Open Thread: No Free Lunch?

In today’s WSJ, Art Laffer critiques the stimulus package:

"In this world of ours, those resources going to the
rebate recipients don’t come from the Tooth Fairy. They have to come
from workers and producers. If the resources come from workers and
producers who thereby receive less for their work than they otherwise
would have received, won’t they in turn spend less? Of course they’ll
spend less, and the people who now supply them with less will also
spend less, and so on down the line."

Now, I have no real love of this stimulus package — why $300? Why not $3,000 or $3,000,000? — however, since it was written, by the father of supply side economics, I knew there had to be something amusing to be found in it. Art Laffer did not disappoint:

As my former colleague and friend Milton Friedman
liked to say, "There’s no such thing as a free lunch," and this rebate
is exactly what he meant. The net effect is that the reduction in
demand from those who pay the real resources will be exactly the same
size as the increase in demand from the rebate recipients. It’s sad but
true. Income effects always net to zero in a closed system."

A rather unintentional howler. You see, one of the arguments the Supply-Siders have put forth is that tax cuts pay for themselves. (This has since been thoroughly debunked).

That’s rather ironic: The latest bunch of free-lunchers, are being called out as, well, a bunch of free-lunchers, by the original free-luncher! Apparently, its only a free lunch if it involves tax cuts, not if it involves spending.

Why do these folks keep forgetting: TANSTAAFL!

~~~

Tax cuts, stimulus spending — any of it a free lunch?

What say ye?

>

Source:
That ‘Stimulus’ Nonsense
ARTHUR LAFFER
WSJ, February 13, 2008; Page A27
http://online.wsj.com/article/SB120286935977964221.html

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What's been said:

Discussions found on the web:
  1. Pool Shark commented on Feb 13

    For those who don’t believe in a free lunch, I submit exhibit 1:

    Food Stamps.

  2. donna commented on Feb 13

    Laffer should be strung up for what he’s done to the social contract.

    Moron.

  3. PFT commented on Feb 13

    “In this world of ours, those resources going to the rebate recipients don’t come from the Tooth Fairy. They have to come from workers and producers.”

    The Fed just creates the money out of thin air to pay for the government securities and they return the interest to the government, and then the other banks in the system can increase the money supply 9+ times (150 billion rebate can increase the money supply by 1.35 trillion or more) and earn usury interest on sub-prime loans and credit card debt which are from the money they create.

    There really is a tooth fairy, but she usually only visits Citigroup, Morgan Stanley and Bank of America as they suck us dry.

    And that shmuck Laffer knows this, but he is just a parasite of those getting rich off the current system, and it just hurts so much when the tooth fairy cheats on them, even if they still make a buck.

    Maybe he worries the tooth fairy will spill the beans and let the people know that great Wizard is just a small old man behind a curtain.

    Time to throw the money changers out of the temple.

  4. Bruce F commented on Feb 13

    No such thing as a free lunch? Sure there is, tell a rich man what he wants to hear and the next thing you know a menu is in front of you.

  5. godot10 commented on Feb 13

    Some should tell Arthur that the money for the stimulus is coming from workers and producers in Asia, who will be paid back with cheaper dollars in the distant future, so not to worry! -).

  6. Robert commented on Feb 13

    Reducing tax rates are only revenue neutral if they are above the optimal rate, otherwise a %100 tax rate should bring in %100 percent of GDP, and nobody could be so stupid as to believe that. I have never seen any studies that show what that optimal rate is, but I believe it is %20. Any claim that revenues during the Reagan administration would have been higher with higher rates can’t be proven, since you can’t prove that growth rates would have been the same.

  7. DebtsDon’tMatter commented on Feb 13

    Well interesting that the supply siders think all you have to do is cut taxes, and by act they increase spending. The end result is DEBT………

    http://www.businessweek.com/ap/financialnews/D8UOVLE82.htm

    WE are looking at over a $400 billion Federal budget deficit this year.. This brings the total increase in Federal DEbt to over nine trillion, almost doublt in 8 years. What a deal, what an accomplishment. So why shouldn’t borrowers and lenders act as it debts don’t matter, that is what our leaders say. Why worry about debt, just spend, start wars and be happy. Some body someday will pay the debt, but it makes us feel good now.

  8. FT Woods commented on Feb 13

    Rebate checks = bank bailout

    The rebate money is going straight to the credit card companies as soon as it comes in. What free lunch?

  9. kk commented on Feb 13

    Supply side works on the revenue side, unfortunatly the government pork part of the equation is what gets us in trouble.

    “No such thing as a free lunch? Sure there is, tell a rich man what he wants to hear and the next thing you know a menu is in front of you.”

    LOL

  10. Ross commented on Feb 13

    Laffer actually got it right in the late 70’s early 80’s. That was an inflection point. Taxes WERE too high and a lot of companies used very bad accounting to volantarily paid too much. FIFO inventory comes to mind. A lot of the economy was ‘underground’ and tax reductions made some of it emerge. ( The IRS also contributed ). But to imply that ALWAYS reducing tax rates increases Uncle Sugar’s coffers is just plain naive at best.

    Arther has succumbed to the celebrity syndrome but I guess when you’re pushing 70 you need all the edge you can get.

    He was never considered a serious economist in my opinion. He simply stated the obvious.

    The stimulas package will debase your money. I recommend you spend it before it does.

