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Basic Macroeconomics

On September 25, 2011, in Uncategorized, by admin

Cross-posted at the Angry Bear blog.

Recently I had the opportunity to speak to Professor David Cohen’s class on the US Presidency in the Political Science department at the University of Akron.

My talk was structured around three questions involving some extremely simple recent economic history. None of the questions were trick questions.

The questions appear below.

Question 1. From 1980 to 1992, the top marginal tax income tax rate was:
-70% in 1980
-69.125% in 1981
-50% from 1982 – 1986
-38.25% in 1987
-28% from 1988 – 1990
-31% in 1991 and 1992

Given this pattern, which of the two graphs that follows do you expect shows the growth rate in real GDP over that period?

Figure 1 Option A
Figure 1 Option A
Option A: A few years after the first tax cuts, there was one year of unusually strong growth. Subsequent growth slowed a lot, and continued slowing as tax rates fell further.

or…

Figure 1 Option B
Figure 1 Option B
Option B: The more tax rates were cut, the faster the economy grew. And then Bush I broke his “read my lips, no new taxes” promise and the economy slowed again.

Question 2.
The following is the list of eight year administrations since 1929:
-FDR (1933 – 1941)
-Truman (1945 – 1953)
-Ike (1953 – 1961)
-JFK/LBJ (1961 – 1969)
-Nixon/Ford (1969 – 1977)
-Reagan (1981 – 1989)
-Clinton (1993 – 2001)
-Bush 2 (2001 – 2009)
(FDR’s first 8 years are included, but the War years are left out. Also, Truman took over a few months into the term.)

It turns out that the degree to which each administration cut the tax burden (i.e., current tax receipts/GDP) during its first two years in office seems to strongly affect the growth rate in real GDP in the subsequent six years in office. (E.g., the amount by which Reagan cut the tax burden from 1980, Carter’s last year in office, to 1982 seems to strongly affect the annualized growth rate in real GDP from 1982 to 1988.)

Which of the following two graphs do you think best explains the relationship that was observed between the change in the tax burden in the first two years of the administration and the subsequent growth in real GDP over the remaining six years?

Figure 2 Option A
Figure 2 Option A
Option A: Administrations which reduced tax burdens early on enjoyed rapid growth later. Administrations which increased tax burdens early had poor growth later.

or

Figure 2 Option B
Figure 2 Option B
Option B: Administrations which lowered tax burdens early on suffered through poor growth later. Administrations which raised tax burdens early had strong growth later.

Question 3
Reaganomics involved cutting taxes and reducing regulation. The New Deal (for our purposes, not including World War 2 years) involved tax hikes and increased government control over the economy. Which of the following two graphs shows the growth rate in Real GDP over the Reagan and FDR years?

Figure 3 Option A
Figure 3 Option A.
Option A. Growth was faster under Reagan than under FDR.

or

Figure 3 Option B
Figure 3 Option B.
Option B. Growth was faster under FDR than under Reagan

The answers…
1. Option A: A few years after the first tax cuts, there was one year of unusually strong growth. Subsequent growth slowed a lot, and continued slowing as tax rates fell further.
2. Option B: Administrations which lowered tax burdens early on suffered through poor growth later. Administrations which raised tax burdens early had strong growth later.
3. Option B. Growth was faster under FDR than under Reagan. Quite a bit faster, in fact.

By the way… in each of the questions, the data for both options A and B was “real.” Its just the wrong answer, in each case, the growth rates did not match the taxes for any given year, but rather were sorted in order to fit the story line that everyone seems to believe. Also, for Question 2, I could have used the first year, the first three years, the first four years, the first six years, or the first seven years rather than the first two years of the administration v. the remaining years of growth and gotten similar graphs. Using the tax change for the first five years v. the annualized change in growth fro the subsequent three years shows almost no correlation whatsoever. My guess is that’s the outlier, given every other combination shows a recognizable story.

Its also worth noting… the three questions I picked are not “gotcha” questions or special cases. They’re central to the macroeconomic theory that has prevailed in the United States for the past few decades, and which American economists have managed to sell to the rest of the developed world since about 1990. The Reagan tax cuts are usually presented as exhibit A that tax cuts “work.” But I could have used Exhibit B (the so-called Kennedy tax cuts) instead. It wouldn’t have made a difference. The second question is an attempt to show how policies affect the economy the entire time they are in effect. Essentially, all the data available since the BEA began computing GDP is there, except the Hoover years, the Bush 1 years, the Carter years, and WW2. The third question compares what are often referred to as the worst economic policies this country enacted in the past 100 years to what are often referred as the paragon of economic policies in the same period.

I’m sad to say I’m confident most economics professors in the United States would get the three questions wrong. I’m also sad to say, I think it is no more possible to explain the US economy without knowing these facts than it is to produce a useful theory of the solar system assuming turtles all the way down.

And since most economics professors wouldn’t get it right, that’s what they’ve been teaching. I would venture to guess, in fact, that a student at, say U of Chicago or George Mason University (to use the flagships for two of the more popular “schools of thought”) is more likely to get these questions wrong after taking an economics course than before. And now, after a few decades, its now popular wisdom and the foundation of our economy. If you’ve been wondering what caused The Great Stagnation and the mess we’re in now, look no farther.

