Tuesday, November 27, 2012

The Supply Side Myth Destroyed Once Again

For those who tenaciously persist in supporting supply-side economic tenets, here is another dagger in your heart. A senior Congressional Research Service staffer and Ph.D. economist (University of Michigan) – Thomas Hungerford - recently authored an economic analysis of reductions in the top marginal tax rates since 1945 and their relationship to economic growth and development.  A central tenet of the Republican “con” is of course that tax cuts for the wealthy will have dramatic trickle down benefits that will massively stimulate the economy.

Before describing the results, I should note that the report, while initially released on September 14 by the CRS - a non-partisan arm of the Library of Congress (http://graphics8.nytimes.com/news/business/0915taxesandeconomy.pdf),  it was pulled back by Senate Republicans and Senate minority leader Mitch McConnell.  According to the New York Times, McConnell and other senators “raised concerns about the [report’s methodology] and other flaws.” More temperate Republicans of course note that the report is accurate and is difficult to refute http://economix.blogs.nytimes.com/2012/11/06/republicans-censor-what-they-cant-refute/

As soon as I read the author’s appendix (which referred to a variety of very careful multivariate tests and corrections for heteroscedasticity as well as auto-correlation in a time series analysis), I was convinced that the Kentucky senator’s methodological concerns were shaped by the same band of Republican analysts that served Karl Rove so well in Ohio during the presidential election.

After a series of time series analyses Hungerford concluded two things:

a)    first, that changes in the top marginal tax rates over a 65 year study period had virtually no discernible effect upon economic growth (savings, investment, or productivity growth) – thus clobbering empirically a central tenet of supply siders;  we appreciate this intuitively since during the 1950s the top marginal tax rate was above 90% and the per capita GDP increased by 2.4% during this period. while in the 2000s the highest marginal tax rate was below 40% yet real per capital growth in GDP was less than 1%;

b)   however, top tax rate reduction does increase the concentration of income at the top of the distribution. Thus, as Hungerford observes, the share of income accruing to the top 1/10th of 1 percent of U.S. families increased from 4.2% in 1945 to 12.3% by 2007.  In short, while marginal tax rate reductions for the wealthiest among us may have no discernible effect upon overall economic productivity, or the size of the entire economic pie, it certainly appears to have very direct effects upon the way in which that economic pie is sliced up – with larger and larger pie shares going to the wealthy.

Friday, November 23, 2012

President Obama: Invest in America and Bring on the Charts!

What should be the priorities of the Obama administration in Economic policy for the second term?

The FIRST priority is very simple: invest in America. As noted here repeatedly, the foundation of long-term economic growth in the private sector is government investment in public goods and services: infrastructure, education, research, and public health.

But now we have conditions that promise huge short-term benefits for government investment. We have a very sluggish economy, high unemployment, and record low interest rates. This is a classic situation of a Keynesian 'liquidity trap' where government spending can bring us out of a downturn. The spending on public goods and services will directly hire both government workers and private contractors, and, through the multiplier or ripple effect this will gain still more jobs. Furthermore, we have a crying need for investment in infrastructure. Not only can we benefit from upgrading our transportation, power and communication infrastructure, but it is now in crying need due to deterioration from delayed maintenance.

The arguments for government spending on investment now are overwhelming. The only thing holding them back is the misguided belief that austerity—cutting back on government—and tax cutting are a better way to get the economy to grow. That these policies will help is contradicted by recent evidence all over the world. Austerity policies in England and the Euro zone have put both into recession, where we have stayed out of returning to it. And tax cuts during the Bush administration did not produce growth, whereas tax increases in the Clinton administration did. And therecent report by the Congressional Research Service, suppressed by the Republicans, confirms the failure of tax cutting as a stimulus to economic growth.

The other argument is that public debt is a short term economic crisis. As Paul Krugman and others have argued, it is not, and long term we can grow out of debt, as we did after WWII. That is providing we have growth, which public investment together with private initiative and investment will create.

Because of the dominance of these "zombie ideas"—refuted but still quoted as God's truth—a SECOND priority is critical. The President must publicly and openly discredit the zombie ideas of Reaganism: the the unholy trinity of cuts—cutting taxes, government and regulation cuts. President Obama has not used the "bully pulpit" to rebut these arguments, and they are the foundation of the opposition.

