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Bill Clinton: Not a “Blood Bath”–Just Good Math

September 6th, 2012 . by economistmom

There’s no one quite like Bill Clinton to talk about how to achieve fiscal responsibility. He’s the master in terms of both the politics and the substance–or “mathematics” as he calls it. From the transcript of his speech:

[D]emocracy does not…have to be a blood sport, it can be an honorable enterprise that advances the public interest…

Now, we all know that [Obama]…tried to work with congressional Republicans on health care, debt reduction and new jobs. And that didn’t work out so well. (Laughter.) But it could have been because, as the Senate Republican leader said in a remarkable moment of candor two full years before the election, their number one priority was not to put America back to work; it was to put the president out of work…

In Tampa, the Republican argument against the president’s re-election was actually pretty simple — pretty snappy. It went something like this: We left him a total mess. He hasn’t cleaned it up fast enough. So fire him and put us back in. (Laughter, applause.)

Now — (cheers, applause) — but they did it well. They looked good; the sounded good. They convinced me that — (laughter) — they all love their families and their children and were grateful they’d been born in America and all that — (laughter, applause) — really, I’m not being — they did. (Laughter, applause.)

And this is important, they convinced me they were honorable people who believed what they said and they’re going to keep every commitment they’ve made. We just got to make sure the American people know what those commitments are — (cheers, applause) — because in order to look like an acceptable, reasonable, moderate alternative to President Obama, they just didn’t say very much about the ideas they’ve offered over the last two years.

They couldn’t because they want to the same old policies that got us in trouble in the first place. They want to cut taxes for high- income Americans, even more than President Bush did. They want to get rid of those pesky financial regulations designed to prevent another crash and prohibit future bailouts. They want to actually increase defense spending over a decade $2 trillion more than the Pentagon has requested without saying what they’ll spend it on. And they want to make enormous cuts in the rest of the budget, especially programs that help the middle class and poor children.

As another president once said, there they go again. (Laughter, cheers, applause.)…

Now, let’s talk about the debt. Today, interest rates are low, lower than the rate of inflation. People are practically paying us to borrow money, to hold their money for them.

But it will become a big problem when the economy grows and interest rates start to rise. We’ve got to deal with this big long- term debt problem or it will deal with us. It will gobble up a bigger and bigger percentage of the federal budget we’d rather spend on education and health care and science and technology. It — we’ve got to deal with it.

Now, what has the president done? He has offered a reasonable plan of $4 trillion in debt reduction over a decade… for every $2 1/2 trillion in spending cuts, he raises a dollar in new revenues — 2 1/2-to-1. And he has tight controls on future spending. That’s the kind of balanced approach proposed by the Simpson-Bowles Commission, a bipartisan commission.

Now, I think this plan is way better than Governor Romney’s plan. First, the Romney plan failed the first test of fiscal responsibility. The numbers just don’t add up. (Laughter, applause.)

I mean, consider this. What would you do if you had this problem? Somebody says, oh, we’ve got a big debt problem. We’ve got to reduce the debt. So what’s the first thing you say we’re going to do? Well, to reduce the debt, we’re going to have another $5 trillion in tax cuts heavily weighted to upper-income people. So we’ll make the debt hole bigger before we start to get out of it.

Now, when you say, what are you going to do about this $5 trillion you just added on? They say, oh, we’ll make it up by eliminating loopholes in the tax code.

So then you ask, well, which loopholes, and how much?

You know what they say? See me about that after the election. (Laughter.)

I’m not making it up. That’s their position. See me about that after the election.

Now, people ask me all the time how we got four surplus budgets in a row. What new ideas did we bring to Washington? I always give a one-word answer: Arithmetic. (Sustained cheers, applause.)

If — arithmetic! If — (applause) — if they stay with their $5 trillion tax cut plan — in a debt reduction plan? — the arithmetic tells us, no matter what they say, one of three things is about to happen. One, assuming they try to do what they say they’ll do…cover it by…cutting those deductions, one, they’ll have to eliminate so many deductions, like the ones for home mortgages and charitable giving, that middle-class families will see their tax bills go up an average of $2,000 while anybody who makes $3 million or more will see their tax bill go down $250,000. (Boos.)