  11. Shane commented on Feb 13

    Not that the U.S. is Argentina, but I just remembered when I visited Argentina in May, I commented to some locals that there seemed to be a lot more newer cars on the roads since the last time I was there (2001). They said yes people have new cars, but the only reason people bought new cars was b/c of government refunds to those who did! And so what, sure we’ve got new cars and it’s not as bad as in ’02, but most people still struggle to have a good meal.

    What a sad day it is when the U.S. has to resort to Third World economics.

  12. Shane commented on Feb 13

    Yes, yes I’ll definitely spend my refund money. Thank you very much Uncle Sam, I’ll trade in a couple of your worthless Franklins for something with some value.

    Hi, ho silver away!!!

  13. David commented on Feb 13

    here is what “ye” would say:

    “Income effects always net to zero in a closed system.” AND “substitution effects accumulate”

    actully he did say this, but in a different context. the reason marginal tax cuts and rebates dont compare is because a marginal tax cut sparks substitution effects (substitution of now more valuable labor for less valuable leisure). rebates dont spark any such effects (nobody substitutes labor for leisure because they got $600). in the case of marginal cuts growth was stimulated, in the case of rebates wealth and spending was redistributed. net gain vs. zero-sum.

    by the way, no supply-sider claims that tax cuts pay for themselves. some have claimed that some cuts may, while most certainly dont. its sloppy to attribute positions to people who dont hold them

  14. algernon commented on Feb 13

    Laeffer is right about the stimulus & not totally wrong on tax cuts.

    Tax cuts don’t necessarily pay for themselves, but lower marginal tax rates (accompanied by gov’t spending restraint) encourages lots of productive activity that leads to economic growth. Would you argue with that?

  15. VJ commented on Feb 13

    DebtsDon’tMatter,

    WE are looking at over a $400 billion Federal budget deficit this year..

    That doesn’t include the real funding for the Iraq and Afghanistan military missions, which is a couple hundred billion. It includes a couple hundred billion in cuts the administration assumes for Social Security & Medicare, which will never happen. And it is masked by hundreds of billions of surpluses in the Social Security & Medicare trust funds, which by federal statute can only be utilized for Social Security & Medicare.

    The actual federal budget deficit is over a trillion dollars, and rising.
    .

  16. VJ commented on Feb 13

    David,

    by the way, no supply-sider claims that tax cuts pay for themselves. some have claimed that some cuts may, while most certainly dont.

    All Supply-Siders indeed claim that tax rate cuts result in increased federal income tax revenue.

    It’s never happened.
    .

  17. NoFate commented on Feb 13

    Laffer got his lunches mixed up.

    The CURRENT stimulus will be paid by FUTURE tax revenues (plus interest).

    Apparently Arthur has no concept of the fourth dimension, which is unfortunate for an Economist.

  18. VJ commented on Feb 13

    algernon,

    Tax cuts don’t necessarily pay for themselves, but lower marginal tax rates (accompanied by gov’t spending restraint) encourages lots of productive activity that leads to economic growth. Would you argue with that?

    Yes.

    It’s never happened.
    .

  19. VennData commented on Feb 13

    You used to be able to find the year over year difference in the debt (not the phony “deficit” as noted by VJ above) here:

    http://www.publicdebt.treas.gov/opd/opdhisto4.htm

    But guess what? The Bush administration took it down… but point you to another site:

    http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo4.htm

    ..but guess what? That site ENDS the debt accumulation in 1999.

    The Bush administration covering their tracks.

    The supply siders have always said their tax cuts will cut the deficit. Always. And they’re always wrong. Always.

  20. glory commented on Feb 13

    Worried Bankers Seek to Shift Risk
    The banking industry is shopping proposals to Congress that could shift some of the risk for troubled loans to the federal government.

    Liquidity reform
    The credit squeeze requires a rethink of banks’ access to cash based on the fundamental principle that liquidity cannot be free.

  21. Denny Crain commented on Feb 13

    I’ll just spend my rebate check down on K Street buying a couple of good-looking whores. If it helps the economy, so much the better. No contraction here.

  22. Josh commented on Feb 13

    Let me preface my question by saying I’m completely ignorant of the particulars of the ‘stimulus package’.

    I’ve heard that the rebate checks are supposed to be an advance of your year-end tax refund. But is it also true that there is something that will reduce your 2008 taxes by the same amount as the rebate check?

  23. rickrude commented on Feb 13

    there is such a thing as a free lunch, for those that get the free money in their hand first, get to spend it before the money becomes inflated.

  24. Doug commented on Feb 13

    Not quite a free lunch. The american consumer goes to the lunch counter, gets a lunch on credit thanks to his father’s great credit history and leaves the bill for his son.

  25. Winston Munn commented on Feb 13

    So, we are going to put out the fire in the Hindenburg by pumping in more hydrogen?

  26. art commented on Feb 13

    when was supply-side economics debunked?

    Details please!…..Mr. Liberal ! hmmm

  27. Shane commented on Feb 13

    VennData,
    Look here for public debt, you have to type in a range, but it works
    http://www.treasurydirect.gov/NP/BPDLogin?application=np

    In the past 7 years we’ve had an increase of ~61% public debt, wow, just wow. If we just say that this year increases as much as ’07 (yeah right), we will stand at 9.78 Trillion dollars public debt, and an increase of ~69.73% in just 8 years.