To let opposition arguments go unanswered is bad politics, and disastrous politics when dealing with Reaganism. The TV press will not go into policy issues, as a rule, and only the President making an issue of them publicly will force public discussion. Here Obama can turn his professorial background to good use. He should have a series of press conferences which he introduces by advocating his own policies, such as the American Jobs Act, and then refute the Reaganist zombie ideas with charts of recent economic facts. When Ross Perot used charts in his debates with Cllinton and Bush I, he changed the national conversation, It is time for Obama to do the same. BRING ON THE CHARTS!

Saturday, November 10, 2012

Romney: Crushed by Science

It is a delicious irony that Romney and his campaign were, by all reports, truly shocked by their decisive, broad-based defeat by Obama.

If they were looking at those who average the polls, like Nate Silver and others, they shouldn't have been shocked at all. But they were ridiculing and insulting these, and insisting that they were completely confident that Democrats couldn't turn out the people which they claimed they could do.

They also ridiculed the Obama get-out-the-vote effort, in which I was an active soldier, as futile. This was in spite of the fact that research had shown the personal contact, such as takes place in door-to-door efforts, is by far the most effective.

In short, they "knew" that the results of research could be ignored in favor of their myths. This was a piece with the whole Republicon Party, and shows they are deeply flawed, not only in their policies, but also epistemologically: they don't believe in science, in learning from solid information and data. They can ignore reality—NOT, as Dana Carvey used say.

It is thus entirely just that they were ultimately defeated partly by their firm belief in their own counter-factual mythology.

Here are two great summaries of the Republicans being out of touch with reality. The first is by Rachel Maddow, from her show:

"Ohio really did go to President Obama last night. And he really did win. And he really was born in Hawaii. And he really is legitimately President of the United States. Again.

"And the Bureau of Labor Statistics did not make up a fake unemployment rate last month. And the Congressional Research Service really can find no evidence that cutting taxes on rich people grows the economy. And the polls were not skewed to oversample Democrats. And Nate Silver was not making up fake projections about the election to make conservatives feel bad. Nate Silver was doing math.

"And climate change is real. And rape really does cause pregnancy sometimes. And evolution is a thing. And Benghazi was an attack on us, it was not a scandal by us. And nobody’s taking away anyone’s guns. And taxes have not gone up. And the deficit is dropping, actually. And Saddam Hussein did not have weapons of mass destruction. And the moon landing was real. And FEMA is not building concentration camps. And UN election observers are not taking over Texas. And moderate reforms of the regulations on the insurance industry and the financial services industry in this country are not the same thing as Communism."

And Here Krugman hits the right's pertinacious ignoring of contrary information in its economic analysis:

"A lot of 1-percent Romney supporters believed that only the unwashed masses could actually believe that Obama was making more sense on economic policy. What’s so strange about this is that everything — everything — that has happened for the past decade has demonstrated the opposite. Modern Republicans are devotees of faith-based analysis on every front.

"On economics, in particular, they are devoted to supply-side fantasies that keep being refuted by evidence — and their reaction is to try to suppress the evidence. They’ve spent pretty much the whole past four years issuing dire warnings about inflation and soaring interest rates that keep not coming true; they cling to the belief that if only a Republican were in office we’d have a 1982-style recovery even though economists who actually studied past financial crises predicted the slow recovery in advance.

"The truth is that the modern GOP is deeply anti-intellectual, and has as its fundamental goal not just a rollback of the welfare state but a rollback of the Enlightenment."

Thursday, November 1, 2012

'Confidence' is a confidence game

Dean Baker writes a brilliant debunking of the Republicon line that the problem with the economy is 'confidence'. In fact as he documents here consumer spending is back up to pre-bubble levels. Investment in commercial buildings, where there is still a backlog from the bubble, is down, but not likely to return until vacant buildings start filling up. However, other investment, as indicated by investment in equipment and software is also almost up to pre-recession levels.

So no, Romney is not 'the confidence fairy', as Krugman puts it derisively, but just a confidence man.

ps. See this earlier post, also referring to a strong argument of Dean Baker against the 'confidence' claim.