Budget Deficits and the Laffer Curve

Financial FAQs

Wikipedia

There is an economic theory of sorts that helps us to understand why our political parties can’t agree on how to grow an economy that benefits most Americans. It’s called the Laffer Curve, reputedly first drawn on a napkin by doctoral student Arthur Laffer in a meeting with Dick Cheney, President Ford’s Chief-of-Staff in the 1970s.

Laffer basically claimed that raising taxes was harmful to economic growth, and his pretty picture convinced conservatives who didn’t like taxes of any kind. His ‘claim’ isn’t true, though it had always been behind conservatives’ call to shrink government spending by cutting taxes. It was the higher maximum tax rates of the 1950s and 60s that enabled the US to build our Interstate highway system and land on the moon, for starters.

But cutting taxes just to enrich certain income brackets, without cutting comparable spending has always resulted in burgeoning deficits, as conservatives certainly know, even if they won’t admit it.

For instance, it purportedly convinced Cheney as GW Bush V.P. that “deficits don’t matter”. Laffer’s claim gave Republicans the cover to lower taxes while increasing spending for President GW Bush’s War on Terror after 9/11, because Laffer asserted it would pay for itself with faster growth. Instead, the Bush tax cuts and increased spending has added a cumulative $4 trillion to the federal debt since then.

Washington Monthly

A short spurt of growth happened in 2018 after the 2017 Republican tax cut, but GDP growth is settling back to the 2 percent range that has prevailed since the end of the Great Recession. And there is another consequence—an upcoming $1 trillion budget deficit.

Growth had flagged since 2008 because so many Americans weren’t put back to work, as happened during the Great Depression. Spending was erratic amid continual budget wars between the two political parties impeded productive investments, such as in our badly outmoded infrastructure.

One example: more than one-third of America’s 600,000 plus bridges are badly in need of repair; our energy grid is more than 70 years old and subject to power failures; our drinking water systems are becoming health hazards—Flint, Mich and Newark, NJ are the latest examples; and we have a K-12 educational system that ranks near the bottom of developed countries.

The Laffer Curve has really done no one good, except to give conservatives talking points with which to maintain the low tax rates of today that have resulted in record federal debt levels.

“There is a strong correlation between cuts in top tax rates and increases in top 1 percent income shares since 1975,” said economists Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva in a 2011 NBER Working Paper. “But top income share increases have not translated into higher economic growth, consistent with the zero-sum bargaining model.”

The resulting record income inequality from the Laffer Curve inspired tax cuts has finally reached the same level that prevailed in 1928, and we all know what happened next—the Great Depression.

Harlan Green © 2019

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Bad Jobs Report, Another New Deal Needed

Financial FAQs

We now know why this economic recovery has been so weak 4 years after the end of the Great Recession. The government has been taken out of the jobs market. Government spending has been cut, rather than increased to make up for the lack of private sector job creation.

The unemployment dropped to 7.3 percent from 7.4 percent, but that was because some 312,000 stopped looking for work, according to the Bureau of Labor Statistics Household report. It was a very weak report at this stage of an economic recovery, and should mean the Federal Reserve won’t act to taper their QE3 purchases in September.

It also means the economy cannot improve without further stimulus from the government sector, since the private sector isn’t creating enough jobs to even keep up with population growth. It means instead of a debate about cutting social security and Medicare spending, as well as defunding Obamacare, Republicans should be debating how much to spend to simulate more economic growth, if they want seen as a friend to business. Otherwise, they will continue to be seen as the no-growth party.

Graph: Calculated Risk

The change in total nonfarm payroll employment for June was revised from +188,000 to +172,000, and the change for July was revised from +162,000 to +104,000. With these revisions, employment gains in June and July combined were 74,000 less than previously reported. This is while most of the new jobs were in the auto sector for manufacturing, and retail, health care and social services in the service sector, which are lower paying jobs.

And so we still have the problem of high unemployment, when 5 percent or lower is considered full employment, with lost productive output some $1.76 trillion below potential GDP growth if we had remained at full employment, according to the Congressional Budget Office.

Graph: EPI

In a word, we need the urgency of another New Deal. Though we don’t have a World War to boost government spending, as in WWII, the Iraq and Afghanistan wars on terror should have generated a national emergency. But the Bush/Cheney presidency decided that we should all go shopping after 9/11, while they fought the wars on limited budgets and tax cuts with borrowed money.

But we can boost government spending without adding much to government debt. In fact, the boost to economic growth and tax revenues would cancel out most of the additional debt, while keeping many millions more employed, according to numerous studies.

How? Begin government-sponsored infrastructure repairs that could boost construction spending by as much as $2.2 trillion, says the American Society of Civil Engineers. And this would be spent in the private sector. Most of it is deferred maintenance, which will only become more expensive if we wait any longer. This certainly is of some urgency. How many more bridges have to fail before we realize this?

Nobelist Paul Krugman lamented such lost economic activity in a recent blog: “With the benefit of hindsight, we do know roughly how depressed the economy has been; we have reasonably good estimates of the effects of government spending; so we can put together an estimate of what would have happened if we had, in fact, pursued a policy of government spending sufficient to keep output at potential.”

The Congressional Progressive Caucus has already put together a “Back to Work” fiscal 2014 budget alternative (BTWB), which would invest $2.1 trillion in job creation measures over 2013-2015.