    So where does all this money come from (I mean it has to come from somewhere, it was money spent, in the form of contracts, salaries, budgets, etc.). That’s annualized at almost 7% growth in debt yoy. Anyone who thinks we don’t have a monetary inflation problem . . . okay . . . . maybe you need to study those numbers a little bit more.

  28. Mr. Obvious commented on Feb 13

    I’m banking mine…why you ask? Storm clouds on the horizon:

    “Corporate executives are poised to start making substantial cutbacks in their staffing, according to a new forecast by employment consulting and legal firm Career Protection.”

    “In fact, the firm is predicting a 37 percent increase in layoffs this year compared with last year, based on a survey of more than 1,300 corporate executives and senior-level officials that was conducted earlier this month.”

    “The layoff forecast is the worst in the past five years, according to Career Protection officials. They also indicated that the firm has already been “inundated” with inquiries from employees at a number of companies that announced layoffs earlier this month, including Bear Stearns (BSC), Chrysler, Citigroup (C), Ford (F), Covidien (COV), General Motors (GM), IndyMac (IMB) and Sprint Nextel (S).”

  29. Marcus Aurelius commented on Feb 13

    No such thing as a free lunch? Sure there is, tell a rich man what he wants to hear and the next thing you know a menu is in front of you.

    Posted by: Bruce F | Feb 13, 2008 7:30:08 PM

    ____________

    True.

  30. Advsy commented on Feb 13

    Stimulus isn’t new!

    What the heck were the Bush Tax cuts? They were a stimulus package. The American Jobs act. A stimulus package. etc. etc. We have stimulated ourselves into an absurdely overwhelming amount of debt! We got our stimulus but the bill is now coming due and payable. We don’t have the funds to pay for it.

    We all should be very worried about that!

    This package just pushes the payday out by a couple of months. But it also makes the bill bigger. Not worth it!!!

  31. John F. commented on Feb 13

    I’m not sure whether to believe you completely discount the role of incentives in taxation or if you’re arguing in bad faith. It’s hard to tell when you attack someone without addressing their argument directly or clearly stating your counterargument.

  32. Bob commented on Feb 13

    Speaking of storm clouds on the horizon:

    This just in…another sign of the Apocalypse appeared this morning when I tuned in to both CNBC and Bloomberg Radio and was only able to get coverage of Congressional testimony regarding an MRI done on an abscess in Roger Clemens’ buttocks, and about how his trainer “injected his wife in his bedroom when he wasn’t home.” I wish I was making this up. Don’t any of these self-important people have anything more important to worry about?

    The “stimulus” package is a joke…try to kick the can down the road and increase taxes later to cover it. That’s the real problem with it, and the point that I think Laffer was (correctly) trying to make, though it got lost in his supply-side dogmatism. It won’t materially increase net demand in our economy, but that will be primarily because it gets overwhelmed by the deflationary forces that are escalating. In 2001, those forces were contained to the Internet/tech/telecom capex space. They are too pervasive today because they are rooted in our global credit infrastructure, which has been weakened by decades of government interference.

  33. slider commented on Feb 13

    Legalizing pot before sending my stimulus check would have made more sense.

  34. Eclectic commented on Feb 13

    “…when was supply-side economics debunked?”

    Art, in case you have noticed lately, we’re swimmin’ in debunk.

  35. Adil commented on Feb 13

    The rebate is TECHNICALLY not a tax cut since the rebate is paid from general tax revenues and not directly linked to your individual tax return or withholding tax. However, from a macroeconomic standpoint, it is very similar to a tax cut (ie it puts extra money into people’s hands). By Laffer’s supply side economics, this should stimulate economic activity and increase government revenues. As Barry says, this is a howler that he is against it!

    Free lunch: Assuming that interest rates and interest payments do not go up substantially for borrowers (government or others) as a result of this stimulus, it is a free lunch in the short term. However, in the long run, this is debt that either has to be repaid or serviced, so it will detract from future growth. It is like all deficits/debt= intergenerational transfer.

    The scary thing is that the US federal deficit is already projected at $400 billion. That is with a gdp estimate of 2.7%. If gdp goes negative, I would expect to see a deficit of closer to $800 billion. An early 80s type recession= look for $1 trillion!

    CBO document from Jan 2001: http://www.cbo.gov/ftpdoc.cfm?index=2727&type=0&sequence=1
    Look at the 2008 projected surplus of $635 billion. Only off by a cool trillion already! Pre recession projections are horrible. The actual numbers swung by hundreds of billions, albeit skewed by huge tax cuts and spending on healthcare and Iraq.

  36. Marcus Aurelius commented on Feb 13

    Legalizing (and taxing) pot – our nation’s #1 Cash crop for years running, BTW – would signal a return to fiscal sanity.

    There might be such a thing as a free lunch, but the stimulus package isn’t it. The stimulus package is worse than insane – it’s pointless. We have borrowed from ourselves, and we’ll probably default on the loan.

    I’ve got the feeling no one in our government knows what they’re doing. And to think – Gore was derided for being too smart.

    Morons rule.

  37. SPECTRE of Deflation commented on Feb 13

    This article explains how far down the rabbit hole we have gone. I will see your free lunch and raise you with a buffet spread:

    Shift Risk to Uncle Sam?

    By DAMIAN PALETTA
    February 14, 2008

    WASHINGTON — The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government.

    One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancings by some delinquent borrowers.

    Credit Suisse officials have met with senior officials from the Department of Housing and Urban Development, which runs FHA, and other policy makers to discuss the proposal.