Or, two, they’ll have to cut so much spending that they’ll obliterate the budget for the national parks, for ensuring clean air, clean water, safe food, safe air travel. They’ll cut way back on Pell Grants, college loans, early childhood education, child nutrition programs, all the programs that help to empower middle-class families and help poor kids. Oh, they’ll cut back on investments in roads and bridges and science and technology and biomedical research.

That’s what they’ll do. They’ll hurt the middle class and the poor and put the future on hold to give tax cuts to upper-income people who’ve been getting it all along.

Or three, in spite of all the rhetoric, they’ll just do what they’ve been doing for more than 30 years. They’ll go in and cut the taxes way more than they cut spending, especially with that big defense increase, and they’ll just explode the debt and weaken the economy. And they’ll destroy the federal government’s ability to help you by letting interest gobble up all your tax payments.

Don’t you ever forget when you hear them talking about this that Republican economic policies quadrupled the national debt before I took office, in the 12 years before I took office — (applause) — and doubled the debt in the eight years after I left, because it defied arithmetic. (Laughter, applause.) It was a highly inconvenient thing for them in our debates that I was just a country boy from Arkansas, and I came from a place where people still thought two and two was four. (Laughter, applause.) It’s arithmetic.

We simply cannot afford to give the reins of government to someone who will double down on trickle down. (Cheers, applause.) Really. Think about this: President Obama — President Obama’s plan cuts the debt, honors our values, brightens the future of our children, our families and our nation. It’s a heck of a lot better.

It passes the arithmetic test, and far more important, it passes the values test. (Cheers, applause.)

25 Responses to “Bill Clinton: Not a “Blood Bath”–Just Good Math”

  1. comment number 1 by: AMTbuff

    The guy in charge at the beginning of any bubble or Ponzi scheme always ends up looking better than the guy in charge when it breaks. Greenspan looks better than Bernanke too. Those perceptions don’t match the participants’ actual responsibility.

    Bubbles and Ponzi schemes create future pain and present pleasure. The two cannot be separated. Even in 2012, people are still falling for this trick.

  2. comment number 2 by: Patrick R. Sullivan

    Bill Clinton sings a different tune when he thinks no one can hear him, except Paul Ryan;

    http://www.youtube.com/watch?v=airJde0Rq44&feature=player_embedded

  3. comment number 3 by: Mark

    How quickly we forget - Clinton was the first President in 50 years to have balanced budgets. Republican presidents for the past 50 years have done everything possible to fiscally bankrupt our country. Check the debt levels in each admin. Check the spending. It wasn’t under Clinton that Greenspan cut the interest to ~1%. It wasn’t under Clinton that those tax cuts knocked out our income and created a bigger deficit than any President before him. It wasn’t Clinton that left the economy in tatters.

  4. comment number 4 by: Ilir Deebran

    Alex Gheg has a new framework that measures progress by measuring hidden thoughts. Quantity, quality, variety and convenience in one equation. http://www.youtube.com/watch?v=u6tFLGpcOpE

  5. comment number 5 by: Vivian Darkbloom

    This is the only math in that entire quoted passage from Clinton’s speech:

    “Now, what has the president done? He has offered a reasonable plan of $4 trillion in debt reduction over a decade… for every $2 1/2 trillion in spending cuts, he raises a dollar in new revenues — 2 1/2-to-1. And he has tight controls on future spending. That’s the kind of balanced approach proposed by the Simpson-Bowles Commission, a bipartisan commission.”

    Here’s Obama’s debt reduction plan as described by the New York Times, a source that tends to put the best spin on his proposals:

    “Mr. Obama said his proposal would cut federal budget deficits by a cumulative $4 trillion over 12 years, compared with a deficit reduction of $4.4 trillion over 10 years in the Republican plan. ”

    http://www.nytimes.com/2011/04/14/us/politics/14obama.html?_r=1

    Diane, a decade has 10 years, not 12. And, $4 trillion is not equal to $4.4 trillion.

    That’s good math? Are you kidding?

