Supply Side Economics Debunked Again

[Cheerful Charlie]

It seems to me that no matter how high the tax rate was, whether income tax or goods and services or both, or how much overall revenue was collected....many governments would still mismanage their spending and run a deficit.

I remember when the deficits started to climb to new heights, Reagan appeared on a televised speech, with a well practiced actor's "why is everybody picking on me?" look on his mug, and stated that the US economy showed its strength by being able to withstand such deficits. There was immense applause nationwide from the right. Yay! Deficits don't matter any more! Before that, Reagan was a harsh critic of deficits. That "deficts don't matter" was of course a phrase VP Cheney made notorious. Then Deficts matter when the tea party arose and pols wanted to usee deficits as an excuse to hack and slash at social spending, deficits combined with small government ideology. Starve the beast. Nobody gets this right for the right reason in the right way. The right wants to make the Bush tax cuts that generate massive deficits permanent. First of all, we need to drag Grover Norquist to the bathtub and drown him. Then Arthur Laffer who still is peddling this Laffer Curve crap to ignorant Republicans. Mismanagement is rife on the right. And we ran off the rails in a major way with that deficits don't hurt us, Reagan speech.

 

[SimpleDon]

Supply-side economics "works". When you encourage growth you get growth.

Likewise, the Laffer curve is basically true.

Where both fall down is the interpretation.

With supply side economics the feedback ratio (tax revenue gained from growth:tax revenue lost from lower taxes) is well under 1. The conservatives pretend it's greater than 1.

With the Laffer curve note the absence of any scale points beyond 0% and 100%. The conservatives simply assume that we are on the right side of the curve despite presenting no evidence of this.

Giving the rich money encourages growth in asset prices, the so-called good inflation of capital gains. This burdens the economy with additional rent and reduces economic growth.

They can't supply evidence of being on the right side of the curve because there isn't any evidence of this. In fact, the evidence is that we are on the positive slope of the curve, where lowering taxes lowers revenues.

The only piece of evidence that I have ever been offered is that the rich pay more in taxes than they did before. This is because they earn so much more than they did before. The 1% pay 30% more in taxes than the 1% did thirty years ago. But they earn three times as much. The problem is that revenues have decreased because the tripling of income for the 1% came at the expense of lower incomes for everyone else, especially for the lower 90% of earners, reducing the taxes that they pay. (All adjusted for inflation)

 

[jonatha]

It most certainly is...

Yeah, none of that really disagrees with my point. It's just pedantry, and bad pedantry at that, about the exact shape of the curve. I didn't mean it is literally a parabola.

What adjective might you use to more accurately describe the historical relationship in the United States between tax rates and tax collected, researched by Martin Gardner and shown below? I'm thinking "ball-of-yarnish"....

 

[Jason Harvestdancer]

Supply-side economics "works". When you encourage growth you get growth.

Likewise, the Laffer curve is basically true.

Where both fall down is the interpretation.

With supply side economics the feedback ratio (tax revenue gained from growth:tax revenue lost from lower taxes) is well under 1. The conservatives pretend it's greater than 1.

With the Laffer curve note the absence of any scale points beyond 0% and 100%. The conservatives simply assume that we are on the right side of the curve despite presenting no evidence of this.

Giving the rich money encourages growth in asset prices, the so-called good inflation of capital gains. This burdens the economy with additional rent and reduces economic growth.

I'm not a supply sider but this is silly - as silly as supply side economics. It is increases in the money supply that cause what most people think of as inflation. I think the price increases are the symptom of inflation and go for a causal definition instead.

 

[dismal]

Yeah, none of that really disagrees with my point. It's just pedantry, and bad pedantry at that, about the exact shape of the curve. I didn't mean it is literally a parabola.

What adjective might you use to more accurately describe the historical relationship in the United States between tax rates and tax collected, researched by Martin Gardner and shown below? I'm thinking "ball-of-yarnish"....

View attachment 6523

It seems very odd that you would make pedantic comments about my use of the term "parabola" and then treat that chart as if it is intended to be an accurate representation. I hope you understood it is a joke.

There are about a bazillion^infinity things that affect tax receipts besides the tax rate, so the curve is conceptual. What is generally not argued by reasonable people are the points I made.

1) At a zero percent tax rate there in no tax collected
2) At a 100% tax rate there is no tax collected.
3) At points in between there is positive tax collected.

From this it can be inferred that there is some non-100% rate that optimizes taxes, and from that it follows that increasing the tax rate beyond that point reduces taxes collected.

If you have some argument against that, feel free to present it. Those articles you linked were not arguments against any of that. Even your pubic hair curve above (despite the obvious flaw of not being a continuous function) seems to have the two endpoints at zero and a rate which maximizes taxes collected in between.

