[Rhodes22-list] Politics: Economics 101

[brad haslett]

As a follow up to MJM's reference to those making over
200K per year, here's a good primer on Economics 101
from todays Wall Street Journal.  MJM is right in that
most people in this income bracket and above are
self-employed or are otherwise able to defer/hide
compensation, ie., company provided cars, phones,
computers, etc.  If you recieve your pay on a W2 you
are a sitting duck for the tax man.  What most people
don't realize is that not only does the tax rate
increase with income, the credits and deductions that
most take for granted start to phase out as well,
another tax increase.  We preach upward mobility in
this country but then build significant dis-incentives
into the tax code should you be ambitious enough to
pursue your goals.  At the opposite end, we provide so
many entitlements, housing, food, etc., that for many
there is no credible reason to seek upward mobility. 
Sen. Moynihan predicted the outcome of this in 1965.  

Here is the article.

   
COMMENTARY  
  
 



 
 
 

 

 
Stick to the Basics

By MICHAEL J. BOSKIN
October 26, 2004; Page A24

Teaching "Economics I" to hundreds of freshmen, it's
dismaying to see the usual election-year distortion
and hyperbole morph into outright economic illiteracy.
>From convenient economic-historical amnesia, to
refusal to acknowledge facts, to suspension of basic
economic principles, what we're hearing from the Kerry
campaign trail is truly remarkable.

Let's start with the Kerry claim that this is the
"worst economy since Hoover." Hoover was in office in
October 1929, when the stock market crashed and the
Great Depression began. The unemployment rate, at a
time when very few families had two earners and there
was a much smaller safety net, reached almost 25% by
1933; indeed, it was still 15% under FDR in 1939. The
current unemployment rate is 5.4%, less than the
average for the last 30 years, and about what it was
when President Clinton ran for re-election in 1996,
though certainly above the 4.2% when President Bush
assumed office.

That low unemployment rate was the result of a
mini-bubble in the labor market accompanying the
maxi-bubble in the stock market. Few economists
believe we can push unemployment permanently back down
to 4.2% without accelerating inflation and risking
much worse economic harm. By President Clinton's last
year in office, inflation had doubled to 3.4%, the Fed
was raising interest rates, the bubble had burst, and
the economy was sliding toward recession.

While there certainly are pockets of hardship (if
you're unemployed, you're 100% unemployed, not 5.4%
unemployed), the Hoover comparison is bizarre. In
1980, President Carter's last year, the unemployment
rate was well over 7% while the contemporaneous
inflation rate was over 12%, a misery index -- the sum
of the two -- of 20%, or two-and-a-half times the
current misery index of 7.9%! In fact, the misery
index has been lower only five times in the last 35
years.

The Kerry campaign claims the Bush tax cuts did
economic harm. This is exactly backwards. While in the
long run, deficits -- as well as the level and
structure of spending and taxes -- do matter, war and
recession are times when deficits naturally occur and
can be downright desirable. This was one of the most
efficacious uses of fiscal policy ever. Only a couple
of years ago, there was serious concern about outright
deflation, falling prices and a Japanese-style lost
decade. It would have been better to have had all the
rate cuts in 2001, rather than phased in slowly.
Better still to have combined the tax cuts with
effective control of future spending as the economy
returned to full employment. But it's no coincidence
that a moribund economy mired in an uneven, uncertain
recovery took off exactly when the 2003 tax cuts were
passed.

John Kerry wants to repeal the reduction in the top
two tax rates, and the dividend and capital gains
relief. He says it would have been better temporarily
to provide larger rebates for lower- and middle-income
people. First, the evidence is that temporary tax
rebates have very little stimulative effect. Second,
the lower rates and dividend and capital gains relief
moved us closer to an economically desirable tax base
by significantly reducing the double taxation of
saving and investment. Indeed, if the concern is the
potential long-run harm of deficits crowding out
private capital formation, it's strange to propose
raising taxes on private capital formation.

To be sure, the deficits (and lower tax rates) have
longer-run consequences. CBO projections of the budget
over the next decade shows a debt-GDP ratio rising
slightly to peak just above 40% in two or three years.
This is hardly a debt spiraling out of control,
leading to inflation fears fueling economic calamity.
It would be better to eventually reduce the debt-GDP
ratio over the next 10 years, preferably by
controlling spending still further and stronger
economic growth. And, of course, the Bush tax cuts and
the Kerry spending (about three times his tax hikes)
have ramifications beyond 10 years, when the financial
problems in Social Security and Medicare become
progressively more severe. The Bush proposal for
personal accounts in Social Security does have
short-run costs and should be combined with other
reforms. Mr. Kerry has explicitly ruled out all
reforms in benefits and that only leaves large tax
increases or bigger deficits. As to Medicare, Mr.
Bush's prescription drug program has some good reform
elements, but was not financed; Mr. Kerry complains it
wasn't large enough, again leaving only even larger
tax increases or even larger deficits.

The Kerry campaign is no better at micro than macro
economics: Suggesting it's the government's role to
prevent any price from rising (tuition,
pharmaceuticals) is reminiscent of the former Soviet
Union, where prices never went up but there were never
any goods available. In fact, overall inflation has
been quite low and some other prices are falling
(computers, cell phones). President Bush is no more to
blame for the decreases than the increases.

Economic policy should be aimed primarily at
maximizing non-inflationary economic growth. That
would require the lowest possible tax rates,
continuously rigorous spending control, gradual Social
Security and Medicare reform, regulatory and
litigation reform, trade liberalization and sound
monetary policy. That's the recipe most likely to lead
to rising living standards, low unemployment,
better-paying jobs and upward mobility for those
who've not yet made it on the economic ladder. It
would also keep the debt-GDP ratio well under control.

President Bush promises a more modest role of
government, trade liberalization, reigning in
litigation, slower growth of government spending and
lower taxes; in short, about the right mix, although
one can argue with the details. To be sure, the first
term was far from perfect (too much spending, steel
tariffs). But Mr. Kerry is proposing quite a bit more
spending, higher taxes, especially on capital
formation, greater government regulation and
restrictions on global trade. That plan would be a
sizeable step toward a European-style social welfare
state, with its concomitant double-digit unemployment
and economic stagnation. So which candidate is out of
touch with economic reality?

Mr. Boskin, professor of economics at Stanford and a
senior fellow at the Hoover Institution, was chairman
of the President's Council of Economic Advisers under
George H.W. Bush.

 

 



		
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