  6. comment number 6 by: Patrick R. Sullivan

    Since some seem to need pictures drawn;

    http://www.youtube.com/watch?v=1eCYq2vD5GY

  7. comment number 7 by: B Davis

    Vivian Darkbloom wrote:

    This is the only math in that entire quoted passage from Clinton’s speech:

    “Now, what has the president done? He has offered a reasonable plan of $4 trillion in debt reduction over a decade… for every $2 1/2 trillion in spending cuts, he raises a dollar in new revenues — 2 1/2-to-1. And he has tight controls on future spending. That’s the kind of balanced approach proposed by the Simpson-Bowles Commission, a bipartisan commission.”

    There is arguably plenty of non-math opinion in the speech. But the statement you quote is far from the only math. Before that statement, Clinton says:

    Now, let’s talk about the debt. Today, interest rates are low, lower than the rate of inflation. People are practically paying us to borrow money, to hold their money for them.

    But it will become a big problem when the economy grows and interest rates start to rise. We’ve got to deal with this big long- term debt problem or it will deal with us. It will gobble up a bigger and bigger percentage of the federal budget we’d rather spend on education and health care and science and technology. It — we’ve got to deal with it.

    This is an important math point. I’ve heard some on the left point to the current low interest rates as a reason to borrow. But that’s a little like running up debt on a new credit card because you’ve been offered a great introductory rate! That rate will someday end.

    Then after the statement you quote, Clinton says the following:


    Now, I think this plan is way better than Governor Romney’s plan. First, the Romney plan failed the first test of fiscal responsibility. The numbers just don’t add up. (Laughter, applause.)

    I mean, consider this. What would you do if you had this problem? Somebody says, oh, we’ve got a big debt problem. We’ve got to reduce the debt. So what’s the first thing you say we’re going to do? Well, to reduce the debt, we’re going to have another $5 trillion in tax cuts heavily weighted to upper-income people. So we’ll make the debt hole bigger before we start to get out of it.

    Now, when you say, what are you going to do about this $5 trillion you just added on? They say, oh, we’ll make it up by eliminating loopholes in the tax code.

    So then you ask, well, which loopholes, and how much?

    You know what they say? See me about that after the election. (Laughter.)

    I’m not making it up. That’s their position. See me about that after the election.

    He is saying that Governor Romney’s plan does not add up because he as offered (and likely does not even have) a credible plan to eliminate enough tax loopholes to pay for his proposed tax cuts. Clinton continues:


    Now, people ask me all the time how we got four surplus budgets in a row. What new ideas did we bring to Washington? I always give a one-word answer: Arithmetic. (Sustained cheers, applause.)

    If — arithmetic! If — (applause) — if they stay with their $5 trillion tax cut plan — in a debt reduction plan? — the arithmetic tells us, no matter what they say, one of three things is about to happen.

    Clinton goes on to describe those three things as 1) they’ll need to seriously cut the large middle-class deductions like the home mortgage and charitable giving, 2) they’ll need to obliterate spending on many middle-class programs, or 3) they’ll explode the debt and weaken the economy. Whether or not you agree with that assessment, that’s math.

  8. comment number 8 by: AMTbuff

    He is saying that Governor Romney’s plan does not add up because he as offered (and likely does not even have) a credible plan to eliminate enough tax loopholes to pay for his proposed tax cuts.

    I’ll go you one better. Even if Romney had specified which deductions would be curtailed, his proposal could still be criticized on the same basis as ObamaCare. Both proposals pick the lowest-hanging fiscal fruit and use it for something other than closing the fiscal gap.

    Obama used Medicare cuts and tax increases on the rich to spend on health insurance subsidies. Romney uses curtailed deductions to reduce tax rates. Other than partisan priorities, there is very little difference. Closing the fiscal gap is just not a priority in these proposals. That makes them both wrong for America.

    Now if Romney seriously proposes the Ryan plan for Medicare and Medicaid, Romney’s tax plan would be easier to swallow. However I don’t believe that a revenue-neutral tax plan should be part of a comprehensive solution to the fiscal gap. The tax plan should be revenue-positive.