 

[Cheerful Charlie]

Lets us argue that in such a lafferesque curve there is a sweet point, a maximum return M. To go along with that you need a sensible spending plan. If you spend 110% of M continually, you will collapse your economy, eventually. When the harm begins to take its toll, the M point changes.

It is obvious that our debts demonstrate our policy, big tax cuts for the rich are not working. Continuing on in that vein is therefore, incompetent.

And if one continually miscalculates M and never learns from the experience, you get continuing political and economic incompetence. You get Kansas, Louisiana, Puerto Rico.

Any governor, senator, or representative that takes Arthur Laffer as anything except a proven, incompetent crank should be turned out of office.

There is also the point that the economy is not really stable and M will move from month to month depending on business cycles and such, even if we have people making a competent effort to get the M point right and succeeding.

 

[dismal]

Lets us argue that in such a lafferesque curve there is a sweet point, a maximum return M. To go along with that you need a sensible spending plan. If you spend 110% of M continually, you will collapse your economy, eventually. When the harm begins to take its toll, the M point changes.

It is obvious that our debts demonstrate our policy, big tax cuts for the rich are not working. Continuing on in that vein is therefore, incompetent.

And if one continually miscalculates M and never learns from the experience, you get continuing political and economic incompetence. You get Kansas, Louisiana, Puerto Rico.

Any governor, senator, or representative that takes Arthur Laffer as anything except a proven, incompetent crank should be turned out of office.

There is also the point that the economy is not really stable and M will move from month to month depending on business cycles and such, even if we have people making a competent effort to get the M point right and succeeding.

Well, even if we had the perfectly accurate representation of the true Laffer curve before us, the fundamental flaw is the premise that the goal should be to maximize taxes collected by the government.

The government should raise only the minimum amount of money required to do those things it should be doing.

 

[SimpleDon]

There are many other theoretical and empirical reasons to believe that supply side economic policies won't work to boost growth and employment in the economy above what the post war Keynesian economic policies did.

The Keynesian policies boosted demand, ie wages, at the cost of supply, ie profits.

Not to belabor the obvious, supply side policies do the opposite, they boost the supply at the cost of demand.

For supply side policies to work better than the demand side policies the economy must be supply side lead. In other words it must be supply side constrained. The supply side must be what is limiting economic growth.

There is no question that the economy of the classical economists of the 18th and the first half of the 19th centuries was supply side constrained. It was a largely agrarian economy and the supply that was limiting growth was land. The same is only slightly less true of Marshall's neoclassical economists of the last half of the 19th century.

But the world's economy and especially the economies of the developed world has changed considerably since then. We have gone from an agrarian economy to an industrial based economy to a rather less well defined postindustrial economy where most products are services.

The industrial and the post industrial economies aren't supply limited. Supply is capital and the capital in our economies is only money and we can create any amount of money that we need.

Industrial and postindustrial economies are demand limited. Treating demand limited economies as if they are supply limited economies as supply side economic policies do, results in too little demand and too much money on the supply side, money that builds asset bubbles and financial market instability.

 

[SimpleDon]

Giving the rich money encourages growth in asset prices, the so-called good inflation of capital gains. This burdens the economy with additional rent and reduces economic growth.

I'm not a supply sider but this is silly - as silly as supply side economics. It is increases in the money supply that cause what most people think of as inflation. I think the price increases are the symptom of inflation and go for a causal definition instead.

Inflation is the increase in prices widespread across the economy. It isn't caused by an increase in the money supply. The increase in the money supply is an effect of inflation, not the cause.

Money is created by actors in the economy taking out loans to buy things. I am arguing that people have to take out larger loans when they buy things that cost more. You are arguing that people take out larger loans so that they can pay more to buy things. I think that my argument is the more likely one.

That silly argument that you complain about isn't an increase in the money supply. It is intentionally increasing the incomes of the rich by decreasing the incomes of everyone else. This is how supply side works.

The rich have a greater propensity to save and invest. This is also part of the rational behind supply side economics. But the investments that we are talking about that the rich make aren't the business investments that grow the economy. They are really nothing more than different methods of saving, things like government bonds and stock, even gold and collectables, classic cars, coins, paintings, etc. The huge amount of money that supply side policies have diverted from wages to profits and the rich in the last thirty five years, as much as 20 trillion dollars, drives the prices of these up, creating asset bubbles.

