Kemp-Roth bill calling for tax cuts of 30 percent over three years.

Beyond tax reductions there are other key elements of supply-side economics. The term has generally been thought also to include other measures, particularly deregulation and tax credits to stimulate business investment, also directed at promoting greater production and greater efficiency or productivity. Once again, the measures are widely accepted in principle by mainstream economists, but their projected returns are hotly debated.

The source of this schism between supply-siders and most other economists appears to stem from the evidence the supply-siders offer to support their case, evidence that is more qualitative than quantitative. They believe in traditional mathematical models showing causes and relationships throughout the economy, but they are looking at pieces of the models that have not been tested or studied in depth.

Generations of economists, for example, have studied what happens to economic output when overall demand is increased. There has generally been less study of what happens to work effort when the highest tax rates are decreased.

''In supply-side economics, it is not the formulas themselves that change,'' said Michael K. Evans of Evans Economics Inc., who has been constructing a definitive econometric model for supply-side economics. ''What changes is the assumptions about how much response there is to various policy moves. The results we are looking for are not easy to find, and people didn't look very hard to find them.''

The supply-siders base their assumptions on the basic notion that Government has gotten so big and taxes have grown so large that the economy no longer works efficiently. Supply-siders say that, rather than making decisions that are economically rational, consumers and businessmen are making decisions based on how to avoid regulations or paying taxes: Individuals look for investments not with the greatest return, but with the lowest taxes. Workers look not for jobs that pay the most, but for ones that let them hide their income. 'Removing Inefficiencies'

Supply-siders reason that if taxes create this layer of inefficiency that makes the economy less productive, people will make more productive decisions and the whole economy will benefit if regulations and taxes are cut.

''The science of economics is removing inefficiencies and that is our whole theme as supply-siders,'' said Jude Wanniski, a consultant with Polyconomics, and a former journalist who helped popularize supply-side theories.

The real question to many economists, however, is how much of a loss in efficiency there really is - and how much of a change in the tax laws would be necessary to get that efficiency back. Put differently, how much will the economy really gain for the tax changes that have been proposed?

''The question about supply-side economics is really an empirical one -how much the economy would respond,'' said Merton J. Peck, chairman of the economics department at Yale University. ''I'm rather dubious about the response,'' he noted.

Most of the supply-side proponents have refrained from quantifying the results they hope for, although some have conceded that the results will be something less than an entire about-face. As Mr. Wanniski put it in an interview last week, ''You would only induce some back into the money economy; you'd never bring back the whole underground economy.''

But mainstream economists keep trying to analyze the individual parts of the supply-side package, based on evidence that is available. They conclude generally that the results are less than predicted by their supply-side colleagues.

The Reagan package calls for slashing personal income taxes by 30 percent over three years, 10 percent each year. The supply-siders contend that if people pay lower taxes for each hour's earnings, they will work longer hours and more intensely, and more people will work. Furthermore, they say, savings will increase, facilitating greater investment.

The lesson from standard economic theory is that lower taxes - and higher wages - make people want both to work more and work less. On the one hand, each working hour brings a greater reward. On the other, they can earn the same amount of money in less time. The evidence shows that people would tend not to change their hours significantly. The portion of income saved has also tended to be constant over time.

The other mainstay in the Reagan program is more favorable business-tax treatment: accelerated depreciation for plant and equipment and an investment tax credit. Accelerated depreciation allows business to deduct part of the cost of a machine or other pieces of property each year, thus reducing taxable income and increasing cash on hand. The faster the depreciation, the more income is sheltered, providing even more funds to buy more new machinery. An investment tax credit is an even more direct incentive to business, because for every dollar spent on new machinery, business can subtract a portion from its tax bill.

''The evidence clearly shows that these kind of investment incentives do stimulate investment,'' said Lawrence Chimerine, chief economist at Chase Econometrics. ''But it won't slow inflation quickly. It would take many years to improve productivity.''

The specific economic impact of lowering the costs of production by reducing regulation is even harder to quantify. Although deregulation is generally expected to encourage business to produce more, theoretically putting some downward pressure on prices, the specifics will vary from industry to industry. Traditional economists say business decisions on investment and production will still be largely influenced by the demand for their products.

Yet another question for economists both inside and outside the supply-side camp is: What other measures complement the supply-side tactics? Such measures as curbing government spending and keeping a tight rein on the money supply - both part of President Reagan's economic program -are not specifically directed at changing production. Rather, they have been offered as part of the Administration's overall approach to economic policy, the essence of which remains the fight against inflation. Monetary Insurance

The pledge to hold down government spending is seen as one way to curb the inflationary push expected from cutting taxes. If every dollar spent by business or consumers is matched by a $1 decrease in government spending, then, according to Keynesian analysis, increases in demand from those two sectors would not provide greater inflationary impetus.

As for monetary policy (which embraces the Federal Reserve's independent control over money, credit and interest rates), Mr. Reagan has not dwelled on it at length. But he has called it an important component of his overall program, and has called on the Fedral Reserve to tighten its control. The Administration may well be counting on its other measures to work, but many economists see restrictive monetary policy as a safety net if the tax cuts result in inflationary tendencies.

Whatever the limitations on supply-side economics, many economists feel it is an approach worth pursuing - if not as the whole solution, then at least as desirable measures. Its tenets are gaining new popularity in college classrooms and being debated by economists of all persuasions.

''My entire department is teaching supply-side economics,'' said Burton Malkiel, chairman of the economics department at Princeton University. ''There is a change on all campuses -not just Princeton - in how we look at government interference.''