As always, if anyone wants my spreadsheets, drop me a line. I’m at my first name (mike) period my last name (kimel – one m only!!) at gmail.com.

Cross-posted at the Angry Bear blog.

This post is the seventh in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940, the third from 1940 to 1950, the fourthh looked at 1950 – 1968, and the fifth from 1968 to 1988. Because the Reagan era is so pivotal in the American psyche, it was also covered again in the sixth post, which looked at the period from 1981 to 1993. This post will look at the period from 1988 to the present.

Before I begin, a quick recap… both the 1901 – 1928 period and the 1929 – 1940 failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. It is worth noting that growth from 1933 to 1940 was generally quite a bit faster than at any other peacetime period since data has been available, both on average and for individual years. Not remotely what people believe, but that’s what it is.

In the 1940 – 1950 period, we did observe slower economic growth following a tax hike and faster economic growth followed a tax reduction. However, that happened when the top marginal tax rate was boosted above 90%.

Interestingly enough, though the so-called “Kennedy Tax Cuts” are often used as one of the prime exhibits on the benefits of cutting taxes, a look at the 1950 – 1968 period yields no such conclusion. Growth rates were already rising before the tax cuts occurred in 1964 and 1965, reached a peak when the tax cuts took place, and started shrinking immediately afterwards. The other period that is always pointed to as evidence that tax cuts spur growth is the Reagan years, which showed up in the 1968 – 1988 and the 1981-1993 posts. It turns out that put into context, the Reagan years produced one year of rapid but not particularly extraordinary growth a few years after tax cuts began. That’s it. In fact, its worse than that… during the Reagan Bush 1 years, aside from that one good year, growth tended to shrink as tax rates were slashed.

Real GDP figures used in this post come from Bureau of Economic Analysis. Top individual marginal tax rate figures used in this post come from the IRS. As in previous posts, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate. Let me stress this point again as I’ve been getting people e-mailing me to tell me I’ve got the growth rates shifted a year. That is correct, and is being done on purpose (and is shown on the graph labels). To avoid questions of causality, the growth rate in year X used in this post is the growth rate from year X to year X+1. And when I say “to avoid questions of causality” – you’d be amazed at how many people write me when I don’t do this and insist that sure, higher tax rates seem to be correlated with faster growth, but that’s because when growth is faster governments feel more willing to charge higher tax rates.

So here’s what the period from 1988 to the present looks like

Figure 1
Figure 1.

Once again, the data fails to show anything resembling the old “lower taxes = faster growth” story. In fact, once again, it kind of looks like things go the other way. The two biggest dips in the graph occur when tax rates are at low points (28% and 35%). The highest tax rates also coincide with the fastest overall growth. But no doubt next week’s post looking at the next period will be the one that finally shows what everyone believes is there. Oh wait, we’ve run out of years.

Now, I’m sure someone will bring up the fact that there was a tech boom and the internet in the late 1990s. And no doubt there was some of that. But that doesn’t explain why only once did the graphs appear to show that cutting tax rates correlates with faster economic growth, and that one time occurred in the middle of WW2 during what was essentially a command economy when tax rates were above 90%. Talk about a special case. Conversely, most of the other graphs that we’ve seen in this series have not shown any relationship between tax rates and economic growth. And then there were a few, such as those showing the Reagan era, that seem to at least suggest that faster growth was more likely when tax rates were higher. None of this matches what we hear in the liberal (ha ha) media. None of this matches what I see in econ textbooks. It doesn’t match what I read in economics journals. But anyone, and I mean anyone, can do these graphs. Not sure many people can replicate Barro.

Next post in the series… what it all means.

As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel (note that I’m not from the wealthy branch of the family that can afford two “m”s – make sure you only put one “m” in there) at gmail period com.

Cross posted at the Angry Bear blog.

This post is the sixth in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940, the third from 1940 to 1950, the fifth looked at 1950 – 1968, and the sixth from 1968 to 1988. Because the Reagan era is so pivotal in the American psyche, though it was covered in the last post, I intend to focus on it again. The last post included the lead in to Reagan’s term, this post contains the follow-up to his term. In this post I’ll look at the period from 1981 to 1993.

Before I begin, a quick recap… both the 1901 – 1928 period and the 1929 – 1940 failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. It is worth noting that growth from 1933 to 1940 was generally quite a bit faster than at any other peacetime period since data has been available, both on average and for individual years. Not quite quite what people believe, but that’s what it is.

In the 1940 – 1950 period, we did observe slower economic growth following a tax hike and faster economic growth followed a tax reduction. However, that happened when the top marginal tax rate was boosted above 90%.
Interestingly enough, though the so-called “Kennedy Tax Cuts” are often used as one of the prime exhibits on the benefits of cutting taxes, a look at the 1950 – 1968 period yields no such conclusion. Growth rates were already rising before the tax cuts occurred in 1964 and 1965, reached a peak when the tax cuts took place, and started shrinking immediately afterwards. The other period that is always pointed to as evidence that tax cuts spur growth is the Reagan years, which showed up in the 1968 – 1988 post. It turns out that put into context, the Reagan years produced one year of rapid but not particularly extraordinary growth a few years after tax cuts began. That’s it.

