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Paul Krugman Asks Whether the Economy Is Headed Towards a “Lost Decade”

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by Joshua Holland

"Lost decade, here we come," writes Krugman, noting that deficit hawks appear to have gained the upper hand within the G20. It's a shift from last year, when most everyone agreed that governments had to spend dollars — or Euros or Yen or whatever — to replace some of those not being spent by people who had lost their jobs, nest-eggs, homes, etc. (or who were afraid of losing those things).

It's basically incredible that this is happening with unemployment in the euro area still rising, and only slight labor market progress in the US.

But don't we need to worry about government debt? Yes — but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts. A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP.

He also talks about how countries like Greece, which face real and immediate deficit crises, differ from economic powerhouses like the U.S. Krugman makes a commonsense argument: you have to wait until the economy recovers to worry about debt reduction. He's right to call the bipartisan freakout over deficits in the near term "utter folly posing as wisdom."

But there's another important point here that I think most people overlook. Federal deficits are keeping the states from turning into little Somalias. Their revenues have crashed, and they can't run deficits to get through the rough. Services are being slashed, and employees are being laid off or furloughed. That makes it hard for them to pay their mortgages and means they end up spending less and paying less in taxes — it's cyclical. And the services being cut are important ones — public transit and education funding is getting killed, poor kids are being kicked off of state health insurance plans and on and on. It would be much, much worse without those federal dollars coming from Washington.

In my "deftly written" and "much-anticipated" forthcoming book*, I spend some time arguing that we should never discuss "taxes" in a generic sense, because they aren't. The burden of various taxes fall differently on the rich or the poor, on businesses or individuals, etc.

It's important to understand that federal taxes tend to be progressive — their burden falls more heavily on the wealthy and on corporations. Broadly speaking, state taxes tend to be pretty regressive. On the whole, they bite the middle class and the poor harder, leave more of a mark.

When we run federal deficits to keep our state's economies solvent, it puts dollars into all of our pockets. They help keep people employed, and those people are able to continue buying things (and paying taxes). They also allow states to continue to offer benefits to the poor and unemployed, with the same effect.

Later, when the economy recovers, the money we borrow today will be paid back through those (more progressive) federal tax revenues. That's a big reason the nation's economic elite is becoming so worried about the federal deficits. Never believe that the Corporate Right believes in low taxes; they believe in lower taxes for themselves and higher taxes for you and me to make up the difference.

Conservatives are most effective when they appeal to people's self-interest. That's what talking about government "taking money out of your pocket" is all about. But in this case, running federal deficits to keep states functioning is really, clearly, putting dollars into your wallet.

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Edited by El Buscador

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Yeah, I have to agree. I think we will be experiencing what Japan went through. That being said we have one thing going for us and one thing going against us.

Whats better about the US is that corporations don't view employment like Japan did in the 1990s ie when you graduate you get picked up and work for the same place for 20 years plus. Those that didn't get picked up were permanently locked out of their profession.

Our Labor force is a bit more loose then that.

Whats worse is that the average Japanese household is much more frugal than the average US household. Therefore it comes to reason that more of the US population will fall into deep poverty than what was seen in Japan.

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Federal deficits are keeping the states from turning into little Somalias. Their revenues have crashed, and they can't run deficits to get through the rough. Services are being slashed, and employees are being laid off or furloughed. That makes it hard for them to pay their mortgages and means they end up spending less and paying less in taxes — it's cyclical.

What's cyclical? We're talking about government employees here - their wages are paid for by our tax dollars to begin with.

It's like saying that you're "saving money" by buying an expensive item because it's on sale.

You're not actually saving anything, you're still spending - just spending less.


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Essentially what Krugman is arguing is that it would be better if states could run large deficits like the federal government does. I disagree. Now the argument about federal spending to stimulate the economy is wishful thinking. If that were the case, then Greece would have a great economy. After all, their government has been spending more than their GDP. It's fighting against yourself. Like bailing a hole in a boat out with a bucket.

Let's look at the economy on a large scope. The federal government runs a deficit (in theory) to stimulate the economy. Where did the money come from? Well under deficit situations, there are two ways it can be done.

