Cost of Bush Tax Cuts

[Magox]

One can make the argument that tax cuts for the class of households that have a higher propensity to save out of income creates a greater pool of savings looking for financial investment opportunities. One can use this argument and provide evidence from the two experiments with supply-side tax cuts to show these experiments ended with speculative bubbles, financial crises and bailouts--the commercial real estate bubble and S&L crisis in the 1980s, and the most recent housing bubble and ensuing crisis.

 

With the exception of small business owners, increasing the "pool of savings" by tax cuts means an increased source of demand for financial assets which might indirectly influence real corporate investment, but more than likely won't, since new business investment is mainly a function of demand for its products (sales).

 

There is a logical case for PJ's argument AND evidence to support it, given two test cases.

Extreme overreach... Evidence does not directly or come close to indirectly supporting this argument.

 

Housing Bubble was created Directly from the Government's incessant desire to put people into homes by pressing the GSE's to lowering credit standards. Lax of regulation in the mortgage markets. Too low for too long interest rate policy by the federal reserve. Repeal of GS which helped cause an explosion of credit through MBS and nonregulated Mortgage securities in the early to mid 2000's. Exotic investment vehicles that served no purpose other than speculation which heightened leverage and risk exposure for banks.

 

Not even the most hyper partisan idiotic liberal economists make this "connection".

 

Very weak argument TPS, very weak.

Edited September 27, 2010 by Magox

[GG]

One can make the argument that tax cuts for the class of households that have a higher propensity to save out of income creates a greater pool of savings looking for financial investment opportunities. One can use this argument and provide evidence from the two experiments with supply-side tax cuts to show these experiments ended with speculative bubbles, financial crises and bailouts--the commercial real estate bubble and S&L crisis in the 1980s, and the most recent housing bubble and ensuing crisis.

 

With the exception of small business owners, increasing the "pool of savings" by tax cuts means an increased source of demand for financial assets which might indirectly influence real corporate investment, but more than likely won't, since new business investment is mainly a function of demand for its products (sales).

 

There is a logical case for PJ's argument AND evidence to support it, given two test cases.

 

Does that mean you will also stop crowing about the Clinton budget "surplus" which was driven primarily by a spike in cap gains tax collections in late '90s?

[TPS]

Does that mean you will also stop crowing about the Clinton budget "surplus" which was driven primarily by a spike in cap gains tax collections in late '90s?

I thought we agreed there were a few other factors, like the unemployment rate falling to 4%, which both increases revenues and lowers expenditures. I don't recall "crowing" though...

[TPS]

Extreme overreach... Evidence does not directly or come close to indirectly supporting this argument.

 

Housing Bubble was created Directly from the Government's incessant desire to put people into homes by pressing the GSE's to lowering credit standards. Lax of regulation in the mortgage markets. Too low for too long interest rate policy by the federal reserve. Repeal of GS which helped cause an explosion of credit through MBS and nonregulated Mortgage securities in the early to mid 2000's. Exotic investment vehicles that served no purpose other than speculation which heightened leverage and risk exposure for banks.

 

Not even the most hyper partisan idiotic liberal economists make this "connection".

 

Very weak argument TPS, very weak.

I've always argued there are a host of reasons for the most recent crisis, no one single factor can describe the perfect storm. Cutting taxes at the top raised the volume of savings looking for returns--more money for hedge funds, reits, etc. There's a long history of economic thought that focuses on rising inequality of income and wealth to (HELP) explain speculative bubbles and crises.

[Magox]

I thought we agreed there were a few other factors, like the unemployment rate falling to 4%, which both increases revenues and lowers expenditures. I don't recall "crowing" though...

I suppose the Tech bubble had very little to do with it....

[/dev/null]

I suppose the Tech bubble had very little to do with it....

Or the slower rate of the growth of federal spending after January 1995

[TPS]

I suppose the Tech bubble had very little to do with it....

I named one out of the "few others" I said there were. The tech bubble relates to what GG said about capital gains taxes, which I never disagreed with. I believe the unemployment rate falling to 4% was a bigger factor.

