Bush's budgetn

[molson_golden2002]

Thank you for the confirmation that one should keep quiet to at least keep up the pretence of not being an idiot.

Avoid it all you want, I'm still right and you are wrong.

[GG]

Avoid it all you want, I'm still right and you are wrong.

 

I guess this answers the question of what ever hapened to Paul Rubens.

[Bungee Jumper]

I guess this answers the question of what ever hapened to Paul Rubens.

 

Has me wondering why Holcomb's Arm feels compelled to be ignorant about economics under a different screen name. It's the same proof he gave for his bull sh-- statistics argument, after all...

[TPS]

You mean this post about "your" assumptions of holding the expenditures constant? (Just so I don't get accused of putting words in your mouth)

Yes. Try reading YOUR quote directly before "my response" on holding expenditures constant--you actually said assuming expenditures grow by 3% annually.

 

Profits are the result of a lot of things that happen outside of sales & expenses. Perhaps you should talk to an accountant who's worked on large multinational accounts about the tug of war of maximizing profits vs minimizing taxes. (I know, real world accounting is a dirty word to economists)

I think maybe you're conflating issues here.

There are two decisions by corporations with respect to taxes. First, decisions that affect pre-tax income, like depreciation, amortization, interest expense, etc. Second, there are considerations that impact their investors' taxes after corporate taxes have been paid. The dividend decision affects investor's taxes and has no impact on the profits already taxed at the corporate level.

 

(Can you please stay on the actual topics being discussed?) Interest rates were already low in Clinton's first term because we were coming out of the '90-91 recession. When the recovery started, Greenspan was raising rates commensurate with the pick up in the economy. Then Bill thought he was safe to raise taxes, which promptly sank GDP growth from about 4% to about 2%. I guess you don't think that it matters that his first Treasury Secretary was the academic-bred Larry Summers, while Rubin came in AFTER the near disaster of the first term.

Oh boy! Did I say Rubin was Treasury Secretary? Maybe you should do a little more research....

After the tax increase in 1993 rates came down about another percent--I remember well, because I refinanced my house that September. So the effect that Rubin hoped for from contractionary fiscal policy was a slowdown to bring rates down, which would set the stage for a capital-led recovery--you should appreciate that.

[TPS]

Define "many" people. The vast majority of people who work for organizations that survive as federal government contractors are middle class average working Joes. If there is one thing the absurd levels of federal bureaucracy ensure, it's that people aren't flat out ripping off the government. Unless of course they are named in some appropriations bills by some Congress-critter.

 

Here's a little example for you....

 

Uncle

[GG]

Yes. Try reading YOUR quote directly before "my response" on holding expenditures constant--you actually said assuming expenditures grow by 3% annually.

 

You must have a different definition of "constant" than I do.

 

Let's recall, in a thread where I talked about supply side revenues, you insisted on bringing up the deficit. When I showed that the deficit was largely caused by increased spending (the deficit would NOT be there even if expenditures increased by a constant 3% rate), you agreed, only to think that in 3 months we would all forget. Maybe you thought the results would change by clinging to the thread that corporate profits and payroll taxes are the real reasons for the revenue surge. On that, I'd say thank you for reinforcing the veiw that the tax cuts weren't a mere short term economy-stimulating gimmick.

 

 

I think maybe you're conflating issues here.

There are two decisions by corporations with respect to taxes. First, decisions that affect pre-tax income, like depreciation, amortization, interest expense, etc. Second, there are considerations that impact their investors' taxes after corporate taxes have been paid. The dividend decision affects investor's taxes and has no impact on the profits already taxed at the corporate level.

 

Bravo, professor. That response would undoubtedly garner applause in a classroom. Too, bad it would be met with laughter in a room full of CFOs.

 

Oh boy! Did I say Rubin was Treasury Secretary? Maybe you should do a little more research....

After the tax increase in 1993 rates came down about another percent--I remember well, because I refinanced my house that September. So the effect that Rubin hoped for from contractionary fiscal policy was a slowdown to bring rates down, which would set the stage for a capital-led recovery--you should appreciate that.