1) Sell treasuries (bonds) that agree to pay more money in the future (interest) in order to get the money now.

2) If not enough treasuries are sold, then the federal reserve can print up the money.

Greece can't do # 2 because they're tied to the Euro. The US can. But that just devalues money, which is a burden on everybody.

The great example over the last few years/decade has been California vs Texas. One state has had high government spending, high taxation, and is not very business friendly. The other state has been the opposite in all regards. The Texas economy kicks California's butt any way you look at it.

Krugman brings up an interesting point in taxation via generality vs specific incomes. It's not so much that corporations want less for themselves and more for everybody else. It's that everybody wants lower taxes for themselves and higher for everybody else. There are very few people who think taxes should go up for their own bracket. But almost everybody thinks that other people should pay higher taxes. This is why governments get into debt in the first place. It's always the notion that somebody else should pay for something (by governments spending on it)

The temptation to have somebody else pay for it by government is spread out the larger the government is. Not many people think their own city should pay to build a new arena. More people think their state should pay to build a new arena. Almost everybody doesn't see a problem with their federal representative getting money from the federal government to build a new arena. But the result is the same regardless of which government level pays for it. Actually it's worse, the higher up you go because the benefit of the arena is overwhelmingly for the local population. Less so at the state level population. And non-existent at the federal level. As such, we again run into cities have tight budgets. States having moderate budgets. Federal having a terrible budget.

Making up the money in federal taxes later when the economy recovers? That's assuming that the increase in taxes is greater than the future budget. And how often does that happen? Economies don't grow because government spends too much money. They grow when private companies are successful and consumers have employment in private jobs. One need only look at communist countries where there is no unemployment. But the economy is terrible.

If Krugman thinks the economy will flourish by "putting more money in your pocket." Then the most efficient way of doing this will be to not take the money out of your pocket in the first place. Less and/or lower taxes. :) But the idea of governments borrowing/inflating or taxing people and then giving that money back out in the form of stimulus spending is inefficient at best.

Edited by Texanadian

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by Joshua Holland

"Lost decade, here we come," writes Krugman, noting that deficit hawks appear to have gained the upper hand within the G20. It's a shift from last year, when most everyone agreed that governments had to spend dollars — or Euros or Yen or whatever — to replace some of those not being spent by people who had lost their jobs, nest-eggs, homes, etc. (or who were afraid of losing those things).

It's basically incredible that this is happening with unemployment in the euro area still rising, and only slight labor market progress in the US.

But don't we need to worry about government debt? Yes — but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts. A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP.

He also talks about how countries like Greece, which face real and immediate deficit crises, differ from economic powerhouses like the U.S. Krugman makes a commonsense argument: you have to wait until the economy recovers to worry about debt reduction. He's right to call the bipartisan freakout over deficits in the near term "utter folly posing as wisdom."

But there's another important point here that I think most people overlook. Federal deficits are keeping the states from turning into little Somalias. Their revenues have crashed, and they can't run deficits to get through the rough. Services are being slashed, and employees are being laid off or furloughed. That makes it hard for them to pay their mortgages and means they end up spending less and paying less in taxes — it's cyclical. And the services being cut are important ones — public transit and education funding is getting killed, poor kids are being kicked off of state health insurance plans and on and on. It would be much, much worse without those federal dollars coming from Washington.

In my "deftly written" and "much-anticipated" forthcoming book*, I spend some time arguing that we should never discuss "taxes" in a generic sense, because they aren't. The burden of various taxes fall differently on the rich or the poor, on businesses or individuals, etc.

It's important to understand that federal taxes tend to be progressive — their burden falls more heavily on the wealthy and on corporations. Broadly speaking, state taxes tend to be pretty regressive. On the whole, they bite the middle class and the poor harder, leave more of a mark.

When we run federal deficits to keep our state's economies solvent, it puts dollars into all of our pockets. They help keep people employed, and those people are able to continue buying things (and paying taxes). They also allow states to continue to offer benefits to the poor and unemployed, with the same effect.