Real GDP figures used in this post come from Bureau of Economic Analysis. Top individual marginal tax rate figures used in this post come from the IRS. As in previous posts, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate. Let me stress this point again as I’ve been getting people e-mailing me to tell me I’ve got the growth rates shifted a year. That is correct, and is being done on purpose (and is shown on the graph labels). To avoid questions of causality, the growth rate in year X used in this post is the growth rate from year X to year X+1. And when I say “to avoid questions of causality” – you’d be amazed at how many people write me when I don’t do this and insist that sure, higher tax rates seem to be correlated with faster growth, but that’s because when growth is faster governments feel more willing to charge higher tax rates.

With the preliminaries out of the way, let’s get started. The first graph shows the tax rates from 1981 to 1993 along with the t to t+1 real GDP growth rates.

Figure 1
Figure 1.

It goes without saying that what the graph does not, repeat, does not show is that lower tax rates have much to do with faster economic growth. In fact, some of the slowest sustained economic “growth” that occurred during the Reagan-Bush years coincided with the lowest tax rates: 28% and 31%. The one standout year occurred when tax rates were at 50%, and had been at 50% for a few years. And yet, somehow this period has entered the public consciousness as Exhibit A that Tax Cuts Work.

That said, I’d like to point out that unlike the folks who venerate Reagan today, Reagan himself did have a reason, an excellent reason, in fact, to try tax cuts… at least the first round of tax cuts. Looking back from the vantage point of 1980 and leaving out the WW2 years, real economic growth when tax rates were in the 90% + range was lower than it was when tax rates were in the 80% to 89.9% range, and that was slower than when tax rates were in the 70% to 79.9% range, and that in turn was slower than when tax rates were in the 60% to 69.9%. That is shown in the graph below.

Figure 2
Figure 2.

Note that all the information contained in Figure 2 was available by the time Reagan took office. If the information in Figure 2 is all you have, it isn’t unreasonable to wonder whether further reductions in the tax rate will lead to faster economic growth. Of course, Reagan did have a bit more information available. He also had growth rates from the last time tax rates were in the 24% and 25% range (i.e., the start of the Great Depression) which were negative… and which might have tipped him off that the relationship between tax rates and growth is actually quadratic. But I guess its a bit much to expect any of Reagan’s advisors to consider anything like a quadratic relationship.

In any case, we can combine Figures 1 and 2 to put the Reagan – Bush rates into context:

Figure 3
Figure 3.

If you’re wondering, during seven of the 12 Reagan-Bush years, growth rates were actually below the average rate observed when top marginal tax rates were above 90%… and the really slow growth during the Reagan – Bush era occurred disproportionately when tax rates were at the 28% and 31%. That is to say, when tax rates were at their lowest levels in the Reagan – Bush era, growth rates were also at their lowest. And as the graph also shows, every single year, repeat, every single year of the Reagan Bush had a lower average growth rate than when tax rates were in the 60% to 69.9% range.

So… what we don’t from the Reagan – Bush era is anything that supports the notion that lower tax rates correlate with faster economic growth. (Note… correlation does not imply causality, but lack of correlation certainly does imply lack of causality.) We do see that it could have been a rational experiment for Reagan to cut tax rates from 70% to 50%. It was not a rational experiment, based on what happened at 50%, to cut rates further, and the result was easily predictable.

And speaking of rational… the story the data tells is strongly at odds with what is commonly believed. And this isn’t ancient history. Most of us lived through this. It isn’t rational for us to believe things that aren’t true. But collectively, we do. And its leading to crummy growth rates. What a surprise.

Next post in the series… 1993 to the present.

As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel (note that I’m not from the wealthy branch of the family that can afford two “m”s – make sure you only put one “m” in there) at gmail period com.

Cross posted at the Angry Bear blog.

This post is the sixth in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940, the third from 1940 to 1950, the fifth looked at 1950 – 1968, and the sixth from 1968 to 1988. Because the Reagan era is so pivotal in the American psyche, though it was covered in the last post, I intend to focus on it again. The last post included the lead in to Reagan’s term, this post contains the follow-up to his term. In this post I’ll look at the period from 1981 to 1993.

Before I begin, a quick recap… both the 1901 – 1928 period and the 1929 – 1940 failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. It is worth noting that growth from 1933 to 1940 was generally quite a bit faster than at any other peacetime period since data has been available, both on average and for individual years. Not quite quite what people believe, but that’s what it is.

In the 1940 – 1950 period, we did observe slower economic growth following a tax hike and faster economic growth followed a tax reduction. However, that happened when the top marginal tax rate was boosted above 90%.
Interestingly enough, though the so-called “Kennedy Tax Cuts” are often used as one of the prime exhibits on the benefits of cutting taxes, a look at the 1950 – 1968 period yields no such conclusion. Growth rates were already rising before the tax cuts occurred in 1964 and 1965, reached a peak when the tax cuts took place, and started shrinking immediately afterwards. The other period that is always pointed to as evidence that tax cuts spur growth is the Reagan years, which showed up in the 1968 – 1988 post. It turns out that put into context, the Reagan years produced one year of rapid but not particularly extraordinary growth a few years after tax cuts began. That’s it.

