Data vs. Tax Cut and Budget Balance Mythologies

In the current discourse, there seems to be some amnesia with respect to when tax cuts occurred, why they occurred, and how they affected Federal budget deficits. Here is some data (read comments to this post).


Figure 1: Federal budget balance as share of GDP (blue), cyclically adjusted budget balance as share of GDP (red), June 2017 estimates. NBER defined recession dates shaded gray. Source: BEA 2017Q4 3rd release, CBO (2017), NBER, and author’s calculations.

EGTRRA is the Economic Growth and Tax Relief Reconciliation Act, JGTRRA is the Jobs and Growth Tax Relief Reconciliation Act. Some people have argued that these tax cut acts actually improved the budget balance (or increased tax revenues). The data shown above argues against this point (as does a large empirical literature).

Addendum: And here are the revenue counterparts.

Figure 2: Federal revenue as share of GDP (blue), cyclically adjusted revenues as share of GDP (red), June 2017 estimates. NBER defined recession dates shaded gray. [JGTRRA arrow corrected 6PM] Source: BEA 2017Q4 3rd release, CBO (2017), NBER, and author’s calculations.

Note the discrete drops in cyclically adjusted revenues at the advent of the GW Bush tax cuts.

47 thoughts on “Data vs. Tax Cut and Budget Balance Mythologies

  1. PeakTrader

    After the Bush tax cuts, budget deficits began to shrink – shrinking to $163 billion in 2007 – even with the wars in Afghanistan and Iraq. Of course, we had a recession in 2001 and Bush expanded Medicare before the 2004 election.

    Reply
  2. Tom

    Agree with Peak. 9/11 followed EGTRRA, so I’m not sure you can pin the worsening deficit on the tax cuts. JGTRRA seemed to work. The deficit soon bottomed and then narrowed quite a bit.

    Reply
      1. PeakTrader

        Menzie Chinn, real GDP growth over the five year period 2003-07 averaged 2.89% per year, on top of the 1982-00 economic boom and mild 2001 recession. The country was at full employment by 2006 and trade deficits reached $800 billion a year or 6% of GDP. It seems, the permanent tax cuts raised revenue and had some effect reducing budget deficits.

        Reply
        1. pgl

          You not only forget (again) about the Bush41 recession but you cherry picked dates by beginning at the end of the Bush43 recession. Growth from 2000 to 2007 averaged 2.5%.

          We noted this during the last post. And you still repeat this intellectual garbage? OK!

          Reply
        2. 2slugbaits

          PeakTrader You’re doing it again. You can’t seem to make up your mind as to whether the discussion is about GDP or the deficit. No one is saying that the Bush tax cuts might not have had some stimulative effect and possibly raised GDP. Let’s assume for the sake of argument that they did. But even assuming tax cuts might increase GDP, that does not mean the revenue gain from higher GDP would exceed the revenue loss from the tax cuts. You really need to think things through. You and CoRev are both trying to argue that cutting taxes raises tax revenue more than the value of the tax cut itself. Pause for a moment and reflect on the sheer stupidity of that claim. To call that claim counter-intuitive would be an understatement. It’s nuts. It’s magical thinking. Keep focused on what we’re talking about. The issue is whether or not tax cuts pay for themselves. They don’t…at least not at anything like current tax rates.

          If you want to argue that tax cuts pay for themselves, then I invite you to put up or shut up. Show us the math as to exactly how that would work. I don’t mean posting some bullshit Forbes article or Art Laffer talking points.; I mean show us the actual math. Prove it using plausible labor response parameters. Do it with real math and real numbers. No fake data. You claim to be a junior PhD. Here’s your chance to prove to us that you’re not just a poser.

          Reply
          1. pgl

            “No one is saying that the Bush tax cuts might not have had some stimulative effect and possibly raised GDP. ”

            I am disputing this supply-side claim. Over the 2000 to 2007 period, real GDP growth averaged a mere 2.5%. Yes, it was faster after the Bush43 recession but what pulled us out of that recession. An appropriately aggressive Federal Reserve policy. John Taylor served in the Bush43 White House and never complained about the low interest rates until around 2010 when his political masters decide it was time to bitch about the Obama and Bernanke efforts to reverse Bush43’s 2nd and larger recession.

