February 25, 2004
Kevin's Continuing (Mis)Adventures in Economics: Part 6
I think this is the sixth post, but if it isn't, what the Hell its a good enough number to start at.
Anyhow in this post, Kevin spots something Greenspan noted about the deficit,
admitted that the size of the deficit made it unlikely that spending cuts alone would be sufficient to accomplish the task. And he said it was unlikely that the United States could "grow its way" out of its budget deficits solely with an expanding economy, a solution often promoted by conservatives.
Kevin then with penetrating insight then asks,
Hmmm, let's see. Spending cuts won't do it. Economic growth won't do it. So what's left?
Kevin then answers his own question,
Oh yeah, repealing Bush's tax cuts. Funny how he just hates to admit that even though he's left no other mathematical alternative, isn't it?
Apparently the idea of economic growth and cutting spending didn't occur to Kevin.
Another interesting problem. I can't seem to find the quote Kevin has highlighted in the article he links too. Maybe Kevin meant to link to this article instead.
I gotta tell ya' its pretty scary how people will take the word of guy who can't get the right link, or see another answer that is rather obvious.
Furthermore, Kevin is also misleading in that he doesn't provide much of the context for what Greenspan's comments apply too. It isn't just the current deficit. Sure its pretty big, and yeah it isn't going to go away anytime soon. However, what really has Greenspan worried is 2008. That is when the Baby Boomers hit age 62, and will probably start leaving the economy. In the few years later the Social Security Trust Fund will stop running a surplus and drawing down on its bonds. This will automatically trigger an increase in the deficit or an increase in taxes...a big increase.
And why is Greenspan reluctant to raise taxes? Increasing taxes tend to reduce economic activity. Reduced economic activity means that you'll have a smaller tax base, and could end up decreasing taxes. The Laffer curve is indeed real no matter how much those on the Left wish it weren't. Simply raising taxes willy-nilly runs the very real risk of reducing tax revenue and putting you back right back were you were or even worse.
Look at the linked graph of the Laffer curve. Notice that save for the peak you there are two tax rates (one high and one low) that yield the very same tax revenue. If we are currently on the left hand side of the curve, raising taxes will at first increase revenues. But if you keep raising taxes, you will start down the right hand side of the graph and eventually get right back to the revenues you had when you had the deficit. Factor in the largely accepted projections that we will face dramatically increasing Social Security and Medicare costs, if you keep raising taxes you'll eventually be worse off.
Now it may not happen right away, but these Baby Boomers aren't going anywhere, except to leisure world. Some of our most skilled workers will be leaving the work force in large numbers soon and replaced by a smaller number of workers. Further, they will be drawing down on their savings. Factor in the fact that economic booms have been decreasing in their magnitude (i.e., the peaks have been declining while the troughs have been holding steady meaning average economic growth is declining) and you get a recipe for decreasing economic growth for the future.
So, you have an economy whose growth rate appears to be slowing, the prospect of dramatically increasing costs due to massive demographic shifts (for which we can do little about save change the policies--which I might add guys like Kevin Drum will immediately demonize people for suggesting), and possibly increasing taxes and you've got a pretty grim looking future ahead.
Greenspan, whose knowledge of economics undoubtedly runs much deeper than Kevin's knows this too,
"I'm just basically saying we are overcommitted at this stage," Mr. Greenspan added. "To the extent we try to resolve the overcommittment on the government side by raising taxes, we are risking lowering the rate of growth in the revenue base."
In short, Mr. Greenspan realizes something Kevin doesn't. The U.S. economy is not a bottomless well form which to get more and more money for the programs he so cherishes. Increasing taxes may work in the short run, but with the long term projected budgetary short falls it is not a long term solution.
Posted by Steve at February 25, 2004 09:37 PMRemember, Kevin's preferred candidate thought progressive taxation was one of the tenets that this nation was founded on.
I know I frequently confuse the Declaration of Independence with The Communist Manifesto.
Posted by: Ron on February 26, 2004 07:00 AMBingo. I actually forgot about that...even though I blogged on it.
Posted by: Steve on February 26, 2004 08:37 AMI pretty much never read CalPundit, but, for a guy who is the spitting image of Niedermeyer from Animal House, he sure goes out of his way to broadcast ridiculous opinions.
Posted by: Nick on February 26, 2004 09:45 AMChicagoBoyz had a topic where the article posted said the US was going to increase population by 100 m in the next 25 or 50 years, can't remember which.
Won't this help?
Posted by: Sandy p. on February 26, 2004 09:58 AMYa know, I've been mulling over this 'taxation without representation' thing; and I've been thinking that if the rich are taxed at a higher rate, shouldn't they be given a higher rate of representation? How do you think that would fly over at Kevin's?
Posted by: Ron on February 26, 2004 11:12 AMLike a lead balloon.
Posted by: Steve on February 26, 2004 12:14 PMTo the contrary Steve, they wouldn't actually understand Ron's point.
Posted by: Robin Roberts on February 26, 2004 12:52 PMHmmm...you could be right Robin. I do try to avoid reading their replies generally speaking.
Posted by: Steve on February 26, 2004 12:54 PMSure they would: The rich should get more power, in order to screw the poor.
Mind you, that's not what Ron is actually saying, but that's how it will be interpreted.
Amusingly, these are probably the same people who applauded Finland's policy of charging speeders who are rich more than speeders who are poor.