Real GDP figures used in this post come from Bureau of Economic Analysis. Top individual marginal tax rate figures used in this post come from the IRS. As in previous posts, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate. Let me stress this point again as I’ve been getting people e-mailing me to tell me I’ve got the growth rates shifted a year. That is correct, and is being done on purpose (and is shown on the graph labels). To avoid questions of causality, the growth rate in year X used in this post is the growth rate from year X to year X+1. And when I say “to avoid questions of causality” – you’d be amazed at how many people write me when I don’t do this and insist that sure, higher tax rates seem to be correlated with faster growth, but that’s because when growth is faster governments feel more willing to charge higher tax rates.

With the preliminaries out of the way, let’s get started. The first graph shows the tax rates from 1981 to 1993 along with the t to t+1 real GDP growth rates.

Figure 1
Figure 1.

It goes without saying that what the graph does not, repeat, does not show is that lower tax rates have much to do with faster economic growth. In fact, some of the slowest sustained economic “growth” that occurred during the Reagan-Bush years coincided with the lowest tax rates: 28% and 31%. The one standout year occurred when tax rates were at 50%, and had been at 50% for a few years. And yet, somehow this period has entered the public consciousness as Exhibit A that Tax Cuts Work.

That said, I’d like to point out that unlike the folks who venerate Reagan today, Reagan himself did have a reason, an excellent reason, in fact, to try tax cuts… at least the first round of tax cuts. Looking back from the vantage point of 1980 and leaving out the WW2 years, real economic growth when tax rates were in the 90% + range was lower than it was when tax rates were in the 80% to 89.9% range, and that was slower than when tax rates were in the 70% to 79.9% range, and that in turn was slower than when tax rates were in the 60% to 69.9%. That is shown in the graph below.

Figure 2
Figure 2.

Note that all the information contained in Figure 2 was available by the time Reagan took office. If the information in Figure 2 is all you have, it isn’t unreasonable to wonder whether further reductions in the tax rate will lead to faster economic growth. Of course, Reagan did have a bit more information available. He also had growth rates from the last time tax rates were in the 24% and 25% range (i.e., the start of the Great Depression) which were negative… and which might have tipped him off that the relationship between tax rates and growth is actually quadratic. But I guess its a bit much to expect any of Reagan’s advisors to consider anything like a quadratic relationship.

In any case, we can combine Figures 1 and 2 to put the Reagan – Bush rates into context:

Figure 3
Figure 3.

If you’re wondering, during seven of the 12 Reagan-Bush years, growth rates were actually below the average rate observed when top marginal tax rates were above 90%… and the really slow growth during the Reagan – Bush era occurred disproportionately when tax rates were at the 28% and 31%. That is to say, when tax rates were at their lowest levels in the Reagan – Bush era, growth rates were also at their lowest. And as the graph also shows, every single year, repeat, every single year of the Reagan Bush had a lower average growth rate than when tax rates were in the 60% to 69.9% range.

So… what we don’t from the Reagan – Bush era is anything that supports the notion that lower tax rates correlate with faster economic growth. (Note… correlation does not imply causality, but lack of correlation certainly does imply lack of causality.) We do see that it could have been a rational experiment for Reagan to cut tax rates from 70% to 50%. It was not a rational experiment, based on what happened at 50%, to cut rates further, and the result was easily predictable.

And speaking of rational… the story the data tells is strongly at odds with what is commonly believed. And this isn’t ancient history. Most of us lived through this. It isn’t rational for us to believe things that aren’t true. But collectively, we do. And its leading to crummy growth rates. What a surprise.

Next post in the series… 1993 to the present.

As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel (note that I’m not from the wealthy branch of the family that can afford two “m”s – make sure you only put one “m” in there) at gmail period com.

Thanks folks! I had a great time.

As I mentioned, I’d provide some links and comments to some sources of data. My suggestion… whenever possible, go back to the original source of the data.

A few sources I use a lot:

The National Income and Product Accounts Tables from the Bureau of Economic Analysis: http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1
Data on labor and employment comes from the Bureau of Labor Statistics: http://www.bls.gov/data/

A good source that compiles data from other government websites is the Federal Reserve Economic Database (FRED) maintained by the Federal Reserve Bank at St. Louis: http://research.stlouisfed.org/fred2/

Another great thing about FRED is that it will produce a lot of graphs for you, and the graphing functionality is really cool. You can put several series on the same graph, combine series, focus on specific years, etc.

Another great site is the Statistical Abstract of the United States: http://www.census.gov/compendia/statab/ Its maintained by the US Census and it contains data from a lot of other government agencies as well. (There is one fly in the ointment – in a bid to save money, the Census is planning on eliminating the Statistical Abstract. I hope it doesn’t happen.)

I would also be remiss in pointing out… if you want to learn more about GDP, try the first chapter of Presimetrics. A free download of the first chapter is available here: http://www.presimetrics.com/index.php?option=com_content&view=article&id=65&Itemid=69

Best of luck, and drop me a line if you have any questions.

Regards.

Mike

 

Cross-posted at the Angry Bear blog.