Later, when the economy recovers, the money we borrow today will be paid back through those (more progressive) federal tax revenues. That's a big reason the nation's economic elite is becoming so worried about the federal deficits. Never believe that the Corporate Right believes in low taxes; they believe in lower taxes for themselves and higher taxes for you and me to make up the difference.

Conservatives are most effective when they appeal to people's self-interest. That's what talking about government "taking money out of your pocket" is all about. But in this case, running federal deficits to keep states functioning is really, clearly, putting dollars into your wallet.

link

There is no such thing as a free lunch. It's impossible for an economy is run on taxes that government employees are paying. In fact, income taxes on government employees are really nothing more than an inefficiency with money going in a circle.

Eventually you will have to pay the piper and the idea of progressive taxes that he is throwing around in an attempt to imply that it will only be the rich that pay the piper is either dishonest or ignorant. You could tax the rich 100% and still not even pay for a fraction of the debts we are talking about. There simply aren't enough rich.

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There is no such thing as a free lunch. It's impossible for an economy is run on taxes that government employees are paying. In fact, income taxes on government employees are really nothing more than an inefficiency with money going in a circle.

Eventually you will have to pay the piper and the idea of progressive taxes that he is throwing around in an attempt to imply that it will only be the rich that pay the piper is either dishonest or ignorant. You could tax the rich 100% and still not even pay for a fraction of the debts we are talking about. There simply aren't enough rich.

Keynesian Economics refers to a set of theories designed to explain the determination of overall output and employment in an economy. The British economist John Maynard Keynes (after whom the set of ideas is named) provided the basis for these ideas in his 1936 book, The General Theory of Employment, Interest and Money. Before the advent of his work, the prevailing point of view among economists and policy makers was that recessions in a private capitalist economy were essentially self-correcting. They argued that if there were more goods and services in the economy than could be sold, prices and wages would fall and restore balance. Keynes’s insight was that for a host of reasons this need not be (and often was not) the case. He suggested that fluctuations in output and employment were the consequence of changes in aggregate demand, and that it was possible for an economy to be trapped in an sustained period where private investment and consumption remained very low even with falling prices.

Keynes provided several reasons as to why the actions of individuals and firms could yield outcomes in which the economy operated below its potential output and growth. Inherent institutional features of the system made prices adjust too slowly downwards; businesses and households maintained pessimistic expectations, thereby holding back investment and consumption; individuals wanted to keep their assets in the most liquid of forms, thereby preventing long term investments from occurring, and so on. In establishing these relationships, Keynes enabled the creation of the field of macroeconomics. But it was in the arena of policy and the role of the state in managing the economy that his ideas had the most public impact. In order to counter the tendencies that prolonged recessions and created depressions, Keynes proposed an active role for government intervention through monetary and fiscal policies to control the business cycle. When private spending was too low, governments could take up the slack and spend in order to maintain aggregate demand. Such policies greatly enabled the moderation of business cycles in the post-war period.

http://www.newdeal20.org/2009/07/01/keynesian-economics-101-894/

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Keynesian Economics refers to a set of theories designed to explain the determination of overall output and employment in an economy. The British economist John Maynard Keynes (after whom the set of ideas is named) provided the basis for these ideas in his 1936 book, The General Theory of Employment, Interest and Money. Before the advent of his work, the prevailing point of view among economists and policy makers was that recessions in a private capitalist economy were essentially self-correcting. They argued that if there were more goods and services in the economy than could be sold, prices and wages would fall and restore balance. Keynes’s insight was that for a host of reasons this need not be (and often was not) the case. He suggested that fluctuations in output and employment were the consequence of changes in aggregate demand, and that it was possible for an economy to be trapped in an sustained period where private investment and consumption remained very low even with falling prices.

