Early this morning, I caught a few minutes of Stephen Moore’s Supply Side arguments on CNBC re Tax Cuts.
Rather than discuss what some have called Economic’s biggest mistake, and what the Chairman of President Bush Council of Economic Advisors Greg Mankiw described in the third edition of his book Principles of Economics textbook as the work of
"charlatans and cranks," I thought I would simply debunk his Capital Gains Tax Cut argument as increasing treasury receipts:
Moore is arguing that since tax reciepts went up after the Capital Gains Taxes were cut in 2003, it should therefore get all the credit. I would respond simply by going to the charts, and pointing out that THE ABSENCE OF CAPITAL GAINS FROM 2000-20003 is the primary reason.
This first chart shows the pre-tax cut period of October 2000 to March 2003; Gee, anyone want to hazard a guess for why Capital Gains Taxes paid were so low after the Nasdaq dropped 78%?
How about NO CAPITAL GAINS = NO CAPITAL GAINS TAXES!
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Nasdaq 2000-03
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The second chart shows what happened after the War began in March ’03. Note that the Nasdaq selloff was very similar in depth to the initial 1929 crash.
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Nasdaq 2003-06
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Gee, when markets rally, people pay more Capital Gains! Go figure . . .
(And this is before we even mention increased Housing sales due to half century low interest rates and the potential capital gains taxes there)
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If you are really interested in Supply Side, have a read of this: 2004: A test of Supply Side economics
And, here is a passage from a section of N. Gregory Mankiw (1998), Principles of Economics textbook, entitled
"Charlatans and Cranks":
An example of fad
economics occurred in 1980, when a small group of economists advised
Presidential candidate, Ronald Reagan, that an across-the-board cut in income
tax rates would raise tax revenue. They argued that if people could keep a
higher fraction of their income, people would work harder to earn more income.
Even though tax rates would be lower, income would rise by so much, they
claimed, that tax revenues would rise. Almost all professional economists,
including most of those who supported Reagan’s proposal to cut taxes, viewed
this outcome as far too optimistic. Lower tax rates might encourage people to
work harder and this extra effort would offset the direct effects of lower tax
rates to some extent, but there was no credible evidence that work effort would
rise by enough to cause tax revenues to rise in the face of lower tax rates. . .
.
Sometimes ad-hominem is the only appropriate response. I see it this way: when idiots continue to skew and spew, they create diversions and obstacles for those who want to do the right thing by addressing the statement, not the person.
But that can only go on so long. Then, after this has gone on for a time, there is only one recourse:
Name calling
Shunning
Given that Stephen Moore is still amongst the public, we can’t shun him yet. Therefore I think we should name-call.
So here it goes:
Stephen Moore is an idiot.
PS: After he wrote a piece on oil prices (how they would soon drop), I sent him an email, arguing fundamentals. He said I was dead wrong. His argument: Read Julian Simon. No discussion of supply and demand. No look at production in the pipeline. Just Julian Simon.
Grrrrr.
Never mind that the vertical axes in the graphs have different scales and base values.
BR asks: And that is significant why?
Sometimes it bugs me that these guys are *never* right but still get so much air time. Is there a point where you are so wrong so consistently that they stop inviting you on the tube? Then I remember what excellent fades guys like Moore are. Like when Luskin goes on Kudlow’s show last year and sez oil is going to $35 and gold back to $200 that’s when you double your positions in both. Sometimes it bugs me that these guys are *never* right but still get so much air time. Is there a point where you are so wrong so consistently that they stop inviting you on the tube? Then I remember what excellent fades guys like Moore are. Like when Luskin goes on Kudlow’s show last year and sez oil is going to $35 and gold back to $200 that’s when you double your positions in both.
I suspect every year since some in the great depression the monetary value of the economy has gotten bigger. After a few years it always adds up.
So you can cut taxes and after a few years revenues do comeback and most years raxes do increase and since the monetary value of the economy is getting bigger you can say it’s cut taxes that did it.