Following a merger, a few months ago I took a severance package from my most recent employer. Put another way, I became unemployed. I started looking for another job but without much luck. In the last few weeks, I’ve also started doing some consulting work with two clients. Its been sporadic but lucrative, and I’m trying to figure out how to ramp that up quickly. Having been a consultant before for eight years, I know the tough thing is always maintaining a strong enough stable of clients. (FYI, the work I’ve been doing has been economic analysis, business analytics, and litigation support. If you or anyone needs that sort of a skillset, drop me a line at “mike” period “kimel” at “gmail.com.”) Fortunately, in addition to the consulting, we have some other income coming in and a fair amount saved up, so I don’t need to get 100 mph immediately.

One of the drawbacks of being unemployed or an independent consultant involves health insurance. When I left my employer, I became eligible for COBRA. Here’s my ongoing COBRA story. I’m going to change all names to protect the guilty and innocent alike. Call my former employer A, the COBRA administrator they use B, and my insurance company C.

A few weeks after I took the severance, A informed B that I was no longer with the company and thus eligible for COBRA. I had been checking B’s website religiously because I’m kind of paranoid about lacking health insurance. So one day, I logged on and found that I was eligible. But there was a small problem – somewhere along the line, I had lost my dependents. So I called B, B called A, some other stuff happened in the background, a day or two went by, and when I logged in, lo and behold, my wife was now listed as a dependent. But there was a small problem – I also happen to have a (at the time) thirteen month old son. So I called B, B called A, some other stuff happened in the background, a day or two went by, and when I logged in, lo and behold, my son was now listed as a dependent. But there was a small problem – neither of my dependents was listed as having been on my insurance policies when I was employed, thus making them ineligible for COBRA coverage. So I called B, B called A, some other stuff happened in the background, and when I logged in, lo and behold, my wife was listed as having been on my health insurance. But there was a small problem – my son was not listed as having had health insurance, making him ineligible for COBRA. So I called B, B called A, some other stuff happened in the background, and when I logged in, lo and behold, both my dependents were listed as having been on my health insurance policy when I was employed. But there was a small problem – it seems that the records provided indicated that I had two spouses and no son. One of my two spouses, interestingly enough, had the same name, birthday and gender as my now non-existent son. The records, in other words, indicated that I personally was violating a nontrivial number of laws. So I called B, B called A, some other stuff happened in the background, and when I logged in, lo and behold, well, I couldn’t find the mistake in the records. So I signed up for COBRA, and I put us on direct payment from my bank account.

All’s well that ends well, no matter how much time is wasted. But I did mention that my insurance company, C, was going to be a part of the story, right? Today a letter comes in the mail. My wife had gone to a dermatologist. The dermatologist submitted the bill to C. C informed the dermatologist that we no longer had coverage.

So I called B. It was a lovely conversation. I was informed that, yes, they have been withdrawing money from my account, and yes, I am paid in full, but nevertheless, C’s records do show us having no coverage. I was told B is calling C. I was told that in 24 to 48 hours I need to call C to see if they listed us as having the insurance coverage for which I have been paying. At some later point my wife or I will also have to call the dermatologist. Call me cynical, but I expect this is going to take a lot of time and interfere with my ability to generate income.

As an aside, in the past few weeks we’ve started looking at new insurance options. Interestingly enough, it seems that if everyone in the family is generally healthy, COBRA is generally not the best option.

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Cross-posted at the Angry Bear blog.

This post is the fifth in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940, the third from 1940 to 1950, and the fifth looked at 1950 – 1968.

Before I begin, a quick recap… both the 1901 – 1928 period and the 1929 – 1940 failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. In the 1940 – 1950 period, we did observe slower economic growth following a tax hike and faster economic growth followed a tax reduction. However, that happened when the top marginal tax rate was boosted above 90%. Interestingly enough, though the so-called “Kennedy Tax Cuts” are often used as one of the prime exhibits on the benefits of cutting taxes, a look at the 1950 – 1968 period yields no such conclusion. Growth rates were already rising before the tax cuts occurred in 1964 and 1965, reached a peak when the tax cuts took place, and started shrinking immediately afterwards.

Real GDP figures used in this post come from Bureau of Economic Analysis. Top individual marginal tax rate figures used in this post come from the IRS. As in previous posts, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate. Let me stress this point again as I’ve been getting people e-mailing me to tell me I’ve got the growth rates shifted a year. That is correct, and is being done on purpose (and is shown on the graph labels). To avoid questions of causality, the growth rate in year X used in this post is the growth rate from year X to year X+1. And when I say “to avoid questions of causality” – you’d be amazed at how many people write me when I don’t do this and insist that sure, higher tax rates seem to be correlated with faster growth, but that’s because when growth is faster governments feel more willing to charge higher tax rates.

So let’s get started. Let’s put up a diagram showing growth rates and tax rates for the period from 1968 to 1988. But we almost don’t have to do it. We all know what happened. We’ve been told so many times. Tax rates were very high in the late 60s and 70s. And then came the Lone Ranger Reagan, and, and lo, Reagan cut taxes. The result is that the economy began to grow like never before. Sure, the story is strikingly similar to the one about the tax cuts in the 1960s, and we know from the last post how that turned out. But still, the Reagan story is even more widely accepted, so here’s the graph that accompanies the story:

Figure 1
Figure 1.

Wait. That can’t be right. Something is wrong with the data because it doesn’t match the narrative!!! Yes, there was a tax cut and the economy started growing. But the only growth that was unusually strong for the time period occurred in one single year, from 1983 to 1984. And immediately afterwards it dropped and kept dropping.