            But shhhh – don’t bother PeakIgnorance with the real world!

          2. PeakTrader

            2slugbaits, where did I say “cutting taxes raises tax revenue more than the value of the tax cut itself?”

            You just make things up or are totally confused.

            I’ve stated before, tax cuts can get us to full employment. Then, raising taxes will slow the expansion to a sustainable rate.

            I suggest you study some macroeconomics textbooks, including on expansionary and contractionary fiscal policies. There are vectors in n-space rather than the simple explanation you want.

          3. CoRev

            2slugs, NO! Only Menzie made this claim. We have not: “You and CoRev are both trying to argue that cutting taxes raises tax revenue more than the value of the tax cut itself. ” Please read or comprehend better. Stop the magical interpretations of what was not said.

  3. Bruce Hall

    The simplest solution: a 2% federal sales tax on all products and services. Consumer spending is about $50T per year; a 2% sales tax would generate the $1T that is the current shortfall. It is not so onerous that everyone could pay and the high consumption individuals would pay the most.

    Sure, there would be calls for exemptions and deductions, but if those were resisted the additional revenue would come from everyone, not just the high income earners and corporations, and the budget would be balanced. You can argue that those on welfare shouldn’t have to pay any taxes, but that’s not how it works at the state level. Everyone should have some skin in the game at the federal level.

    Reply
    1. pgl

      You remind me of John Cochrane. Hey – tax the little people as taxing high income earners will spell gloom and doom! But at least you two admit we can raise taxes which is progress over the other right wing Trump cheerleaders!

      Reply
      1. Bruce Hall

        pgl,

        In my state (Michigan), you pay a 6% tax on products you buy. The state doesn’t care what your income is. You also pay over 26 cents per gallon of gasoline. The state doesn’t care what your income is.

        Now, I’ll trade those two taxes for a 2% federal tax (on top of my income tax, excise taxes, breathing taxes) for the state taxes (but I won’t be given that choice). The “little people” as you so elitistly phrase it don’t pay much, if any federal taxes. The biggest spenders would also be the most taxed under a general 2% (additional) federal tax.

        But any taxes for the “little people” are too much for SJWs. Why is that “big guy”? 2% too much? Hmmm. I’d guess that the total raised from the “little guys” would amount to about 1/10th the total revenues from a 2% tax. But I guess there could be yet another income credit (kickback/giveaway) line that reads “If your income is less than $XXX enter 2% of your total income here” (if the person bothers to file tax forms). After all, the purpose of federal taxes, as stated in The Constitution, in Article I, Section 8, is not to pay the country’s debts and provide for “the general welfare” of the United States, but to redistribute money as deemed appropriate by the leftist royalty.

        I think the meaning of “general welfare” may have been corrupted over the centuries by some elitists whose power depends on the votes of the “little people”.

        Reply
  4. 2slugbaits

    Bruce Hall Consumer spending is about $50T per year; a 2% sales tax would generate the $1T that is the current shortfall. It is not so onerous that everyone could pay

    So let’s crunch the numbers. To estimate the average tax increase you should take $1T and divide it by the number of adults with incomes who make purchases. I’ll let you do the arithmetic. After you’ve done that, why don’t you get back to us as to whether or not that wouldn’t be an “onerous” burden on plenty of people. Really?

    Reply
    1. pgl

      Bruce Hall says consumer spending is $50 trillion per year? WTF? BEA says 2017 GDP was only $19.391 trillion of which $13,396 trillion went to consumption.

      Bruce – your data sources are even worse than those of CoRev! Maybe you were talking about World Consumption! Yea – let’s impose a sales tax on what people in other nations consume!

      Reply
      1. 2slugbaits

        I’m not quite sure where he got that $50T figure either. I’m guessing that it represents the total value of all final and intermediate transactions rather than just value added increments, but that’s just a guess. Sounds pretty flakey to me.