 

OK, let's see what research can show us (I'll admit that I got Bentsen's & Summers' terms transposed)

 

Bill Clinton 1st Term January 1993 - January 1997

 

GDP

Dec-92 3.32%

Dec-93 2.67%

Dec-94 4.02%

Dec-95 2.5%

Dec-96 3.7%

 

The economy in Clinton's first term, coming off a recession that had near 8% unemployment, started a rebound during Bush I's last year. But it was enough for Bill (Bentsen) to push through a rich man tax hike in '93. He was promptly rewarded by the economy tanking in 1995, which led to Bentsen's exit. Rubin comes in and impresses on his boss that taxing the rich is not a good idea for economic growth. The result, the reduction in capital gains taxes, and we know the rest.

 

Now let's see what our research shows about Greenspan's thinking.

 

Fed Rate decisions

 

Feb 4, 1994 Up 0.25% 3.25%

Mar 22, 1994 Up 0.25% 3.50%

Apr 18,1994 Up 0.25% 3.75%

May 17, 1994 Up 0.50% 4.25%

Aug 16, 1994 Up 0.50% 4.75%

Nov 15, 1994 Up 0.75% 5.50%

Feb 1, 1995 Up 0.50% 6.00%

Jul 6, 1995 Down 0.25% 5.75%

 

What's this I see?

 

After the tax increase in 1993 rates came down about another percent--I remember well, because I refinanced my house that September.

 

I guess we'll have to have differing enterpretations of the calendar as well. I wonder why Fed started dropping rates in 1995? Was that the result of the contractionary Rubin policy?

Edited February 8, 2007 by GG

[TPS]

You must have a different definition of "constant" than I do.

 

Let's recall, in a thread where I talked about supply side revenues, you insisted on bringing up the deficit. When I showed that the deficit was largely caused by increased spending (the deficit would NOT be there even if expenditures increased by a constant 3% rate), you agreed, only to think that in 3 months we would all forget.

Can you not read? I did the calculations on the deficit holding spending constant, or as you suggested "normalized at 3%." And i stated "the decline in revenues accounted for 40-60% of the deficits" from 2001-2005; expenditure increases, therefore, are responsible for the remainder. You yourself agreed that tax cuts reduce revenues in the short run. The deficits are a function of increased spending AND decreased revenues--I've always said that. I focus on the revenues because tax cuts affect revenues, not expenditures. I'd hope most people understand that.

 

Bravo, professor. That response would undoubtedly garner applause in a classroom. Too, bad it would be met with laughter in a room full of CFOs.

Your typical response. All you ever do is spew rhetoric, without any facts. Your logic is, "because I say it's so, it's so." Please explain how the dividend decision reduces corporate taxes.

 

Oh, wait, looky here, GG is finally trying to make an argument with data instead of jargon.

OK, let's see what research can show us (I'll admit that I got Bentsen's & Summers' terms transposed)

 

Bill Clinton 1st Term January 1993 - January 1997

 

GDP

Dec-92 3.32%

Dec-93 2.67%

Dec-94 4.02%

Dec-95 2.5%

Dec-96 3.7%

 

The economy in Clinton's first term, coming off a recession that had near 8% unemployment, started a rebound during Bush I's last year. But it was enough for Bill (Bentsen) to push through a rich man tax hike in '93. He was promptly rewarded by the economy tanking in 1995, which led to Bentsen's exit. Rubin comes in and impresses on his boss that taxing the rich is not a good idea for economic growth. The result, the reduction in capital gains taxes, and we know the rest.

 

First, Robert Rubin was one of Clinton's top economic advisors in his first term, before going to Treasury in the second. Through HIS urging Clinton gave up his "Putting People First" program and pursued a deficit reduction plan. You can read about it in Bob Woodward's Agenda, or Robert Riech's Locked in the Cabinet.

Nice how you cherry pick your year about the tax hike--the tax hike pushed through in 1993 with impact in 1994, but you choose 1995's growth. Hmmm....

The reason the economy slowed in 1995 is given in your next attempt to use data.

 

Now let's see what our research shows about Greenspan's thinking.