    If the Romney tax plan passes, you can expect rates to increase very shortly thereafter. The rate increase could be part of a grand bargain including transformation of Medicare and Medicaid into sustainable forms. If that’s Romney’s plan, then it’s OK. I just dislike the political sales technique that both parties have used, claiming that their plans are all gain and no pain. We are too close to the point where every available option will be all pain and no gain. Voters might as well get used to that reality.

  9. comment number 9 by: Patrick R. Sullivan

    ‘Obama used Medicare cuts and tax increases on the rich to spend on health insurance subsidies. Romney uses curtailed deductions to reduce tax rates. Other than partisan priorities, there is very little difference.’

    Actually there is quite a big difference. Their effects on economic growth, which as Harvey Rosen is pointing out, was the entire idea behind Romney’s tax proposal;

    http://www.princeton.edu/ceps/workingpapers/228rosen.pdf

    ‘Relatively little has been said about the possible effects of the Romney proposal on economic growth. This is curious because increasing growth is the motivation for the proposal in the first place.

    ‘In this paper, I analyze the Romney proposal taking into account the additional income
    that might be generated by economic growth. The main conclusion is that under plausible
    assumptions, a proposal along the lines suggested by Governor Romney can both be revenue neutral and keep the net tax burden on high-income individuals about the same. That is, an increase in the tax burden on lower and middle income individuals is not required in order to make the overall plan revenue neutral.’

  10. comment number 10 by: Anna Lee

    Patrick R. Sullivan, Is that “trickle down” or just another “free lunch”?

  11. comment number 11 by: B Davis

    Anna Lee wrote:

    Patrick R. Sullivan, Is that “trickle down” or just another “free lunch”?

    I think that many of the predictions that broad income tax cuts will spur strong economic growth, especially those that suggest that they will pay for themselves, are “free lunch” predictions. I saw no such effects in my analysis at this link.

    Regarding the Paul Ryan plan, I recently listened to an interesting podcast that discusses the famous economists Keynes and Hayek. An intro to the podcast states the following:

    Paul Ryan has said that many of his economic ideas were inspired by the work of Friedrich von Hayek, an Austrian economist who rose to prominence in the middle of the 20th century.

    But some of Hayek’s ideas are contrary to what Ryan and other Republicans are pushing for.

    The intro goes on to list these ideas as follows:


    1. Taxes

    Cutting taxes before you have money to do is very Keynesian … not Hayekian. Hayek specifically said unless the government is in surplus, you shouldn’t cut taxes, because that would only increase the debt.

    2. Universal Health Care

    Hayek also said a country should have:

    A generous welfare system, a safety net for people who fall through the cracks, everyone should be provided with home, universal healthcare. This seems to be skipped over by all the people who call themselves Hayekians.

  12. comment number 12 by: Patrick R. Sullivan

    ‘Is that “trickle down” or just another “free lunch”?’

    That is a vapid comment.

  13. comment number 13 by: Vivian Darkbloom

    “I think that many of the predictions that broad income tax cuts will spur strong economic growth, especially those that suggest that they will pay for themselves, are “free lunch” predictions. I saw no such effects in my analysis at this link.”

    This is a straw man argument. Frankly, I don’t know anyone who seriously argues that tax cuts “pay for themselves” or are a “free lunch”.

    The argument that needs to be addressed is whether lower tax rates translate into higher economic growth (and, conversely, whether higher rates equate with lower growth). I doubt many economists dispute that those two move in opposite directions. The lunch is not free; however, under most circumstances the lunch can be had at a discount. Rosen’s rebuttal assumes a discount of 3 to 7 percent by cutting rates and eliminating tax expenditures—that is by no means claiming the entire gross revenue loss (before eliminating the revenue generated from eliminating tax expenditures) is “free”, but it is not irrelevant or insignificant, either.

    Those who favor raising tax rates need to answer thesequestions:

    Will higher rates result in higher economic growth, or lower growth?

    Conversely, will lower rates translate into higher economic growth, or lower growth?

    The answer to this, I think, is that higher rates are not an entirely “free lunch”, either.