        Reply
        1. Bruce Hall

          2slug and pgl,

          It’s possible that the data are not correct or the statement below worded in such a way that I interpreted a fairly straightforward statement incorrectly: https://tradingeconomics.com/united-states/consumer-spending
          Consumer Spending in the United States increased to 12035.23 USD Billion in the fourth quarter of 2017 from 11916.58 USD Billion in the third quarter of 2017. Consumer Spending in the United States averaged 5368.31 USD Billion from 1950 until 2017, reaching an all time high of 12035.23 USD Billion in the fourth quarter of 2017 and a record low of 1320.40 USD Billion in the first quarter of 1950.

          But, presuming the data are correct, then the “12035.23 USD Billion in the fourth quarter” is $12 trillion for the latest quarter of the data or ~$50T estimated for 2018.

          Reply
    2. Bruce Hall

      2slug,

      No, you take the total spending regardless of the number of people spending the money. So, if you you spend $3000 per month, that equates to $60 (even if that’s a household).

      Remember this is all about wanting to eliminate the budget deficits without cutting spending“Data vs. Tax Cut and Budget Balance Mythologies
      “. If you are reluctant to cut spending, you have to increase taxes in order to make up the shortfall (presuming the pie doesn’t get bigger which, apparently, is the assumption here).

      Conservatives have criticized the latest budget as a giant pile of pork. They liked the tax changes because they believe the economy will grow and national debt reduced, but also expected concomitant spending reductions (or at least holding the line in total) which, in Washington, is totally unrealistic. How can you buy votes if you don’t spend more of the voters’ money?

      Reply
  5. pgl

    Menzie’s graph shows a couple of things that happened just as Reagan took office. The deficit soared … and we had a massive recession in 1982. So much for the magic of that 1981 tax cut! But shhh – don’t tell PeakIgnorance.

    Reply
  6. CoRev

    Menzie, OMB actuals for the FY 2000 -2016 budget surplus/deficits:
    Year Deficit Amt Receipts ——– GDP $B
    2000 236,241 ——- 2,025,191 —– 10,148.2
    2001 128,236 ——- 1,991,082 —— 10,564.6
    2002 -157,758 —— 1,853,136 —— 10,876.9
    2003 -377,585 —– 1,782,314 —— 11,332.4
    2004 -412,727 —— 1,880,114 —— 12,088.6
    2005 -318,346 —— 2,153,611 —— 12,888.9
    2006 -248,181 —— 2,406,869 —— 13,684.7
    2007 -160,701 —— 2,567,985 —— 14,322.9
    2008 -458,553 —— 2,523,991 —— 14,752.4
    2009 -1,412,688 — 2,104,989 —— 14,414.6
    2010 -1,294,373 — 2,162,706 —— 14,798.5
    2011 -1,299,599 — 2,303,466 ——- 15,379.2
    2012 -1,086,955 — 2,449,990 ——- 16,027.2
    2013 -679,542 —- 2,775,106 ——- 16,515.9
    2014 -484,600 —- 3,021,491 ——- 17,243.6
    2015 -438,496 —- 3,249,887 ——- 17,982.9
    2016 -584,651 —- 3,267,961 ——– 18,469.9

    Notice the impacts of the shallow recession which can be seen in receipts starting in 2000. The impacts of the 2001 EGTRRA and the 2003 JGTRRA are also obvious, BUT the impacts on the FY Budget deficits are also obvious. Except for Bush’s bad luck with bookend recessions Bush would actually have had a balanced budget throughout while implementing tax cuts. We can just barely notice the impact in GDP growth from the 2001recession, more importantly it is interesting to note that GDP grew throughout the GW Bush administration. My position has been since 2005 that the tax cuts turned the economy around from the recession, and then stimulated it allowing the receipts to increase and FY deficits to diminish.

    If we want to see the impacts of the E/JGTTRA on the economy we can again use the OMB tables:
    Year —- GDP ——— Difference
    2000 10,148.2 637.7
    2001 10,564.6 416.4 EGTTRA
    2002 10,876.9 312.3 Positive Growth during a recession
    2003 11,332.4 455.5 JGTTRA
    2004 12,088.6 756.2 Increased Growth
    2005 12,888.9 800.3
    2006 13,684.7 795.8
    2007 14,322.9 638.2 Recession Starting
    2008 14,752.4 429.5
    2009 14,414.6 -337.8
    2010 14,798.5 383.9
    2011 15,379.2 580.7
    2012 16,027.2 648
    2013 16,515.9 488.7
    2014 17,243.6 727.7
    2015 17,982.9 739.3
    2016 18,469.9 487
    What we see is that E/JGTTRA actually did what they were supposed to do, minimize the impacts of the 2001 recession and further stimulate the economy. Until of course that pesky 2007 recession.

