Economics

Hail to the Liberal Version of the Laffer Curve

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Investors Business Daily discovers the new thinking in Obama's economic planning: a liberal version of the Laffer Curve, "which posited that certain tax cuts will pay for themselves by accelerating economic growth."

"One of the most important things we can do for debt and deficit reduction is to grow the economy," [Obama] said, adding that "if there are steps that in the short term may reduce the amount of cash in the treasury but in the long term mean that we're growing at 3.5% instead of 2.5%, then those ideas are worth exploring."…

Obama's argument goes like this: More deficit-financed federal spending today will boost economic growth tomorrow, and that faster growth will throw off more tax revenues. Voila! Federal spending will eventually pay for itself!

It's the liberal version of the Laffer Curve….

This logic finds support from NY Times columnist and Nobel-Prize-winning economist Paul Krugman who wrote in late 2009:

"Spending more on recovery will lead to a stronger economy, both now and in the future — and a stronger economy means more government revenue."

Krugman later wrote that "people like me have been hesitant to make this argument loudly, for fear of being cast as the left equivalent of Arthur Laffer."…

Eh, mebbe. But IBD winds up its house editorial with this set of rhetorical questions:

What do we have to show from Obama's historic "pay for itself" stimulus spending spree? A recovery weaker than any since the Great Depression. A jobless rate that — two years after the recession ended — remains above 9%.  Three years of $1 trillion-plus deficits. A debt burden that's climbed more than 40%. And no hope in sight of any of this getting much better.

Now Obama has the temerity to suggest that we apply the same economic medicine all over again, and the gall to argue that it will somehow pay for itself?

Whole thing here.

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  1. They should’ve called it the “laugher curve.” Any child knows they can only spend what they’ve got.

    WWCT (What Would Coolidge Think)

  2. But the failures were surely that we didn’t spend ENOUGH, right? I mean, had we spent 10 times as much think of how everyone would be employed- not to mention how much money everyone would be making in their new government jobs. If everyone works for the state, there is no unemployment.

  3. It’s funny, but I had the strangest dream that the Democrats were screaming about deficit spending in the early years of the century. Must’ve been the chili I ate last night.

    1. Woah, seriously? Me too. My dream included liberals ripping Dick Cheney apart when he said that “deficits don’t matter”. Ah, well. No more eating before bed.

      1. Mass hallucination is common among libertarians. Or so I’m told.

  4. This logic finds support from NY Times columnist and Nobel-Prize-winning economist Paul Krugman who wrote in late 2009:

    Late 2009? I’m pretty sure I read that Krugman column in early 2010, and mid 2010, and late 2010, and early 2011…

  5. This country has a huge issue that must be resolved, and leaders that are unworthy of their office. I wonder if this is how people felt in the years before the civil war.

    1. No, I’m pretty sure they felt a lot sweatier- with no ac. Also, I’ve been told they felt much more racist and felt much more tooth pain.

      1. Yeah, and young men south of Mason-Dixon knew they could lick any ten Yankee ribbon clerks.

        1. Yeah, that worked out well for them.

          1. The Yankee farm boys were every bit as tough as Rebel hillbillies, and the soft handed cavaliers were no match for the scrapings of the Northern slums and factories.

            1. The confederates were outgunned and outnumbered 6 to 1.

        2. They could. Their problem was their leaders who failed to anticipate that Lincoln and his murderers henchman would take the battle to the women and children.

          1. It’s so awful to have murderous henchmen demanding that 1/3 of the population in certain states stop being enslaved.

            What’s the deal with all the Republicans and Stormfront posters masquerading as libertarians lately?

            1. Supporters of Lincoln are the stormfront folks. He chose to make war on civilians. He chose total war. That is why he was so admired by Adolph Hitler.

              Are you at all familiar with the facts of Lincoln’s regime? Apparently not.

              1. Let’s not pretend that there is some noble version of war that differs in meaningful ways from “total war.”

              2. No one who went to public school is familiar with all the facts of Lincoln’s regime. My high school history teacher was one of many who want Lincoln canonized because his fear of being remembered as “History’s greatest butcher” was just proof of his absurd humility in the face of his own perfection. To them, Lincoln freed the slaves and saved the country with no downside, just like Obama killed Bin Laden with his own hands.

                1. No one who went to public school, or even private school, is familiar with “all the facts” about any historical period or event. There are umpteen thousand books about Lincoln and historians still find something new about him to write about.

              3. “That is why he was so admired by Adolph Hitler.”

                You keep mentioning this as if it meant something other than you’re dumb enough to think it means something.

                1. It’s only freedom when blacks don’t have any.

              4. Yeah, he warred on civilians. BFD. They learned something valuable-ie don’t enslave people or attempt to create nations based on racial slavery. We should learn something for our counter-insurgency from Lincoln.

              5. I suppose slave owners weren’t making war on civilians, and Confederates never did either. Those southern gentlemen were always so gentlemanly.

              6. I suppose slave owners weren’t making war on civilians, and Confederates never did either. Those southern gentlemen were always so gentlemanly.

  6. There is, of course, a difference between tax cuts and spending. Especially, I would think, in how they impact the economy.

