Quote:
Originally Posted by TexTushHog
CaptMidnight, you didn't answer the question: "what would you use in place of time-series/cross-section analysis?"
We're waiting.
|
I would simply take a look at history.
In virtually every instance where policymakers have pushed marginal income tax rates to very high levels, most of the anticipated revenue increases never materialized. In many cases, revenue
fell relative to what analysts believed it would have been had a lower top rate been chosen. Back in post #25, I noted concern about that very thing.
In the next post, you said (regarding very high tax rates) this:
Quote:
Originally Posted by TexTushHog
It didn't work too badly here. Our top rate was 80% for years and years. From 1941 to 1963 it was over 80%. From 1964 to 1981 it was 70% or more. And from 1982 - 1986 it was 50%. But 1941 to 1963 were very prosperous years for the U.S. and especially prosperous for the middle class.
|
One of the reasons it "didn't work too badly" here was that hardly any fairly wealthy individual paid tax at a rate more than a fraction of the statutory top-bracket rate. Prior to the 1986 rate reduction/loophole closing policy changes, it was extremely easy to shelter large portions of your income, or in many cases virtually all of it.
But I think the main reason the economy was healthy for a number of years in the post-WWII period was that we were a manufacturing and exporting colossus with about half the world's GDP. Most of the industrial capacity of what would have otherwise have been our global competition had been blown away, and we had not yet begun the processes of deindustrialization and offshoring that began in the 1970s and accelerated later.
And frankly, I can't see how time-series cross-section analysis could possibly be of much use in modeling behavioral responses to tax increases. Equity and fixed-income strategists sometimes get their research assistants to model various things, but it often doesn't work too well there, either. Although I love the beauty of rigorous mathematical models that can get you to the truth regarding an issue, I simply don't think it works here.
It's a little like the macro demand models so many people rely on. It's just amazing what people come up with. Christy Romer's estimate of the extent to which the unemployment rate would decline if the $825 billion stimulus package was passed may have been based on any of a number of different models a lot of people were producing at the time. Inputs of government spending were expected to generate a specified quantity of new hires, no matter how uselessly or wastefully the money was spent. Research by Harvard's Robert Barro and others shows that if you do not alter sustained patterns of production, all you achieve is a slight sugar high for the economy while you are spending all the extra money, and then the economy slows down again after you reduce the spending, leaving you with nothing of value and more debt. That's why it was critical to spend the money on something useful, such as infrastructure that we actually need.
Regarding the World War II issue, I understand why people think it's what got us out of the Great Depression. That's what virtually all of us "baby boomers" were taught in school. Up until the last ten years or so, I believed it myself.
Harvard economist Ken Rogoff has done some of the best research on financial crises, and I highly recommend his excellent book
This Time is Different: Eight Centuries of Financial Folly.
Early in our recent financial crisis, he recommended a very aggressive monetary response (which we had, of course), but counseled against what he referred to as a "panicked fiscal surge." He was especially dismissive of the effort when he saw how wasteful it was.
Here's a short (less than 2-minute) clip from a debate Rogoff had with Krugman, where the latter said that if we feared we were about to be invaded by space aliens and threw trillions of dollars into gearing up to defend ourselves, all that spending would finally get us out of our slump.
http://www.youtube.com/watch?v=zFEmlgfEGYo
You can see that Rogoff was not very impressed with that idea, pointing out that our situation now with the huge debt overhang is a different sort of animal.
Another interesting thing about the issue concerning the economy and WWII is that the late Paul Samuelson, one of the most famous Keynesian economists in history, said that when we sharply reduced spending after the end of the war (to about 10% of GDP at one time) we risked going back into a depression worse than the one in the 1930s. Keynes himself, before he died in 1946, responded to those who said we needed to continue high levels of spending to sustain the economy by insisting that deficit spending should always be a
stricly temporary measure.
It's amazing to me that so many academic economists, even famous ones, seem not to understand Keynes's work and his legacy.
So many of them have been so wrong about so many things for so many years that I believe you should take anything said by an academic economist with a grain of salt.
Simple Fact