  14. comment number 14 by: Brooks / Gordon

    Vivian,

    Re: Frankly, I don’t know anyone who seriously argues that tax cuts “pay for themselves”

    Conservative radio, blogs, and some Republican politicians still make or strongly imply this claim, albeit I think somewhat less commonly than they did several years ago. Check out the biggest cheese in conservative talk radio, Rush Limbaugh http://mediamatters.org/video/2011/05/27/limbaugh-sells-the-falsehood-about-tax-cuts-inc/180111

    Also, note that Limbaugh piles ignorance on top of ignorance (and ironically, given he is making a point about combating ignorance), by not only saying that lowering taxes vs. current rates would increase revenues, but also saying that the Laffer Curve specifies the point at which lowering rates furtherat stops increasing revenues (as opposed to what it actually does, which is simply to illustrate the general — and rather obvious — concept that, as we continue lowering [or raising] tax rates, at some point the net effect on revenues changes direction).

    That said, whether or not the above is a straw man depends on what/whom is being addressed. If Romney/Ryan or anyone else is not making or implying such a claim, then raising it to knock it down as an argument against him/them would probably be a straw man.

    Of course, you may be straying into straw man territory yourself with your questions to those who favor higher rates, since they may not be implying that there is no reduction in economic growth, nor is their case for higher taxes dependent on that assumption. That said, any drag on economic growth should, of course, be a consideration, and any usage of static scoring should come with a note that revenue from a tax increase may (or is likely) overstated, unless that premise is rejected with supporting argument.

  15. comment number 15 by: AMTbuff

    revenue from a tax increase may (or is likely) overstated

    That goes double when discussion revenue to be gained by eliminating tax breaks. If the original point of the tax break was to elicit a behavioral response, one can’t legitimately assume that behavior will not change back when the tax break is removed.

    To economists, eliminating a tax break which is unrelated to accurate measurement of disposable income would be beneficial to economy even if revenue stays the same. Eliminating distortion (non-market driven behavior) is a win.

  16. comment number 16 by: Vivian Darkbloom

    That’s the first time I’ve heard that asking a question is knocking down a straw man. Oh, well. And, Brooks, the answer you gave suggests it is not a straw man, even if I had answered those questions myself. When is the last time you’ve heard the Obama campaign mention that raising tax rates will reduce somewhat economic growth? I’m not talking about Ruth Maddow or some other leftwing screwball media entertainer. Does the administration proposal to raise tax rates (and additional net revenue from the full package) “come with a note that “revenue ….may (or is likely) overstated?

    As for tax cuts partially paying for themselves and the Romney proposal, here’s something else to keep in mind (along with that straw man). Romney is not proposing a “tax cut”—he’s proposing a major tax reform where rates are reduced and deductions eliminated. If Romney had been proposing *only* reducing tax rates by 20 percent, then any claim that that tax cut would “pay for itself” would be patently absurd. But, of course, that is not what he is proposing.

    This is essentially, I think, would AMTbuff (correctly) points out above.

  17. comment number 17 by: Brooks / Gordon

    Vivian,

    I didn’t say you had erected a straw man; I said you may be doing so. If, as seems to be the case based on your reply, your questions were not rhetorical — i.e., not implying that many/most/all advocates of higher taxes are asserting no negative effect on economic growth and/or not implying that any such effect is fatal to the case for increasing taxes — but merely pointing out that they should address that potential (likely) effect, then of course you did not erect a straw man. It wasn’t clear to me, and based on what you wrote and the context (the statement to which you were replying), it seemed possible that you were erecting such a straw man, so I said you may be doing so. Apparently you weren’t.

    Re: Obama, no, I haven’t seen him or his campaign acknowledge negative dynamic effects of a tax rate increase. As a matter of integrity, they should, particularly if stating revenue gain per static scoring. It might even be good politics in the sense that Romney will make the point, so — both as a legitimate point and as potentially effective political strategy — Obama could point out that we are not talking about a tax increase on high earners in isolation, other things equal, but rather vs. Romney’s plan (opaque as it is) that includes lower spending (and apparently probably a higher tax burden on those making under $200k [or something along those lines] with lower tax burden on those above), and in at least (and I’d guess only) the short-term that could mean less economic growth than higher spending, higher tax burden on “the rich”, and perhaps lower tax burden on “the middle class.” (As an aside, I’m leaving aside the whole matter of whether reducing tax deductions for some segment is really more like reducing spending on them than a tax increase on them.).