    The risk of the plan: If delinquent borrowers default on their refinanced loans in large numbers, the federal government would have to absorb the loss.

    The fact that the plan is receiving serious consideration suggests the level of concern in Washington as housing problems worsen.

    Some early efforts have fallen short. Last fall, the government backed a plan by banks to rescue bank-affiliated funds that had invested in mortgage-backed securities, but it fell through. More recently, a hotline set up with Washington’s support for troubled borrowers has helped only a small fraction of those in need.

    Politicians and bankers are now abuzz with talk about broader ideas to prevent housing from deteriorating.

    Another plan gathering support seeks to make it easier for banks to write off part of the unpaid balance on loans that exceed a property’s value, people familiar with the matter said. If that happens, homeowners would owe less, and they might be able to refinance their loans and avoid foreclosure.

    Several lenders are already considering the move, known as a “principal charge off,” but are hesitant to move forward, in part because of legal concerns. However, if the industry came forward with a standard backed by the Treasury Department, it would be easier to make the write-offs.

    “Everybody is looking at everything,” Federal Deposit Insurance Corp. Chairman Sheila Bair said. “The door is not closed on anything.”

    The Credit Suisse plan would open the way for nearly 600,000 subprime borrowers, many of whom are delinquent on their mortgages, to refinance into loans backed by the FHA. Some 1.3 million borrowers were either seriously delinquent or in foreclosure at the end of the third quarter, the most recent numbers available from the Mortgage Bankers Association. The number is expected to rise.

    In a 20-page summary handed out to lawmakers, policy makers and regulators, Credit Suisse said the plan would make $89 billion in subprime loans eligible for refinancing. Credit Suisse spokeswoman Victoria Harmon said bank officials have “shared our ideas and technical advice on FHA” and received “constructive” responses from the government.

    Officials from J.P. Morgan Chase & Co. are pulling together their own proposal to expand the number of homeowners who could refinance into FHA-backed loans.

    [EXCERPT]

  38. Clayton commented on Feb 13

    I can’t imagine that you actually read all of these comments… but there are certainly free lunches in any decent economic model…

    For example, if you reduce the marginal tax rate to zero, workers are able to substitute value creating labor for less valuable leisure. Tax recepts remain the same, but a pareto-superior location is achieved. At least in theory, you’ve achieved a free lunch.

    There are also winners and losers out in the economy due to shifts in the value of labor an the cost of raw materials, but any decent model also shows that this value creation generates net benefit in society.

    To make this intuitive, you could simplify the world to two parties to see why… the value creator (who now has more value) is willing to spend money on the finite labor of everyone else. The problem is that it’s spread over so many people that the total impact on a single indiviual is so small that the basic idea, while right, is often lumped into the “trickle down” buzzword that now has negative connotations.

    Of course, there are probably dozens or hundreds of other examples including monopoly busting (even if you recompense the old monopolist to achieve pareto superiority). Inefficiencies (both market and bureaucratic) mean that we have opportuntiies for free lunches.

    ===

    Next, Laffler’s original point was merely that there’s a yield curve for tax revenues that, at some point and despite increasing tax rates, turns negative. That it was brough out of context for political purposes does not change the fundamental accuracy of the point.

    Further, tax revenues do not equate to utility so that “optimizing government receipts” is fundamentally faulty. Our goal is to optimize utility (or, in the best case, use taxes to achieve pareto superior results by addressing things with positive/negative externalities).

    Finally, I challenge the basic criticism of the consequences of lower marginal tax rates because they typically assume that there is no growth effect of this tax reduction.

    (While I may have oversimplified the math, the idea holds perhaps with different precise numbers.)

    Instead, assume a 10% discount rate and a “base” growth rate (of the tax base) of 2%… if a 12.5% reduction in taxes would generate a 1% increase in growth (from 2% to 3%), the NPV (net present value) of these two streams of tax revenue would be roughly equal.

    At a 6% discount rate (closer to the government’s cost of capital), the government could cut taxes by 25% and still obtain the same NPV if they gain an extra 1% of growth.

    Again, this is strictly the NPV of government receipts… when you add the fact that people get to keep that “lost” tax revenue (spending it elsewhere) and combine it with a reduction in deadweight loss (due to the lower marginal tax rate adn that “free lunch”), the benefit to society is substantially larger. Of course, since the NPV of tax receipts is equal, government services **need not** be reduced; rather, they can be logically funded with borrowing.

    … but please, why bother doing the actual analysis when higher taxes (and non-growth inducing spending) are the way to solve all problems

  39. David commented on Feb 13

    Free Lunch is right! The government must be scared! People are starting to rob graves, for valueables; like rings! I kid you not!

    HAMLET “What is he whose grief
    Bears such an emphasis, whose phrase of sorrow Conjures the wandering stars, and makes them stand Like wonder-wounded hearers? This is I, Hamlet the Dane and the king is a liar. Shakespeare

  40. Eric commented on Feb 13

    So Barry when was supply side economics debunked. It is the out of control entitlement spending being pushed by the libs that is burying this country.

  41. Winston Munn commented on Feb 13

    “Everybody is looking at everything,” Federal Deposit Insurance Corp. Chairman Sheila Bair said.

    Except in the mirror.

  42. David commented on Feb 13

    It always amuses me how a money manager like the author here calls repeatedly for tax increases.