    Reply
    1. pgl

      “What we see is that E/JGTTRA actually did what they were supposed to do, minimize the impacts of the 2001 recession and further stimulate the economy.”

      Not quite. We were told by Bush’s economists that the tax cut would raise savings which is not an expansionary policy. Never mind that it did not do that. But it was the FED lowering interest rates that offset the recession.

      This is well known but do continue to live in your world of Alternative Facts.

      Reply
  7. 2slugbaits

    CoRev You claim that you never said tax cuts would reduce the deficit. Really? Then how should we interpret this statement you made in Menzie’s previous post? The two Bush tax cuts were lowering the deficits after the early recession.

    Sounds to me like you’re saying Bush’s tax cuts lowered the deficit. Do you have another interpretation?

    PeakTrader 2slugbaits, where did I say “cutting taxes raises tax revenue more than the value of the tax cut itself?”

    I’m glad that you are now on record as agreeing that tax cuts do not pay for themselves and will widen the deficit. That’s progress.

    Reply
    1. pgl

      Are you accusing them of flip flopping straight from the excuses for the Bush43 tax cuts.

      Note PeakyBoo argued we needed that tax cut to raise aggregate demand. How does that work? Oh yea people consume more aka a reduction in national savings.

      But when they were selling this tax cut they claimed it would raise national savings – which means less private consumption.

      It’s shimmer. A dessert topping and a floor wax!

      Reply
    2. CoRev

      2slugs, nice trick. Rewording the claimed quote and then arguing on the reworded version, More magic I see.
      BTW, what happened to the 2005,6 & 7 deficit? You might find the answer in my OMB chart extraction.

      Reply
      1. Menzie Chinn Post author

        CoRev: If we are focusing on tax revenues responding to tax rate cuts, you might profitably look at the cyclically adjusted revenues in 2007 vs 2001…

        Reply
        1. CoRev

          Menzie, when discussing the FY deficit I prefer either the OMB or Treasury data. Y’ano not trusting some one’s definition of a cycle and its components is simpler when tracking a single metric. That ole KISS method, is best because other administration policy implementations than just tax cuts do matter.

          Pgl, if you believe that the Fed monetary policy pulled us out of the 2001 recession, then the FED peaks prior to the 2001 and 2007 recessions are just as likely their cause.

          Reply
          1. 2slugbaits

            CoRev With respect to the 2001 recession, it is very likely true that Fed rate hikes (at the very least) contributed to the recession. Partly a dot.com bubble bursting and partly the Fed raising rates. That would make the 2001 recession just another garden variety recession. The 2007 Great Recession had its origins in the financial sector rather than the Fed.

      2. 2slugbaits

        CoRev Rewording the “claimed quote”? Huh? I copy and pasted your own words. Go check it out. You said: The two Bush tax cuts were lowering the deficits after the early recession. How is that a “nice trick”? The deficit is the difference between revenues and expenditures. If expenditures are fixed, then the only way deficits can go down is if revenues increase. Ergo, if you say that the Bush tax cuts lowered the deficits, then it is equivalent to saying the Bush tax cuts increased revenues. This is pretty much 1st grade arithmetic.

