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  • “We cannot count on problems elsewhere in the world to make Treasury securities a safe haven forever.”

    Posted by Jonathan on September 17th, 2012 (All posts by )

    The Magnitude of the Mess We’re In:

    The fixes are blindingly obvious. Economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation and education reform. The need is clear. Why wait for disaster? The future is now.

    Worth reading.

     

    8 Responses to ““We cannot count on problems elsewhere in the world to make Treasury securities a safe haven forever.””

    1. Joe Citizen Says:

      “Economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base,”

      Given the history of this country, at least over the past century or so, would you not agree that the empirical evidence (lets leave the purely theoretical stuff aside) demonstrates that if we wish to hit the fiscal and economic sweet spots – lets say, an actual surplus in the federal budget, existing within an era that manifests the longest economic expansion, and greatest wealth creation in history – that the solution is the tax structure that came into being with the Clinton ’93 tax plan? And that was, unfortunately, blown up by his successor, leading to deficits once again, and mediocre growth?

    2. Andrew_M_Garland Says:

      The 1993 Clinton Tax Increase Did Not Lead to the Budget Surpluses of the Late 1990s
      By Daniel Mitchel
      === ===
      [edited]  Proponents of higher taxes claim that Bill Clinton’s 1993 tax increase was a big success, citing budget surpluses that began in 1998.

      This is not supported by the data. In February of 1995, 18 months after the tax increase, President Clinton’s Office of Management and Budget projected deficits for the next five years under existing policy (a “baseline” forecast). OMB estimated that future deficits would be about $200 billion and would slightly increase over 5 years. The Clinton Administration admitted that it did not expect a budget surplus, with numbers in agrement to the OMB.

      Why was there a surplus in the late 1990s? The OMB’s Historical Tables reveal that this was the result of genuine fiscal restraint. Total government spending increased by just 2.9% over a four-year period in the mid-1990s. This restraint produced the surprise of big budget surpluses.

      In addition, [a Republican controlled] Congress and the White House agreed on a fairly substantial tax cut in 1997.
      === ===

      So, tax increases didn’t work as expected, but spending restraint, debt reduction, and a tax cut produced a surprise surplus and increased prosperity.

    3. Jonathan Says:

      would you not agree…

      I would not agree. The late-’90s surplus was largely a consequence of a windfall in tax collections that resulted from the tech boom, which itself took off in 1997 after Congress cut the capital gains tax rate over President Clinton’s objections. the govt surplus was wasteful as it diverted scarce capital from productive investments, with average returns at the time probably in the double digits, into paying off low-interest govt debt. It would have been better for the federal govt to run a balanced budget, or even better a moderate deficit, to maximize the amount of investment capital that was available to entrepreneurs. It would have been better still to cut overall govt spending, flatten and cut income tax rates and eliminate taxes on capital and corporate income.

      The Clinton ’93 tax plan, by contrast, proposed to substantially raise tax rates and contributed heavily to the Democrats’ loss of 50+ House seats in the 1994 elections. The economy didn’t strengthen until the Republican-controlled House took office in 1995, effectively blocking further tax increases, and the economy really took off after the 1997 tax cuts. Your argument is therefore not merely wrong but actually gets things backwards. Most of the ’90s success was due to Republican-supported tax cuts and divided govt — IOW despite Clinton rather than because of him — with the exception of some policies such as NAFTA for which he deserves credit.

    4. Michael Kennedy Says:

      “that the solution is the tax structure that came into being with the Clinton ’93 tax plan? And that was, unfortunately, blown up by his successor, leading to deficits once again, and mediocre growth?”

      This is what faces us if Obama is re-elected. Totally the reverse of economic theory.

      Sorry to recognize a troll.

    5. Joe Citizen Says:

      “The late-’90s surplus was largely a consequence of a windfall in tax collections that resulted from the tech boom”

      Which was taxed at the rates in place thanks to the Clinton plan – at least the income taxes. This does not contradict my point.

      “which itself took off in 1997 after Congress cut the capital gains tax rate over President Clinton’s objections”

      Are you seriously claiming that the internet boom would not have happened were it not for an 8 pt drop in the cap gains rate?

      “.. the govt surplus was wasteful…”

      That is a separate question, whether surpluses are desirable. I was going on the assumption that at least a balanced budget was a relatively good thing. Perhaps that is an argument for later…

      “The Clinton ’93 tax plan… contributed heavily to the Democrats’ loss of 50+ House seats in the 1994 elections.”

      Certainly plausible, but hardly the point. I am sure you would readily agree that the voters don’t always get it right.

      “The economy didn’t strengthen until the Republican-controlled House took office in 1995, effectively blocking further tax increases,”

      First off, there were no additional tax increase on the table. Secondly, the recovery began well before 95. GDP rates:

      1993 – 0.7%
      1994 – 4.1%
      1995 – 2.5%
      1996 – 3.7%
      1997 – 4.5%
      1998 – 4.4%
      1999 – 4.8%
      2000 – 4.1%

      And no, there was no turbo boost after 97. Just a continuation.