 

Fed Rate decisions

 

Feb 4, 1994 Up 0.25% 3.25%

Mar 22, 1994 Up 0.25% 3.50%

Apr 18,1994 Up 0.25% 3.75%

May 17, 1994 Up 0.50% 4.25%

Aug 16, 1994 Up 0.50% 4.75%

Nov 15, 1994 Up 0.75% 5.50%

Feb 1, 1995 Up 0.50% 6.00%

Jul 6, 1995 Down 0.25% 5.75%

 

What's this I see?

Well, let's see, you start with 1994. Now why is Greenspan raising rates in 1994, because of the strong growth in 1994 as a result of lower long term rates in 1993.

 

After the tax increase in 1993 rates came down about another percent--I remember well, because I refinanced my house that September.

 

 

I guess we'll have to have differing enterpretations of the calendar as well. I wonder why Fed started dropping rates in 1995? Was that the result of the contractionary Rubin policy?

Obviously we differ on the calendar--you cherry pick your dates.

 

10-year T-bond:

12/92 6.77%

10/93 5.33%

12/94 7.81%

12/95 5.71%

12/96 6.3%

12/97 5.81%

 

I would hope that you agree markets are "forward looking," yes? That's one of the things Rubin's deficit reduction strategy relied on. Once clinton passed the 1993 tax act, bond markets responded knowing it was contractionary; hence the relatively quick drop in long term rates. Your Greenspan numbers are a reflection of a strong economy in 1994, which was in reaction to the low long rates. Investment expenditures increased by 22.3% in 93Q4, 18.3% in 94Q1, and 25.5% in 94Q2. The strong growth caused long rates to rise again on inflationary expectation. Greenspan's tight monetary policy in 1994 helped slow the economy in 1995. Even my principles students could get that one.

 

By the way, it's interesting that you call 2.5% GDP growth "tanking." It wasn't until Bush's 4th year that GDP exceeded 2.5% from those stimulating tax cuts.

[GG]

Can you not read? I did the calculations on the deficit holding spending constant, or as you suggested "normalized at 3%." And i stated "the decline in revenues accounted for 40-60% of the deficits" from 2001-2005; expenditure increases, therefore, are responsible for the remainder. You yourself agreed that tax cuts reduce revenues in the short run. The deficits are a function of increased spending AND decreased revenues--I've always said that. I focus on the revenues because tax cuts affect revenues, not expenditures. I'd hope most people understand that.

 

It's laughable that you say that you focus on revenues, when you turn every single discussion into deficits. For the last time, when I discuss supply side economics, I only focus on the impact of the policy on the GDP growth and revenues. Expenditures have nothing to do with revenues. Expenditures have nothing to do with revenues. Expenditures have nothing to do with revenues.

 

Of course I agreed that tax cuts impact revenue generation in the short term. Only a math-challenged idiot would dispute that. But, over the longer term the economic stimulus provided by additional capital being returned to the private sector (especially the sector that is most likely to generate sustainable economic growth) will more than make up the revenue shortfall caused by lowering tax rates.

 

That's why revenues gained in the last 3 years would have been sufficient to balance the budget had expenditures only grew at 3%/year.

 

It's not that difficult.

 

Your typical response. All you ever do is spew rhetoric, without any facts. Your logic is, "because I say it's so, it's so." Please explain how the dividend decision reduces corporate taxes.

 

It is because I said so.

 

It is also because tax policy influences a lot of decisions CFOs make. If there is an incentive for the shareholders to receive dividends, they will pressure the CFOs to pay out dividends and maybe forego capital investments or repatriate funds that had been parked in a sundry account. Some of this can be done through balance sheet moves some will improve the income statement.

 

I also never said that dividends reduce corporate taxes. Read again.

 

 

Oh, wait, looky here, GG is finally trying to make an argument with data instead of jargon.

First, Robert Rubin was one of Clinton's top economic advisors in his first term, before going to Treasury in the second. Through HIS urging Clinton gave up his "Putting People First" program and pursued a deficit reduction plan. You can read about it in Bob Woodward's Agenda, or Robert Riech's Locked in the Cabinet.

Nice how you cherry pick your year about the tax hike--the tax hike pushed through in 1993 with impact in 1994, but you choose 1995's growth. Hmmm....