This kind of argument plays well because it’s simple and when you get some grump taking a little time off from bitching about the war on Christmas to yell “Look Bush cut taxes and taxes are up and he cut capital gains taxes and capital gain tax revenues are up, it’s so unlike the recession we had in the Clinton years” it sounds authoriative. And insecure people who vaguely remember things believe. And that’s what it’s about.
And yes in the informal talks the cultists do talk about the horrible economy of the Clinton years. They talk about the recession just as they say Carter tried price and wage controls and the energy controls he actuallly started to eliminate. They rewrite history.
They are liars,
Just one Moore reason why the wsj editorial page is a waste. Twice now huge deficits are the result of tax cuts, not increased revenue (that is a result of the tax cuts).
Maybe a good rule of thumb for TV is “never trust anyone who tries to make a complete argument in 30 seconds.”
The TV good guys are the ones who recognize that it’s almost impossible to reduce a nuanced position down to a soundbite, and so, rather than trying to come up with E=MC2, they explain one variable or concept at a time and reiterate that it is only part of a larger picture. They show you the tip of the iceberg, instead of pretending they have the iceberg in the palm of their hand.
The TV bad guys are the ones who act like the world is simple as can be and golly gee folks, anyone with eyes and ears can see that X is true just because of Y.
If I were responding to Moore I would do the Ali G thing: ask outrageously stupid questions that make a point of their own.
“So yo, Mista Moor. You iz sayin dat since tax cuts for me Julies came first and tax receipts for da man went up second, tax cuts gets all da credit. Much respek for Cause N’ Effect. Booyakasha! But now me has a thought, check dis: iz tax cuts responsible for da 2003 rise of soldier casualties in Iraq? Cuz like, dey came second too right?”
your killing me!
trader75: You make several good points. Our TV pundits, by and large, are entertainers and sycophants. Perhaps not always sycophants to power–the people they interview. But sycophants to their career and their perception of what it means to be a pundit.
So instead of investigating issues with any depth or truth, they have time slots that must be filled. “Ah, let’s get Stephen Moore on to hear his opinion.” “Blah blah blah blah…”
It takes comedians to make our pundits look like idiots. The colbert report took a while to grow on me (at first I thought it might die a quick death) but now I view it entirely as social commentary and, even if he might not always be funny, in the large sense, it is enlightening. The beginning credits with flags and frenetic graphics–classic.
His interview with Bill Kristol was classic, right along the lines of your example above. Kristol looked like an idiot. All he seemed able to say was “duh duh duh duh”
Perhaps the problem is that our TV media pundits aren’t quick on their feet. They can’t think too fast. So they are unable to quickly form analogies that pull the rug out from under Stephen Moore without a full frontal assault.
I’m not surprised CNBC (aka Bubblevision) would have a guy like Moore on at all. The Village Idiots that run and are on that channel continuously give air time to just about anyone or Headline economic number (and politically juiced in my view– to what ever the market needs to see) that will pump the economy and Stock Market higher, regardless of their credibility. It’s more about Ratings than it is about giving your audience an honest perspective of the Stock Market and Economy. No surprises there. But you consistently see such a bias anywhere you turn — Bloomberg, WSJ, Cavuto’s show, Bulls and “More Bulls” on Fox etc.
It would be nice to see more of the data presented on this site (other than Kudlows show) get some regular air time.
I’m not surprised CNBC (aka Bubblevision) would have a guy like Moore on at all. The Village Idiots that run and are on that channel continuously give air time to just about anyone or Headline economic number (and politically juiced in my view– to what ever the market needs to see) that will pump the economy and Stock Market higher, regardless of their credibility. It’s more about Ratings than it is about giving your audience an honest perspective of the Stock Market and Economy. No surprises there. But you consistently see such a bias anywhere you turn — Bloomberg, WSJ, Cavuto’s show, Bulls and “More Bulls” on Fox etc.
It would be nice to see more of the data presented on this site (other than Kudlows show) get some regular air time.
To other advisors out there: How often in 2000-2001 did you hear from clients, “I don’t want to sell because I don’t want to pay the taxes”?Well, they held on and had no taxes.Buy and hold 4-letter stocks w/o fundamentals or divvys to save on taxes!Imagine that!
First off, to trader75: Respek. You is a G.