    Tax cuts: individuals and businesses decide how the money is allocated, presumably toward uses with greater ROI/marginal utility.

    Spending: Government decides how the money is allocated, presumably toward uses with greater political reward for the party in power.

    Although tightly targeted tax cuts blur the line considerably.

    1. Empirical evidence agrees with you. Barro’s research suggests a zero to very low multiplier (still less than 1) for spending but an above 1 multiplier for tax cuts.

      Although tightly targeted tax cuts blur the line considerably.

      I dont know of any evidence on this, but Im sure you are right.

  7. “if there are steps that in the short term may reduce the amount of cash in the treasury but in the long term mean that we’re growing at 3.5% instead of 2.5%, then those ideas are worth exploring.”

    Does this qualify as creating a new bubble?

    1. Can we afford to create a new bubble? Trying to prop up the housing one is killing us.

      1. But Krugman told me we need to create bubbles to replace old bubbles.

        1. Creative destruction! Schumpeter was right!

          Krugman, somewhat less so.

          1. All those broken bubbles! When the bubble-makers are doing well, we’re ALL doing well!

      2. Oh, that reminds me. I heard just a few minutes of a Romney speech over the weekend. The highlight I remember was his decrying the still-falling housing prices. So, yeah, just like ’08, won’t be much of a choice if he’s the GOP candidate.

    2. Except the part where it actually creates a bubble? Sure.

  8. BTW, where is Draco?

  9. The more you spend, the more you save!

    1. A penny spent on under-road tunnels for animals is a penny earned.

      1. NO! NO, NO!!! Only under-road tunnels TARGETED to rainbow colored unicorns will provide a full penney of benefits to the economy!
        And shovel ready…uh, shovels will spread the unicorn manure far and wide, causing great increases in the fertility of our farms as well as health benefits! Unicorn manure – is there anything it can’t do????

  10. tightly targeted tax cuts blur the line considerably.

    As they distort the economy in the quest for bureaucrats’ glorious visions of a better and more just society.

  11. It’s just part of the keynesian accounting identity and it’s absurd omissions.

  12. As I’m sure many here know, over at Mises Robert Murphy dismantles both Krugnuts and The Bernank on this regularly.

  13. If it wasn’t for me and the Republicans, we’d all be cycling in a perpetual revenue machine.

  14. Here’s another good example of liberals discovering the Laffer Curve:

    http://www.cato-at-liberty.org…..n-nothing/

  15. 1) Increase spending/cut taxes
    2) Something happens
    3) Everything is better.

    The failure of our two political parties to get beyond this schematic level of thinking is the reason that our political discourse is so useless. It isn’t about the broad principles in the end…it’s about the specific situation and the specific policy. As a result, we have a bunch of morons in congress posturing on vacuous positions, increasing uncertainty, and, as a result, creating a greater drag on the economy than either the tax rate or the spending levels. The anemic recovery is anemic for a lot of reasons…but it will stay that way as long as businesses have to wait on the government to set policy.

    1. but it will stay that way as long as businesses have to wait on the government to set policy.

      Which is why “get the hell out of my way” is the only acceptable policy.

    2. I don’t think the drag on this recovery is uncertainty, as such, NM.

      Its the sure knowledge that government has just gotten much bigger and more intrusive. This isn’t an unknowable future possibility. Its a cold hard fact.

      People aren’t worried nearly so much about what the State will do next, as they are scared by what its doing right fucking now.

      1. RC…

        Both are a drag on the recovery, however, the entrepreneurs I know have expressed to me directly that they are waiting until they know what Congress is going to do before hiring (or hiring back) workers. Some also mirror the concerns you express…but it is not a consistent a sentiment…based on my small sample.

      2. Actually, I agree with NM that uncertainty is a huge part of the weight on the economy now. A big part of that is the new health care laws, which no one fully understands the implications of. No one wants to risk business endeavors that they may not be able to afford under continuously changing circumstances.

      3. People aren’t worried nearly so much about what the State will do next, as they are scared by what its doing right fucking now.

        Upon reflection…I actually think I need to go farther with my response to this. RC is NOT expressing a “cold hard fact” here, he is expressing an opinion. There are many ways we can talk about how “big” and “intrusive” government is…but if we are comparing the current situation to 2008, there is not a straightforward metric that makes it obvious that government is significantly bigger or more intrusive than it was. Saying these words helps to form one side of the debate, but it remains at that schematic level which doesn’t move us any closer to a solution.

        1. Spending as percent of GDP?

          Probably the most straitforward metric on size of government.

          1. Probably the most straitforward metric on size of government.

            You can have a shrinking government that grows in relation to an even more quickly shrinking GDP, so it is not a great metric in the end.

            1. Particularly when we are talking about 2008…a government that stayed at exactly the same size would have looked like it was growing as GDP dropped.

              1. a government that stayed at exactly the same size would have looked like it was growing as GDP dropped.

                And, relative to the size of the private sector, it would have grown.

              2. Particularly when we are talking about 2008…a government that stayed at exactly the same size would have looked like it was growing as GDP dropped.