        Regarding the GDP data in the OMB tables, first keep in mind that the numbers you reported are all in nominal dollars, not chained real dollars. Inflation in the mid-2000s was not trivial. Still, there was real growth in the mid-2000s, and it’s no surprise that real economic growth will lead to higher revenues. That’s not exactly contentious. But as best I can tell you are going beyond that. You are trying to attribute the growth in revenues to Bush’s tax cuts, and that doesn’t stand up to close scrutiny. Showing that revenues increased in the mid-2000s is hardly evidence that Bush’s tax cuts were responsible for those higher revenues. Please show us how it is mathematically possible for tax cuts to result in a net increase in revenues given plausible labor response values and 2000 tax rates. There are also plenty of other things that increase GDP, not just tax cuts. For one thing, go look at the history of Fed interest rate reductions. When Bush took office (Jan 2001) interest rates were at 6%. By Jun 2003 interest rates were down to 1%. You might think that the Fed’s actions had something to do with the economic recovery. And note that the Fed’s interest rate cuts raise GDP without having to cut revenues. You should also look at on-budget revenues as a percent of GDP during the Bush years and compare those numbers to the historical percentages. You’ll see that revenues as a percent of GDP fell by about 2 percentage points. In other words, absent Bush’s tax cuts the federal government probably would have been running a balanced budget in the mid-2000s. And as Menzie points out, you really need to look at revenues in terms of cyclically adjusted numbers. That’s why I described the 1.1% unified budget deficit in 2007 as “piss poor” relative to what it should have been.

        Reply
        1. CoRev

          2slugs claims: “Rewording the “claimed quote”? Huh? I copy and pasted your own words. ” No you didn’t. Your 1st response said: ”
          2slugbaits
          April 12, 2018 at 10:48 am

          P
          2slugbaits
          April 12, 2018 at 10:48 am

          PeakTrader … You and CoRev are both trying to argue that cutting taxes raises tax revenue more than the value of the tax cut itself. …It’s nuts. It’s magical thinking. Keep focused on what we’re talking about. The issue is whether or not tax cuts pay for themselves. They don’t…at least not at anything like current tax rates.

          If you want to argue that tax cuts pay for themselves, then I invite you to put up or shut up. …”

          You then claimed you quoted me: ”
          2slugbaits
          April 12, 2018 at 4:32 PM
          “CoRev Rewording the “claimed quote”? Huh? I copy and pasted your own words. Go check it out. You said: The two Bush tax cuts were lowering the deficits after the early recession. …”

          Please note the difference in what you claimed we said: “If you want to argue that tax cuts pay for themselves, …” and what was actually said: “The two Bush tax cuts were lowering the deficits after the early recession.” Again, nice trick, but it wasn’t mine nor Peak’s claim.

          2slugs, when talking about the deficit I go to the OMB or Treasury tables for actuals. Anything else is speculation, and when using yours and Menzie’s preferred approaches the list of variables and their interpretations are too open to personal interpretations. And we know there is NONE in economics and especially associated with tax cut results. BTW, how many articles have we had on this very subject here re: states, state to state comparisons, and federal revenues/deficits? Their interpretations certainly must be contention free!

          BTW, thank you for agreeing the deficit : “The deficit is the difference between revenues and expenditures.” It really is that simple. That simple definition is something I’ve argued with you for years. Usually after you bring up the On/Off Budget BS. That’s also why I look askance at all the interpretations.

          Reply
          1. 2slugbaits

            CoRev But the distinction between on-budget and off-budget is very important if you want to identify the source of the rising deficit. Since the off-budget accounts are running surpluses, the obligation to future tax payers is equal to the absolute value of the on-budget deficit (because those are funded by marketable bonds) plus the off-budget surplus (because that surplus reflects a non-marketable future obligation). There’s a reason why the OMB tables show both alongside the unified deficits.

            And I still don’t understand how you can plausibly deny that you were claiming deficits increase revenues. I suspect that you simply don’t recognize the cognitive dissonance in what you said.

        2. CoRev

          2slugs, you still continue arguing, but now repeat what we meant as your position. Yes that’s what we mean and what the data show. Remember what happened with receipts and deficits in 2005, 2006, 2007?

          And, how soon you forget: “The deficit is the difference between revenues and expenditures.” , were you trying to convince yourself re: the On/Off budget BS?

          Reply
  8. Moses Herzog

    In no mood to get into it with the Trump apologists tonight. Just wanna say both of the graphs above tell you more about America, and American citizens’ lack of knowledge about their own damned country in the last roughly 35 years than any long essay could. Menzie could put up those graphs 365 days a year for the next 10 years and he’d get nothing but applause from me.