    Anyway, if you think taxes are too low, cut an extra check to the government. Return your rebate. Start a blog to promote it. Lead by example. Call Buffett–he thinks his taxes are too low. Get the heavy hitters on your side.

    Until then, you’re just whining because you don’t like the current President. When we run deficits under a democrat President, all of a sudden all this complaining in the press, etc will magically disappear.

  43. Hags commented on Feb 13

    Where’s MY free lunch? As a Long Islander and as two income civil servants husband/wife team, I am faced with $4,200 AMT, no rebate because I earn too much (for Arkansas I do, but for LI, I get a 1,500 sq ft cape and $11,00 in real estate taxes) and I get NO REBATE. Who pays for this stimulus package–ME!!! I no longer have money to spend. Take from the NYers and the CA high tax states and transfer the money to the poor states like MO, MI, and AK.
    And where’s our illustrious NY Senator? campaigning for her next job (which she will NOT get..)

  44. Bob A commented on Feb 13

    Supply Side theory has been temporarily suspended in favor of Buy Votes theory

  45. Zeroization commented on Feb 13

    Hilarity from Laffer

    The Big Picture has a hilarious quote from Art Laffer (yes, that Laffer) about the tax rebate. Ironically, he doesnt like it.

  46. DoctorOfLove commented on Feb 13

    Clayton and David for the win. I say this because I was happy to see someone beat me to it.

    Apparently Barry is in favor of a 100% income tax (or if not, why not?).

  47. Francois commented on Feb 14

    “It always amuses me how a money manager like the author here calls repeatedly for tax increases.”

    It always amuses me how some posters cannot distinguish between a critic of an econ dogma and the tax rate.

    Unless you buy the fallacy that not continually cut tax rates is equal to a tax increase, your amusement does not make any sense.

    OTOH, if you buy the above argument, then you’ve replaced the karma of logic by the dogma of rhetoric.

    On a more practical note, no sensible person believe the total tax bill of middle America is too low. (It’s about 40% of income for those between 50 and 95,000 USD) What is obvious is the incredible maldistribution and use of the tax revenues.

    The wealthiest Americans did not NEED tax cuts, nor did they “deserve” any. Professional sports should NOT be subsidized by taxpayers’ dollars, yet, they couldn’t survive without them. Stupid laws like Proposition 13 in CA should have been repealed a looooooong time ago.

    And yes! Washington pork is an unbelievable irritant to anyone who pay taxes and value fiscal discipline.

    But don’t post stupid ad hominem attacks (Mr. Liberal…Sheesh! couldn’t you come up with something more original…can’t you think for yourself at times??) at someone who express doubts about supply side econ, because it doesn’t contribute to the debate AT ALL, and there is plenty of doubts to be expressed anyway. This goes for every economic theory under the sun by the way.

    Now, if you want us to believe that the dismal science has suddenly joined the rank of nuclear physics, thanks to the illuminating miasma of the supply side economics, be informed that I own all the bridges in Brooklyn (and beyond!) and that a clearance sale will be held at your convenience.

    Magister Dixit!

  48. Street Creds commented on Feb 14

    I will take my $1200.00 and buy an ounce of gold, if I can get it for that.

  49. Bob A commented on Feb 14

    The whole Trickle Down idea is a fraud anyhow.

    I mean look at the record. We borrow money from China to give rich people tax cuts and they took the money and loaned it all to people who can’t pay it back. And what’s left they spent on fancy cars made in foreign countries.

    Trickle Down the Drain they should call it.
    Oughta be a crime.

  50. Odysseus commented on Feb 14

    Clayton:
    “Next, Laffler’s original point was merely that there’s a yield curve for tax revenues that, at some point and despite increasing tax rates, turns negative. That it was brough out of context for political purposes does not change the fundamental accuracy of the point.”

    Yes, you can credibly argue that reducing from 90% marginal rates or 70% marginal rates will likely result in stimulus. That argument is almost impossible when reducing from 35%.

  51. Hard Right commented on Feb 14

    “I’ll just spend my rebate check down on K Street buying a couple of good-looking whores. If it helps the economy, so much the better. No contraction here.”

    Unless you contract syphilis. But don’t worry. President Obama will make somebody else pay for your treatment. Go ahead and stimulate them.

  52. Greg commented on Feb 14

    Any publicity is good publicity, and Laugher knows this.
    Barry, you might consider relegating Laugher to the League of the Unmentionables on the site, joining the Harpy and Stein.
    That would reduce our aggregate blood pressure.

  53. Passing Through commented on Feb 14

    How does one typically square the notion of there not being such a thing as a free lunch and the notion that economic activity (can be) non-zero sum?

  54. Kort commented on Feb 14

    I didn’t realize so many communists read this blog.

  55. Finance Monk commented on Feb 14

    I didn’t realize so many people actually discussed supply side without being ironic. :)

  56. cinefoz commented on Feb 14

    I would prefer the government act responsibly with taxes and spending.

    If it refuses to do that, and prefers to give away free money in creative ways, then I insist on getting all the free money I can from them. I’m not going to hand wring about government stupidity. Just give me my piece of the pie.

    Re the quote above .. I think Laffer said that in a closed system, the system is not richer if you take money out of one pocket and put it in another. The only way you can add money to the consumer level is to lower taxes, borrow cash and distribute it in some way, or print it and make it available as easy credit.