Second off: to echo Tom C, I heard every excuse for not selling in 2000. And before that, I heard about why we weren’t MORE aggressive. And today, I hear the same thing again. Coincidence?
Taxes affect behavior in the real world. Folks are taking capital gains today. The loss carry-forwards are being wiped out and reciepts are up dramatically. To pretend that favorable tax treatment has no effect is as silly as Wall Street advice in the run-up to NASDAQ 5000.
I see that the markets have decided to trade sideways in anticipation of The Big Picture’s “Tony Montana Trader Award” presentation that takes place at 2:15pm. I have to say it may be a bit anticlimactic since all 3,246 nominations were for the same person but , as they say, the show must go on! I am thinking the acceptance “speech”, to be given in these very same pages, should be an eye-opener, not to mention an ear-scalder!
and in all fairness shouldn’t we add that Larry Kudlow says things that are entirely fantasy based all the time.
like how about ‘they don’t work in Europe’.
Bob-
39% of the German population derive their income from employment.
Not to point out the obvious, but tax cuts dont cause deficits; spending does. When you spend more than you make, you have a deficit.
If you worked in government like I do you would understand that no amount of tax increase is going to help us out of this mess.
You have to cut spending and cut lots of it to fix the problems we are moving towards.
Furthermore, one point that Barry doesn’t mention about supply side economics is that it is predicated on the assumption that you also control spending. In otherwards, if you match your spending and tax rates (lower taxes, lower spending) then your tax receipts go up.
Now, I would agree; Moore is somewhat of an idiot, because he argues for keeping taxes low on capital gains and dividends, which primarily benefit investors, rather than arguing for tax cut extensions and lower government spending.
The problem right now is we have too much cash chasing too few good investments. Thats the Fed’s fault, but it also doesnt help that these tax rates are so low.
–and the dirty little secret that supply-siders like Moore fail to mention is that the policy is inherently inflationary, at least the way it is implemented. what are the tax receipts adjusted for the decline in the dollar?
i don’t think it is a coincidence that Clinton/Rubin subscribed to a strong dollar policy, which included a balanced budget, and thus real wages increased. the Bush policy of a weak dollar (supply-side policy) has been no doubt a cause in the falling real wages since he took office.
i’m not claiming they are each totally responsible because there are many other variables but there is no doubt it is related.
obviously Moore wouldn’t mention this but i think it’s criminal that the dumbass Democrats can’t get the picture…. the very people most affected by falling real wages are the ones that voted for Bush.. no that’s some good irony
People who know how to short should have made lots of capital gains in the 2000-2003 period. The average retail investor doesn’t know how or why shorting is useful, but I would expect people with a lot of money to know how and when to go short. I would hope that rich investors make as much money in bear markets as they do in bull markets, but I suspect that the facts would prove me wrong. Which is just as well, since that means the minority of people who are happy to short the market make more money when stocks drop. Also, if more people shorted markets they would decline faster. Net long positions always have to outnumber net short positions.
Its astonishing how little we hear about deficits causing inflation these days. Too much deficit federal spending ain’t good.
Incidentally, deficits are caused by spending more than you take in.
You can close deficits by spending less, taking in more, or a combination of the two.
But its not quite that black and white.
Raise taxes too much, and you grind the economy to a halt. Cut spending to much at an inopportune time, and the lack of stimulus cools growth.
That said, I favor deficit reduction through both spending cuts and tax hikes.
Tax hikes at a time like this would be akin to beating up somone when they are already knocked down. The state and local tax pressure is already bad enough. If you add in a cooling real estate and inflationary issues combined with stagnating wage growth, you would have to be totally insane as a politician to propose higher income taxes.
Investor tax hikes certainly wouldnt be a bad idea.
The reason we dont hear about deficits is because no one wants to confront the problem until the problem actually begins to show tangible effects.
Governments are notoriously bad at confronting causes; they want to attack effects.
Cutting spending at a time like this would seem to be the perfect time to do so. In fact this might be the last best chance to do so.
The deficit causing inflation/crowding out thing went out with the Reagan administration. Where are the Chinese going to go with their current accounts surplus, Japan?