    Reply
  9. Ed Hanson

    To attempt to end some of the confusion by those who are responding to Menzie’s post need to realized for all the macroeconomics seen in it with its charts; with its cyclical adjusted balance budget, and its revenue as a share of GDP; its not about economics at all. It is philosophy. It is the promotion of socialism over free enterprise, the creation of large government to force its citizens to act as the government determines rather than limited government created to protect individual rights to use what hard earned resources they create to determine their own lives, its central planning rather the spontaneous creation by human action of a free market.

    The measure of taxation is not that it should successfully rise in relation to GDP, but how effectively, and efficiently its collection. In general terms, it should remain in a stable range of GDP, and diverge from that only with tax laws changes as the citizens desire. The last election included a contest between those who wished to grow taxation verses those who desired less taxation and rates. Those who wish a lessening of tax rates were in part driven by the actions of government such as the enshrinement into the Constitution that the 16th amendment of unlimited power of government by its wording (ObamaCare decision}, and the use of the IRS against perceived political opponents. And this time those who desired less tax rates won. The last time such a direct desire of the citizenship was heard, was the election of Ronald Reagan, which was, in part, a result of the taxation history that follows.

    So, rather than concentrate on tax rates changes much discussed above, I would rather look at a time of little tax law change, the last half or so 1970’s. Perhaps what happened then has faded into memory. It was the years of rising inflation and because of this, increasing tax revenues to the government as shown in the both charts above with there steep positive slope. Taxes raised were increasing quickly as a percentage of GDP. And for many people if not most, rising faster than economic improvement. As inflation grew, tax payers found the more dollars they earned just kept pace with that inflation, but current law forced them into higher tax brackets. Thus without real improvement of their standard of living, they found the government taking a greater share of their earnings without even a vote by their representatives. It is important to note that the big government promoters liked this situation. Tax revenue growth without that tricky vote to have to put your name to. But also note, for all you hear of the socialist philosophy, realize this. It was not making taxation more progressive, the top bracket had no higher to go, but moved up the less wealthy. This demonstrates that, while there are those who truly think highly progressive taxation is a good thing, they really are satisfied with more revenues, which they will raise by any means they can. The need is the greater control of resources which must be attained to reach their statist goals.

    To keep this short, do not be fooled with charts that show revenue increasing and decreasing as a percent of GDP. There will be change resulting from good times or bad times and always will be. But changes can also result from tax reform enacted by law and these changes should be determined by the desires of the citizens. Deficits are created, not by lack of revenues, but by spending more than those revenues. Do not be fooled by the rhetoric of a balanced budget, for those who want bigger and more intrusive government know that debt created and taxation raised are one and the same, just a difference of time on those taxed. It is not a balanced budget they want, but the greater revenues, and during times of reduced tax rate the shouting just gets louder. And still in the times of tax rate increases, the spending above means continues.

    Ed

    Reply
      1. Ed Hanson

        Thanks Corev,

        but never use them myself. I just do not like that social network trying to take over the word. And it was such a perfectly good word, too. But as a consequence, it kept me off facebook, yea.

        Ed

        Reply
    1. 2slugbaits

      Ed,

      Calm down and switch to decaf. The guy you voted for (i.e., Trump) has not reduced taxes; he’s simply shifted the burden onto a non-voting generation. You opine about the wishes of citizens, but apparently you aren’t terribly concerned about making fiscal decisions today that will affect people who are not yet born and have no voice. They will still be paying for your mistake long after you’re dead. Cutting tax rates today without cutting spending does not cut taxes. I think you’re operating under tax rate illusion.

      Let’s review public finance 101. Deficit spending when the economy has slack resources does not crowd out other consumption and investment spending. Future generations are left with the interest payments, but when interest payments are low the benefits are likely to exceed the costs; so deficit spending makes sense. But if the economy is operating at normal levels of output, then deficit spending consumes current period resources. The opportunity cost of deficit spending is alternative spending. Notice that the opportunity cost of deficit spending when there is slack in the economy is essentially zero because the alternative is resource idleness. And of course you still have to pay interest, and the interest rates are likely to be much higher when the economy is operating at normal capacity.

      Keeping resources fully employed is the goal of macroeconomics. There is nothing in textbook macro that is particularly socialist. You can be a philosophical conservative and still want to pursue the macroeconomic goal of keeping all resources fully employed. When it comes to the size of government, macroeconomics is silent. It’s simply about taming the business cycle. Period.