In 1987, there was a small pickup in growth which accompanied a further tax cut (50% to 38.5%), but the year after, when the top marginal tax rate dropped further (to 28%), growth fell again.

Strip away the rhetoric, and it would seem the “evidence” for the benefits of Reaganomics, for the most part, are that following the small tax cut in 1981 (70% to 69.25%) and the bigger one in 1982 (69.25% to 50%), there was one seemingly extraordinary year of growth from 1983 to 1984. I could swear the narrative usually isn’t stated in this way.

But let’s take a close-up of the Reagan years and put them (and the one extraordinary year) in perspective. In the next graph we have the 1980 -1988, but for comparison, I’ve included the growth rate from 1938 to 1939. That happens to be the third slowest year of the pre-WW2 New Deal era. Here’s what it looks like:

Figure 2
Figure 2

Now, you may be able to noodle out why I picked the third slowest year of FDR’s first 8 years from the graph – see, it turns out that Reagan’s best year was faster than FDR’s worst, and FDR’s second worst pre-WW2 years, but that’s about it.

Redoing Figure 2 and adding in FDR’s best pre-WW2 New Deal year: 1940 to 1941, produces this graph:

Figure 3
Figure 3.

Doesn’t look at all like what you learn in school, eh? How about what you hear on Fox? Or from El Rushbo? What about from Rick Perry? Heck, you don’t even hear about this from liberals.

What you will hear is denial, and on the rare occasions where someone is willing to accept the data, excuses. Now, I’m sympathetic to the idea that FDR and Reagan were Presidents at very different times, that perhaps FDR had higher potential growth due to a bounceback effect (I don’t buy it, but I’m sympathetic to the idea). I also don’t find it offensive if someone states that times and laws were different, and even if Reagan had FDR’s approach to government in mind, he could never have enacted the same policies that FDR applied. What I am not sympathetic to are people who tell us about how well Reagan’s policies worked and who also insist that FDR ruined the economy or made it worse. People who make such claims can only fall into two categories, the “good” one being the misinformed.

So to sum up… so far in this series… it seems the evidence has been at least weakly against the idea that tax cuts lead to faster economic growth in the 1901 – 1928, 1929 – 1940, and 1950 – 1968 periods. The 1940 – 1950 period does seem to behave consistently with that notion, though it is worth noting that it happened when tax rates were above 90%. The period from 1950 – 1968, despite the frequent obfuscatory comments from certain sectors, also completely fails to support the notion that lower tax rates are followed by faster economic growth. And frankly, the 1970s and 1980s don’t help the cause either.

Because the Reagan years play such an important role in the way we do economic policy in this country, we’ll revisit them in the next post in the series.

As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel (note that I’m not from the wealthy branch of the family that can afford two “m”s – make sure you only put one “m” in there) at gmail period com.

Cross-posted at the Angry Bear blog.

This post is the fifth in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940, the third from 1940 to 1950, and the fifth looked at 1950 – 1968.

Before I begin, a quick recap… both the 1901 – 1928 period and the 1929 – 1940 failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. In the 1940 – 1950 period, we did observe slower economic growth following a tax hike and faster economic growth followed a tax reduction. However, that happened when the top marginal tax rate was boosted above 90%. Interestingly enough, though the so-called “Kennedy Tax Cuts” are often used as one of the prime exhibits on the benefits of cutting taxes, a look at the 1950 – 1968 period yields no such conclusion. Growth rates were already rising before the tax cuts occurred in 1964 and 1965, reached a peak when the tax cuts took place, and started shrinking immediately afterwards.

Real GDP figures used in this post come from Bureau of Economic Analysis. Top individual marginal tax rate figures used in this post come from the IRS. As in previous posts, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate. Let me stress this point again as I’ve been getting people e-mailing me to tell me I’ve got the growth rates shifted a year. That is correct, and is being done on purpose (and is shown on the graph labels). To avoid questions of causality, the growth rate in year X used in this post is the growth rate from year X to year X+1. And when I say “to avoid questions of causality” – you’d be amazed at how many people write me when I don’t do this and insist that sure, higher tax rates seem to be correlated with faster growth, but that’s because when growth is faster governments feel more willing to charge higher tax rates.

So let’s get started. Let’s put up a diagram showing growth rates and tax rates for the period from 1968 to 1988. But we almost don’t have to do it. We all know what happened. We’ve been told so many times. Tax rates were very high in the late 60s and 70s. And then came the Lone Ranger Reagan, and, and lo, Reagan cut taxes. The result is that the economy began to grow like never before. Sure, the story is strikingly similar to the one about the tax cuts in the 1960s, and we know from the last post how that turned out. But still, the Reagan story is even more widely accepted, so here’s the graph that accompanies the story:

Figure 1
Figure 1.

Wait. That can’t be right. Something is wrong with the data because it doesn’t match the narrative!!! Yes, there was a tax cut and the economy started growing. But the only growth that was unusually strong for the time period occurred in one single year, from 1983 to 1984. And immediately afterwards it dropped and kept dropping.

In 1987, there was a small pickup in growth which accompanied a further tax cut (50% to 38.5%), but the year after, when the top marginal tax rate dropped further (to 28%), growth fell again.