The structural nature of government today makes it impossible to raid the private sector without increasing spending. The votes of the disaffected taxpayers need to be offset by the votes of happy taxeaters. Higher taxes means even higher spending.
Barry,
While I agree that the tax cut should not get all the credits for the current economy expansion, It should at least get some well deserved credit. I think part of the reasons for this amazing bull market is the capital gain and dividend tax cut. Let’s be fair.
Tom:
The federal government fell to 18.4% of GNP in 2000 compared to nearly a quarter in the mideighties.
This was after Reagon, Bush 1 and Clinton had eached raised taxes.
Your claim is false.
Since it took me only a few minutes to find this out using a miracle called a search engine I would say it borders on dishonesty. Unless you wish to plea stupidity.
Spending as a percentage of GNP has risen under Bush 2 after tax cuts. If anything the 2 seem positively correlated.
If you look at the data, it appears that this expansion is almost entirely driven by cheap money. A significant fraction of the jobs that have been created in the past few years have been in construction and real estate. Those jobs come from the housing bubble, which comes from cheap money. Cheap money has also driven up all other financial assets.
Tax cuts may have helped, but their effect is too small to measure when compared with the cheap money effects. Given that the tax cuts led to increased government borrowing and therefore a reduction in cheap money, they probably had no net effect on the economy.
Remember that a tax cut without a spending cut is equivalent to mailing people US treasuries without asking them to pay for them. The overall effect is just a transfer of wealth from one group to another. In this case, it is a transfer from future taxpayers to current taxpayers and holders of US treasuries.
Arthur Laffer and Tom Friedman have told us that you can grow your way out of deficits with tax cuts and the world is flat. The super rich are laughing all the way to the bank over these big fish stories as the former middle class cry over their flattened wallets.
Ritholtz says that due to market crash there were no cap gains 2000 – 2003 so comparison to now is inappropriate. However, I just finished reading that, “It marked the largest one-month receipt total since the government collected $332 billion in revenue in April 2001, reflecting a boom in capital gains from stock investors lucky enough to cash out their investments before the bursting of the stock market bubble in early 2000”. Looks like somebody’s got some revsing to do. God Bless you Barry!
Barry.
There-
No need to get defensive. The absolute size of the federal government, regardless of the percentage of GDP consumed is my point. There are any number of reasons to explain what occurred in the past and defense spending as a percent of GDP might be a number to consider. National Defense is the uncontested role of the federal government. The 1986 (?) budget compromise supports my contention that tax increases can lead to higher spending. Changes in geo-political circumstances such as new markets and technological innovations also have their effects on inflation as well as tax reciepts. The government is a worthwhile expense fostering the protection of private property, law enforcement and the security of contracts. Basic infrastructure allowing the ease of movement for goods and services as well as a level of basic economic protection for those with no alternatives. However, governmnet is a COST to the productive part of the economy and develops interests of it own which may have absolutely no connection to the general welfare. The SIZE of the central state is a long term problem since it only GROWS in absolute terms while dependent on taxes generated through private economic activity. The simple fact is taxing any activity will diminish that activity. Business cycles come and go but the demands of a bureaucratic, administrative state only increase. The changes in allocating defense dollars to other parts of the budget as well as the communication revollution and the ending of the cold war allowed the changes in % of GDP consumed by the federal government to actually decrease.The corelations you speak about are almost meaningless without context.
Tom C.: With considering about 133M payroll jobs a good proxy to total employment (give or take a number or multi-job holders) and a population about 300M, that would be no more than somewhere around 45% deriving their income from employment in the US.
BR: It’s significant mostly just in a factually pointing out way.
Saying that Govt as a % of GDP is up or down is sidestepping the issue, with all due respect. Let me illustrate with a hypo situation.
Suppose GDP were $100 and govt reps $20.
Govt spending remains proprtional and in time T+1 GDP is $106 and govt reps $21.2. Scenario A seems ok, right. Gov/GDP ratio has stayed at a constant 20% and we have had economic expansion.