Keynes provided several reasons as to why the actions of individuals and firms could yield outcomes in which the economy operated below its potential output and growth. Inherent institutional features of the system made prices adjust too slowly downwards; businesses and households maintained pessimistic expectations, thereby holding back investment and consumption; individuals wanted to keep their assets in the most liquid of forms, thereby preventing long term investments from occurring, and so on. In establishing these relationships, Keynes enabled the creation of the field of macroeconomics. But it was in the arena of policy and the role of the state in managing the economy that his ideas had the most public impact. In order to counter the tendencies that prolonged recessions and created depressions, Keynes proposed an active role for government intervention through monetary and fiscal policies to control the business cycle. When private spending was too low, governments could take up the slack and spend in order to maintain aggregate demand. Such policies greatly enabled the moderation of business cycles in the post-war period.

http://www.newdeal20.org/2009/07/01/keynesian-economics-101-894/

Keynesian economics has been proven time and again not to work. It is being proven right now in europe and here. All you have to do is look to see it. Keynesian economics is just for expanding government and that is about it. Supply side is the proven way out. Look up what happened when Reagan did it.

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Keynesian Economics refers to a set of theories designed to explain the determination of overall output and employment in an economy. The British economist John Maynard Keynes (after whom the set of ideas is named) provided the basis for these ideas in his 1936 book, The General Theory of Employment, Interest and Money. Before the advent of his work, the prevailing point of view among economists and policy makers was that recessions in a private capitalist economy were essentially self-correcting. They argued that if there were more goods and services in the economy than could be sold, prices and wages would fall and restore balance. Keynes’s insight was that for a host of reasons this need not be (and often was not) the case. He suggested that fluctuations in output and employment were the consequence of changes in aggregate demand, and that it was possible for an economy to be trapped in an sustained period where private investment and consumption remained very low even with falling prices.

Keynes provided several reasons as to why the actions of individuals and firms could yield outcomes in which the economy operated below its potential output and growth. Inherent institutional features of the system made prices adjust too slowly downwards; businesses and households maintained pessimistic expectations, thereby holding back investment and consumption; individuals wanted to keep their assets in the most liquid of forms, thereby preventing long term investments from occurring, and so on. In establishing these relationships, Keynes enabled the creation of the field of macroeconomics. But it was in the arena of policy and the role of the state in managing the economy that his ideas had the most public impact. In order to counter the tendencies that prolonged recessions and created depressions, Keynes proposed an active role for government intervention through monetary and fiscal policies to control the business cycle. When private spending was too low, governments could take up the slack and spend in order to maintain aggregate demand. Such policies greatly enabled the moderation of business cycles in the post-war period.

http://www.newdeal20.org/2009/07/01/keynesian-economics-101-894/

If this were true, we could all work for the government, do nothing, get paid, and then there would be things for us to buy with the money. I'm not trying to imply that the government doesn't do anything, but it isn't as if there is suddenly more productive work for the government to do just because a recession occurred. When the government starts spending money that it doesn't have to do something that it doesn't need to do, the economy isn't being helped. That's what Roosevelt did in 1932 and the economy continued to get worse until 1941.

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Keynesian economics has been proven time and again not to work. It is being proven right now in europe and here. All you have to do is look to see it. Keynesian economics is just for expanding government and that is about it. Supply side is the proven way out. Look up what happened when Reagan did it.
Today, supply-side economics is often conflated with the politically rhetorical term "trickle-down economics," but as Jude Wanniski points out in his book The Way The World Works, trickle-down economics is conservative Keynesianism associated with the Republican Party.

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The deficits and debt soared - along with the share of jobs that didn't pay a lving wage. What a recipe for economic success...

I don't know where you get your history from but Reagan gave us the longest and strongest recovery of all time. Anything else is revisionist history.

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I don't know where you get your history from but Reagan gave us the longest and strongest recovery of all time. Anything else is revisionist history.

Debt to GDP ratio was 32.5% when The Gipper took office and it was 53.1% when he left. Bush 1 managed to bring it up the 66.1%. Starting at that 66.1%, Clinton managed to leave office with a 56.4% ratio (first reduction since Carter) which Bush II then turned into a 83.4% ratio over his two terms. There's nothing revisionist about it. Just the numbers.

Median wage decreased $228.00 under Reagan, it further decrased $825.00 under Bush I, then gained $565.00 under Clinton. That gain was short-lived, however, since the median wage took a $588.00 hit under Bush II.

Get the picture?