Posted by: Dean on February 26, 2004 12:55 PMWell, Dean, that would kinda be what I was saying :-) I have this mean streak...
But if you have an idea that I can twist that into, I'd give it a whirl next time Kevin goes off on the dire need to tax the rich.
Posted by: Ron on February 26, 2004 01:05 PMSteve,
I think the most telling thing you pointed out was that the most skilled and experienced workers are going to start retiring soon. Given how healthy and youthful a present day 65 year old is compared to even 20 years ago, given how our economy will need workers, and given the demographic time bomb social security is, why is it unacceptable to suggest raising the retirement age?
I am far to lazy to figure this stuff out myself, but imagine what those projected deficit charts look like if the retirement age went to 71 by, say, 2016.
Posted by: Pete Harrigan on February 26, 2004 01:33 PMSteve- You called it right. Greenspan is concerned about the demographic problems posed by Social Security (and Medicare, although I don't beleive he opened that can of worms in his testimony.) Past comments also indicate his concern for our low savings rates. Don't worry too much about Kevin. He either doesn't understand the dynamics of the SS problem, or as sounds more likely, just wants another reason to pound the table for more taxes.
As an aside to sandy p on population: The only increase in population that helps is the part that are net payers into the social welfare system, which means workers making at least 75% of the median income or more. Unskilled and entry-level workers are either no help or net drains themselves on the system. Europe is going to find this out the hard way. Their birth rates have been lower than replacement rates for some time, and are going to hit the demographic wall on social welfare sustainability before we will. To make up for their own declining populations through immigration, they will have to attract skilled workers. In the meantime, their current inability to assimilate their immigrant populations is leading to massive social instability.
Posted by: Dave Sheridan on February 26, 2004 04:54 PMWhat Greenspan really is looking at is what Einstein called the most powerful force in the universe - compound interest.
Properly put, it means that percentages of economic growth over time produce an exponential equation with regards to tax revenue, while fixed government payouts are stuck to a generally linear equation.
He expects (generally linear) cuts now and continued (exponential) economic growth to massively change the equations later.
The alternative, which is to raise revenue now through higher taxes, is genrally at best a roughly linear proposition. It runs the risk of squishing the exponential factor of economic growth.
Thus, Einstein was not only smarter than Kevin Drum, he's apparently the inspiration for Mr. Greenspan.
Posted by: Kieran Lyons on February 26, 2004 09:10 PMAnother thing I need to take up over at Kevin's, his complaining about corporations taking up off-shore tax shelters combined with his deriding the Laffer curve.
So many topics, so little time...
Posted by: Ron on February 27, 2004 08:28 AMThe basic fact is that Kevin Drum is just a blithering moron.
He rants about the current deficit which is projected to be about 4% of GDP. Policies that lead to this are "insane".
Then when talking about Social Security suddenly 4% of GDP is no longer a huge sum, and neither is 7%.
The guy is about as intellectually honest as a young earth creationist and a snake oil salesmen rolled into one.
Posted by: Steve on February 27, 2004 10:51 AMIt should be at about this time where I again defend Mr Drum. However, I have decided from my most recent argument over there that the bulk of his commenters are pin headed idiots that don't have 2 brain cells to rub together. And if Kevin draws a crowd like that...
I think a reasonable man could simply take the opposite stance and be right most of the time (I assume they will get lucky every now and again).
My mood will improve and I will go argue again. But right now, I need a dose of sanity, logic, and internal consistency.
On the other hand, maybe I shouldn't bait them so often...naw.
Posted by: Ron on February 27, 2004 11:31 AMI'm working my way down through your blog, when I suppose I should be working my way UP.
My bad. Nonetheless, as a non-reader of Kevin Drum, I wish you'd all quit bashing him -- because it adds nothing to my understanding of the situation.
For instance, I don't see where in the Greenspan article linked, he substantiates the conclusion that economic growth "and" cutting spending would solve the problem.
Also, I would like you to address the concern that "raising the age of social security given the increases of longevity" might not address the concerns of lower socio-economic populations who, not too far into the future, aren't going to live long enough to reap the benefits of a social security system into which they've paid for several decades.
Do you have data on the death rates of: blacks, hispanics, native americans, poor people? I imagine they are beset with issues of hypertension, diabetes, alcoholism, etc. One can argue that some of it is genetic, some of it life-style. None the less, many -- many -- of these people have paid into a social security system promoted as providing them with a poverty-level sinecure in their retirement. Now it looks as if the age of retirement is going to be pushed past the age of death for many of them. Certainly, any meaningful age to enjoy their "retirement."
Yet many wealthy Americans are going to reap social security benefits who don't need it, if means testing was in place. Certainly many Americans who have reaped the benefits of better health care, and thus longevity.
Really, I am not a "lefty" person, but the "push them out of the life boat" mentality on this blog is a bit unnerving, especially given the SS bill of goods sold to Americans for so long.
I am 41. My husband is 42. I don't imagine SS is going to be available to us when we "retire," despite the fact that we have paid tens of thousands of dollars into it.
Posted by: cj on February 27, 2004 11:03 PMcj says
I wish you'd all quit bashing him
I usually don't bash Kevin. I like to argue over there, 2 reasons: I learn a little about how the left views things, and I can always get into an argument (I like to argue, go figure).
I've spent a nice, calm weekend, and I'm back to enjoying myself arguing over at Kevin's today.
Posted by: Ron on March 1, 2004 08:17 AM