    Valid point, of course, that (supposedly, unspecified) reduction/elimination of tax deductions would increase revenue and thus decrease the incremental growth of the economy (more precisely, the tax base) to yield revenue neutrality.

  18. comment number 18 by: B Davis

    Vivian Darkbloom wrote:

    This is a straw man argument. Frankly, I don’t know anyone who seriously argues that tax cuts “pay for themselves” or are a “free lunch”.

    As Brooks pointed out in comment number 14, Rush Limbaugh has argued it explicitly. You can listen to him at Brook’s link.

    The argument that needs to be addressed is whether lower tax rates translate into higher economic growth (and, conversely, whether higher rates equate with lower growth). I doubt many economists dispute that those two move in opposite directions.

    In fact, there are a number of economists who dispute that. I list a couple examples at this link. One is economist Laurence Kotlikoff who wrote the following on page 115 of the book “The Coming Generational Storm”:


    …For tax cuts to raise revenues, pretax labor earnings have to rise by a larger percentage than the tax rate falls.

    There are two competing forces at play in determining whether pretax earning rise, stay the same, or fall. On the one hand, workers may say to themselves, “Boy, now that taxes are lower, I can work less and still receive the same after tax pay. I’m going to cut back my workweek.” On the other hand, they may say, “Boy, now’s a good time to work more and earn more because taxes are lower on every extra dollar I earn”. Economists call the first of these reactions the income effect. They call the second reaction, the substitution or incentive effect.

    Some of the best labor economists in the country have spent their lifetimes measuring the income and substitution effects. The broad consensus of these experts is that the two effects are roughly offsetting. This means that if wage tax rates are cut by, say 15 percent, tax revenues will fall by 15 percent.

    The other was a study by Christina and David Romer which suggested that a deficit-driven tax increase could have a positive effect on the economy.

    The fact is, there are competing factors and it appears that some tax cuts may have a positive effect and some have a negative effect on the economy. The same is true of tax hikes. At this link, for example, Bruce Bartlett says the following about the Bush tax cuts:


    It would have been one thing if the Bush tax cuts had at least bought the country a higher rate of economic growth, even temporarily. They did not. Real G.D.P. growth peaked at just 3.6 percent in 2004 before fading rapidly. Even before the crisis hit, real G.D.P. was growing less than 2 percent a year.

    By contrast, after the 1982 and 1993 tax increases, growth was much more robust. Real G.D.P. rose 7.2 percent in 1984 and continued to rise at more than 3 percent a year for the balance of the 1980s.

    Real G.D.P. growth was 4.1 percent in 1994 despite widespread predictions by opponents of the 1993 tax increase that it would bring on another recession. Real growth averaged 4 percent for the balance of the 1990s. By contrast, real G.D.P. growth in the nonrecession years of the 2000s averaged just 2.7 percent a year — barely above the postwar average. [The New York Times, Economix, 7/26/11]

    Hence, I think that the point of Clinton’s comments are that you have to start with basic arithmetic when you consider tax cuts and spending increases. By basic arithmetic, both will increase the deficit. You can then start looking at other effects but you need to measure them carefully. You can’t simply judge that there will be certain behavioral effects, however reasonable those theories may seem. You need to carefully measure them in the data. From everything I’ve read, there is no clear data that shows that there is a clear relationship between tax cuts and increases in economic growth, at least not in all or even most cases.

  19. comment number 19 by: Brooks / Gordon

    Vivian and B Davis,

    B Davis makes an important point (which I should have noted) per Romer & Romer. The net effect of a tax cut on GDP can depend on whether (or to what extent) it lowers deficits vs. being associated with higher spending.