Edited by Mr. Big Dog

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Tax Policy, Economic Growth and American Families

Introduction

Over the past decade and a half, Americans have been presented with two radically different visions of the role of government. The first vision, articulated and implemented by President Reagan in the 1980s, declares that government taxation and burdensome regulations are harmful to the natural market forces that generate economic growth. Since economic growth is the only way to truly create jobs and raise incomes, policies that reduce taxes and government intervention are the keys to higher living standards for all Americans.

President Clinton espouses the second vision, which maintains that the expansion of government does not have harmful effects on the economy and, in fact, may actually be a source of economic growth. Proponents of this vision believe that it is largely through government policies that people can be made better off. According to this vision, tax increases, such as those enacted in 1990 by President Bush and in 1993 by President Clinton, are valid and effective means by which to achieve such policies. When tax increases are not politically feasible, continued deficit spending is the next-best alternative.

In one sense, President Clinton's fiscal policies are a continuation of the Bush Administration's fiscal policies -- both administrations sought to reduce the budget deficit by raising taxes. President Clinton's agenda, however, is far more harmful than his predecessor's, as evident by Clinton's massive 1993 tax increase, his attempt in 1994 to socialize health care, and Clinton's original budget plan this year that proposed hundreds of billions of dollars in new debt for the United States.

Clinton's tax-and-spend policies have been in place for almost three years and it is now possible to compare the record of the pro-economic growth policies advocated by Republicans to the pro-government growth policies of President Clinton and the Democrats. The best comparison of these policies is a side-by-side examination of the economic recovery under President Reagan in the 1980s and the current recovery under Presidents Bush and Clinton.

Summary

With four years of data on the current economic recovery (extending back to the Bush Administration), it is now possible to tally up the scorecard and compare the Bush/Clinton recovery that started in 1991 with the Reagan recovery that began in 1982.[1] President Clinton has boasted that his policies have spurred economic growth, added jobs, and helped the middle class. However, the data show that the Bush/Clinton recovery is weak compared to the Reagan recovery along several important measures. Both economic growth and job creation in the current recovery lag behind the Reagan recovery by two full years. The middle class is suffering an actual loss in real median family income, while during the Reagan recovery it gained. Moreover, tax revenues increased more rapidly under Reagan's tax cuts than under the Bush/Clinton tax increases.

The most outstanding policy differences between the two recoveries are in the realm of tax policy. Reagan instituted across-the-board reductions in tax rates, while Bush and Clinton both pushed massive tax increases. The most disturbing conclusion is that the 1990 and 1993 tax increases have cost Americans far more than the extra earnings collected by the IRS; they have cost the economy at least two years of growth. Comparing the two recoveries:

Real GDP grew more in five years under Reagan (23 percent cumulative growth) than it is projected to grow in seven years under Bush/Clinton (21 percent cumulative growth).

After four years, 4 million more jobs were created under Reagan than under Bush/Clinton.

Federal revenues, adjusted for inflation, grew much faster under Reagan (33 percent cumulative growth) than projected under Bush/Clinton (20 percent cumulative growth).

Real per capita disposable income grew more in two years under Reagan than in all four years combined thus far in the Bush/Clinton recovery (8.2 percent versus 7.8 percent).

Median family income grew in all of the first three recovery years under Reagan, compared to three consecutive declines under Bush/Clinton.

In other words, during the economic expansion following Reagan's tax cuts, the economy grew faster, experienced stronger revenue growth, created more jobs, and saw more rapid income growth than the current expansion under the high tax policies of Presidents Bush and Clinton.

Economic Growth Spurred by Tax Cuts, Slowed by Tax Increases

Nothing illustrates the negative effect of tax increases as well as comparing economic growth following Reagan's 1981 tax cuts and the tax increases in 1990 and 1993. Both the tax cuts and the tax increases had profound effects on the subsequent economic recoveries, which began in 1982 and 1991, respectively. To assess the magnitude of such effects, Figure 1 compares the cumulative percentage growth in real GDP from the low-point of each recession. Comparing the cumulative real GDP growth experienced in the 1980s and 1990s, it is evident that Reagan's tax cuts led to a strong, healthy recovery, with GDP growing 29 percent in just 7 years.[2] Over the same time span following the Bush/Clinton tax increases, real GDP is expected to increase only 21 percent.[3] In fact, the economy after Reagan's tax cuts grew more in 5 years than the Bush/Clinton recovery will in 7 years. In other words, the burden of tax increases on the economy has "cost" the American economy 2 years of growth.