    Laffer usually stresses that precisely targeted tax cuts raise money. And he is correct. The capital gains tax is an excellent example. Lower capital gain rates create more transactions that ultimately raise total revenue from capital gains. His insane, criminally stupid, and flaky followers unanimously translate this rather innocuous statement into ‘all tax cuts raise money’.

    Also, policy should allow the tax cuts to favor Investment over Consumption. This makes everyone better off by creating jobs and wealth. Again, his insane, criminally stupid, and flaky followers unanimously translate this into ‘give me cash to spend on anything I like’.

  57. SPECTRE of Deflation commented on Feb 14

    Suppose you were an idiot. And suppose you were a member of Congress … but then I repeat myself.

    – Mark Twain

  58. Tom C commented on Feb 14

    In 1981 the feds spent $678 billion. In 2006, $2,655 billion. A 292% increase. Adjusted for inflation, it comes to an 84% increase when the population has grown 30%.

    It seems the more difficult it becomes for the feds to raise money the better. Maybe they’ll make some tough decisions and change their ways? If you guys believe that the marginal tax rate and the cost of government has no effect on productive economic behavior I’d like some of what you’re smoking. There is a structural problem with the vote buying, tax and spend, entitlement system that’s developed here over the last 60 years or so and it really can’t continue. Unless, of course, you like the idea of living off of the production of others or you don’t mind watching your taxes grow at the rate of federal spending growth.

  59. Advsy commented on Feb 14

    So Barry when was supply side economics debunked. It is the out of control entitlement spending being pushed by the libs that is burying this country.
    Eric

    You have got to be kidding. The “libs” have not been in charge for almost a decade!

    So, you got the out of control thing right. But to shift blame to where it does not exist? What kind of denial is that???

  60. Gold commented on Feb 14

    Buy gold with the rebate. Really screw up the idiot signing this debt generating give away.

    In a few years the gold will be worth a whole lot more in inflated dollars. Then the kids can buy food and fuel which they won’t be able to afford with the shrinking green back.

    BUY GOLD>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

  61. Gold commented on Feb 14

    Buy gold with the rebate. Really screw up the idiot signing this debt generating give away.

    In a few years the gold will be worth a whole lot more in inflated dollars. Then the kids can buy food and fuel which they won’t be able to afford with the shrinking green back.

    BUY GOLD>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

  62. Gold commented on Feb 14

    Buy gold with the rebate. Really screw up the idiot signing this debt generating give away.

    In a few years the gold will be worth a whole lot more in inflated dollars. Then the kids can buy food and fuel which they won’t be able to afford with the shrinking green back.

    BUY GOLD>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

  63. Gold commented on Feb 14

    Buy gold with the rebate. Really screw up the idiot signing this debt generating give away.

    In a few years the gold will be worth a whole lot more in inflated dollars. Then the kids can buy food and fuel which they won’t be able to afford with the shrinking green back.

    BUY GOLD>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

  64. bluestatedon commented on Feb 14

    I will bet that 90% of the American taxpaying public does not realize right now that the $1200 they spend will be deducted from their tax refund for the 2008 tax year. This alleged stimulus is simply an advance on a future “paycheck.”

    TAANSTAFL is always correct, everywhere. The core concept is that for every action, there is somewhere a corresponding consequence. The consequence may not be explicitly financial or monetary, and it can either be beneficial or harmful. It is virtually always unforeseen and unintended.

  65. Tom C commented on Feb 14

    ‘The libs have not been in charge for a decade’. History did not begin a decade ago. The shift to the full blown entitlement system began in the 30’s and was institutionalized in the 60’s. Your ‘libs’ put the programs in place. Reforms have been attempted and have been demagogued down and rejected out of hand ever since. ‘Tax, tax, spend, spend, elect, elect’. Add ‘debt, debt’ to that original formula and that’s where we are.

  66. David W commented on Feb 14

    I’m surprised at the level of ignorance displayed here on supply side theory.

    Supply side theory simply states the universal truth that you get what you reward. If you lower marginal rates, you will get more investment and production. That is an irrefutable fact of human nature. Rebates, such as the current plan, have no supply side effects because they offer no incentive for future production. Rebates are a purely Keynesian approach. This is why Laffer is objecting to the current plan.

    The United States currently has the highest corporate tax rate of the major developed countries. Lowering that rate would be a true incentive, and would bring production and jobs back into the U.S.

    The degree to which a marginal rate cut pays for itself depends upon where on the Laffer curve the economy sits, and the time frame over which you are measuring. However, a lower marginal rate will always result in a higher rate of economic growth. The proofs of this abound. Look at the Asian Tigers of the ’80s, and Ireland more recently as some of the more obvious examples.

    The tax that provides the most bang for the buck in terms of return is the capital gains tax. Every cut in this rate has paid for itself several times over.

  67. David commented on Feb 14

    Of course tax cuts don’t pay for themselves… fully.

    But the “Laffer curve” does have some merit, especially with regard to business owners, the wealthy, and those with capital to invest. Higher marginal rates means more hiding of income, more deferring of capital gains, more money moved to the Cayman Islands, more money invested in municipal bonds, more money in variable annuities, and increasing pressure on Congress to introduce ever more loopholes into the tax code.

    It may be true that cutting taxes does not generate a “free lunch” for U.S. citizens. But it is equally true that raising taxes does not generate a “free lunch” for those who want the government to drop taxpayer money from helicopters.