 

I show data for 1993-1995 to demonstrate events in Clinton's first term. Yet I get accused of cherry picking the year?

 

The budget bill got signed in August 1993, didn't go into effect until 1994, and the economy slowed in 1995. I take it that you believe high income payers will adjust their behavior immediately and it wouldn't take time for the economy to reflect the higher level of taxation.

 

So let's use yor data.

 

TPS - Well, let's see, you start with 1994. Now why is Greenspan raising rates in 1994, because of the strong growth in 1994 as a result of lower long term rates in 1993.

 

After the tax increase in 1993 rates came down about another percent--I remember well, because I refinanced my house that September.

Obviously we differ on the calendar--you cherry pick your dates.

 

10-year T-bond:

12/92 6.77%

10/93 5.33%

12/94 7.81%

12/95 5.71%

12/96 6.3%

12/97 5.81%

 

I would hope that you agree markets are "forward looking," yes? That's one of the things Rubin's deficit reduction strategy relied on. Once clinton passed the 1993 tax act, bond markets responded knowing it was contractionary; hence the relatively quick drop in long term rates. Your Greenspan numbers are a reflection of a strong economy in 1994, which was in reaction to the low long rates. Investment expenditures increased by 22.3% in 93Q4, 18.3% in 94Q1, and 25.5% in 94Q2. The strong growth caused long rates to rise again on inflationary expectation. Greenspan's tight monetary policy in 1994 helped slow the economy in 1995. Even my principles students could get that one.

 

Interesting use of data, indeed.

 

I started in 1994, because that was the first Fed rate action during Clinton's presidency.

 

Now to your point of rates going down another percent after the tax increase - how can that possibly happen when the law was signed in August 93, and the rate trough was October 93? That must have been quite the fall. Of course the 10-yr bond was on a continuous drop from early 1992, and the 1% drop occured over the year given the usual fears about a double dip recession. This is supported by the spread to the treasuries which were wide at the time. The spreads narrowed in '94, only to expand again in '95. If Greenspan's monetary policy was the sole reason for the slowdown in '95, then there would have been little reason for the spreads to widen in '95.

[Alaska Darin]

Only a math-challenged idiot would dispute that.

Pardon me while I take this personally.

 

-Holcomb's Arm

[DC Tom]

Pardon me while I take this personally.

 

-Holcomb's Arm

 

No, he's not math challenged. I've just lied so effectively I've deluded all you sheep into thinking he is and not seeing the truth...

[TPS]

It's laughable that you say that you focus on revenues, when you turn every single discussion into deficits. For the last time, when I discuss supply side economics, I only focus on the impact of the policy on the GDP growth and revenues. Expenditures have nothing to do with revenues. Expenditures have nothing to do with revenues. Expenditures have nothing to do with revenues.

ECO101: Discretionary fiscal policy is actively manipulating government's budget to achieve a particular outcome. Government can either change taxes, change spending, or both. Any change in fiscal policy changes the government's budget situation. Keynesians argue that tax cuts stimulate the economy by causing deficits in the short term. Any discussion about tax cuts is ALSO a discussion about the government's budget.

 

Of course I agreed that tax cuts impact revenue generation in the short term. Only a math-challenged idiot would dispute that. But, over the longer term the economic stimulus provided by additional capital being returned to the private sector (especially the sector that is most likely to generate sustainable economic growth) will more than make up the revenue shortfall caused by lowering tax rates.

 

That's why revenues gained in the last 3 years would have been sufficient to balance the budget had expenditures only grew at 3%/year.

 

Now that you finally agree that tax cuts impact revenue generation in the short term, maybe we're getting closer. Ignoring the expenditure side to keep it simple for you, assume the tax rate is 20%. If you cut it to 18% (a 10% reduction), and GDP grows by 3%/year, then it will take 3 1/3 years to generate revenues from increased income to compensate for the tax RATE cut, even if expenditures were held constant. So, yes, if you wait long enough, GDP growth will finally generate enough tax REVENUE to balance the budget--or eliminate the DEFICIT.