    Although, in general, I would expect a scenario of higher taxes (particularly if associated with greater progressivity) AND accompanying higher spending (i.e., holding deficit constant on a static basis) to be stimulative in the short term but a drag in the long term, a tax increase alone would lower deficits, and I would expect the opposite effect (drag in short term, positive effect in long term).

    As a note, I always cringe when I see analysis of the sort by Bartlett in that quote by B Davis: I don’t think we can simply observe a few data points, or even a statistically established strong correlation (rather than cherry-picked data, and I don’t know which Bartlett’s analysis reflects) and draw a conclusion re: net effect on GDP of tax cuts or tax increases. Obviously there are a great many factors affecting GDP growth rates, and it could be that the net effect tends to be in one direction, yet the correlation points in the opposite direction.

  20. comment number 20 by: B Davis

    Brooks / Gordon wrote:

    As a note, I always cringe when I see analysis of the sort by Bartlett in that quote by B Davis: I don’t think we can simply observe a few data points, or even a statistically established strong correlation (rather than cherry-picked data, and I don’t know which Bartlett’s analysis reflects) and draw a conclusion re: net effect on GDP of tax cuts or tax increases. Obviously there are a great many factors affecting GDP growth rates, and it could be that the net effect tends to be in one direction, yet the correlation points in the opposite direction.

    Regarding Bartlett’s analysis, I agree that we can’t simply observe a few data points. On reading it more closely, for example, I had some questions about the following statement:

    By contrast, after the 1982 and 1993 tax increases, growth was much more robust. Real G.D.P. rose 7.2 percent in 1984 and continued to rise at more than 3 percent a year for the balance of the 1980s.

    The first table at this link does show that there were tax hikes in 1982, 1983, and 1984. However, there was the large tax cut in 1981 and it’s difficult to separate the tax cut from the tax hikes. Also, the first graph at that link shows that 10-year GDP growth was very stable from 1975-1985 through 1996-2006. It might be better to measure over a full business cycle but the business cycle just happened to have been about 10 years long from 1975 through 2006. That is the reason that the purple line (GDP growth) is fairly smooth during that period. The fact that it remains at the same general level, however, also shows that GDP growth did not change much during that period. In any event, the graph is attempting to look at all data points from 1950 to the present. That would seem very much better than looking at just a few data points.

  21. comment number 21 by: Vivian Darkbloom

    Keith Hennessy picks up on Clinton’s “good math”:

    http://keithhennessey.com/2012/09/13/price-one-trillion/

  22. comment number 22 by: Jim Glass

    That’s a nice catch by Hennessey there, Vivian.

    Politicians are deceitful. (Even Democrats!) Who’d a thunk it? :-)

    As to Romer & Romer, here’s some analysis indicating the R&R analysis indicates the revenue maximizing Laffer Curve tax rate in the USA is 33%.:

    http://ricochet.com/main-feed/The-Laffer-Curve-and-New-Evidence-that-Taxes-Stifle-Economic-Output

  23. comment number 23 by: Jim Glass

    *The argument that needs to be addressed is whether lower tax rates translate into higher economic growth (and, conversely, whether higher rates equate with lower growth). I doubt many economists dispute that those two move in opposite directions.*

    In fact, there are a number of economists who dispute that … One is economist Laurence Kotlikoff who wrote:

    “…For tax cuts to raise revenues, pretax labor earnings have to rise by a larger percentage than the tax rate falls.”

    That’s saying tax cuts don’t increase revenue, not that they don’t boost the economy.

    Say the Fed govt collects 20% of GDP in revenue. For a tax cut to *increase revenue* it would have to increase GDP by more than five times the cut in taxes. That’s pretty dang implausible on its face (if cutting taxes actually had a payoff that huge someone would have noticed by now — like Democrats wanting to get both free tax revenue to spend on more entitlements and credit for exploding the economy upward and cutting everybody’s taxes.)

    This should be the end of this crazy “reducing income taxes increases tax revenue” discussion right there. Even the Bush Treasury itself denied that the Bush tax cuts would do anything like increase revenue.

    OTOH, there is no inconsistency between that and the plain economic logic that tax cuts boost economic activity generally (if a good deal less than by five-fold) as per “tax something, get less of it, and vice versa.” Taxes increase the cost of activity, and higher cost reduces quantity demanded. QED.