[Magox]

I named one out of the "few others" I said there were. The tech bubble relates to what GG said about capital gains taxes, which I never disagreed with. I believe the unemployment rate falling to 4% was a bigger factor.

Yeah, I guess the tech bubble had nothing to do with the 4% in the year 2000.

 

Tech boom started in 1995... The unemployment rate was at 5.6%... When the Tech Bubble was at it's peak in 2000, the unemployment dropped to 4% unemployment rate

 

http://www.infoplease.com/ipa/A0104719.html

 

Also on a sidenote, let me crush the liberal argument that I hear day after day on the financial and news networks.

The argument is "Well, Clinton raised taxes and we went through the most prosperous period in bla bla bla bla.... so tax increases don't affect growth"

 

Well no ****, we were going through an enormous TECH BUBBLE, that create substantial gains in employment, spending and capital gains revenues... So with such a tidal wave of revenues, the economy could easily absorb a tax hike....

 

Comparing that situation with todays, in making the argument that we could once again absorb another tax hike is an intellectually disingenous argument. Comparing the bubble economy of the late 90's with todays is preposterous....

 

However, I do believe we should raise taxes on everyone right now, because I personally believe that we are in deep **** with our national debt. It's painfully obvious that neither party is serious about reducing the debt, and frankly I am now more pessimistic than I have ever been regarding our National debt issue. Neither the libs are the conservatives want to lower taxes. So just right there we are going to add $4 trillion to the national debt.

 

The Libs demonize any serious attempt to at least debate reforming medicare and S.S and GOP establishment candidates are too afraid to touch the third rail of politics...

 

Neither party wants to fully eliminate earmarks...

 

But I won't make the dumbass argument that the libs or Geithner will make that raising taxes on the top income earners won't affect growth.. The options aren't great, as Alan Greenspan recently stated "Our choices right now are not between good and better; they're between bad and worse. The problem we now face is the most extraordinary financial crisis that I have ever seen or read about."

 

I happen to agree with him..

 

 

 

 

 

Oh and TPS, you are making some weak arguments today my man.... You have to know, when you debate with me, I come prepared with facts... .

Edited September 28, 2010 by Magox

[TPS]

Yeah, I guess the tech bubble had nothing to do with the 4% in the year 2000.

 

Tech boom started in 1995... The unemployment rate was at 5.6%... When the Tech Bubble was at it's peak in 2000, the unemployment dropped to 4% unemployment rate

 

http://www.infoplease.com/ipa/A0104719.html

 

Also on a sidenote, let me crush the liberal argument that I hear day after day on the financial and news networks.

The argument is "Well, Clinton raised taxes and we went through the most prosperous period in bla bla bla bla.... so tax increases don't affect growth"

 

Well no ****, we were going through an enormous TECH BUBBLE, that create substantial gains in employment, spending and capital gains revenues... So with such a tidal wave of revenues, the economy could easily absorb a tax hike....

 

Comparing that situation with todays, in making the argument that we could once again absorb another tax hike is an intellectually disingenous argument. Comparing the bubble economy of the late 90's with todays is preposterous....

 

However, I do believe we should raise taxes on everyone right now, because I personally believe that we are in deep **** with our national debt. It's painfully obvious that neither party is serious about reducing the debt, and frankly I am now more pessimistic than I have ever been regarding our National debt issue. Neither the libs are the conservatives want to lower taxes. So just right there we are going to add $4 trillion to the national debt.

 

The Libs demonize any serious attempt to at least debate reforming medicare and S.S and GOP establishment candidates are too afraid to touch the third rail of politics...

 

Neither party wants to fully eliminate earmarks...

 

But I won't make the dumbass argument that the libs or Geithner will make that raising taxes on the top income earners won't affect growth.. The options aren't great, as Alan Greenspan recently stated "Our choices right now are not between good and better; they're between bad and worse. The problem we now face is the most extraordinary financial crisis that I have ever seen or read about."

 

I happen to agree with him..

 

 

 

 

 

Oh and TPS, you are making some weak arguments today my man.... You have to know, when you debate with me, I come prepared with facts... .

I knew I should've thrown the "natural rate" term in...