 

[Cheerful Charlie]

If the US grows its money supply continually, but it goes to the rich and not working class Americans, you end up with a shrinking middle class and eventually, economic catastrophe. So if theoretically the US could by fiat create money in large amounts, without having to worry about a final reckoning, they should do that and boost all Americans net worth by fiat. Welcome to the US Big Rock Candy Mountain, right?

You have to get back to real basic economics, else go the way of Greece or Puerto Rico.

 

[Loren Pechtel]

Supply-side economics "works". When you encourage growth you get growth.

Likewise, the Laffer curve is basically true.

Where both fall down is the interpretation.

With supply side economics the feedback ratio (tax revenue gained from growth:tax revenue lost from lower taxes) is well under 1. The conservatives pretend it's greater than 1.

With the Laffer curve note the absence of any scale points beyond 0% and 100%. The conservatives simply assume that we are on the right side of the curve despite presenting no evidence of this.

Giving the rich money encourages growth in asset prices, the so-called good inflation of capital gains. This burdens the economy with additional rent and reduces economic growth.

They can't supply evidence of being on the right side of the curve because there isn't any evidence of this. In fact, the evidence is that we are on the positive slope of the curve, where lowering taxes lowers revenues.

The only piece of evidence that I have ever been offered is that the rich pay more in taxes than they did before. This is because they earn so much more than they did before. The 1% pay 30% more in taxes than the 1% did thirty years ago. But they earn three times as much. The problem is that revenues have decreased because the tripling of income for the 1% came at the expense of lower incomes for everyone else, especially for the lower 90% of earners, reducing the taxes that they pay. (All adjusted for inflation)

What is the connection between this and my post?

 

[Jason Harvestdancer]

Inflation is the increase in prices widespread across the economy. It isn't caused by an increase in the money supply. The increase in the money supply is an effect of inflation, not the cause.

Just like a broken bone is the effect of pain and not the cause of pain. Good one. The increase in the money supply causes the widespread price increases.

 

[Jason Harvestdancer]

Supply side economics doesn't necessarily mean a low top tax rate. You can have a high rate for the top bracket if you have deductions for behavior that supply side economics agrees with, such as creating jobs.

People forget that Supply Side is inspired by (but is distinct from) Keynesian economics. Target tax deductions fits in nicely with both philosophies.

 

[jonatha]

What adjective might you use to more accurately describe the historical relationship in the United States between tax rates and tax collected, researched by Martin Gardner and shown below? I'm thinking "ball-of-yarnish"....

View attachment 6523

It seems very odd that you would make pedantic comments about my use of the term "parabola" and then treat that chart as if it is intended to be an accurate representation. I hope you understood it is a joke.

There are about a bazillion^infinity things that affect tax receipts besides the tax rate, so the curve is conceptual. What is generally not argued by reasonable people are the points I made.

1) At a zero percent tax rate there in no tax collected
2) At a 100% tax rate there is no tax collected.
3) At points in between there is positive tax collected.

From this it can be inferred that there is some non-100% rate that optimizes taxes, and from that it follows that increasing the tax rate beyond that point reduces taxes collected.

If you have some argument against that, feel free to present it. Those articles you linked were not arguments against any of that. Even your pubic hair curve above (despite the obvious flaw of not being a continuous function) seems to have the two endpoints at zero and a rate which maximizes taxes collected in between.

The parts in bold are not entirely accurate. As the noncontinuous-but-historically-accurate curve above shows, there may be several rates at which the amount of tax collected is maximized, and while a move away from any of them (in either direction) will initially reduce the amount continuing the move will eventually bring you back to the maximum (unless you started at the first such rate and went down, or the last such rate and went up). There is only a single optimal tax rate if you *assume* the curve has degree 2, which historical evidence suggests is not the case.

Those presenting the Laffer argument tend to like the single maximum because they tend to argue that the US tax rate is presently to the right of the optimal value. It was this simplistic analysis that prompted Gardner to make his critique, not an attempt at humor...

 

[dismal]

It seems very odd that you would make pedantic comments about my use of the term "parabola" and then treat that chart as if it is intended to be an accurate representation. I hope you understood it is a joke.

There are about a bazillion^infinity things that affect tax receipts besides the tax rate, so the curve is conceptual. What is generally not argued by reasonable people are the points I made.

1) At a zero percent tax rate there in no tax collected
2) At a 100% tax rate there is no tax collected.
3) At points in between there is positive tax collected.

From this it can be inferred that there is some non-100% rate that optimizes taxes, and from that it follows that increasing the tax rate beyond that point reduces taxes collected.

If you have some argument against that, feel free to present it. Those articles you linked were not arguments against any of that. Even your pubic hair curve above (despite the obvious flaw of not being a continuous function) seems to have the two endpoints at zero and a rate which maximizes taxes collected in between.