      Now, it is true that many macroeconomists are left-leaning (because they’re smarter???), but that is independent of whether or not they are macroeconomists. Most left-leaning macroeconomists are opposed to deficit spending in general and they are especially opposed to it when the economy is operating at potential GDP. The first choice of most macroeconomists is monetary policy, with fiscal policy as a second best alternative when monetary policy is unlikely to be effective (e.g., when the economy is at the ZLB). Yes, left-leaning economists tend to prefer more government spending, but they also tend to support higher taxes to pay for that higher spending. You’re making the false assumption that calling for higher spending necessarily means calling for larger deficits.

      At the other extreme we have today’s GOP calling for tax cuts and deficits regardless of the economic conditions. Tax cuts when the economy is in the dumper. Tax cuts when the economy is booming. Tax cuts for all seasons. Then pretend that Republicans cut federal spending. Try going to the BEA tables and check out the history of federal government spending as a percent of GDP. Go on, check it out. Then come back and tell us that Republicans are all about reducing federal spending. I suggest you wear asbestos pants. The facts are that the GOP is the party of free lunches. So when you voted for Trump, you voted for high taxes on future generations, crowding out current period consumption, higher interest rates and/or higher exchange rates, and bigger deficits. I’m sure your grandchildren will appreciate what you’ve done for them.

      Reply
      1. Ed Hanson

        slug

        First thing first. Generally I do not like long posts, and am sorry for the length of mine, but sometimes ideas have to be explained at some length. I appreciate that you slogged through it. So I will try to respond to your post in a briefer manner. Read my response by order of your paragraphs.

        Cutting taxes now was exactly right thing to do. It should have been done before but President Obama did not have either the courage or the political strength to get a meaningful cut to get past his party. If you read my post carefully, you would read that I am quite concerned about the appropriators and their disregard to a sensible budget. But face the facts, the current budget was bipartisan and heavily endorsed by the democrat leadership. Widespread is the blame, and has been since Gingrich was hounded out of office. If you truly want a balanced budget, you need to agree to being sorry he is no longer around.

        Nope, the goal of public finance 101, to use your words, is to allow the economy to grow at its best and fastest over the years. Usually, that means quit messing with it. One of the values of a small and limited government is it cannot mess as much with the millions who strive to make there lives better. And, of course, the result of a greater free market, and greater choice of action is a greater economy for us all.

        Keeping resources fully employed is more like the pipe dream of appropriators, cronyists, and the outright corrupt. Legitimate macroeconomists recognize that creative destruction is part of a healthy economy, and the broad sweep of government intervention and funding will also support those resources that should be lost to some and remade by others. And there are many learned and academic types who realize that best theory of macroeconomics limit the scope, and power, and size of government. And that is the formula for the best possible economic growth.

        It may be your left-leaning macroeconomist are opposed to deficit spending, but if so, they are no more listened to then the right-leaning macroeconomists, who, btw, are the smarter ones, who are against deficit spending. And no,it turned out that ZLB did not negate monetary policy, and that monetary policy still had plenty of ammunition.. It was the fiscal stimulus that was the great failure.

        How soon you forget, slug. The economy has been in the dumper for years. Perhaps there is political part in you that could be satisfied with the lackluster performance of the country has had for years. But fortunately, there were enough people in enough states to realize that it could be and should be better. And they were right. It is better.

        And no, the repubs are not the party of free lunches, both are. Yes, both are, and that means the dems too. It is a disease of politicians. And no, the world is not locked into the doom you write of. In fact, it will muddle through. And you will be thanking the higher growth that resulted from Presidents Trump election for making it possible to muddle through better.

        Ed

        Reply
        1. CoRev

          ED, I agree with your comments, but not this: “And you will be thanking the higher growth that resulted from Presidents Trump election for making it possible to muddle through better.” 2slugs, pgl and their ilk have not agreed that the Reagan, Bush, and Trump tax cuts actually brought higher growth and increased revenues, ss long as they are coupled with spending restraint, the historical approach of these previous administrations.