 

I'm not talking about the source of the expansion in the 1990s, which of course was the tech bubble.

Up until the mid-90s the so-called "natural rate of unemployment" or "non-accelerating inflation rate of unemployment (NAIRU) was believed to be between 5-6%. In the past, when Unemployment (U) approached 5-6%, the FED would raise rates to slow the economy down. Since inflation was tame in the 1990s, the FED believed that NAIRU was lower, and let the expansion continue. The point is that the FED decides when to let the party stop by raising rates, and in the 1990s they let the party continue because the inflation barrier changed.

 

Maybe you need to do a little more homework...

 

To save you some time, here's a little primer on the debate from that period by Roubini:

Nairu

Edited September 28, 2010 by TPS

[Magox]

I knew I should've thrown the "natural rate" term in...

 

I'm not talking about the source of the expansion in the 1990s, which of course was the tech bubble.

Up until the mid-90s the so-called "natural rate of unemployment" or "non-accelerating inflation rate of unemployment (NAIRU) was believed to be between 5-6%. In the past, when Unemployment (U) approached 5-6%, the FED would raise rates to slow the economy down. Since inflation was tame in the 1990s, the FED believed that NAIRU was lower, and let the expansion continue. The point is that the FED decides when to let the party stop by raising rates, and in the 1990s they let the party continue because the inflation barrier changed.

[TPS]

Yes, it's a bit more complicated than saying it was the tech boom, but the Roubini link (you can ignore the equations) has a good discussion and links to the debate of the period (including some WSJ editorials).

Edited September 29, 2010 by TPS

[3rdnlng]

Here's a pretty good take on why we can't get this economy going.

 

http://content.eaglepub.com/?laKXZ45p7nojSQ.1o1sS2iecqHhquNgRl

[Gary M]

Here's a pretty good take on why we can't get this economy going.

 

http://content.eaglepub.com/?laKXZ45p7nojSQ.1o1sS2iecqHhquNgRl

 

You can't believe those evil business owners, all they want to do is to make money and keep it.

[Magox]

Yes, it's a bit more complicated than saying it was the tech boom, but the Roubini link (you can ignore the equations) has a good discussion and links to the debate of the period (including some WSJ editorials).

This has very little to do with our discussion TPS.... We were debating the reasons why the Clinton administration experienced a year of "surplus" and whether or not Supply side economics as you suggested contributed to the bubble (which is an absurd claim). Then you link me something that has absolutely nothing to do with the conversation, hence the ...

 

However this piece does support your argument that we have had regarding inflation.... Where this piece fails are the ramificiations or possibilities of a precipitous dollar drop or commodity shock to the upside.... Inflation is already building, where you and other economist fail are that you concentrate too much in Core CPI and PPI and other traditional inflation readings. In the real world, all consumers look at food, gasoline, heating/AC, clothing and health care costs as their daily inflation gauges.... These pressures are building and they are building with the real unemployment rate at 17%.

 

That should scare the hell out of people.... The dollar and other currencies WILL continue their decline relative to commodities, and countries that live in the developing world and lower to middle income earners in the developed world will be hurt the most. The policies of the Federal Reserve and the U.S government are the ones to mainly blame (and no, I don't just mean the Obama administration this goes back way before him).

 

By the time we reach 8% unemployment, which may be farther away than I had originally anticipated, oil prices will be up over $120 a barrel. You can bank on it....

[TPS]

This has very little to do with our discussion TPS.... We were debating the reasons why the Clinton administration experienced a year of "surplus" and whether or not Supply side economics as you suggested contributed to the bubble (which is an absurd claim). Then you link me something that has absolutely nothing to do with the conversation, hence the ...

 

You chimed in on the response I gave to GG, which means you got on board the new topic. I'm happy to get back to the original--friggin' hijackers!

