Mike the Mad Biologist

It never ceases to amaze me just how little some people actually understand about taxes, given how het up we get about taxes. We saw this before, when Obama unveiled his tax plan. Now, Mitch Albom gets into the act, incorrectly calling the increase in taxes on the wealthiest Americans a 5.4% increase:

Someone making $1,000,000 per year wouldn’t pay $54,000 more in taxes under this bill. They’d pay $9,000.

That’s because the 5.4% surcharge would only apply to someone’s income over $1,000,000. Your tax bill wouldn’t suddenly go up by $54,000 if one year you made $1,000,000 instead of $999,999.

Here’s how the proposed surcharge would actually work. There would be:

• an additional 1% tax on income between $350,000 and $500,000. Thus, if someone makes $500,000 per year, they would pay an extra 1% of $150,000, or $1,500.

• an additional 1.5% tax on income between $500,000 and $1,000,000. Thus, if someone makes $1,000,000 per year, they would pay an extra 1.5% of $500,000, or $7,500.

That’s $9,000 more in taxes ($1,500 + $7,500), or 0.9%.

(Now, it is true that someone making $10 million per year would pay an additional $495,000. That would consist of the extra $9,000 on the first million plus 5.4% ($486,000) on the next $9 million.)

(I think the decamillionaire will get by somehow). It’s remarkable that people think that increases in the top tax bracket are ‘retroactive’ towards lower brackets. I don’t understand the cognitive process here. And it seems to happen quite often.

How does Albom, who doesn’t seem like a particularly stupid guy, come to this conclusion?

Comments

  1. #1 Kate from Iowa
    July 27, 2009

    It’s all about the “trickle down theory”, isn’t it. Remember the hard sell they did on that? To someone of a not skeptical enough bent, or to someone who’s had that kind of crap pounded into his skull relentlessly since Reaganomics was proposed and then slammed down the throats of…well, those same poor little (superrich) victims that are (maybe) going to have to take that dinky little tax hike, it’s become The Truth Of How Things Work. (note caps)

    That it dosen’t work that way and never has dosen’t matter.

  2. #2 David
    July 27, 2009

    you assume Mitch A. doesn’t understand and is simply wrong. I think he understands just fine and is deliberately mis-stating the facts. Just like other conservative lies such as those surrounding the “death tax” and the public health insurance option.

  3. #3 Rev.Enki
    July 27, 2009

    Easy. A good 95% of “conservatives” are either liars, or amazingly fecking stupid, or both. I’m never surprised when some talking head spouts this counterfactual bullshit, particularly on the television. But I just can’t help but be shocked anyway when they *almost never get called on it.*

  4. #4 NewEnglandBob
    July 27, 2009

    Kate is correct. Ever since that nonsense od Reaganomics, people believe in foolish schemes.

    The big one is that if we cut taxes, then commerce will increase (supply side nonsense) and tax revenue will increase. I guess we should then cut taxes to zero and the federal deficit will disappear because the revenue will approach infinity.

  5. #5 Katherine
    July 27, 2009

    Nearly everyone will have to pay tax when they become a working adult (under-18s are exempt from tax in my country). But when do they teach you about how your tax system works at school? If you choose to take any kind of economics or accounting class they MIGHT teach you. Surely this should be something that basic maths classes could cover. I didn’t really figure out how tax worked until I was working. So it’s no wonder that many people never figure it out.

  6. #6 Mike Convente
    July 27, 2009

    Another side point to make is how taxes are not merely important, but essential, to a functioning government and society.

    Grover Norquist once infamously said that he “wanted to shrink government to the size that it could be drowned in a bathtub.” Well, ground-zero for that type of government is California; how’s that workin’ out for ya Grover?

  7. #7 Troublesome Frog
    July 27, 2009

    I think Katherine has it pretty well nailed. I remember a lot of discussion in high school civics about the structure of government, but I don’t remember anything at all about taxation. This seems like a crucial thing to understand as fundamentally, most of our debates on public policy involve how much of each other’s money we’re going to spend and how we’re going to collect it.

    In fact, I’ll go so far as to say that I’m far less bothered by the fact that most people can’t even name half of the sitting Supreme Court justices than I am about our general ignorance of the tax system. At least we can assume that the people on the SC are doing their jobs without our intervention.

  8. #8 R EG
    July 27, 2009

    Sadly, governments are not above exploiting public ignorance of the tax system.

    If anyone promises you a “5 % tax reduction!” you will not gain by $ 5.00 on each $100.00 you earn. It will be 5 % of the current taxation rate. So if you are taxed at 15 % it will be reduced to 14.25 %. Woo Hoo! Now ask yourself how many services you are willing to give up to save that 0.75.

    You know, really, I would much rather live on the after tax income of someone making $1,000,000/year than someone making $50,000/year. In any tax system it’s the take home that counts, and only once, in any jurisdiction, has anyone ever paid over 100 % in tax. ( In Sweden, very briefly, law was changed as soon as it became apparant that it could happen.)

  9. #9 Paul Murray
    July 27, 2009

    Sigh. It would be so much easier if it were just an equation … but Joe Average would like it even less.

    I also think that it would be nice if interest on bank accounts was calculated *continuously*. But that ain’t going to happen either.

  10. #10 QrazyQat
    July 28, 2009

    How many of these people with salaries over a half million dollars do their own taxes and accounting? Albom makes, according to Forbes, a $6 million salary. Of course he has no idea how his taxes work; he pays someone else to work it for him. The problem lies in his not understanding that he needs to ask that person how it works when it comes time for him to write about the subject. Or forgo writing about the subject he knows nothing about because he pays someone else to know it for him.

  11. #11 abb3w
    July 28, 2009

    Why don’t people understand? Humans find math difficult. Therefore, many humans haven’t learned what they need to understand such, are averse to the effort of listening when someone is willing to explain, and have trouble thinking about it even after they’ve heard.

    All of which leads to crappy understanding.

  12. #12 tegalans
    July 29, 2009

    You guys obliviously don’t see the bigger picture. Businesses follow the path of least resistance. If it is cheaper to produce in a different area then why wouldn’t they? The cost of production equates to the cost of a product. And taxes are part of the overall cost of production. The higher the price the less likely people will by it. Ex. If an Ipod is made 100% in America then it would cost 800 dollars, but since it’s parts are made all over the world it’s cost is 250 dollars. Higher cost less consumption, less consumption, less production, when there is less production there is no need for employers to produce thus unemployment goes up. Even the Senator from California Diane Feinstein has recently said that California can not compete with the cost of production of Mississippi thus she expects to lose a Toyota Plant and several thousands jobs. So if you wish to have economic growth and stop the exodus of jobs from California and indeed America, then why would you want to raise any taxes. Here’s another example: Recently the Movie Industry in Hollywood has asked the State for Tax Incentives (IE. a tax cut for a specific industry) so that they can continue to produce in that state. Taxes are just one part of the overall cost of production, but anything that can lower that cost and attract industry to America in the way that Hollywood wants to attract Movie Production must be good. Production is the key to good solid economic growth, why do you think Hollywood wants Movies to be Produced there? If tax “incentives” are good enough for the movie industry then why not for every industry. So, tax cuts can cause economic growth if it cuts the cost of production. Even Hollywood, in an ironic way, understands this.

  13. #13 Troublesome Frog
    July 30, 2009

    tegalans,

    I’m assuming that you don’t think that the optimal amount of taxes is $0. If that’s the case, at what point is the “lower taxes are good for the economy” logic outweighed by other factors?

  14. #14 tegalans
    July 30, 2009

    Yes, there are many factors in the overall cost of production like Energy, Resources, Labor, Taxes, Transportation and etc. The only thing government can do to decrease the cost of production is lower taxes. So once America becomes more attractive to companies and the Car Plant is built here instead of Brazil or the steal plant is built here instead of India then the government has done enough. It’s not so much that I want taxes lowered; I just want the cost of production lowered which can be a mix of many things not just taxes. In some cases it doesn’t matter what the tax rate is some products, do to labor cost or other factors, just can’t be built here. But nonetheless production is the key to economic growth, so the logic of “lower taxes” is to decrease the cost of production; when thing are cheaper you get more of it.

  15. #15 tegalans
    July 30, 2009

    Steel not “steal” I’m pretty sure there are other typos, so forgive me.

  16. #16 Anonymous
    July 30, 2009

    > Yes, there are many factors in the overall cost of production like Energy, Resources, Labor, Taxes, Transportation and etc.

    Agreed.

    > The only thing government can do to decrease the cost of production is lower taxes.

    Nonsense! Government has a strong impact on the cost of energy, resources, labor, transportation, etc. For example, deregulation of energy in California caused (or at least provided the environment for) energy prices to go crazy. Transportation would be far more expensive if we didn’t have public roads and interstates. The government provides plenty of other services (a legal system to enforce contracts, patent and copyright monopolies, police and fire protection, etc) which would be expensive or impossible to duplicate by private companies.

  17. #17 tegalans
    July 30, 2009

    I meant in terms of economic growth. The most effective thing it CAN do to cause economic growth is lower taxes since it directly affects the cost of production. There are things that it SHOULDN’T do because it can hurt economic growth. Like when it comes to labor it can stay out of the price, every time government raises the minimum wage tens of thousands of low income employees lose their jobs. Government can also stay out of bed with Labor Unions, any legislation that makes it easier for Unions to form translates to hundreds of thousands of jobs lost. It’s not a coincidence that Right to Work States have stronger Economic growth compared to Union States. And when it comes to the legal system Government can stay out changing contract law that have served this country for hundreds of years. Obama recently changed laws favoring Jr. Bond Holders over Preferred Bond Holders which undermines Confidence in our system and makes future investors weary of investing in struggling companies because they feel that the Government can just erase their right to being paid back first. And when it comes to energy government government SHOULDN’T create legislation that will increase the cost because Energy is a factor in the overall cost of production. But that didn’t stop the Democrats did it? In fact did you know their very action of just passing the Cap And Tax bill through the House changed the mind of a company who was going to build a Steel Plant in Louisiana, but decided instead in building in Brazil? Any action that increases the cost of Production will shift demand from American made goods to foreign made goods. First comes shift of Demand, then comes shifting of jobs. But you liberals will never understand that, if 15% unemployment in Michigan hasn’t waken you up then nothing will. Do you want to know why China isn’t in Recession? It’s because it produces. Do you want to know why Texas has 7.5% unemployment while the National is 9.5%? It’s because it easier to produce in Texas. Do you want to know why Texas has an 8 billion surplus while California has a 24 billion deficit? Because Texas’ tax rate isn’t based on volatile incomes like production taxes or income taxes.

  18. #18 Troublesome Frog
    July 30, 2009

    I meant in terms of economic growth. The most effective thing it CAN do to cause economic growth is lower taxes since it directly affects the cost of production.

    This still does not make sense. Anonymous pointed out a long list of things that the government has control over that affect both relative and absolute costs of production. Lowering taxes will lower the cost of production, it has other effects as well, some of which offset those cuts. It’s a complex feedback system, not a simple accounting equation.

    It’s not a coincidence that Right to Work States have stronger Economic growth compared to Union States.

    It may not be coincidence, but is it cause and effect? States with heavily unionized labor forces also happen to be states whose economies are based on older, slower growing industries than states whose economies are based on, say, the service sector.

    And when it comes to energy government government SHOULDN’T create legislation that will increase the cost because Energy is a factor in the overall cost of production.

    That depends. Is government’s only job to keep the cost of production low, or is part of its job to force the market to acknowledge externalities like pollution? I tend to believe that it’s the latter. Pollution isn’t free. It just doesn’t show up on balance sheets unless you force it to.

    But that didn’t stop the Democrats did it? In fact did you know their very action of just passing the Cap And Tax bill through the House changed the mind of a company who was going to build a Steel Plant in Louisiana, but decided instead in building in Brazil?

    Sounds to me like the correct policy is to add corrective tariffs to prevent the offshoring of energy intensive goods. In fact, if you don’t do that, taxing pollution is almost totally ineffective.

    Do you want to know why China isn’t in Recession? It’s because it produces.

    I wouldn’t hitch my boat to China’s booming economy too quickly if I were you. An artificially export-driven labor farm is probably not the way to go when the import-heavy economies are in turmoil.

    Do you want to know why Texas has 7.5% unemployment while the National is 9.5%? It’s because it easier to produce in Texas.

    Would that also explain why New Hampshire’s is 6.8%, Vermont’s 7.1% and states like Massachusetts, Minnesota, Hawaii, and Connecticut are all also close to that and below the national average? It’s because they’re bastions of the free market and low costs of production? Or are there more variables at work and more data points than 1 out of 50?

    Do you want to know why Texas has an 8 billion surplus while California has a 24 billion deficit? Because Texas’ tax rate isn’t based on volatile incomes like production taxes or income taxes.

    As a Californian, I would say that it’s likely that Texas doesn’t stupidly govern by direct democracy the way California does. Unfortunately, we’ve managed to make ourselves structurally ungovernable and we’re probably overdue for a constitutional convention. Tax structure is the least of our worries.

  19. #19 tegalans
    July 30, 2009

    “This still does not make sense. Anonymous pointed out a long list of things that the government has control over that affect both relative and absolute costs of production. Lowering taxes will lower the cost of production, it has other effects as well, some of which offset those cuts. It’s a complex feedback system, not a simple accounting equation.”

    Build a road; yes that will affect transportation and can help our economy grow, but the effects will not be felt over night. Once again I am stating things Government can do to help the economy grow almost immediately. (See post # 14) If government can lower the cost of production through many forms then go for it; cutting taxes does not have to be the only option. Though I don’t see how anything anonymous pointed out can cut cost. From his post I only saw sectors where government should tread softly in order not to raise prices, nothing it could really improve upon

    “It may not be coincidence, but is it cause and effect? States with heavily unionized labor forces also happen to be states whose economies are based on older, slower growing industries than states whose economies are based on, say, the service sector.”

    I argue that those industries can not innovate due to restrictions imposed by Labor. Ex: Ford Motor Company built a revolutionary production plant in Brazil that can help them make cheaper cars. The UAW won’t let them build such a plant in America. I see Texas growing not just in the Service Sector, but in Many areas, such as technology, manufacturing,and medical research. If Conservationism is flawed then why in 2007 53% of all Jobs created in America were created in Texas and then again in 2008 70% of all jobs created were in Texas? I don’t believe all of those were in Wal-Mart and McDonald’s. Oh, and remember the energy sector has been hit hard by the price collapse, so don’t say it’s because of oil.

    “That depends. Is government’s only job to keep the cost of production low, or is part of its job to force the market to acknowledge externalities like pollution? I tend to believe that it’s the latter. Pollution isn’t free. It just doesn’t show up on balance sheets unless you force it to.”

    Defiantly a tough argument, no one wants mercury and lead in their water supply. But when I look around the world the poorest nations are the most polluted, the wealthier the cleaner. Now the question is is that because of government regulation and mandate or were we able to innovate because of our wealth creation? Remember, wealth can only be made by production. So I don’t have a answer for that argument, but I do know that any action must be measured and should not drastically raise production cost which is what the Cap and Trade bill will do.

    “Sounds to me like the correct policy is to add corrective tariffs to prevent the offshoring of energy intensive goods. In fact, if you don’t do that, taxing pollution is almost totally ineffective.”

    I cringe every time I hear something that sounds like protectionism. Tariffs? Haven’t we learned from the history
    of the Great Depression? The intent of tariffs are to hurt the other guy, but math has proven that it actually hurts us. You can increase the price of imports but that only forces people to spend more money, essential giving the people less buying power and making them poorer. Perhaps we could build Nuclear Plants, it solves that “Carbon” Problem and keeps energy cost low.

    “I wouldn’t hitch my boat to China’s booming economy too quickly if I were you. An artificially export-driven labor farm is probably not the way to go when the import-heavy economies are in turmoil.”

    Labor Farms? I’ll have you know that China is seeing a huge growth in Middle Class. But what’s your solution? Borrow the money to maintain our standard of living or make the money through Production?

    Let’s break this argument down. In order to grow the economy you need money. Standard of living is dictated by wealth. The more money we have the faster our economy grows and the higher our standard of living becomes. There is only one sustainable way to make money and that’s by exchanging a good or service for it. So to make money we need to produce a good or service of good quality and “competitive price” Do you agree? How do you think we grow the economy? Explain to me how government taking any action that makes it harder to produce helping our economy grow.
    If tax cuts are good enough for the liberals of Hollywood then why isn’t it good enough for other Industries? I may be just one factor, but the Movie Industry thinks it’s a big enough factor to ask for it.

  20. #20 Troublesome Frog
    July 30, 2009

    Build a road; yes that will affect transportation and can help our economy grow, but the effects will not be felt over night. Once again I am stating things Government can do to help the economy grow almost immediately.

    The other way the government can grow the economy almost immediately is to increase spending, provided that increase is not completely offset by short-run tax increases. Remember, GDP = C + I + G + NX.

    Then the question we should be asking ourselves is, what do our current circumstances and long-run circumstances dictate? I would argue that in a (rare) situation like this one, they dictate an increase in government spending and a suspension of tax increases.

    Though I don’t see how anything anonymous pointed out can cut cost.

    Infrastructure is an input. Investment in infrastructure is a way of increasing short run fixed costs across the board for long run decreases in marginal cost of everything. Further, government has a place in making sure that markets remain competitive and innovative, which is not something that comes naturally to certain types of markets. That’s how.

    Ford Motor Company built a revolutionary production plant in Brazil that can help them make cheaper cars. The UAW won’t let them build such a plant in America.

    Let’s hear the full story. A link would be great.

    I see Texas growing not just in the Service Sector, but in Many areas, such as technology, manufacturing,and medical research.

    With the exception of manufacturing, those are the industries I was referring to. Modern high growth industries that have nothing to do with unions one way or another. States that are heavily unionized tend to be heavily manufacturing based. That’s the confounding variable I was referring to. As to manufacturing growth in Texas, I’d like to see numbers before I believe it.

    If Conservationism is flawed then why in 2007 53% of all Jobs created in America were created in Texas and then again in 2008 70% of all jobs created were in Texas?

    You’ve taken one data point and drawn a line through it. From June of 2008 to June of 2009, the unemployment rate of Texas nearly doubled. The number of jobs created is a noise variable in that case. The lost jobs (and lots of them), just like everybody did. If your thesis is as strong as you suggest, how do you explain the data about the crazy liberal states I pointed to? The reality is that the pattern you’re attempting to see in the data simply isn’t there.

    But when I look around the world the poorest nations are the most polluted, the wealthier the cleaner.

    There’s a reason for that: The poor nations are at the “pre-pollution regulation” stage of their development. The wealthy nations aren’t. They have put those regulations in place. You’re correct that the reason they do it is because they’re wealthy enough to do so. What I don’t see is the argument that somehow the US falls into the category of “too poor to regulate its pollution.”

    So I don’t have a answer for that argument, but I do know that any action must be measured and should not drastically raise production cost which is what the Cap and Trade bill will do.

    Let’s see your numbers.

    I cringe every time I hear something that sounds like protectionism. Tariffs? Haven’t we learned from the history of the Great Depression?

    A carbon tariff has nothing to do with protectionism. Its purpose is not to grow the local economy. The purpose is to make sure that we pay the price of carbon. Taxing pollution locally makes no sense if we’re just going to “import” it. If you tax carbon $1 and a person can save $1 by importing, they’ll import and you won’t make a dent in carbon. If you tax the import of carbon $1, the incentive goes away and the production happens wherever it would have happened in the absence of a carbon tax. You either do both or neither. Doing just one is dumb.

    Labor Farms? I’ll have you know that China is seeing a huge growth in Middle Class.

    That’s not relevant to my point. China has insufficient local demand to keep its economy “booming” if the first world nations suffer from a collapse of demand. They live and die by exports. Don’t expect them to be a shining beacon of property in that case.

    But what’s your solution? Borrow the money to maintain our standard of living or make the money through Production?

    I’m not sure what you’re asking. In the short run, my solution is for the government to borrow at the low rates available to it and stimulate the economy by investing in cheap infrastructure in order to get us out of our unemployment trap. In the long run, I don’t know what problem I’m being asked to solve.

    Explain to me how government taking any action that makes it harder to produce helping our economy grow.

    I think we’ve discussed this. When the government takes tax money, it doesn’t just burn it. It spends it on goods and services in the economy. The supply side sees an increase in cost and the demand side increases by an equal amount. The question is the relative efficiency of how the money is spent. For example, if we take tax dollars to spend on health care and that displaces a comparable amount of private spending on health care, the net impact is negligible.

    If tax cuts are good enough for the liberals of Hollywood then why isn’t it good enough for other Industries?

    Oooh! Liberal Hollywood bogey man! Booga booga! He’s going to get you!

  21. #21 tegalans
    July 30, 2009

    I don’t think you understand our situation. Our debt is too big, we can not continue to borrow money to maintain our standard of living. Within the next 10 years our National Debt will double, as more debt is created it’s value goes down thus to sell our T-Bills interest rates must go up. Higher Interest Rates means a slower economy. Now, you can lower Higher Interest rates by printing money but that causes inflation. We each see the world through a different lens. I see the spending of the 1930′s as causing the problem to last a Decade. I see Japan’s spending causing their lost decade. Answer my question though if tax “Incentives” will benefit the Movie Industry and create jobs in Hollywood then why can’t it be applied to other Industry. I think the only way to bring jobs back to America is to give an “incentive” to all industry. But what ever right, Obama won and the Democrats control Washington. My opinion is irrelevant; time will prove me wrong or right. Though I still don’t understand how anyone can dismiss 20 trillion dollars in debt and 50+ in future liabilities as a stable economy ripe for economic growth.

    Oh here are my numbers; a study by MIT states that the average increase per household would be 3,100 dollars a year, of course that’s before rebates (ah rebates, a way to buy your vote)

    Also watch this video from Obama on youtube watch?v=BqHL404zhcU

  22. #22 tegalans
    July 30, 2009

    “I think we’ve discussed this. When the government takes tax money, it doesn’t just burn it. It spends it on goods and services in the economy. The supply side sees an increase in cost and the demand side increases by an equal amount. The question is the relative efficiency of how the money is spent. For example, if we take tax dollars to spend on health care and that displaces a comparable amount of private spending on health care, the net impact is negligible.”

    So the supply side sees an increase in cost. Well that’s my point. But the demand side does not increase to offset the increase in cost. We are a global economy based on imports and exports. Demand shifts, while our government may spend tax dollars on American made goods increasing demand a little foreign consumers will see the increase in price and buy from someone else. So the demand for our products will go down if no one outside of America buys from us. So let’s say that increase demand from the American government offsets the loss of demand from foreign consumers, thus demand remains constant, the price would still go up thus hurting production.
    You’re argument relies that demand will go up overall to compensate for the increase cost, but it cannot go up overall because we’ll lose foreign demand.

  23. #23 Troublesome Frog
    July 30, 2009

    I don’t think you understand our situation. Our debt is too big, we can not continue to borrow money to maintain our standard of living.

    Well, you cannot continue it *indefinitely* for sure. Actually, you can, but just not at the rate we’re doing it. That’s a long term concern, though.

    Within the next 10 years our National Debt will double, as more debt is created it’s value goes down thus to sell our T-Bills interest rates must go up.

    I’m not suggesting that we borrow for 10 years or more. I’m suggesting that we borrow now. What has happened is the supply of loanable funds for private industry (that is, the demand for private debt) has dried up and been replaced with enormous demand for government debt. One way to look at this operation is that we are taking the cheap loanable funds in the form of public debt and using them to spend on investment projects to offset what would otherwise be a collapse of investment.

    We each see the world through a different lens. I see the spending of the 1930′s as causing the problem to last a Decade.

    And I’m sure you have a great economic model that supports that and agrees with the raw data. One that runs counter to just about every modern economic model, but a model nonetheless, right? It’s not a matter of “lenses” so much as a matter of actual data.

    I see Japan’s spending causing their lost decade.

    Again, I’d love to see your model rather than your intuitive feel of it. How does government spending cause a deflationary spiral, exactly?

    Answer my question though if tax “Incentives” will benefit the Movie Industry and create jobs in Hollywood then why can’t it be applied to other Industry.

    I laugh because I don’t understand the conservative assumption that liberals are all in the thrall of Hollywood or even care in the slightest about the movie industry over any other industry. The short answer is this: Favorable tax treatment can be applied to any industry to cause it to grow. It does not follow that favorable tax treatment for any industry or tax cuts as a whole are always the correct answer to any policy problem.

    My main issue is that conservative economic dogma seems to be, “The economy is booming! We should cut taxes,” and, “The economy is in no condition to handle taxes. We should cut taxes!” If your prescriptions for all situations is tax cuts, you can see how economic insights are not really taken seriously after a while.

    Though I still don’t understand how anyone can dismiss 20 trillion dollars in debt and 50+ in future liabilities as a stable economy ripe for economic growth.

    Well, our current debt is $11T currently and will be around $19T in 2019. That still puts it significantly less than its peak as a share of GDP. The absolute numbers don’t matter. The numbers in real GDP terms are what make the difference. The trick is not to continue to grow forever. We moved into very prosperous times with our debt load at 120% of GDP after World War II. In short, there’s more to the picture than the simple debt number.

    Oh here are my numbers; a study by MIT states that the average increase per household would be 3,100 dollars a year, of course that’s before rebates (ah rebates, a way to buy your vote)

    “A study by MIT?” Really? Let’s look at the details. Which study, for starters? When would this increase occur, finally? How was it calculated? The number seems… well… laughably high. Further, it’s completely in the control of the capping authority. Cap emissions at the natural level of production and nothing happens. Cap emissions at 1% of the natural level and watch the whole place collapse. What were the assumptions in the model?

  24. #24 tegalans
    July 30, 2009

    “We moved into very prosperous times with our debt load at 120% of GDP after World War II. In short, there’s more to the picture than the simple debt number.”

    Do you want to know why we were prosperous? It was because we were producing half of the world’s goods. Were not even producing our own. Oh and I’d like to see a model that proves Keynesian economics actually work.

    “Well, our current debt is $11T currently and will be around $19T in 2019. That still puts it significantly less than its peak as a share of GDP. The absolute numbers don’t matter. The numbers in real GDP terms are what make the difference. The trick is not to continue to grow forever.”

    Yes, but our projected debt is going to be around 20 trillion. And as any investor knows you don’t look at the current amount, but at what the amount will be. And 20 trillion is unsustainable. And with the new health care bill future liabilities will go up as well. We already see interest rates on T-Bills starting to spike.

  25. #25 Troublesome Frog
    July 30, 2009

    Do you want to know why we were prosperous? It was because we were producing half of the world’s goods.

    Actually, in 1950, we were just over 1/4 of the world’s GDP. And being in debt did not prevent that. That’s my point. The quantity of debt is not a predictor of prosperity unless the interest in servicing it drags it down. The actual structure of your economy is what matters, and we’ve dug ourselves out of deeper holes than this one.

    Short term blips like stimulus spending are not the problem. Long term trends are. Those certainly need to be fixed.

    Were not even producing our own.

    Well, after subtracting off net exports, our GDP last year was about $14 trillion. It looks like our net imports was something less than -$200B. We’re producing *something*.

    Oh and I’d like to see a model that proves Keynesian economics actually work.

    Keynesian economics *is* a model. Have you actually looked at what those models say? Or do you, like so many, just use the word “Keynesian” as an epithet rather than something with actual meaning?

    I’m still wondering how government spending causes (and exacerbates!) a deflationary spiral. Your model sounds flat-out fascinating.

    Yes, but our projected debt is going to be around 20 trillion.

    That’s what I said.

    And as any investor knows you don’t look at the current amount, but at what the amount will be. And 20 trillion is unsustainable.

    $20 trillion is a number, not a trend. That quantity should be perfectly sustainable assuming it doesn’t continue to grow at the current rates in perpetuity.

    And with the new health care bill future liabilities will go up as well.

    And private liabilities for health care would go down to some extent as well. Health care is our ticking time bomb one way or another. Pick your poison.

    We already see interest rates on T-Bills starting to spike.

    Given that treasuries are quite low historically speaking and the 30 year has moved about 10 basis points in the past month, I’m interested in understanding what your definition of “spike” is. You should be more concerned with the spreads between public and private debt instruments. Those are still not so healthy looking.

  26. #26 tegalans
    July 31, 2009

    Geez…I’ll make this easier. When government wants to spend money it doesn’t have it issues treasury bills that are then sold. The more of these Bills that are put on the market the more the value of them goes down; so in order to sell them the interest rates must go up. When interest rates go up it constricts the money supply, thus Government action achieves nothing. To offset the rise in interest rates government prints money which cause inflation. Either way government action does nothing or makes the situation worse.

    God, it’s basic economics 101
    Didn’t the Stagflation of the 70′s prove the Keynes was an idiot? The fundamental principle of Keynesianism is that there cannot be a simultaneous rise in inflation and unemployment, i.e. the Phillips Curve; so obliviously he was wrong. You need to study up on Milton Friedman and the Austrian School. So far Austrian Economists were the only ones able to predict the housing bubble and current recession. If they could predict it then they must also have understood it, so… I’ll take their solution over Keynes who was proven wrong in the 70′s.

  27. #27 Troublesome Frog
    July 31, 2009

    Geez…I’ll make this easier.

    Holy shit, the treasury view. Why am I not surprised? On the one hand, you cite Friedman and on the other hand you espouse a view that ignores monetary economics.

    The model you’re grasping for assumes that government borrowing completely crowds out private investment and net out to zero. This *can* be true, but there’s no reason to assume that it will be. In order for that to be true, government borrowing has to have no effect on the velocity and quantity of money.

    God, it’s basic economics 101.

    Did you take economics 101? Be honest now.

    Didn’t the Stagflation of the 70′s prove the Keynes was an idiot?

    I think I have my answer to the previous question. The short answer is no, it did not. It refuted the Philips Curve, which had been generally replaced by the 1970s (courtesy of Uncle Milton).

    The fundamental principle of Keynesianism is that there cannot be a simultaneous rise in inflation and unemployment, i.e. the Phillips Curve; so obliviously he was wrong.

    I wouldn’t call that the fundamental principle of Keynesianism at all. It was believed to be generally true at the time, but it’s not the most important point. The key point is that the assumptions of classical economics do not hold when resources are not being fully utilized. He wrote a lot, all incomplete, but not without enormous insight.

    You need to study up on Milton Friedman and the Austrian School.

    1) Milton Friedman was not, by any stretch, one of the Austrian school. In fact, aside from the common thread of rabid free-marketism, I can’t for the life of me understand why people invoke them together in these debates.
    2) Based on the structure of your arguments, you may want to study both Milton Friedman and the Austrian school. Or at least better articulate which of their models you’re using, because the blend you’re trying to put together is not mixing well at all.

    I’m half expecting to see a hybrid Friedman-Misses model that miraculously explains deflation as a result of government spending…

    So far Austrian Economists were the only ones able to predict the housing bubble and current recession.

    1) You clearly haven’t been following the economic chatter over the past 10 years or so if you really think that.
    2) If you spend the be better part of a century predicting economic collapse and not seeing one, you don’t get to claim credit for being right when one eventually happens, especially when you’re not the only ones who made the prediction.

    If they could predict it then they must also have understood it, so… I’ll take their solution over Keynes who was proven wrong in the 70′s.

    That seems like a sketchy assumption. In 80 years, they still haven’t managed to come up with a coherent explanation for why changes in nominal interest rates cause malinvestment, which is kind of the core of the whole position. That’s not to say that there hasn’t been some very fine work done by Austrian economists, but really, I think you’re giving too much credit where none is due.

  28. #28 tegalans
    July 31, 2009

    After the Philips curve was proven wrong and Keynesianism were called into question, Milton offered a solution a return to Markets free from government Intervention. The result was Reagan. Now Reagan wasn’t a perfect President in that he didn’t curb spending as much as he should have but the economic benefits of Milton’s plan cannot be ignored.

    And yes I have taken basic economics. I have also studied Microeconomics and Macroeconomics.

    I never claim that Milton was a part of the Austrian School, but was referring to their similarities in their Free-Market belief.

    Make fun of the Treasury View all you want. Spending of money will benefit the economy, it is the act of borrowing or taxing to make that money that hurts the economy. That’s why I say it has no effect or negative effect. And negative effect in the time lag of collecting the money and the expenditure of it. The money spent to increase GDP has to come from lowering GDP in one sector of is borrowed and will result in losing nearly everything you gain. But since you Keynesians are so much more intelligent and you can spend money more wisely how come even after 8 years of enormous spending unemployment remained at the same level when FDR took Office. Even his Treasury Secretary Henry Morgenthau Jr., part creator of the New Deal, said that they failed? Once again it was repeated and failed in the 1970′s; so please explain why? And once again in the 90′s the notion of government spending did not help Japan. Do you care to elaborate?

    You’re whole assumption is that Keynes was right, yet you fail to offer proof of so. Can you? You’re argument is circular.

  29. #29 tegalans
    July 31, 2009

    Oh and where do you get this notion that Milton was for a policy of a centralized bank increasing the monetary supply? Milton was against the Fed, but said that since it does exist it should continually expand the money supply, but overall he’s against the Fed. So it’s not a stretch to speak of Milton and disregard monetary policy since even Milton was against Centralized Control of the Money supply.

  30. #30 tl
    July 31, 2009

    The reason nobody understands the tax brackets is because the vast majority of people never deal with them directly. When filling out tax returns, we either go to a table that says, if you make this much, this is the number to write on line X, or a computer spits out a number for line X, or if we have enough money, an accountant fills in line X. It’s completely opaque to the average person, so they don’t really understand what a “tax bracket” really is.

  31. #31 Troublesome Frog
    July 31, 2009

    And yes I have taken basic economics. I have also studied Microeconomics and Macroeconomics.

    By “studided” do you mean, “read lots of stuff on misses.org?”

    I never claim that Milton was a part of the Austrian School, but was referring to their similarities in their Free-Market belief.

    You still haven’t explained which of their models you’re using to explain the world. Friedman’s monetary theories flatly contradict the Austrian view of what to do in a depression-like situation.

    Spending of money will benefit the economy, it is the act of borrowing or taxing to make that money that hurts the economy. That’s why I say it has no effect or negative effect.

    Taxing, yes. Borrowing? As I tried to explain, that depends on circumstances. That statement is true whether you buy into a new-Keynesian view of the world or whether you’re totally on board with Freidman. If a saver takes $1 out of the private credit markets and buys into us treasuries in a panic and the government says, “Thank you for the cheap $1 loan. I shall now spend that money on capital-intensive goods, which is what a private investor would have done,” that’s one possible outcome. Your preference seems to be that investors buy US treasuries and drive the risk-free interest rate up along with all other interest rates simultaneously, tightening the credit crunch.

    What is the net effect of each on investment and GDP?

    The money spent to increase GDP has to come from lowering GDP in one sector of is borrowed and will result in losing nearly everything you gain.

    Again, you’re arguing for *complete* crowding out, which relies on some very bizarre assumptions. How are those assumptions justified? Especially when the credit markets are as broken as they have been?

    …how come even after 8 years of enormous spending unemployment remained at the same level when FDR took Office?

    I can explain that. Like basically every other number you’ve pulled out, it’s wrong or meaningless in context. FDR’s inauguration: March 1933. Unemployment was 25%. 1933 + 8 = 1941: Unemployment at 10%. Interestingly, you didn’t choose 1938 where there was a dip in employment… right after the government spending cuts.

    More relevant answer: Based on the output gap, the rate and size of the stimulus was modest–more of a “break even” number, really.

    Once again it was repeated and failed in the 1970′s; so please explain why?

    It was not repeated in the 1970s. You’re working with some secret definition of Keynesian stimulus. You could help by defining it.

    And once again in the 90′s the notion of government spending did not help Japan.

    Well, their banking system was zombied for much of that decade (a problem we likely share, but not to the same extent). If your credit channels are broken, stimulus can return your GDP to even “on paper” but you can’t really transition back to normal operation. I sincerely hope that we don’t end up stuck there.

    Speaking of Japan, I’m still very interested in your “government spending causes deflation” model.

  32. #32 Troublesome Frog
    July 31, 2009

    Boy, that last part of my big 3rd paragraph makes absolutely no sense. That will teach me to cut and paste my responses together during a refactor and not proofread carefully. I’ll have to fix that later.

  33. #33 tegalans
    July 31, 2009

    First off I never said that Government Spending causes Deflation. When government borrows a lot of money interest rates go up constricting the supply and making it harder for other people to borrow.

    Your whole theory revolves around the notion that you can have a positive on one side without incurring a negative on the other side. The laws of Physics say otherwise. To every action there will be an equal and opposite reaction. Think of basic math; to add 1 to one side of an equation you have to take it from the other side or add 1 to the other side. The First option incurs a negative the other option has both 1′s canceling each other out making the action irrelevant. There is no net gain of 1 there cannot be. There must be a balance, when one side goes down the other side goes up, when one side goes up the other side goes down. Every action government takes has to incur a negative, thus what is the point of such an action? Please explain to me how you can achieve a net gain?

  34. #34 Troublesome Frog
    July 31, 2009

    First off I never said that Government Spending causes Deflation. When government borrows a lot of money interest rates go up constricting the supply and making it harder for other people to borrow.

    So your contention is that Japan’s lost decade was a result of high real interest rates due to crowding out? I just want to be sure of this.

    Your whole theory revolves around the notion that you can have a positive on one side without incurring a negative on the other side.

    Without incurring an *equal* negative on the other side.

    The laws of Physics say otherwise. To every action there will be an equal and opposite reaction.

    This is economics, not physics. This is folksy equivocation, not real analysis. It’s like suggesting that we apply Newton’s law of cooling to somebody who is “hot” at the craps table.

    Every action government takes has to incur a negative, thus what is the point of such an action? Please explain to me how you can achieve a net gain?

    I’m going to have to start outsourcing this explanation, but let’s start at first principles. Your argument is that interest rate crowding out will cause any government spending to net out to zero. For starters, let’s apply that logic to the private sector only:

    1) Borrowing $1 for one private investment pulls $1 out of the credit pool for some other private sector investment.
    2) Because all private investment must come at the expense of some other private investment, there is a net change in investment of zero.
    3) Private industry cannot expand the economy as its own battles over loanable funds cancel each other out.

    Clearly, your theorem proves too much.

    So the question is, why doesn’t this work? Let’s go back to Uncle Milton and mv = py. You’re assuming that for a fixed M and P, Y cannot move because V is fixed as well. There is no reason for this to be so. In fact, when we’re underutilizing resources, there’s even less of a reason to believe that. Let us go to two pieces explaining how this works courtesy of Brad DeLong at UC Berkeley. First is the straightforward monetarism argument (start around page 4). Second is the whimsical Socratic dialogue version of liquidity preference.

    Cheers.

  35. #35 magic.
    August 12, 2009

    very thanks for article

  36. #36 muhtar
    February 14, 2010

    I’m assuming that you don’t think that the optimal amount of taxes is $0. If that’s the case, at what point is the “lower taxes are good for the economy” logic outweighed by other factors?

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