  68. David commented on Feb 14

    “the wealthiest Americans don’t NEED tax cuts” That may be true. However, it is the “wealthiest Americans” who are paying just about all the taxes, outside of SocSec/Medicare.

    The “progressivity” of the tax code has only increased with the last round of tax cuts. If you agree that “middle America’s” tax burden (combining local, state and FICA taxes) is “about right” or even too high, or, as in your words, it’s certainly not too low, then you need to promote entitlement changes, because that’s what a good chunk of their tax burden is going for. Along with changing local gov’ts spending habits(reducing school spending and gov’t worker pensions, anyone) to hold the line on property taxes, which certainly are a significant burden to “middle America.”

    Until then, if you cut income taxes in America, since the top 10% pay 70% of total federal income taxes in America, you will “cut taxes for the rich.”

  69. Matty commented on Feb 14

    “The net effect is that the reduction in demand from those who pay the real resources will be exactly the same size as the increase in demand from the rebate recipients.”

    I think that he’s missing a critical component of the rationale behind these rebates. They’re effectively a transfer from the wealthy to the less-so, but stating that the net effect on demand will be zero does not take into account the fact that marginal propensity to consume is inversely proportional to wealth (and presumably income.) Therefore, if the wealthy, for example, spend 80 cents on average of their next (net of taxes) dollar of income, saving 20 cents, while the less-wealthy, on average, spend 95 cents, with 5 cents going to savings, you will stimulate demand through transfers from the wealthy to the less-wealthy. (Note that you’ll only temporarily stimulate demand, not shift it. A more permanent or structural change would be required to shift aggregate demand.)

    That said, this is simply a water-treading scheme to buy votes, or at the very least, dampen consumer anger at election time come November.

    Matty

  70. VJ commented on Feb 14

    Eric,

    It is the out of control entitlement spending being pushed by the libs that is burying this country.

    Nope.

    It has been the tax rate cuts that are primarily responsible for the massive deficits and debt, followed by the profligate spending on the Military Industrial Complex.
    .

  71. VJ commented on Feb 14

    David,

    Anyway, if you think taxes are too low, cut an extra check to the government. Return your rebate. Start a blog to promote it. Lead by example. Call Buffett–he thinks his taxes are too low.

    Silly premise.

    There are a number of pro basketball players who are advocates of raising the hoop to a higher level, purporting that it would improve the game. Your premise is that only those who favor raising the hoop should have to shoot to a higher hoop and everyone else shoots to the existing hoop. No. It is perfectly acceptable to advocate for a change in policy while operating under existing rules.

    When we run deficits under a democrat President, all of a sudden all this complaining in the press, etc will magically disappear.

    To the contrary, for twelve years during Reagan/Poppy Bush, they ran massive federal budget deficits, yet deficits didn’t matter, until it was raised in the ’92 campaign by then Governor Clinton. After he became President, all of a sudden the Republicans thought the federal budget deficits were the number one priority. From 2001 forward, with the Republicans in control again, suddenly federal budget deficits didn’t matter anymore.

    The “progressivity” of the tax code has only increased with the last round of tax cuts.

    Lunacy.
    .

  72. VJ commented on Feb 14

    David W,

    If you lower marginal rates, you will get more investment and production.

    It’s never happened.

    The United States currently has the highest corporate tax rate of the major developed countries. Lowering that rate would be a true incentive, and would bring production and jobs back into the U.S.

    Nonsense.

    Corporate America pays almost nothing in corporate income tax now.

    However, a lower marginal rate will always result in a higher rate of economic growth.

    It’s never happened.

    The tax that provides the most bang for the buck in terms of return is the capital gains tax. Every cut in this rate has paid for itself several times over.

    It’s never happened.
    .

  73. Tom C commented on Feb 14

    Hate to burst your ideological bubble there, son, but defense spending is a minor factor in the growth of government spending. In 1981 it was 23.2% of federal spending and 5.2% of GDP peaking in 1987 at 28 and 16% respectively. Currently defense spending comes to 20% of the federal budget and 4% of GDP.In fact, at present, both numbers are lower now than during Jimmy Carter’s administration.

  74. WarPresident commented on Feb 14

    War is never a minor part of any inflation. ANyone that says war doesn’t cause inflation , doesn’t know squat about history or economics.

    Look what happened after
    WWI
    WWII
    Korea
    Vietnam
    and now the preemptive daddy of them all

    IRAQ (where are those WMDs anyway)

    Yes, as was said by Sun-Zu, in the first book ever written about war:

    WHERE ARMIES MARCH INFLATION FOLLOWS

    This is true always has been true and will continue to be true.

  75. VJ commented on Feb 15

    Tom,

    I referenced spending on the Military Industrial Complex, not merely “defense spending“. Spending on the Military Industrial Complex and interest on the Reagn/Bush comprise almost 2/3rds of every dollar you pay in federal income tax.
    .

  76. Tom C commented on Feb 15

    VJ- Your perspective is a little warped. The debt is comprised of the unfunded cost of programs originating in the New Deal (Social security) and the Great Society (medicare), to name only the two largest budget items. The regulatory costs of federal administrative law have been excluded from my figures. When you speak of the military/industrial complex, what budget items are you referring to?

  77. VJ commented on Feb 15

    Tom,

    I’m afraid that it is YOU that enjoys the “warped” “perspective”.

    The debt is comprised of the unfunded cost of programs originating in the New Deal (Social security) and the Great Society (medicare)

    No, it is not.