 

I don't think we were debating Clinton originally either. The debate, from my end, was whether tax cuts for the wealthy (a part of supply side theory, not the whole of it) can add fuel to the bubble? My contention is that cuts to households at the top create a greater pool of savings which are used for financial investment, which can fuel a bubble. Unless you are a small business owner, savings of households are used to buy financial assets, which increases the demand for those assets (which is NOT the same thing as real investment). Tax cuts for those who save a greater proportion of their income add more fuel to asset prices/bubbles, than tax cuts for those who spend all of their income. That does not mean the tax cuts caused the bubble, rather they add to it. There is nothing at all absurd about that argument--it's a fact that the rich save more than the poor.

 

Btw, the argument about tax cuts for households is not the same as supply-side tax cuts for businesses. There is a marginal impact on real investment from reducing the after-tax return on those productive investments.

 

Here's a pretty good take on why we can't get this economy going.

 

http://content.eaglepub.com/?laKXZ45p7nojSQ.1o1sS2iecqHhquNgRl

Gee, such an unbiased source....

 

This quote about the possibility of increased taxes:

"That means small business owners have no idea come January how much capital they will have available to pay their workers and make investments."

I thought workers were paid out of pre-tax income?

 

He also says the #1 impediment from government is taxes (I'm sure that's true). However, surveys say the #1 impediment for small businesses at the moment is lack of demand/sales, which is the #1 impediment to investment right now.

[3rdnlng]

You chimed in on the response I gave to GG, which means you got on board the new topic. I'm happy to get back to the original--friggin' hijackers!

 

I don't think we were debating Clinton originally either. The debate, from my end, was whether tax cuts for the wealthy (a part of supply side theory, not the whole of it) can add fuel to the bubble? My contention is that cuts to households at the top create a greater pool of savings which are used for financial investment, which can fuel a bubble. Unless you are a small business owner, savings of households are used to buy financial assets, which increases the demand for those assets (which is NOT the same thing as real investment). Tax cuts for those who save a greater proportion of their income add more fuel to asset prices/bubbles, than tax cuts for those who spend all of their income. That does not mean the tax cuts caused the bubble, rather they add to it. There is nothing at all absurd about that argument--it's a fact that the rich save more than the poor.

 

Btw, the argument about tax cuts for households is not the same as supply-side tax cuts for businesses. There is a marginal impact on real investment from reducing the after-tax return on those productive investments.

 

 

Gee, such an unbiased source....

 

This quote about the possibility of increased taxes:

"That means small business owners have no idea come January how much capital they will have available to pay their workers and make investments."

I thought workers were paid out of pre-tax income?

 

He also says the #1 impediment from government is taxes (I'm sure that's true). However, surveys say the #1 impediment for small businesses at the moment is lack of demand/sales, which is the #1 impediment to investment right now.

 

Nice. Turn an economic discussion into a political one. When you do that then it is obvious your economic views are formulated to back up your political views. What's important isn't so much the messenger but the message.

 

The small business owner has personal needs too and if he isn't going to have enough money to pay his home mortgage once the new tax rates hit, then he sure as hell isn't going to spend money that he absolutely doesn't have to.

 

Why do you think there is a lack of demand? The people that have cash are conserving it because they don't know what is going to happen.

[Magox]

The debate, from my end, was whether tax cuts for the wealthy (a part of supply side theory, not the whole of it) can add fuel to the bubble? My contention is that cuts to households at the top create a greater pool of savings which are used for financial investment, which can fuel a bubble. Tax cuts for those who save a greater proportion of their income add more fuel to asset prices/bubbles, than tax cuts for those who spend all of their income. That does not mean the tax cuts caused the bubble, rather they add to it.

 

Btw, the argument about tax cuts for households is not the same as supply-side tax cuts for businesses. There is a marginal impact on real investment from reducing the after-tax return on those productive investments.

 

You can't say on the one hand that they Save the majority of their money and on the other say they fuel asset prices through consumption; that is a contradictory remark.

 

What fueled over 99% of the housing bubble had virtually nothing to do with supply side economics. The fact that the origin of the housing bubble was in the Sub Prime Housing market, which means that most of the lending were to people who were considered to be higher than average credit risks, which means NOT THE WEALTHY, debunks your claim.