“The Back to Work budget would sharply accelerate economic and employment growth; it would boost gross domestic product (GDP) by 5.7 percent and employment by 6.9 million jobs at its peak level of effectiveness (within one year of implementation), while ensuring that fiscal support lasts long enough to avoid future fiscal cliffs that could throw recovery into reverse,” said EPI’s analysis of the budget proposal.

Or, instead of labeling government-sponsored work as another New Deal, why not says it’s a “good deal” for American jobs and workers?

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

Greater Lawlessness Causes Great Recessions

Popular Economics Weekly

We know Greg Smith’s unveiling of Goldman Sachs’ ‘culture’ of GS profits ahead of clients’ interests was nothing new. And that real laws were broken—from conflicts of interest to outright fraud. The 2010 congressional hearings unveiled much of the double dealing that was rationalized by Goldman Sachs’ buyer-beware code—its clients should be sophisticated enough to know that Goldman would try to maximize its own profits, before its clients’ profits.

But other laws were broken; as well as economic rules that govern sound business practices in the runup to the Great Recession. Pundits have traced the decline of Wall Street ethics from the morphing of partnership-owned investment banks to corporations, as well as the enormous growth of financial markets that bred outright greed.

But there is little mention of how it caused our economic decline into the Great Recession. What was behind this culture of greed and unethical behavior; a culture of greater lawlessness can be traced back to the early 1980s when President Ronald Reagan trumpeted that government was the problem and more private enterprise the solution for greater prosperity.

In attempting to downgrade governmental powers, conservative regimes in particular began to consciously disregard the laws of our land—from not enforcing existing regulations, to Iran-contra gun-running in President Reagan’s case, to abrogating international treaties such as START nuclear non-proliferation, and muzzling Department of Justice Attorneys General under GW Bush, to name just a few cases.

The number of convicted criminals in those administrations tells part of the story. President Reagan’s administration was marked by multiple scandals, resulting in the investigation, indictment, or conviction of over 138 administration officials, the largest number for any U.S. President.

And Salon.com had documented 34 incidents of law-breaking in just the first 4 years of GW Bush’s Presidency, the most blatant being unmasking covert CIA operative Valerie Plame, and its fabricated claims that Iraq had weapons of mass destruction.

But even more damage was done via blatantly disregarded economic laws of successive Republican administrations. It was really the attempt by Big Business to unravel the economic safeguards of the New Deal, first spelled out in Paul Krugman’s The Great Unraveling, by advocating massive budget deficits to pay for a Pax Americana—with especially severe consequences for the old and poor.

“Deficits don’t matter” was the infamous chant of Bush VP Dick Cheney. At a time when economic inequality had risen to levels last seen in the 1920s, these administrations wanted to divert attention from a vanishing social safety net by proposing the ago-old Darwinian solution—the free market. For only the fittest will survive in a world that is ruled by self-interest, rather than laws and regulations.

The United States, beginning in the 1980s once again became the most ardent advocate and practitioner of the oldest form of capitalism, now a primitive relic of 18^th century enlightenment. This is but one part of our aging democracy that U.S. hegemonists put up as the model for western civilization. But it is a very imperfect model for the rest of the world as well.

A 2002 survey of 38,000 people in 44 countries by the Pew Center for the People and the Press found what they think of our American Way. “Since 2000, favorability ratings for the U.S. have fallen in 19 of the 27 countries where trend benchmarks are available…pluralities in most of the nations surveyed complain about American unilateralism,” says the study. They think we disregard their interests in pursuit of our own self-interest.

Few dispute that our capitalistic economic system has won the day. It produces great wealth, particularly for those at the top of the wealth pyramid. Robert Reich’s book, “The Future of Success” said it best: “By the end of the (20th) century, the richest 1 percent of American families, comprising 2.7 million people, had as many dollars to spend after taxes as the bottom 100 million.”

But not for the 99 percent majority, in other words. Why so much greed, and willful lawlessness? This last happened in the 1920s run up to the Great Depression. Fear overruled both laws and common sense, so that the lobbyists of self-interest came to the fore. Our economy was being transformed from a rural to industrial economy, which drove workers into the cities. Wages plunged along with prices, and so did economic activity for more than 10 years. It was only the New Deal that brought benefits to the larger majority of citizens and leveled the economic playing field.

The same has happened today. Conservatives are again ignoring basic economic  truths in their attempt to destroy our working class as we know it, by passing laws that ban collective bargaining in states like Wisconsin, or right to work laws that say workers do not have to pay union dues even though they derive the benefits from belonging to a union. We know the results in Wisconsin after one year. Employment has plunged and is the worst of the Midwest states that surround it, according to the Economic Policy Institute.

Graph: EPI

It is no coincidence that those 23 states that have passed right to work laws are also the poorest states, with the highest income inequality, lowest educational achievement, and receive the most in public subsidies. Taking incomes and wealth away from workers in those states can only make them poorer in relation to other states and regions, and a continuing drain on public finances.

That is the real lesson of our greater lawlessness. By choosing to break laws and regulations that govern economic activity, economic activity is being pushed back to levels of past centuries. For workers will only have the incentive to produce more and better products and services when they have the incentive to do so.

In the end, such greater lawlessness means a disregard for everyone but one’s own clan or tribe, a greater selfishness, and no country can survive such a breakdown in social welfare. That is the lesson learned from the Great Recession. Policies that ignore economic as well as civil laws, that continue to divert incomes and wealth to the wealthiest, impoverish the majority.

Harlan Green © 2012