However, the real question is this. What if the govt reduced spending to 18. Would GDP be higher, lower or the same as 106. It’s quite possible GDP could be $107 as scenario B. Is Scenario B better than Scenario A. You betcha!!
I argue that govt real spending increases are inflationary and, regardless of whether they remain constant vs GDP, that inflation saps some of the potential growth out of GDP. Regardless of whether the spending is financed by taxes or borrowing. The method of financing in the short run has different effects but in the long run, a dollar taken out of the private sector today (taxes) or tomorrow (repay the Fed debt) has basically the same effect. The ride to ruin is just by a different route.
Another way to think about this would be that govt spending goes largely to consumption, which eats into saving, which eats away at investment, which retards future economic growth.
Tom C – If I am not mistaken, both the overall size of government, and government spending went down, and taxe rates went up under Clinton. So, we have an instance where higher taxes did not yeild higher spending, as you claim. Is this “the exception that proves the rule”, or what?
«supply side economics is that it is predicated on the assumption that you also control spending. In otherwards, if you match your spending and tax rates (lower taxes, lower spending) then your tax receipts go up.»
This is just voodoo too: lower spending can have a huge deflationary impact. Even if lower taxes had an expansionary one, nobody can guarantee that it would be bigger than the deflationary impact of a tighter spending policy, and that wouldn’t lead to lower GDP and tax receipts.
Indeed odds are that at least in a downturn the net effect would be quite negative, both for GDP and taxes.
But then ”lower taxes, less spending” is likely to have two effects regardless of economic conditions:
* High earners benefit, because they save on lower taxes and don’t lose much from lower government services.
* Poor people will accept lower salaries to hang on to their jobs, because while their after tax income is not significantly increased by lower taxes, the government services they rely on, however bad, get cut.
In other words the distributional effects of lower taxes, lower spending are always “good” :-).
dude-
The ‘overall size’ of government has not decreased year over year since the end of WW2. Easy to check if the size of the federal budget is used as the measure. Certainly it never decreased during the Clinton Years.
cm-
If you consider the demographic differences between Germany and the US the situation is even more grim for Germany than the 39% figure might imply.
«The ‘overall size’ of government has not decreased year over year since the end of WW2. Easy to check if the size of the federal budget is used as the measure. Certainly it never decreased during the Clinton Years.»
Sounds like prevarication to me: the nominal total size of the budget is something that honest people are not interest in discussing, because the important measures are either the size of the budget as a percentage of GDP, or less commonly and interestingly the (after inflation) cost per resident (regardless of status).
If one looks at the absolute nominal figure the effects of inflation and population growth are going to dominate.
Capital gains should not be taxed at all.
Maybe higher capital gains contributed to the dearth of buyers indicated by the decline your graph depicts? And then maybe cutting them contributed to turning the curve in the other direction? In which case it would be fair to say that cutting capital gains was causally related to the increase in tax revenue that naturally attends a rising market?
Outside of tautologies like mathematical theorems, and Biblical principles, there is no unqualified truth. Certainly not in a discipline like economics, which is lots more like palmistry than it is math.
You guys sound tough in the blogosphere, but I’ll bet few of you would face Moore in a televised debate on the issue. The reason is that there is no absolute truth here, your dogmatic statements notwithstanding, and the debate would go to the best communicator, not the superior theoretician.
In the end this is an argument, not about facts, but values. If it were about facts, there would be no name calling, and no anger. I am an electrical engineer. If someone says that he has a machine that puts out more work than you put in to make it go, I don’t call him names, and I sure don’t have a burning need to go onto the web and dress him down. This is because the principle involved is not arguable, and I have better things to do than call out every crank.
Mr.Nast-
I agree completely.Competing interests and the tension between liberty and security colors the debate over taxes and the cost of governmnet more than anything else.The idea that taxes have no effect on behavior,however, is laughable.
I’ve generally found Stephen Moore to be reasonable. Barry, did he actually say the tax cuts deserved ALL of the credit for the increased tax receipts as you aver? Or some of the credit, as appears probable?
Much respek to Max for using Trader 75’s hilarious Ali G riff as his new header!
http://maxspeak.org/mt/
Booyakasha!