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The Supply Sider's Debt Crisis Solution

post #1 of 27
Thread Starter 
Maybe we could have a "Grand Compromise" with Obama with these conditions...and in the process conduct a great experiment on supply side economics...The compromise would be: $4 trillion in immediate entitlements only spending cuts. $1 trillion in immediate tax increases on people making $250K and higher. With the following important conditions: 1. We have a bipartisan commission of economists to measure job creation and economic growth following the spending cuts and tax increases. Following a 12 month period from day of enactment of the tax increases, the commission measures the amount of job creation and growth above an agreed upon baseline. 2. If the job creation and growth has not been negatively impacted by more than 3% then the tax increases stay. 3. If jobs are destroyed during the 12 month test period then the tax increases immediately go away and instead 10% across the board tax decreases are implemented. The benefits would be to test once and for all if massive tax increases harm the economy if only on those making $250K. This would provide substantial evidence on whether some of our supply side ideas work and the suggestion that small business and general hiring is negatively impacted by tax increases. By taking this tax question off the table through the experiment, we could focus on better policies.
post #2 of 27
I don't see what this really has to do with supply-side theories. No proper Keynesian would recommend raising taxes right now either, especially by such a large amount. Even if you firmly believe in demand-side theories, taxes obviously curb demand. The argument is whether all tax hikes curb demand equally, or not -- not that they don't curb demand at all. Some politicians will essentially suggest that, but it's not representative of real academic theory, just as right-wing politicians often misappropriate and manhandle conservative economic theories.
post #3 of 27
Thread Starter 
Quote:
Originally Posted by NameBack View Post
I don't see what this really has to do with supply-side theories. No proper Keynesian would recommend raising taxes right now either, especially by such a large amount. Even if you firmly believe in demand-side theories, taxes obviously curb demand. The argument is whether all tax hikes curb demand equally, or not -- not that they don't curb demand at all. Some politicians will essentially suggest that, but it's not representative of real academic theory, just as right-wing politicians often misappropriate and manhandle conservative economic theories.
OJFC. This solution has everything to do with supply-side theory as it would get to the rate of business formation before and after tax increases and it would directly address high income individual's decisions in that hiring. And yes there is plenty of academic theory and papers around this idea.
post #4 of 27
AF, In the short-medium term, say 12 months, how much do you think a $4 trillion spending cut affects the unemployment rate?
post #5 of 27
Thread Starter 
Quote:
Originally Posted by cross22 View Post
AF,

In the short-medium term, say 12 months, how much do you think a $4 trillion spending cut affects the unemployment rate?

I honestly don't know. Hard to tell but the subjective analysis might look like:

Negative: Might lead to job loss in the public sector and some in private sector.

Positive: The cuts only would impact the growth in spending so the baseline would be left intact for the most part minus say Obamacare.

Positive: A deal would provide investor clarity on debt ceiling crisis and taxes which might free up the capital sitting on the sideline.

Positive: Investor reaction to renewed fiscal responsibility would likely lift stock market and dollar valuation. Might bleed over to calm Greece/Italy/UK crises.
post #6 of 27
Quote:
Originally Posted by Artisan Fan View Post
Negative: Might lead to job loss in the public sector and some in private sector.
But the bulk of the savings would be through Medicare/Medicaid/Social Security entitlements, and possibly Defense, right? This would not result in any measurable job loses in public sector, rather it would hit the healthcare-related private sector, defense contracting, and reduce aggregate demand in general. Wouldn't you expect the short to medium term job losses to be very large and widespread?
post #7 of 27
Thread Starter 
Quote:
Originally Posted by cross22 View Post
But the bulk of the savings would be through Medicare/Medicaid/Social Security entitlements, and possibly Defense, right? This would not result in any measurable job loses in public sector, rather it would hit the healthcare-related private sector, defense contracting, and reduce general aggregate demand. Wouldn't you expect the short to medium term job losses to be very large and widespread?
I don't think so as I expect any cuts to be phased in over ten years. I think there would be great sensitivity about it happening faster due to a) weak recovery getting weaker and b) political challenges from people being out of work for both sides, especially Obama. Does Obama want protestors from out of work healthcare workers. As it exists currently, it could impact the private sector jobs more than public sector but that really depends on Obamacare. Will it still be included? I'd like it not to be but politically I think Pelosi would put her foot down and she already is now saying no entitlement cuts. I agree on the defense side...likely lots of private sector cuts although that has been happening for many years as my cousin at Lockheed will attest to.
post #8 of 27
Quote:
Originally Posted by Artisan Fan View Post
OJFC. This solution has everything to do with supply-side theory as it would get to the rate of business formation before and after tax increases and it would directly address high income individual's decisions in that hiring. And yes there is plenty of academic theory and papers around this idea.
But...demand-side theories also predict that tax increases reduce consumption and therefore demand, and therefore job creation. My point is that tax increases resulting in an outcome of lower job growth is not something that can only be explained by supply-side theories. Also I think you misunderstood my point about political appropriation of economic theories (it was a sort of ungainly sentence, admittedly). What I meant is that demand-side theories would suggest that a tax increase, even on the rich, would be anti-stimulative and would not be good for employment. When politicians suggest otherwise, it is not on good economic theory, even if they try to couch it as such. Also, your plan has not only tax increases, but spending cuts -- so, if job creation goes down, how exactly can you be sure that it was purely caused by the tax hikes? You propose an uncontrolled experiment, in which we are just supposed to ignore the larger of the two fiscal policy changes (four times larger, actually) for some unexplained reason, and then we are supposed to interpret the outcome as evidencing one school of thought, even though multiple schools of thought would predict the same outcome? Come on, AF.
post #9 of 27
Thread Starter 
NB, You seem to only regurgitate demand-side theory. It's like you are embracing this as it is only theory (in some ways) that supports your policy recommendations such as your big govt tendency and your dismissal of the fiscal crisis. Sure if there are job losses then consumption is affected so I'm not dismissing it. But all the evidence I've seen is that stimulus is an epic fail. What happened to Obama's stimulus? How did that work for us? It did not. OTOH, we cut CGT and economic growth flourished. All I am proposing is let's try raising taxes and let's see a. how much in revenue with the tax increases actually raise? and b. how does it impact job creation and overall GDP growth? How is that not a fair proposal? What would you propose we do? What is your solution? Also, if you think the demand-side is important how does the tax increase on $250K earners (the Prez wants $200K single earners btw) impact consumer spending? I think it will have a very bad impact. It will hit the job creators and the few people spending money now.
post #10 of 27
Thread Starter 
I would add that the best thing we can do for consumer spending is the following: 1. Provide clarity on policy. This will help hiring by calming executives. 2. Lower taxes to spur hiring. 3. Show fiscal restraint which will lift the Street thereby having a perceptual and direct impact on people's wealth. 4. Have common sense loan underwriting regs but remove the burden of heavy changes in capital ratios thereby calming banks and promoting lending. 5. Lower CGT and corporate tax rates to spur investment. 6. Decrease federal spending to stop crowding out private investment. 7. Abolish Obamacare to create more healthcare jobs. Remove medical data restrictions so health insurers and pharma and biotech can make cheaper better products.
post #11 of 27
Is this the thread for economic false dichotomies?
post #12 of 27
Quote:
Originally Posted by Artisan Fan View Post
NB,