fig-1.gif

To put the consequences of slow growth in perspective, consider what would have happened had the current recovery matched the Reagan recovery. Real GDP is expected to be $7.2 trillion in 1998. If the economic expansion that began in 1991 were to match the growth under Reagan, real GDP would be $500 billion higher in 1998 and $2.8 trillion higher over 1992-98. Real GDP "lost" to slow growth would amount to over $7,300 per American family of four in 1998.

Job Creation Falters Under Bush/Clinton Tax Increases

The effects of higher taxes and increased government regulation have been painfully felt by working Americans, particularly those who have not been able to find jobs. Just one year after emerging from the recession, employment grew 3.5 percent under Reagan. [4] At the same point in the current recovery, employment actually fell 0.2 percent. Under the Bush/Clinton recovery, 7.5 million jobs have been created in the past four years (Figure 2). While this may seem substantial, it pales in comparison to the 11.5 million jobs created in the first four years of the Reagan recovery.

fig-2.gif

The 2 year growth gap in real GDP is reflected in the figures for job creation. Two years of the Reagan recovery nearly match four full years of job growth under Bush/Clinton. During the first four years of the Reagan recovery, there were an average of 240,000 jobs created each month. In the four year period following the 1990-91 recession, the average monthly job growth was just 156,000. In other words, for every two jobs created between 1992-95, three jobs were created under Reagan between 1983-86.

Real Revenue Growth Under Reagan Out-Paced Bush/Clinton

Contrary to the claims of Democrats, tax cuts under Reagan were not the cause of persistent budget deficits. As Figure 3 shows, real revenue grew much faster in the Reagan recovery than in the Bush/Clinton recovery. Under Reagan, federal revenue, in inflation-adjusted dollars, grew at an average annual rate of 4.8 percent, compared to 3.2 percent growth under Bush/Clinton.[5] After six years of economic expansion, real revenues under Reagan (with tax cuts) grew a cumulative 32.6 percent. Even with two tax increases, Bush/Clinton revenues are projected to increase just over 20 percent in six years, a feat Reagan accomplished two years quicker.

fig-3.gif

Even measured in absolute terms, revenue growth was much greater under Reagan than under Bush/Clinton. After six years of economic expansion, Reagan real revenues were $277 billion higher than at the end of the recession. Projected revenues under Clinton show that six years after the 1990-91 recession ended, revenues will be just $225 billion higher.

The reason for this is simple: The growth of revenues is tied to growth of the economy. Tax cuts stimulate economic growth, which in turn means that incomes are higher than they would be otherwise. Conversely, tax increases hinder growth and constrain economic expansion. Thus, revenue during the Reagan recovery actually grew faster than revenue in the Bush/Clinton recovery, despite the fact that Reagan instituted tax cuts while Bush and Clinton raised taxes.

Higher Taxes Mean Less Disposable Income

Examination of disposable income further reinforces the negative role of taxes. Measured on a per capita basis in inflation-adjusted dollars, the Reagan recovery far outstripped the Bush/Clinton recovery in growth in disposable personal income, as illustrated in Figure 4. Real per capita disposable income grew a total of 11.3 percent in the first four years of the Reagan recovery.[6] Over an equivalent time period in the Bush/Clinton recovery, real per capita disposable income grew a meager 7.8 percent. Real per capita disposable income grew more under Reagan in two years (8.2 percent) than it did in four years under Bush and Clinton (7.8 percent).

fig-4.gif

Disposable income is defined as the amount of income that is left to individuals after paying taxes. As such, growth in disposable income is crucial for maintaining a rising standard of living. The anemic growth in disposable income under Bush/Clinton is indicative of two trends. First, higher taxes mean that Americans have to send a greater portion of their incomes to the federal government. Second, higher taxes stifle economic growth, which in turn means that the overall economy as well as individual incomes do not grow as fast as they would otherwise.