The parts in bold are not entirely accurate. As the noncontinuous-but-historically-accurate curve above shows, there may be several rates at which the amount of tax collected is maximized, and while a move away from any of them (in either direction) will initially reduce the amount continuing the move will eventually bring you back to the maximum (unless you started at the first such rate and went down, or the last such rate and went up). There is only a single optimal tax rate if you *assume* the curve has degree 2, which historical evidence suggests is not the case.

Those presenting the Laffer argument tend to like the single maximum because they tend to argue that the US tax rate is presently to the right of the optimal value. It was this simplistic analysis that prompted Gardner to make his critique, not an attempt at humor...

Did you ever take an economics class? Maybe before some guy at the front drew a supply curve or a demand curve or a Laffer Curve they started with an assumption along the lines of "all other things being equal". Whenever you are talking about history or different countries, one thing we can be pretty sure about is that at different times and at different places some of the infinity+ number of things that could be different are not going to be equal.

Another thing we can be pretty sure about is that when we apply the assumption that "all other things are equal" and change one variable the resulting curve is a continuous function.

 

[jonatha]

The parts in bold are not entirely accurate. As the noncontinuous-but-historically-accurate curve above shows, there may be several rates at which the amount of tax collected is maximized, and while a move away from any of them (in either direction) will initially reduce the amount continuing the move will eventually bring you back to the maximum (unless you started at the first such rate and went down, or the last such rate and went up). There is only a single optimal tax rate if you *assume* the curve has degree 2, which historical evidence suggests is not the case.

Those presenting the Laffer argument tend to like the single maximum because they tend to argue that the US tax rate is presently to the right of the optimal value. It was this simplistic analysis that prompted Gardner to make his critique, not an attempt at humor...

Did you ever take an economics class? Maybe before some guy at the front drew a supply curve or a demand curve or a Laffer Curve they started with an assumption along the lines of "all other things being equal". Whenever you are talking about history or different countries, one thing we can be pretty sure about is that at different times and at different places some of the infinity+ number of things that could be different are not going to be equal.

Another thing we can be pretty sure about is that when we apply the assumption that "all other things are equal" and change one variable the resulting curve is a continuous function.

Actually, Gardner's curve is continuous, at least in the mathematical sense. What precisely are you objecting to?

 

[dismal]

,

Did you ever take an economics class? Maybe before some guy at the front drew a supply curve or a demand curve or a Laffer Curve they started with an assumption along the lines of "all other things being equal". Whenever you are talking about history or different countries, one thing we can be pretty sure about is that at different times and at different places some of the infinity+ number of things that could be different are not going to be equal.

Another thing we can be pretty sure about is that when we apply the assumption that "all other things are equal" and change one variable the resulting curve is a continuous function.

Actually, Gardner's curve is continuous, at least in the mathematical sense. What precisely are you objecting to?

A continuous function can only have one value for each tax rate (t). This is definitional. When you hold all other thing equal besides t and change t, the result must be a continuous function. If you consider a point where say t=40%, you can't have multiple points on the curve because at points where t=40% it's not "all other things are equal" anymore but "all things are equal". If literally all things are the same you don't get different outcomes. The curve you have linked has multiple violations of this and is thus nonsensical.

 

[jonatha]

,

Actually, Gardner's curve is continuous, at least in the mathematical sense. What precisely are you objecting to?

A continuous function can only have one value for each tax rate (t). This is definitional.

Well, when you were taking economics I was getting a math degree at an Ivy League university, and that's not what the definition of continuous is...

The curve you have linked has multiple violations of this and is thus nonsensical.

No, the curve I linked connects all the actual, historical values of tax receipts versus marginal tax rate over the past few decades in the United States. (Other curves would too, of course.) The fact that it's nothing like a parabola is an inconvenience for those who would use Laffer's "curve" to interpret events or dictate policy...

 

[dismal]

,

A continuous function can only have one value for each tax rate (t). This is definitional.

Well, when you were taking economics I was getting a math degree at an Ivy League university, and that's not what the definition of continuous is...

The curve you have linked has multiple violations of this and is thus nonsensical.

No, the curve I linked connects all the actual, historical values of tax receipts versus marginal tax rate over the past few decades in the United States. (Other curves would too, of course.) The fact that it's nothing like a parabola is an inconvenience for those who would use Laffer's "curve" to interpret events or dictate policy...

If that's what it is then it's a bunch of points where all other things weren't equal. Thus it's not a Laffer curve. End of discussion.

 

[Cheerful Charlie]

Laffer Curve


"A beautiful theory killed by an ugly little fact."
- Thomas Huxley