    A) Both Social Security and Medicare have operating SURPLUSES, which this administration utilizes to mask the actual size of the federal budget deficits, along with all the other trust funds.

    B) The vast majority of the federal debt is from tax cuts for the Rich & Corporate.
    .

  78. Tom C commented on Feb 16

    So where are those ‘surpluses’? How high would you like taxes to be? Is 85% growth in federal spending versus 30% growth in population since 1981 sound like a prudent way to go? Does that trend seem sustainable? What about those ‘military/industrial complex’ budget items? Do unfunded liabilities enter your calculations?

  79. VJ commented on Feb 16

    Tom,

    So where are those ‘surpluses’?

    In the trust funds.

    As an example, the Social Security Trust Fund is currently holding over two trillion dollars ($2,239,437,635,000) of U.S. Treasury securities as an investment, with an ROI in recent years between 5%-6%, far better than the stock market over the past seven years.

    GoTo:

    http://www.ssa.gov/OACT/ProgData/investheld.html

    and click the “GO” button.

    How high would you like taxes to be?

    That’s a completely different issue/discussion, but obviously returning the rates on the Rich & Corporate to the levels during the previous administration would be a good start, given the record levels of economic prosperity.

    Is 85% growth in federal spending versus 30% growth in population since 1981 sound like a prudent way to go?

    Again, a separate issue/discussion, given that the vast majority of the federal debt is from a dramatic decline in federal income tax revenues, resulting from tax cuts for the Rich & Corporate.

    What about those ‘military/industrial complex’ budget items?

    What about them ?

    * The current administration inherited a level of military spending that was more than 22 times as large as the combined spending of the seven countries traditionally identified by the Pentagon as our most likely adversaries: Cuba, Iran, Iraq, Libya, North Korea, Sudan and Syria.

    * The current administration inherited a level of military spending that was more than five times larger than the military budget of Russia, the second largest military spender on the planet.

    * The current administration inherited a level of military spending that was more than that of the next 12 biggest-spending nations on the planet, COMBINED.

    Yet, they MASSIVELY ramped up spending on the Military Industrial Complex.

    Do unfunded liabilities enter your calculations?

    In regards to the issue of current “debt”, which you raised ?

    Of course not.
    .

  80. Tom C commented on Feb 16

    -Budget surpluss in gov’t debt? You believe that’s sustainable? It’ll take more than ‘higher taxes on the rich’ to pay for that.

    -Prior tax levels? Fair. Do you believe that the cost of government relative to GDP no effect on productive behavior? Remember, it’s a cost to production and costs to production will be paid either through higher prices which effect the ability to compete or inflation. That’s the way the state works. It’s interests, as it grows, tend to compete with other more productive interests. When the state moves beyond it’s proper functions it no longer adds value, only costs. There’s no free lunch.

    -Tax revenues haven’t declined.

    -What relevence does the defense budget of cuba have to that of the US? % of GDP is key when speaking of budget items.All of the countries mentioned spend far more as a percentage of domestic production as did the soviet union. Russia’s a different story. I brought up the budget. You said the defense budget differed from the ‘m/i complex’. I still don’t know what you’re talking about.

    The issue of the relative growth in federal spending is not irrelevent if it describes a possible structural problem and an unsustainable trend.

    A liability is a liability, unfunded or otherwise.

  81. VJ commented on Feb 17

    Tom,

    Budget surpluss in gov’t debt? You believe that’s sustainable?

    Were you residing in the U.S. during the ’90s ?

    Tax revenues haven’t declined.

    The U.S. Treasury and Congressional Budget Office disagree with you. After four rounds of tax cuts for the Rich & Corporate:

    Receipts… As a share of GDP, they accounted for the smallest proportion since 1959

    Budget Review

    What relevence does the defense budget of cuba have to that of the US?

    Ask the pentagon. I don’t make their policy, I just report it.
    .

  82. Tom C commented on Feb 17

    The cost of government at all levels which include federal mandates on states and localities plus the cost of administrative rules/regulations as a percentage of GDP has never been higher. In absolute terms, federal tax revenues have not declined. Seperating payroll taxes from income taxes is budgetary sleight of hand, like calling debt a surplus. Deductions and exclusions from taxable income no longer exist for the ‘rich’ (a purely arbitrary distinction, btw, if one lives in the northeast). In real terms the federal bite is higher today even with lower marginal rates (see 84% inflation adjusted growth in spending since 1982). ‘Investing’ a budget item surplus in federal debt only increases the debt if the spending side doesn’t change. Spending is an issue. Theoretically, higher taxes, without spending restraint, will lead to higher deficits absent a split between the poltical control of the executive and legislative branches. Historically, that appears to be the case. Defense spending is a straw man although it will, like all government functions, be ineficient and expensive. Only the federal govenment, however, can fill the role of providing national defense.Entitlements and federal mandates on states and localities are out of control. Government isn’t fair. Government, absent restraints only grows. The state is coercion and properly so but it needs to stick to it’s proper functions. One might have thought that with the fall of the Soviet Union and it’s policy of social engineering on steroids shown to be an utter failure that our defense budget could have been brought down even more that it has and the policies of our domestic social democrats would have modified a bit toward restraint. The reason things haven’t may reflect more on the nature of state power and it’s refusal to back down regardless of economic reality.

    As far as Cuba and the Military and Industrial Complex go, you brought them up to try to make a point, so I’m still not sure what your point is.

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