                It wouldnt have just looked like it, it would have been growing.

            2. Actually, that is why it is a great metric in the end. If GDP is shrinking, a same size government needs to shrink, in absolute $s, just as fast.

              I government that spends 20% of GDP in the US is the same size government as one spending 20% of GDP in Belize.

              So rapidly shrinking/growing GDP can radically change government size if it doesnt adjust.

              1. It is a pretty good metric for comparing across countries. Just not sure it is a good metric for comparing across time. If you did the appropriate trend analysis, it could be useful, but GDP is going to fluctuate much more quickly than size of government.

        2. there is not a straightforward metric that makes it obvious that government is significantly bigger or more intrusive than it was.

          Sure there are. Lots of them. The budget (even as a percentage of GDP). Number of pages of new laws and regulations. Enforcement actions and sanctions. Wiretaps requested and approved.

          Please, do put forward any metric, any at all, that would indicate government has not gotten bigger and more intrusive. Its a fact, not an opinion.

          1. Since you like the relative metrics…how about Executive Branch employees per 1,000 population…down to about 8.5 (about 9.1 under GWB).

            But…that really doesn’t capture “the size and intrusiveness” of the government much better. You could go with an absolute number of federal workers and end up with in increase.

            1. The point being…the size of government is a complex construct that, when simplified to a single metric or a bumper-sticker, doesn’t lead to straightforward policy decisions.

      4. Its [sic: it’s; it = the drag on the economy] the sure knowledge that government has just gotten much bigger and more intrusive.

        Focusing on the bolded portions of the statement…these are the opinion of RC Dean. As I stated in my first response…while I have talked to business owners who agree with him…more of them don’t seem to be thinking along these lines. They are not “sure” that government has gotten bigger. They aren’t so aware of it being “much bigger” and “more intrusive” that this even came up in our discussions. While uncertainty over policy always comes up. Again…based on the sample of my friends who own businesses.

  16. Which is why “get the hell out of my way” is the only acceptable one possible policy.

    1. Let’s hear another that doesn’t require a government of philosopher-princes.

      1. I wont even go that far. Its the only one that doesnt lead to the government changing policy back and forth.

        It could be argued that “get the hell out of the way” is a policy that wouldnt be perpetual, but that wouldnt be the hell out of the way then.

  17. Let’s hear another that doesn’t require a government of philosopher-princes.

    You realize that “get the hell out of my way” is one of those overly schematic, yet ultimately vacuous positions I am complaining about, right? It fits under the phrase “not even wrong” as there is not enough content or specificity to move the discussion forward. Libertarian principles are essential to shaping sensible policy, but they are not, in themselves, policies. Getting past the principles to the policy takes more work. Our current politicos don’t want to do the work or shaping principles into workable policies. It seems.

    1. While Im not an anarchist, are you saying that anarchy wouldnt be a policy?

      The policy from that principle seems pretty straight forward.

      To me “Get the hell out of the way” as principle is almost as easy to get to policy as anarchism…How about an amendment (to steal from #1): Congress shall make no law regulating nor taxing business.

      Kind of takes it out of the legislatures hands going forward (not that it totally works, see the first amendment).

      1. While Im not an anarchist, are you saying that anarchy wouldnt be a policy?

        Yep. It would be a, what, delusion? 😉

        1. It would be a bad policy, but a policy none the less.

          1. A policy of whom?
            Who would make the policy?
            Who would enforce the policy?
            A policy entails a policy making institution.

  18. but they are not, in themselves, policies.

    bzzzzzt

    You’re looking at it upside down. The Market (evil, evil market) is not and ultimately cannot be driven by any sort of top-down “policy”; it is merely the aggregate result of billions of individually made decisions. Getting politicians the fuck out of the way allows those decisions to me made.

    “The market” is merely shorthand for life.

    1. That is an area I agree with Rand: those who are anti-market are anti-life.

    2. market) is not and ultimately cannot be driven by any sort of top-down “policy”

      Driven,no. Shaped, certainly. Shaped for the better, debatable.

  19. Nobody with any sense wants to hire additional employees without having a reasonable estimate of the marginal cost of those new hires.

  20. http://www.theatlantic.com/bus…..ry/241366/

    Not paying for stuff is something that politicians of either party can agree upon…

    1. The chart there reminds me of an idea I had for the estate tax: 50%* tax rate until your share of the national debt is reached, 0% above that.

      So, if we are at ~46k, then your max death tax would be 46k.

      *or whatever, it can be 100% or 10%. I prefer I reasonably high number so that most people would pay at least part of their share and a significant number would pay all.

  21. Just last week I was parodying the President as believing that “spending pays for itself.” Now it isn’t parody.

  22. NM, I think that uncertainty tends to be “top of mind” because its what people are worrying about. All the burdens that already in place have been dealt with, in some way, so they aren’t as worrying.

    That doesn’t mean they aren’t a bigger drag on the economy, though.

  23. for fear of being cast as the left equivalent of Arthur Laffer.

    There is stronger evidence that the laffer curve works then there is evidence that stimulus spending works.

  24. en there is evidence that stimulus spending works.

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