 

The real argument is whether so-called supply-side tax cuts will increase GDP by greater than its long term trend over time. Which is why I bring in the issue of GDP growth. Of course GDP is cyclical, and it can be greater or less than 3% growth. Tax cuts are usually enacted when the economy is sluggish. Keynesians would argue that the tax cuts will create a stimulus (via the government now running a deficit) to increase economic growth, but they will not change the long run growth trend (Long run growth is a function of labor force growth and productivity increases).

 

From the BEA web site, current personal taxes were $1,296 billion in the first quarter of 2001; personal tax receipts did not exceed that number until the first quarter of 2006. The reason is because GDP growth has not been any greater under Bush (and his tax cuts) than under any other administration (in fact, on average, it's been less than the historical 3% trend). During Bush's first 3 years real GDP grew by an average 1.6%; in the past 3, it's grown by an average of 3.5% (it's averaged 2.6% for the first 6 years).

 

It is also because tax policy influences a lot of decisions CFOs make. If there is an incentive for the shareholders to receive dividends, they will pressure the CFOs to pay out dividends and maybe forego capital investments or repatriate funds that had been parked in a sundry account. Some of this can be done through balance sheet moves some will improve the income statement.

I don't disagree at all. Of course tax policy influences corporate decisions. Much like Microsoft's dividend payment a few years back, which came out of its cash hoard (balance sheet), after the decrease in the tax rate on dividends.

 

I also never said that dividends reduce corporate taxes. Read again.

But you insinuated my statement about taxes was incorrect--"CFOs would laugh at it." Nothing you said contradicts my statement, or gives any indication why CFOs would not agree with my statement. This offshoot to the discussion was based on your query about whether the rise in corporate profits could be due to the desire to pay out dividends, and I responded that dividend policy doesn't impact profits. Please give me a concrete example of how dividend policy impacts profitability.

 

I show data for 1993-1995 to demonstrate events in Clinton's first term. Yet I get accused of cherry picking the year?

Because you ignore the growth rate for 1994 and choose to say the taxes impacted 1995, the lower growth year.

 

The budget bill got signed in August 1993, didn't go into effect until 1994, and the economy slowed in 1995. I take it that you believe high income payers will adjust their behavior immediately and it wouldn't take time for the economy to reflect the higher level of taxation.

Absolutely. In fact, they adjusted behavior on the expectation of the tax increase. Or do you believe that high income tax payers aren't forward looking?

 

 

Now to your point of rates going down another percent after the tax increase - how can that possibly happen when the law was signed in August 93, and the rate trough was October 93? That must have been quite the fall. Of course the 10-yr bond was on a continuous drop from early 1992, and the 1% drop occured over the year given the usual fears about a double dip recession.

Try looking up articles from the credit section in the Wall Street Journal for the weeks leading up to and following enactment of the law in August. I am not saying it was the sole factor responsible for falling rates, but it contributed. There was a lot of discussion about how much of an effect it had, and almost all agree it had an effect. You'll also find discussions on Clinton's policy of relying on lower long term rates to stimulate the economy.

 

This is supported by the spread to the treasuries which were wide at the time. The spreads narrowed in '94, only to expand again in '95. If Greenspan's monetary policy was the sole reason for the slowdown in '95, then there would have been little reason for the spreads to widen in '95.

I'm not sure where you get your data. From the FED's data on interest rates, the spread between the 10-year bond and 6 month T-Bill was about 2.5% for the first half of 1994, then falling to 2% toward the second half. In 1995 the spread started at 1.3%, and ended the year at 0.4%. The early 1994 spread was about the same as it was in 1993 as well.

 

Since the spreads actually decreased in 1995, I guess that would mean Greenspan's policy did have the effect I stated.

[GG]

... Any discussion about tax cuts is ALSO a discussion about the government's budget.

 

Not when the discussion is about supply side economics and its impact on economic growth.

 

Now that you finally agree that tax cuts impact revenue generation in the short term, maybe we're getting closer.

When did I ever disagree on that?