Strip away the rhetoric, and it would seem the “evidence” for the benefits of Reaganomics, for the most part, are that following the small tax cut in 1981 (70% to 69.25%) and the bigger one in 1982 (69.25% to 50%), there was one seemingly extraordinary year of growth from 1983 to 1984. I could swear the narrative usually isn’t stated in this way.

But let’s take a close-up of the Reagan years and put them (and the one extraordinary year) in perspective. In the next graph we have the 1980 -1988, but for comparison, I’ve included the growth rate from 1938 to 1939. That happens to be the third slowest year of the pre-WW2 New Deal era. Here’s what it looks like:

Figure 2
Figure 2

Now, you may be able to noodle out why I picked the third slowest year of FDR’s first 8 years from the graph – see, it turns out that Reagan’s best year was faster than FDR’s worst, and FDR’s second worst pre-WW2 years, but that’s about it.

Redoing Figure 2 and adding in FDR’s best pre-WW2 New Deal year: 1940 to 1941, produces this graph:

Figure 3
Figure 3.

Doesn’t look at all like what you learn in school, eh? How about what you hear on Fox? Or from El Rushbo? What about from Rick Perry? Heck, you don’t even hear about this from liberals.

What you will hear is denial, and on the rare occasions where someone is willing to accept the data, excuses. Now, I’m sympathetic to the idea that FDR and Reagan were Presidents at very different times, that perhaps FDR had higher potential growth due to a bounceback effect (I don’t buy it, but I’m sympathetic to the idea). I also don’t find it offensive if someone states that times and laws were different, and even if Reagan had FDR’s approach to government in mind, he could never have enacted the same policies that FDR applied. What I am not sympathetic to are people who tell us about how well Reagan’s policies worked and who also insist that FDR ruined the economy or made it worse. People who make such claims can only fall into two categories, the “good” one being the misinformed.

So to sum up… so far in this series… it seems the evidence has been at least weakly against the idea that tax cuts lead to faster economic growth in the 1901 – 1928, 1929 – 1940, and 1950 – 1968 periods. The 1940 – 1950 period does seem to behave consistently with that notion, though it is worth noting that it happened when tax rates were above 90%. The period from 1950 – 1968, despite the frequent obfuscatory comments from certain sectors, also completely fails to support the notion that lower tax rates are followed by faster economic growth. And frankly, the 1970s and 1980s don’t help the cause either.

Because the Reagan years play such an important role in the way we do economic policy in this country, we’ll revisit them in the next post in the series.

As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel (note that I’m not from the wealthy branch of the family that can afford two “m”s – make sure you only put one “m” in there) at gmail period com.

Cross-posted at the Angry Bear blog.

This post is the fourth in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940, the third from 1940 to 1950. This week we look at 1950 – 1968.

Before I begin, a quick recap… both the 1901 – 1928 period and the 1929 – 1940 failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. In the 1940 – 1950 period, we did observe slower economic growth following a tax hike and faster economic growth followed a tax reduction. However, that happened when the top marginal tax rate was boosted above 90%.

There were also a few other findings that might be surprising given the poor acquaintance Americans have with data. For example, the so-called Roaring 20s were a period in which the economy was often in recession. The New Deal era, on the other hand, coincided with some of the fastest economic growth rates this country has seen since reliable data has been kept. Additionally, rather than leading to faster economic growth, the economy actually slowed, a lot, during World War 2.

Real GDP figures used in this post come from Bureau of Economic Analysis. Top individual marginal tax rate figures used in this post come from the IRS. As in previous posts, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate.

Now that the preliminaries are done, if I was following the same pattern I followed in other posts I’d post a graph showing real GDP growth rates and tax rates. But this time I’m going to hold off on that graph for a few more paragraphs. Instead, I want to discuss an extremely pervasive myth about the period, and how that affects our understanding of economic of the era. The myth involves the so-called Kennedy Tax Cuts. Ask most economists and they’ll tell you: the economy was in the doldrums until Kennedy cut taxes from 91% to 70%. After that shot in the arm, growth took off like a shot. There is a second myth, but it is more confused: the myth of the idyllic 1950s. That one says that there was rapid growth in the 1950s because the US had little economic competition, what with the rest of Free World haven’t been destroyed during World War 2. It doesn’t reconcile that well with the Kennedy tax cut myth since, of course, for the Kennedy tax cuts to pull the economy out of the doldrums caused by a 91% tax rate, the economy has to be in the doldrums rather than idyllic when tax rates are 91%.

So let’s look at what happened. The graph below shows growth rates for the period. (I’m not including tax rates quite yet… that comes later.)

Figure 1
Figure 1.

Well, growth rates in the 1950s weren’t steady. There were a lot of ups and downs. During three years in the 1950s, growth rates equaled or exceeded those in Reagan’s best year. But it was also a period in which in which there were two recessions (and two more between 1945 and 1950, and another one in 1960) and the economy actually shrunk in two different years. The 1950s can’t be characterized as idyllic nor as the doldrums.