 

As I have always said, in which I am 100% correct, this housing bubble was MAINLY because of Governments desire to have as many people as possible into home ownership. The CRA renewed push from Clinton and Congress to lower credit standards and increase pressure on the GSE's for lower to middle income earners backs up my argument considering that the origin of the housing bubble was in Sub Prime Lending.... Of course there were other factors that fueled the fire, which I have already mentioned, but the source of the problem comes from the government...

 

 

In regards to your last comment, I never made the argument that supply-side tax cuts for upper income households was a good idea. If you read my comments you would see I have been stating that the tax cuts not just for the upper income earners but for everyone is too high on the Laffer Curve and I have advocated that they should not be renewed permanently... I could go along with a two year extension but outside of that, it's time to let them expire....

Edited September 29, 2010 by Magox

[TPS]

You can't say on the one hand that they Save the majority of their money and on the other say they fuel asset prices through consumption; that is a contradictory remark.

They both refer to the impact on savings, not consumption.

 

What fueled over 99% of the housing bubble had virtually nothing to do with supply side economics. The fact that the origin of the housing bubble was in the Sub Prime Housing market, which means that most of the lending were to people who were considered to be higher than average credit risks, which means NOT THE WEALTHY, debunks your claim.

 

As I have always said, in which I am 100% correct, this housing bubble was MAINLY because of Governments desire to have as many people as possible into home ownership. The CRA renewed push from Clinton and Congress to lower credit standards and increase pressure on the GSE's for lower to middle income earners backs up my argument considering that the origin of the housing bubble was in Sub Prime Lending.... Of course there were other factors that fueled the fire, which I have already mentioned, but the source of the problem comes from the government...

First, are you saying there was only a bubble in poor neighborhoods? Was it poor blacks and mexicans who bought all those houses in Las Vegas, Florida and California?

Is buying a house the only way to invest in housing assets (REITs for example)? I'm talking about all of the **** created based upon the price of the underlying assets--that's what bubbles are about. Speculation about some underlying asset that drives financial assets related to the real asset to higher and higher levels, which drives the price of the underlying assets higher, which drives the paper assets higher, which....

 

I'm not denying there was some impact, but not the main impact. CRA applies to financial institutions that take in deposits, so they are required to lend some % in the communities where they take in those deposits. The majority of sub-prime loans were generated by mortgage finance companies which are NOT covered by CRA. Even many Wall Street IBs bought their own finance companies to fuel their MBS and derivative markets.

The FED and FDIC have done the research (and published papers), and from this both Bernanke and Bair, both appointed by Bush, have testified that the primary factor was not CRA, rather it was predatory lending, securitization, and lax regulation.

The right pushes this as the main issue because it plays into the anger of their targeted constituents.

 

In regards to your last comment, I never made the argument that supply-side tax cuts for upper income households was a good idea. If you read my comments you would see I have been stating that the tax cuts not just for the upper income earners but for everyone is too high on the Laffer Curve and I have advocated that they should not be renewed permanently... I could go along with a two year extension but outside of that, it's time to let them expire....

I'm not making a subjective claim about those tax cuts, I'm trying to explain how one can make the argument that they impacted the bubble (which I do happen to believe though). This all goes back to a comment by PastaJoe.

[Magox]

They both refer to the impact on savings, not consumption.

 

 

CRA applies to financial institutions that take in deposits, so they are required to lend some % in the communities where they take in those deposits. The majority of sub-prime loans were generated by mortgage finance companies which are NOT covered by CRA.

Really dude, you have to learn to comprehend what people say rather than interpret it as you see it.

 

I said MAINLY and I said ORIGINATED, nowhere did I even suggest or imply ONLY. OK? Good!

 

Second, No you are wrong regarding FANNIE AND SUBPRIME.

 

http://www.washingtonpost.com/wp-dyn/content/article/2008/08/18/AR2008081802111.html

 

In January 2007, as years of loose mortgage lending were about to send the nation's housing market into devastating decline, Fannie Mae chief executive Daniel H. Mudd wrote a confidential memo to his board.

 

Discussing the company's successes, Mudd said one of Fannie Mae's achievements in 2006 was expanding its involvement in the market for subprime and other nontraditional mortgages. He called it a step "toward optimizing our business."