Income Equality Tied To Economic Growth

One criticism that is raised against the Reagan years is that there was a rise in income inequality. The historical record, however, does not support such a conclusion. Data collected by the Federal Reserve reveal that there was, at worst, no significant change in income inequality between 1983 and 1989.[7] Moreover, IRS data indicate that the wealthy paid an increasing share of income taxes during the 1980s.[8]

These observations are consistent with economic theory. In a slowdown or a recession, the wealthy can take care of themselves through their savings and investments. Data show that the wealthy derive a much greater portion of their income from capital investments.[9] Low-income individuals, however, derive most of their income from wages and salaries, which typically decline during recessions. Since they have less savings to draw on, low-income individuals bear the burden of anemic growth far more than the wealthy. Low-income individuals are further hurt by the fact that wage and salary growth is contingent on economic growth.

Critics of the Reagan years assert that cutting taxes on capital is unfair because more of the benefits (in terms of taxes returned to taxpayers) go to individuals with higher incomes. Cutting taxes on saving and investment, however, has implications beyond just the effect on tax returns, particularly with regard to which people are affected. Lower taxes on capital serve to encourage its use. More capital leads to higher wages, increased incomes, and more high-quality jobs. By raising real wages, a reduction in taxes on capital encourages greater workforce participation and spurs investments in human capital, education, and training. Whenever the economy's stock of capital increases, the relative income shares of those already wealthy decline. As a result, the gains from economic growth are spread more evenly across the population.

In fact, data from the 1980s show that a good deal of the alleged rise in inequality is attributable to greater workforce participation. Most studies on income inequality rely on data compiled from tax returns. These studies often point to the fact that the income of some tax returns increased faster than others (even if most households increased in wealth). The problem with these numbers is that they fail to account for increased female labor force participation. Women who were not working previously chose to enter the labor market, since lower taxes on the product of labor increased the net compensation of their work. With two earners, families with these new labor force entrants saw rapid increases in their family income, creating the appearance of inequality. In reality, these number's simply reflect the fact that more people were working.[10]

Median Family Income Falls Under Policies of Higher Taxes

For the typical American family, slower economic growth may seem an abstract economic theory. The effects of slower growth, however, have been undeniably felt by working American families. The increase in taxes during the Bush/Clinton recovery has lead to a noticeably negative effect on family income (Figure 5). In 1991 alone, the median family income, adjusted for inflation, fell by $957.[11] In 1992 and 1993, real median family income dropped by $461 and $709, respectively, resulting in a net fall of $2,127 in inflation-adjusted income during the current recovery.

fig-5.gif

During the Reagan recovery, real median family income increased by $378 in the first year alone. Median family income rose $965 in the second year of the Reagan recovery and another $484 in Year 3. Overall, real median family income was $1,827 higher after the first three Reagan expansion years.

Conclusion

An examination of economic growth, job creation, federal revenue collection, and two measures of personal income reveals an unmistakable trend: The current economic recovery pales in comparison to the Reagan recovery along all measures. When Clinton praises the state of the economy, saying, "We are getting our economic house in order...we are moving in the right direction," it is important to keep everything in perspective. The economy is growing, but far below the potential demonstrated under Reagan.

With the burden of higher taxes weighing the economy down, the economy cannot be expected to expand by the leaps and bounds it did in the 1980s. While Clinton's top economic adviser, Laura D'Andrea Tyson, expresses satisfaction with our progress, stating that "the prospects for a sustained period of economic growth remain strong," contentment with our position will have cost our economy a cumulative total of $2.8 trillion by 1998.

http://www.house.gov/jec/growth/taxpol/taxpol.htm

Debt to GDP ratio was 32.5% when The Gipper took office and it was 53.1% when he left. Bush 1 managed to bring it up the 66.1%. Starting at that 66.1%, Clinton managed to leave office with a 56.4% ratio (first reduction since Carter) which Bush II then turned into a 83.4% ratio over his two terms. There's nothing revisionist about it. Just the numbers.

And a very narrow view of what a good recovery is. You can cherry pick bad numbers out of any recovery and declare is a bad one. If your honest about it you must admitt the best recovery of the 20th century belongs to Reagan and supply side economics.

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