    I don’t know of any economist who disputes that as a matter of principle. It would deny the law of supply and demand.

    “There are two competing forces at play in determining whether pretax earning rise, stay the same, or fall. On the one hand, workers may say to themselves, ‘Boy, now that taxes are lower, I can work less and still receive the same after tax pay. I’m going to cut back my workweek.’ On the other hand, they may say, ‘Boy, now’s a good time to work more and earn more because taxes are lower on every extra dollar I earn’. Economists call the first of these reactions the income effect. They call the second reaction, the substitution or incentive effect.

    “Some of the best labor economists in the country have spent their lifetimes measuring the income and substitution effects. The broad consensus of these experts is that the two effects are roughly offsetting”.

    That’s extremely superficial. E.g.:

    1) It applies only to income tax on personal earnings, not any other taxes. Many studies show taxes on capital produce a very sharp response. As to sales taxes, remember how the infamous Bush I era “luxury tax” (that broke his “read my lips” pledge) utterly destroyed the yacht-building industry and hammered many other luxury good industries until repealed.

    2) It ignores that the “balance of income/substitution effects”, for income tax on earnings, itself varies sharply by marginal tax rate.

    3) It ignores that the details of the taxpayer situation matter greatly. E.g.: Many studies show that income tax increases (within the modest range of recent US experience) produce (a) very little labor-supply response among family *primary* earners, because they still have to pay the rent and utility bills, so they can’t work less; but also (b) large labor-response effects among family second-earners. This is because the income of the *second* working spouse piles up into higher marginal tax rates (#2 above) while marginal costs of working are higher (having to pay for child care, a housecleaner, etc.) So higher marginal tax rates often hit the second earner to make it impossible, or not worth while, to cover those costs of working.

    4) It ignores long-term effects. The income-substitution effect on primary earners is on net modest in the *short term*, because the primary earners are stuck with their mortgages, utility bills, etc. But in the long run they can, and do, adjust their expenditures.

    And *what the taxes are used for* matters a great deal in this regard. E.g., consider these two situations:

    A) Earners have to finance their own retirements, health insurance, etc, out of pocket from their earnings, while paying very low tax rates on their earnings.

    B) The government promises to finance retirements, health care, etc., regardless of how much people earn; and earners pay very high tax rates on their earnings.

    In situation B very clearly one expects to see fewer hours worked, since as per the incentives facing individuals, both the need for hours worked *and* the after-tax return from hours worked are lower — reducing the incentive to work on both the supply *and* demand side.

    Ergo, moving from A to B will be expected to reduce hours worked, GDP, average income, and all the rest.

    Nobelist Ed Prescott has rather fully documented this process in effect in Europe as hours worked dropped from US levels in the 1960s to, well, European levels today.

    http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3346

  24. comment number 24 by: Patrick R. Sullivan

    ‘…remember how the infamous Bush I era “luxury tax” (that broke his “read my lips” pledge) utterly destroyed the yacht-building industry ….’

    I remember it because it cost me a lot of money. I lost many thousands of dollars of accounts receivable when the yacht builders to whom I’d extended credit for purchases of abrasive materials didn’t pay me for them.

  25. comment number 25 by: Brooks / Gordon

    Jim,

    Re: Say the Fed govt collects 20% of GDP in revenue. For a tax cut to *increase revenue* it would have to increase GDP by more than five times the cut in taxes.

    Just as a couple of notes (not to disagree with your overall point), I think the above is probably close to right, but not completely. It is the tax base, not GDP, that must grow that much (even if we assume that 20% of GDP as a constant, as you do). Growth in the tax base due to a tax rate cut is driven not only by GDP growth but also by reduced tax avoidance (and evasion).

    Also, revenue growth would likely be accompanied by a rise in revenues as a percent of GDP, due to more production resulting in tax liabilities or higher tax liabilities (bracket creep).

    Also, your 20% may include taxes paid on investment income (unless you were just picking 20% as a round number for income tax revenues), and such revenues aren’t a direct function of GDP.