          Reply
          1. noneconomist

            Which of those you mentioned actually restrained spending? Certainly not Reagan, who presided over the then largest FY deficits ever. The national debt rose 183% during the Reagan years. Reagan in 1981 called the approaching $trillion debt unfathomable, which likely required a much stronger description by the time he left office in 1989.
            GHW Bush did little to alleviate the trend. By the time he left office, the national debt had nearly quadrupled since 1981.
            Bush II had the advantage of Republican congresses from 2001 to 2007 but they proceeded to renew deficits increase the national debt by 55% during those years. Few spending restraints there. And, whatever figures you use, the Bush II years saw the debt more than double.
            The last president to actually attempt to restrain spending was Jimmy Carter who, you might remember, was pilloried by Reagan for his deficits and wild spending. Carter’s final budget (1981) included a $79.9 Billion deficit. Reagan’s first was short $127.9 Billion, his second $207.8 Billion.

          2. CoRev

            Noneconomist, mixing deficits with national debt is a classic mistake. Debt is issued in multi-year bonds which usually not go away unless the annual deficits are positive (surpluses) when they come due. We have little history of bond buy backs, so the national debt continues an upward climb. When a buyback does occur it is not too uncommon to find that the buyback is of higher interest rate bonds for issued lower rate bonds.

            This site explains it: “Treasury may be able to lower the government’s interest expense by buying higher-yield debt and replacing it with lower-yield debt.”
            https://www.treasurydirect.gov/instit/annceresult/buybacks/buybacks.htm
            IIRC, the largest such buyback was the buyback program under the Obama administration. Another explanation:
            http://cepr.net/publications/reports/financial-engineering-the-simple-way-to-reduce-government-debt-burdens
            “The interest burden on the Treasury will not change through these transactions. The only effect will be to lower the official value of outstanding debt. However if people in policy positions continue to attach importance to this number then this sort of debt exchange should rank high on the list of policy options. There is no less costly way to eliminate close to half a trillion dollars in debt.

            You might remember we were not the only nation/ Central Bank making this move.

  10. rtd

    Menzie,
    Nice post. I do agree that the party of fiscal responsibility seems to be an exaggeration. However, there are a lot of moving parts. As such, how does “The data shown above argues against this point (as does a large empirical literature).”? How reliably can we distinguish the impact of the legislation, various lags (implementation, effectiveness), and other macro-phenomena (monetary policy, correlation with recessions, etc)?

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  11. Anon3

    We need to do the Democrat thing and raise tax rates on the rich ……… so we can get real GDP growth back down to Obama levels. Nothing spells success–as we learned incessantly from Obama-shill Menzie–like 1.5 to 2% growth in gdp.

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  12. noneconomist

    Until recently, deficits and the growing national debt were fiscal sins. Although plenty of conservatives had apparently been sleeping quite comfortably for most of the Bush II years, that all changed on Jan. 20, 2009. Some time on that day, Republicans discovered we were $10.2 Trillion in debt. The reaction was nearly biblical with much wailing and gnashing of teeth. The congressional pulpits were full of willing preachers who opined that these debtors would surely throw the country into a pit of fire from which it could never escape. The Revs. Ryan and McConnell led the charge. They heartily agreed with Bishop Hatch who mournfully predicted “trillion dollar deficits as far as the eye can see.”
    To rectify this, they threw themselves behind a man who characterized himself as. of all things, a willing debtor, the “king of debt”, who once said he would be willing to settle treasury debts at LESS than face value of the securities already sold. (He may well also have been that much feared, much anticipated “wolf in sheep’s clothing” the righteous are always warning about, although this wolf had already triumphed over multiple bankruptcies himself).
    But there was, thankfully, a solution. Cut taxes and we can reduce those pesky deficits. As a candidate, the “king of debt” (also referred to as a “baby Christian” by his devout religious followers) had also promised to eliminate the debt during his time in office. His followers take his word as his bond.
    Praise God! The path is clear. Cutting taxes, especially for the wealthy and for corporations WILL lead to lower deficits and a reduction of debt. Much as it did in the halcyon years: 1982-1989 and 2001-2007. The prophets claim it’s already happening. No more need to wail incessantly or to needlessly grind molars. We are saved by the man who told us it was all right there in Two Corinthians.

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