 

Ignoring the expenditure side to keep it simple for you, assume the tax rate is 20%. If you cut it to 18% (a 10% reduction), and GDP grows by 3%/year, then it will take 3 1/3 years to generate revenues from increased income to compensate for the tax RATE cut, even if expenditures were held constant. So, yes, if you wait long enough, GDP growth will finally generate enough tax REVENUE to balance the budget--or eliminate the DEFICIT.

 

The real argument is whether so-called supply-side tax cuts will increase GDP by greater than its long term trend over time. Which is why I bring in the issue of GDP growth. Of course GDP is cyclical, and it can be greater or less than 3% growth. Tax cuts are usually enacted when the economy is sluggish. Keynesians would argue that the tax cuts will create a stimulus (via the government now running a deficit) to increase economic growth, but they will not change the long run growth trend (Long run growth is a function of labor force growth and productivity increases).

 

From the BEA web site, current personal taxes were $1,296 billion in the first quarter of 2001; personal tax receipts did not exceed that number until the first quarter of 2006. The reason is because GDP growth has not been any greater under Bush (and his tax cuts) than under any other administration (in fact, on average, it's been less than the historical 3% trend). During Bush's first 3 years real GDP grew by an average 1.6%; in the past 3, it's grown by an average of 3.5% (it's averaged 2.6% for the first 6 years).

 

Isn't it great to be the Monday Morning QB of the economy after seeing a pretty good rebound from a potential catastrophe? We can be sanguine about the economy now running at a 3% average clip and ignoring the conditions of 2001, when Bush started putting tax cuts into action. At that point, the probability of long term slowdown to mirror Japan's bubble burst was a lot closer than returning to average economic growth rates.

 

I don't disagree at all. Of course tax policy influences corporate decisions. Much like Microsoft's dividend payment a few years back, which came out of its cash hoard (balance sheet), after the decrease in the tax rate on dividends.

But you insinuated my statement about taxes was incorrect--"CFOs would laugh at it." Nothing you said contradicts my statement, or gives any indication why CFOs would not agree with my statement. This offshoot to the discussion was based on your query about whether the rise in corporate profits could be due to the desire to pay out dividends, and I responded that dividend policy doesn't impact profits. Please give me a concrete example of how dividend policy impacts profitability.

I didn't say dividend policy impacts profitability. I said low taxes on dividends is a factor in generating higher corporate tax receipts.

 

You're ignoring the scores of corporate restructurings and IPOs of high dividend paying companies over the last 3 years. A high dividend payer may have been buried within the total tax structure of the parent. Once spun off, the new dividend payer will be a taxable company.

 

Because you ignore the growth rate for 1994 and choose to say the taxes impacted 1995, the lower growth year.

Absolutely. In fact, they adjusted behavior on the expectation of the tax increase. Or do you believe that high income tax payers aren't forward looking?

 

And even the wiliest of high income tax payers will take some time to adjust to a new tax scheme. I think you would agree that the impact of tax decreases will work its way through the system much quicker than devising ways to shield income from taxes.

 

Try looking up articles from the credit section in the Wall Street Journal for the weeks leading up to and following enactment of the law in August. I am not saying it was the sole factor responsible for falling rates, but it contributed. There was a lot of discussion about how much of an effect it had, and almost all agree it had an effect. You'll also find discussions on Clinton's policy of relying on lower long term rates to stimulate the economy.

Yet the data shows a steady decline in rates from early 1992 through mid 1993 (hitting bottom in Sept/Oct) before starting its rise.

 

I'm not sure where you get your data. From the FED's data on interest rates, the spread between the 10-year bond and 6 month T-Bill was about 2.5% for the first half of 1994, then falling to 2% toward the second half. In 1995 the spread started at 1.3%, and ended the year at 0.4%. The early 1994 spread was about the same as it was in 1993 as well.

 

Since the spreads actually decreased in 1995, I guess that would mean Greenspan's policy did have the effect I stated.

 

I was talking about the spread between corporates & treasuries. If the markets fully expected Rubin's plan to work, there would be no reason for the spreads to widen on already rising fed rates.

[EC-Bills]

No, he's not math challenged. I've just lied so effectively I've deluded all you sheep into thinking he is and not seeing the truth...

 

Damn you and your black heart Tom. I believed every word you said