However, academic debate over supply-side economics seems sure to continue. Already, it has both its admirers and detractors. Some critics, such as Lester Thurow, a professor at the Massachusetts Institute of Technology, think it could easily backfire, sending the economy into roaring inflation. Others think the program may have a chance.

''It is still conceivable that such a program might work if it is significantly dramatic and convinces the general public that it is a sharp break with the past,'' said William Baumol, president of the American Economics Association and a professor at both New York University and Princeton.

''If it succeeds, it will not be by working through conventional economic avenues, but by really changing expectations,'' Mr. Baumol remarked. ''If people believe that there will be a marked decrease in the rate of inflation, that might be a self-fulfilling set of beliefs.''

Professor Baumol's argument rests on another controversial economic theory known as rational expectations, popularized by economists at the Federal Reserve Bank of Minneapolis and the University of Chicago. This holds that people's behavior is determined by their outlook for the future, such as whether they expect higher prices or stable prices, and that it does not necessarily repeat how they have reacted in the past. While the rational expectations theory is not an explicit part of the Reagan program, some see it as being implicitly embodied in supply-side forecasts.

It is on such new concepts as rational expectations and supplyside economics that the Reagan Administration is resting its hopes not only for radical improvement in the American economy but for its own political success as well.

Illustrations: photo of Arthur B.Laffer photo of Jude Wanniski photo of Michael K.Evans



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War and Peace : Skeptical Finance : John Kenneth Galbraith :Talleyrand : Oscar Wilde : Otto Von Bismarck : Keynes : George Carlin : Skeptics : Propaganda  : SE quotes : Language Design and Programming Quotes : Random IT-related quotesSomerset Maugham : Marcus Aurelius : Kurt Vonnegut : Eric Hoffer : Winston Churchill : Napoleon Bonaparte : Ambrose BierceBernard Shaw : Mark Twain Quotes

Bulletin:

Vol 25, No.12 (December, 2013) Rational Fools vs. Efficient Crooks The efficient markets hypothesis : Political Skeptic Bulletin, 2013 : Unemployment Bulletin, 2010 :  Vol 23, No.10 (October, 2011) An observation about corporate security departments : Slightly Skeptical Euromaydan Chronicles, June 2014 : Greenspan legacy bulletin, 2008 : Vol 25, No.10 (October, 2013) Cryptolocker Trojan (Win32/Crilock.A) : Vol 25, No.08 (August, 2013) Cloud providers as intelligence collection hubs : Financial Humor Bulletin, 2010 : Inequality Bulletin, 2009 : Financial Humor Bulletin, 2008 : Copyleft Problems Bulletin, 2004 : Financial Humor Bulletin, 2011 : Energy Bulletin, 2010 : Malware Protection Bulletin, 2010 : Vol 26, No.1 (January, 2013) Object-Oriented Cult : Political Skeptic Bulletin, 2011 : Vol 23, No.11 (November, 2011) Softpanorama classification of sysadmin horror stories : Vol 25, No.05 (May, 2013) Corporate bullshit as a communication method  : Vol 25, No.06 (June, 2013) A Note on the Relationship of Brooks Law and Conway Law

History:

Fifty glorious years (1950-2000): the triumph of the US computer engineering : Donald Knuth : TAoCP and its Influence of Computer Science : Richard Stallman : Linus Torvalds  : Larry Wall  : John K. Ousterhout : CTSS : Multix OS Unix History : Unix shell history : VI editor : History of pipes concept : Solaris : MS DOSProgramming Languages History : PL/1 : Simula 67 : C : History of GCC developmentScripting Languages : Perl history   : OS History : Mail : DNS : SSH : CPU Instruction Sets : SPARC systems 1987-2006 : Norton Commander : Norton Utilities : Norton Ghost : Frontpage history : Malware Defense History : GNU Screen : OSS early history

Classic books:

The Peter Principle : Parkinson Law : 1984 : The Mythical Man-MonthHow to Solve It by George Polya : The Art of Computer Programming : The Elements of Programming Style : The Unix Hater’s Handbook : The Jargon file : The True Believer : Programming Pearls : The Good Soldier Svejk : The Power Elite

Most popular humor pages:

Manifest of the Softpanorama IT Slacker Society : Ten Commandments of the IT Slackers Society : Computer Humor Collection : BSD Logo Story : The Cuckoo's Egg : IT Slang : C++ Humor : ARE YOU A BBS ADDICT? : The Perl Purity Test : Object oriented programmers of all nations : Financial Humor : Financial Humor Bulletin, 2008 : Financial Humor Bulletin, 2010 : The Most Comprehensive Collection of Editor-related Humor : Programming Language Humor : Goldman Sachs related humor : Greenspan humor : C Humor : Scripting Humor : Real Programmers Humor : Web Humor : GPL-related Humor : OFM Humor : Politically Incorrect Humor : IDS Humor : "Linux Sucks" Humor : Russian Musical Humor : Best Russian Programmer Humor : Microsoft plans to buy Catholic Church : Richard Stallman Related Humor : Admin Humor : Perl-related Humor : Linus Torvalds Related humor : PseudoScience Related Humor : Networking Humor : Shell Humor : Financial Humor Bulletin, 2011 : Financial Humor Bulletin, 2012 : Financial Humor Bulletin, 2013 : Java Humor : Software Engineering Humor : Sun Solaris Related Humor : Education Humor : IBM Humor : Assembler-related Humor : VIM Humor : Computer Viruses Humor : Bright tomorrow is rescheduled to a day after tomorrow : Classic Computer Humor

The Last but not Least


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Last modified: October 01, 2017