      And of course, there is also the contrast with what happened after 2001 when the Republicans cut taxes (decreased revenues, then deficits) compounded by two wars that were put on the credit card.

      Or shall we go back to the greatest fiscal disaster of all? Ronald Reagan who managed to triple the national debt in just 8 years, thanks to his economic theories? (and yeah – even your worst nightmares about an Obama second term would just manage to double the debt).

    6. Andrew_M_Garland Says:

      Clinton’s tax remark
      10/19/95 – New York Times

      === ===
      Speaking at a campaign fund raiser in Houston, Mr. Clinton said: “Probably there are people in this room still mad at me at that budget because you think I raised your taxes too much. It might surprise you to know that I think I raised them too much, too.”
      === ===

    7. elf Says:

      The Budget surpluses of the 90s disappear if you count social security being raided for $825 Billion.

      The Ruling Class rules according to it’s needs, and they’re doing just fine. More of us on welfare is not a problem for them, it’s a benefit.

      It’s a waste of oxygen by old men to speak reform to this bunch, or indeed any government after Bush the Elder.

      For their sense of duty is to themselves. When Bush 41 raised taxes it was out of a sense of duty [however mistaken].

      We have Noblesse Sans Oblige. And corrupt to their very marrow. Stop wasting your breath talking about reform. They couldn’t if they wanted to, and they don’t.

    8. Death 6 Says:

      Any sustained economic growth above 3% is a turbocharged growth rate. The period of the middle to late 90’s was significantly fueled by 1) the innovative application of communications and information technological development, 2) a slowing of government spending (mostly defense cuts, to our later peril), 2) increased specialization and international trade (NAFTA and other reduction in trade barriers), welfare reform that increased both the opportunity and incentive to be productive), modest deregulation (Chaired by ALGORE) and stable tax expectations and a huge cut in capital gains taxes that provided the ability to invest in the new technologies. The budget surpluses were not harmful, in fact they redirected tax money back into capital markets as the government bonds were paid off crowding in. We currently are not only taking over a trillion dollars a year out of current saving by running these deficits, we are also keeping another 16 trillion tied up in our accumulated national debt.

      The cheap shot at Reagan is a revisionist view of the dynamics of the 1980’s. Marginal tax rates were so steeply progressive that they were unsupportable of economic growth above population growth in the long term. Reagan wanted to modernize our defense forces (stuck in the 1950’s technology) and he wanted to create the conditions of robust economic growth (at least 3.5%). In order to get the defense funding and significant tax reform he wanted, he had to agree to leave major parts of the entitlement domestic programs intact. His initiatives on the supply side (you recall, Voodoo economics as per Bush Sr.) of the economy (free trade, welfare reform, deregulation and tax reform) were the catalyst for the tech revolution of the 90’s and his defense and foreign policy resulted in the opportunity to cut defense after the principal threat withered. Too bad Bush Sr. and Clinton had no clue what was essential and what was excess. They had help from congress in getting it mostly wrong. I don’t say everything Reagan did was ideal, but his pragmatic actions were instrumental in setting up the opportunities for the 90’s. It was a democratic congress so they passed those deficit budgets. He didn’t get everything, maybe not even most of what he wanted, but he was able to get some significant policy passed.

      Yes, we ran some large deficits. One of the challenges of supply side policy is that they present short-term costs with primarily longer-term structural benefits. Demand side fiscal and monetary policies have a more immediate effect on both sides of the equation and on balance is generally harmful based on timing, political abuse incentives and crowding out of investment leading to slower long-term growth.

      If you want to point to the 4.1% growth in 1994, that number for one year in recovery is actually not unusually high when unemployed resources are abundant, note the lag the following year- running out of stream. Then it picks up and sustains over 4% for several years. In today’s economy we have primarily a supply side problem. Unprecedented massive fiscal and monetary stimulus, continued threat of and implementation of bad supply side policies (threats of higher marginal tax rates, higher capital gains, death tax; impending higher health care taxes/costs, regulation explosion, lagging free trade agreement implimentation, moving away from welfare reforms), unstable international situation impacting energy and resource availability as well as a national track record of discouraging domestic hydrocarbon supplies are guaranteed to continue to cripple our economy. While some of this is largely beyond our internal control, we are systematically compounding it by perverse domestic and foreign policy.

      The same adverse external influences represent our greatest window to use appropriate policy to give us our greatest ever opportunity to succeed while others flounder in their progressive, Keynesian death spirals. Growth coming out of this economic malais is huge because the ir has seldom been as many available unused or under used resources. There is no excuses for this tepid “recovery”. It is the direct result of the uncertainty in and increasing impediments to the productive sector caused primarily by current policy.

      The crossroads we face is between these two divergent courses of action: continued growth of the redistributive welfare and centralist state with intergenerational borrowing and consequent lower material standard of living and involuntary national social action resulting in group identity and conflict or a course of minimizing government growth and power with increased conditions for economic growth, individual opportunity for productive self-reliance and subsidiarity social community identity and unity. I don’t know if Romney is up to implmenting the second course in a timely and effective manner, but I know who won’t.

      Mike