You seem to only regurgitate demand-side theory. It's like you are embracing this as it is only theory (in some ways) that supports your policy recommendations such as your big govt tendency and your dismissal of the fiscal crisis.

Sure if there are job losses then consumption is affected so I'm not dismissing it. But all the evidence I've seen is that stimulus is an epic fail. What happened to Obama's stimulus? How did that work for us? It did not.

OTOH, we cut CGT and economic growth flourished. All I am proposing is let's try raising taxes and let's see a. how much in revenue with the tax increases actually raise? and b. how does it impact job creation and overall GDP growth?

How is that not a fair proposal?

What would you propose we do? What is your solution?

Also, if you think the demand-side is important how does the tax increase on $250K earners (the Prez wants $200K single earners btw) impact consumer spending?

I think it will have a very bad impact. It will hit the job creators and the few people spending money now.

I...I don't think you're understanding my point.

My point is not that we should raise taxes, or that it won't hurt the economy -- I've explicitly said just the opposite, actually.

My point is that you seem to think that the conclusion "tax increases will hurt growth" is wholly unique to neo-classical economics, or something. It's not. That's my point. A Post-Keynesian would say not to raise taxes. A Paleo-Keynesian would say not to raise taxes. A MMT proponent would say not to raise taxes. Hell, even most New Keynesians would say not to raise taxes right now.

In fact I'm sort of hard pressed to think of any particular economic school of thought that thinks raising taxes in a weak recovery is a good idea, or that tax hikes have no impact on growth, regardless of the timeframe.

You know what my solution is, but people here aren't really interested in debating it seriously (and that's fine, I get that, it's a fairly fringe school, though no more than Austrian theory, which get plenty of reverence here). I think the government should spend, spend, spend, cut corporate taxes and taxes related to employment, and finance its spending by selling bonds to the Fed (i.e., printing money).

I feel like you want to argue against what the Dems in Congress are advocating -- but frankly most serious progressive economists and commentators aren't really advocating what the Dems in Congress are advocating, and I'm certainly not a fan of it either.
post #13 of 27
Quote:
Originally Posted by Artisan Fan View Post
I would add that the best thing we can do for consumer spending is the following:

1. Provide clarity on policy. This will help hiring by calming executives.

2. Lower taxes to spur hiring.

3. Show fiscal restraint which will lift the Street thereby having a perceptual and direct impact on people's wealth.

4. Have common sense loan underwriting regs but remove the burden of heavy changes in capital ratios thereby calming banks and promoting lending.

5. Lower CGT and corporate tax rates to spur investment.

6. Decrease federal spending to stop crowding out private investment.

7. Abolish Obamacare to create more healthcare jobs. Remove medical data restrictions so health insurers and pharma and biotech can make cheaper better products.

1-5 I'm down for, with two caveats: one, I think the effects of CGT tax cuts are vastly overrated by the political right and in popular discourse, compared to the emphasis they get even in right-leaning economic discourse. However, as you know I don't care much about the deficit so whatever. Two, I think the whole "confidence fairy" thing is a pretty laughable rhetorical device used to argue against regulation in lieu of anything measurable. But policy clarity is hardly a bad thing so, again, whatever.

6 & 7 obviously I strongly disagree with. Interest rates are extremely low and therefore I'm unclear as to how government spending is crowding out investment -- and MMT even suggests that deficits actually lower rates anyway (though I know that'll get laughed out of the thread, so I won't bother making the argument for it).
post #14 of 27
i've never seen someone have so much confidence in a school of economic thought that has consistently failed every time it's been attempted. unbelievable.
post #15 of 27
I'm so glad that we have just two levers on the economy, and that the feedback on pulling these levers is so immediate and indisputable. Now, which lever to pull...
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