Now, there is a point in the graph that seems consistent with the idea that Kennedy did something that was a game changer. Kennedy took office in January 1961, while the economy was going through the downward part of the cycle we had seen repeated since 1950. And then… instead of the economy continuing on its downward trajectory, growth picked up and accelerated (with one blip), staying (mostly) above 5% through about 1965. LBJ of course, took office when JFK was shot on November 22, 1963 so in this version of history, presumably, the end of the Kennedy boom came about when LBJ started inflicting socialism on us. The only fly in that ointment to that story, of course, is that while hitting the same growth rate as Reagan achieved in his best ever year was not uncommon in the 1950s when the top marginal tax rate was 91%, it stopped happening after JFK.

Which is all well and good, except for one detail apparent in the graph below which shows both the growth rate and the tax rate:

Figure 2
Figure 2.

As figure 2 shows, the cut in the top marginal rate occurred in 1964 (91% to 77%) and 1965 (77% to 70%). Yes, the Kennedy tax cuts were pushed through by LBJ after Kennedy was dead, and growth rates had already been fast and getting faster for several years before they occurred. Worse, real growth in the 1960s reached their peak – the acceleration that had begun years earlier all of a sudden came to a halt – when the tax cuts occurred. For the remainder of LBJ’s term, growth remained strong, but not as strong as it had been earlier. For instance, the average of the annual growth rates of the 1961 to 1962, 1962 to 1963, and 1963 to 1964 years when tax rates were 91% was 5.41%. The average from 1966 to 1967, 1967 to 1968, and 1968 to 1969, after the tax rates were dropped was 3.49%. (Yes, I know, in his last year LBJ raised tax rates back to 75.25%, but even then it was well below the 91% before the tax cuts.)

This is not, repeat, remotely consistent with the myth I keep hearing about the Kennedy tax cuts.

So far in this series… it seems the evidence has been at least weakly against the idea that tax cuts lead to faster economic growth in the 1901 – 1928, 1929 – 1940, and 1950 – 1968 periods. The 1940 – 1950 period does seem to behave consistently with that notion, though it is worth noting that it happened when tax rates were above 90%. Next post in the series: 1968 – 1980.

As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel (note that I’m not from the wealthy branch of the family that can afford two “m”s – make sure you only put one “m” in there) at gmail period com.

Cross-posted at the Angry Bear blog

The Effect of Individual Income Tax Rates on the Economy, Part 3: WW2 and the Immediate Post-War Recovery

This post is the third in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940. This one will look at the period from 1940 to 1950.

Before I begin, a quick recap… both the 1901 – 1928 period and the 1929 – 1940 failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. There were also a few other findings that might be surprising – the so-called Roaring 20s were a period in which the economy was often in recession. The New Deal era, on the other hand, coincided with some of the fastest economic growth rates this country has seen since reliable data has been kept. As we will see in this post, the period from 1940 to 1950, encompassing WW2 as well as the immediate post-war recovery, also is subject to a lot of popular misconceptions.

Real GDP figures used in this post come from Bureau of Economic Analysis. Top individual marginal tax rate figures used in this post come from the IRS. As in previous posts, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate.
The following graph shows the growth rate in real GDP from one year to the next (black line) and the top marginal tax rate (gray bars) for the period from 1940 to 1950.

Figure 1
Figure 1

Finally, in the fourth decade we looked at in this series so far, we see a graph that doesn’t contradict textbook economics: growth seems to slow down as tax rates rise, reaching its lowest point (on the graph) when tax rates peaked. Then, after tax rates begin to fall, growth picks up again. So why do we see this negative correlation between tax rates and subsequent growth rates during the 1940 to 1950 period when we saw the opposite in the previous periods?

Well, as I’ve pointed out many times in the past, there is a quadratic relationship between tax rates and subsequent growth rates (kind of like the Laffer curve, but with real GDP growth taking the place of tax collections), and the fastest growth tends to occur when the top marginal rate is somewhere around 65%. (At this juncture I have to point out things can be true whether we like them or not. If you’re looking for a micro-foundations reason why raising tax rates can create faster economic growth, try this.)

In any case, tax rates in 1940 were at 79%, and they reached a high of 94% in 1944 and 1945. Clearly, at 79% the top marginal tax rates were already above optimum, and raising them simply moved them even farther away from the optimum growth rate. Conversely, cutting tax rates down to the low 80% following the end of WW2 moved tax rates closer to optimum.

But growth does not live by tax rates alone and the graph above hints at a few other misconceptions. Let’s start with a big one shared by folks on the left and the right, namely that World War 2 led to faster economic growth. In fact, many folks go so far as to say the economy suffered very slow growth until the outbreak of WW2, which as we saw in the last post in the series, is a comical claim. The graph below shows growth rates from 1938 to 1944. (Remember – for our purposes, growth is from t to t+1… thus, growth in 1938 is the percentage change between the 1938 real GDP and the 1939 real GDP.) As with Figure 2 in the previous post, the best ever year of the Reagan administration is also included for comparison purposes.

Figure 2
Figure 2.

Notice… growth was already fairly quick from 1938 to 1939, and from 1939 to 1940… and then it really jumped from 1940 to 1941. Pearl Harbor was December 7, 1941, so most of that latter jump came before the American entry into the war. Now, one might say that somewhere around 1938 was the beginning of US involvement in WW2, what with Liberty Ships and the Arsenal of Democracy and all. