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Reagan Insider on how the GOP, and Dems Destroyed the U.S. Economy

I prefer measuring tax revenue and expenditures as a % of GDP rather than solely by absolute numbers. Doing so makes a huge difference. For example, if tax revenue growth is slower than overall economic growth while expenditures grow at the same rate as the economy, then federal budget deficits will widen, even if tax revenue is increasing in absolute terms. Even under President Reagan, tax revenue dipped from 19.6% of GDP to 17.3% before rising gradually but never regaining the figure of 19.6% of GDP. Under the Bush tax cuts, tax revenue fell from 20.6% of GDP to as low as 16.1% of GDP before recovering to 18.5% of GDP just before the financial crisis/severe recession.

Here is a good analysis of the Clinton economic plan

Tax Cuts, Not the Clinton Tax Hike, Produced the 1990s Boom | The Heritage Foundation
 
I prefer measuring tax revenue and expenditures as a % of GDP rather than solely by absolute numbers. Doing so makes a huge difference. For example, if tax revenue growth is slower than overall economic growth while expenditures grow at the same rate as the economy, then federal budget deficits will widen, even if tax revenue is increasing in absolute terms. Even under President Reagan, tax revenue dipped from 19.6% of GDP to 17.3% before rising gradually but never regaining the figure of 19.6% of GDP. Under the Bush tax cuts, tax revenue fell from 20.6% of GDP to as low as 16.1% of GDP before recovering to 18.5% of GDP just before the financial crisis/severe recession.

To do as you suggest ignores the condition of the economy when Reagan took office, mortgage rates were 17% and inflation was double digit. Unemployment was rising. There is no way that the economic growth would have occurred as it did were it not for the tax cuts. Putting money into the hands of the people who created it unleashed incredible economic growth and job creation. That for some reason is ignored. Wonder why?
 
Yep, that is what the people who don't believe that tax cuts grow govt. revenue always say but that ignores human behavior and the very poor performance in projection by the CBO. Ever checked their track record. It isn't pretty. Obama claimed the economy would grow over 4% this year and is wrong and that affects govt. revenue.

IMO, tax cuts that are fully funded e.g., either matched by offsetting revenue increases or spending reductions are far better than those that are not financed. To President Reagan's credit, initially there was an attempt to seek deep spending reductions. But that effort failed and then was not sustained. Reagan also confronted stagflation where a supply side remedy was useful.

In contrast, in the current situation, the nation has witnessed a shock to aggregate demand. Its problem is not a matter of a lack of aggregate supply, hence supply side remedies are not the right medicine this time around.

Furthermore, down the road the nation faces enormous long-term fiscal challenges. To address those issues, the nation will need to combine tax hikes, discretionary spending reductions (including Defense spending), and entitlement reform. Entitlement reform will very likely require fundamental health care reform that addresses that sector's chronic excess cost growth problem. The IMF suggests that the largest, but not whole share, of fiscal consolidation be achieved by spending reductions.

IMO, a formula that is comprised of two-thirds spending reductions/reduced growth in spending and one-third on the revenue side would probably be useful. It would be fairly close to the successful Canadian fiscal consolidation of the 1990s, though the necessary U.S. adjustment is much larger than Canada's.

Given the gravity of the fiscal imbalances, some revenue increases will be necessary. Needless to say, those increases cannot be implemented all at once nor should they focus strictly on a narrow base of taxpayers.

Now with Regard to Clinton, there is a very good analysis of the Clinton years that point to the 1997 tax cuts that led to the economic growth.

President Clinton signed his 1997 tax cuts into law in August 1997. The law took effect beginning in 1998. Average annual economic growth during the 1992 Q4-1997 Q4 period was 3.5%. During the 1997 Q4-2000 Q4 timeframe, it came to 4.2%. Hence, there was a modest uptick in economic growth. But myriad factors, including but not limited to the tax cuts, contributed. In any case, prior to the tax cuts, aside from the initial years of economic recovery, economic growth was robust. In contrast, during the 2000 Q4-2008 Q4 timeframe, economic growth averaged 1.7%.

Per mathematics doesn't work because it ignores human behavior and our consumer driven economy.

Of course details may differ. However, the differences attributed to human behavior are not so large that one can argue that had the tax cuts not been implemented, tax revenue would have been no higher than what it actually was.
 
donsutherland1;1058924059]IMO, tax cuts that are fully funded e.g., either matched by offsetting revenue increases or spending reductions are far better than those that are not financed. To President Reagan's credit, initially there was an attempt to seek deep spending reductions. But that effort failed and then was not sustained. Reagan also confronted stagflation where a supply side remedy was useful.

In contrast, in the current situation, the nation has witnessed a shock to aggregate demand. Its problem is not a matter of a lack of aggregate supply, hence supply side remedies are not the right medicine this time around.

Furthermore, down the road the nation faces enormous long-term fiscal challenges. To address those issues, the nation will need to combine tax hikes, discretionary spending reductions (including Defense spending), and entitlement reform. Entitlement reform will very likely require fundamental health care reform that addresses that sector's chronic excess cost growth problem. The IMF suggests that the largest, but not whole share, of fiscal consolidation be achieved by spending reductions.

IMO, a formula that is comprised of two-thirds spending reductions/reduced growth in spending and one-third on the revenue side would probably be useful. It would be fairly close to the successful Canadian fiscal consolidation of the 1990s, though the necessary U.S. adjustment is much larger than Canada's.

Given the gravity of the fiscal imbalances, some revenue increases will be necessary. Needless to say, those increases cannot be implemented all at once nor should they focus strictly on a narrow base of taxpayers.



President Clinton signed his 1997 tax cuts into law in August 1997. The law took effect beginning in 1998. Average annual economic growth during the 1992 Q4-1997 Q4 period was 3.5%. During the 1997 Q4-2000 Q4 timeframe, it came to 4.2%. Hence, there was a modest uptick in economic growth. But myriad factors, including but not limited to the tax cuts, contributed. In any case, prior to the tax cuts, aside from the initial years of economic recovery, economic growth was robust. In contrast, during the 2000 Q4-2008 Q4 timeframe, economic growth averaged 1.7%.



Of course details may differ. However, the differences attributed to human behavior are not so large that one can argue that had the tax cuts not been implemented, tax revenue would have been no higher than what it actually was.
Some good insight however I reject tax hikes because tax hikes will not create new taxpayers to grow enough revenue to fund our deficits and debt. A good combination of tax cuts and massive spending cuts is what is needed at this time. If not we are still going to have high unemployment and puny economic growth. there are 16 million unemployed Americans today and no plan to get them back to work.
 
To do as you suggest ignores the condition of the economy when Reagan took office, mortgage rates were 17% and inflation was double digit. Unemployment was rising. There is no way that the economic growth would have occurred as it did were it not for the tax cuts. Putting money into the hands of the people who created it unleashed incredible economic growth and job creation. That for some reason is ignored. Wonder why?

Sorry, your post and mine crossed. In my reply (#78) to your earlier message, I noted:

Reagan also confronted stagflation where a supply side remedy was useful.

In contrast, in the current situation, the nation has witnessed a shock to aggregate demand. Its problem is not a matter of a lack of aggregate supply, hence supply side remedies are not the right medicine this time around.


With respect to stagflation, a supply side remedy is useful. I agree that the tight money (Fed under Paul Volcker) and supply side fiscal policy (under President Reagan) was the right combination to address stagflation. However, the 2001 and 2007-09 recessions were the result of demand shocks resulting from the aftermath of the technology stocks bubble and then real estate bubble. Supply side remedies address a lack of supply relative to demand (entire curves). In the Reagan years, there was a need to shift the supply curve to the right. In the 2001 and 2007-09 recessions there was a need to the aggregate demand curve to the right. Different economic situations require different economic medicine.
 
A good combination of tax cuts and massive spending cuts is what is needed at this time.

There's no way Washington will be able to find the political support to eliminate its fiscal imbalances strictly through spending reductions and also undertake the additional spending reductions required to finance tax relief. To get there, much of discretionary spending would need to be eliminated (including Defense spending) and/or the major entitlement programs would need to be dramatically reduced. That's highly unlikely. A combination of spending reductions (preferably the larger share of fiscal consolidation IMO) and tax increases will be needed. Early action could reduce the size of necessary revenue increases.

If not we are still going to have high unemployment and puny economic growth. there are 16 million unemployed Americans today and no plan to get them back to work.

A sizable component of the high unemployment rate is structural in nature. In the wake of the housing bubble, financial crisis, and steep recession, certain sectors (construction, financial services, etc.) are not likely to return to their former size (relative to GDP) anytime soon. Given labor market rigidities, including a employees skills/experience-job needs mismatch, slow job growth due to caution with respect to sluggish growth aggregate demand from continuing consumer deleveraging, a disjointed/fragmented employment services industry, educational attainment trends, etc., the unemployment rate is likely to remain several points higher than the bottoms following other recent recessions. There is no simple answer for structural unemployment.
 
Sorry, your post and mine crossed. In my reply (#78) to your earlier message, I noted:

Reagan also confronted stagflation where a supply side remedy was useful.

In contrast, in the current situation, the nation has witnessed a shock to aggregate demand. Its problem is not a matter of a lack of aggregate supply, hence supply side remedies are not the right medicine this time around.


With respect to stagflation, a supply side remedy is useful. I agree that the tight money (Fed under Paul Volcker) and supply side fiscal policy (under President Reagan) was the right combination to address stagflation. However, the 2001 and 2007-09 recessions were the result of demand shocks resulting from the aftermath of the technology stocks bubble and then real estate bubble. Supply side remedies address a lack of supply relative to demand (entire curves). In the Reagan years, there was a need to shift the supply curve to the right. In the 2001 and 2007-09 recessions there was a need to the aggregate demand curve to the right. Different economic situations require different economic medicine.

I reallly respect your opinion but I don't find any time suitable for a tax increase especially with this level of unemployment and debt. No tax increase is going to put people back to work and you cannot raise taxes enough without destroying the economy to pay off the debt. When the debt is this high, the unemployment this high, and the spending so great it is going to take better economic growth to grow us out of this mess and that can be created with tax cuts including eliminating the capital gains taxes. The problem is that will generate so much money for the govt. and Congress has shown no ability to tackle spending.
 
There's no way Washington will be able to find the political support to eliminate its fiscal imbalances strictly through spending reductions and also undertake the additional spending reductions required to finance tax relief. To get there, much of discretionary spending would need to be eliminated (including Defense spending) and/or the major entitlement programs would need to be dramatically reduced. That's highly unlikely. A combination of spending reductions (preferably the larger share of fiscal consolidation IMO) and tax increases will be needed. Early action could reduce the size of necessary revenue increases.

A sizable component of the high unemployment rate is structural in nature. In the wake of the housing bubble, financial crisis, and steep recession, certain sectors (construction, financial services, etc.) are not likely to return to their former size (relative to GDP) anytime soon. Given labor market rigidities, including a employees skills/experience-job needs mismatch, slow job growth due to caution with respect to sluggish growth aggregate demand from continuing consumer deleveraging, a disjointed/fragmented employment services industry, educational attainment trends, etc., the unemployment rate is likely to remain several points higher than the bottoms following other recent recessions. There is no simple answer for structural unemployment.

There in lies the problem,
There's no way Washington will be able to find the political support to eliminate its fiscal imbalances strictly through spending reductions
so why would anyone support tax increases under that scenerio. Let the people keep what they earn and become less dependent on the govt.
 
I reallly respect your opinion but I don't find any time suitable for a tax increase especially with this level of unemployment...

As noted earlier, tax increases can't be implemented all at once. Realistically, most of the 2001 and 2003 tax relief will need to be renewed so as not to be economically disruptive. However, a gradual phasing in of tax hikes will need to take place in coming years if the nation is to pursue a credible fiscal consolidation strategy.

No tax increase is going to put people back to work and you cannot raise taxes enough without destroying the economy to pay off the debt.

That's part of the reason tax hikes cannot comprise the bulk of fiscal consolidation nor can they be implemented immediately. The unemployment rate will decline when firms have a better gauge of the growth curve in future aggregate demand (magnitude and sustainability). Temporary payroll tax relief will not materially alter that situation. Instead, risk-averse firms would likely pocket their tax savings to increase their bottom line. Until firms believe aggregate demand growth is sufficient and sustainable to justify expanding employment, they won't do so given the costs of adding employees.

...Congress has shown no ability to tackle spending.

At present, Congress' reluctance to exercise fiscal discipline remains a prevalent bipartisan approach. A case in point was Congress' overwhelming waiving of very modest Medicare cost savings with respect to physician fees.
 
There in lies the problem, so why would anyone support tax increases under that scenerio. Let the people keep what they earn and become less dependent on the govt.

I support tax increases as part of a comprehensive solution to address the nation's debt situation. The costs of modest increases in taxes will be small compared to those associated with a full-blown debt crisis.
 
I support tax increases as part of a comprehensive solution to address the nation's debt situation. The costs of modest increases in taxes will be small compared to those associated with a full-blown debt crisis.

How many times has that been tried with Reagan and GHW Bush trying to reign in spending but politicians were more interested in keeping their job than they are in doing their job. First of all I am not convinced that tax increases mean more revenue to the govt. because when you raise taxes you change human behavior and that affects the economy as well as govt. revenue. The bigger issue is employment and until at least half the unemployed get back to work the focus should be on growing the economy and it is going to take tax cuts to do that. Tax increases IMO need to be put off until much later and as you stated cannot be implemented immediately. Let's see how tax cuts and spending cuts work.
 
The bigger issue is employment and until at least half the unemployed get back to work the focus should be on growing the economy and it is going to take tax cuts to do that. Tax increases IMO need to be put off until much later and as you stated cannot be implemented immediately. Let's see how tax cuts and spending cuts work.

This may fulfill your normative economic goals (a smaller government), but on the net tax cuts coupled with spending cuts will be contractionary (assuming the two are proportional in size).
 
This may fulfill your normative economic goals (a smaller government), but on the net tax cuts coupled with spending cuts will be contractionary (assuming the two are proportional in size).

What if the tax rate cuts do what they always have done, grow govt. revenue and that money is left to the Politicians to spend?
 
Of course they wouldn't and thus they would not be paying off the debt

Right, I thought you were arguing that we should lower taxes and lower spending to stimulate the economy (to increase employment). This is on the net contractionary if the two are of proportional size.
 
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Right, I thought you were arguing that we should lower taxes and lower spending to stimulate the economy (to increase employment). This is on the net contractionary if the two are of proportional size.

I was responding to your comments,

This may fulfill your normative economic goals (a smaller government), but on the net tax cuts coupled with spending cuts will be contractionary (assuming the two are proportional in size

Giving the govt. more money to spend isn't contractionary
 
I was responding to your comments,



Giving the govt. more money to spend isn't contractionary

Did I not say "spending cuts?" Now if you want tax cuts and spending increases (or constant I suppose) then I would completely agree with you.
 
Did I not say "spending cuts?" Now if you want tax cuts and spending increases (or constant I suppose) then I would completely agree with you.

Yes, you did say that, my point was that promises to make spending cuts haven't been kept, they weren't kept during the Reagan years with Gramm-Rudman, and they weren't done when GHW Bush agreed to raise taxes $1 for every $3 of spending cuts. In all cases we got the tax increases but not the spending cuts. It would be great if Congress kept their promise at least once
 
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