 

A month later, Fannie Mae outlined plans to further expand its activities in the subprime market. The company recognized the already weak performance of subprime loans but predicted that they would get better in 2007, according to another Fannie Mae document.

 

Internal documents show that even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers.

Since then, Fannie Mae's exposure to loosely underwritten mortgages has produced billions of dollars of losses and sent its stock price plummeting, prompting the federal government to prepare for a potential taxpayer bailout of the company. This month, Fannie Mae reported that loans from 2006 and 2007 accounted for almost 60 percent of its second-quarter credit losses.

 

Fannie Mae documents from the period, obtained by The Washington Post, paint a picture of a company with the dual incentives of fostering affordable housing and making money, and of one caught between the imperatives of increasing its market share while avoiding excessive risk. In a bid to juggle these demands, the company's executives took on risks they either misunderstood or unduly minimized.

 

 

 

Consider the low lending standards that were a significant component of the mortgage crisis. Lenders made millions of loans to borrowers who, under normal market conditions, weren't able to pay them off. These decisions have cost lenders, especially leading financial institutions, tens of billions of dollars.

 

It is popular to take low lending standards as proof that the free market has failed, that the system that is supposed to reward productive behavior and punish unproductive behavior has failed to do so. Yet this claim ignores that for years irrational lending standards have been forced on lenders by the federal Community Reinvestment Act (CRA) and rewarded (at taxpayers' expense) by multiple government bodies.

 

The CRA forces banks to make loans in poor communities, loans that banks may otherwise reject as financially unsound. Under the CRA, banks must convince a set of bureaucracies that they are not engaging in discrimination, a charge that the act encourages any CRA-recognized community group to bring forward. Otherwise, any merger or expansion the banks attempt will likely be denied. But what counts as discrimination?

 

According to one enforcement agency, "discrimination exists when a lender's underwriting policies contain arbitrary or outdated criteria that effectively disqualify many urban or lower-income minority applicants." Note that these "arbitrary or outdated criteria" include most of the essentials of responsible lending: income level, income verification, credit history and savings history--the very factors lenders are now being criticized for ignoring.

 

The government has promoted bad loans not just through the stick of the CRA but through the carrot of Fannie Mae and Freddie Mac, which purchase, securitize and guarantee loans made by lenders and whose debt is itself implicitly guaranteed by the federal government. This setup created an easy, artificial profit opportunity for lenders to wrap up bundles of subprime loans and sell them to a government-backed buyer whose primary mandate was to "promote homeownership," not to apply sound lending standards.

 

Of course, lenders not only sold billions of dollars in suspect loans to Fannie Mae and Freddie Mac, contributing to their present debacle, they also retained some subprime loans themselves and sold others to Wall Street--leading to the huge banking losses we have been witnessing for months. Is this, then, a free market failure? Again, no.

 

http://www.forbes.com/2008/07/18/fannie-freddie-regulation-oped-cx_yb_0718brook.html

 

Sorry TPS, the facts don't support your argument. As I stated, government pressure to the GSE's to increase lending to lower to middle income earning households, absurd government subsidies (tax breaks) for homeownership for everyone, interest rate policy, lax regulation in the mortgage industry, insane and useless highly leveraged investment vehicles provided by Wall Street, and Repeal of GS which opened up the gates to a flood of money in MBS are the main culprits.

 

What is at the ROOT of the housing bubble is government policy regarding home ownership.... There is no denying that if you look at this from an objective POV....

[drnykterstein]

I am one of Obama's boogeyman "rich," and I pay for an excellent accountant. Guess what: I pay a SHITLOAD in taxes.

 

No accountant gets you out of taxes. Believe that, not the other myths about how the rich can always find a way out of paying taxes.

Obama's number over and over and over again has been 250k. To be clear, you saying this means you make over 250k (I think that would make you the richest man in Buffalo?).

 

Does your accountant invest your money and turn your money into more money? I'm sure pay taxes on this money, but your 10% gain on your 500k is much better than Shaniqua Jones down the street who had $10 leftover to invest and spent it on a lottery ticket and didn't win.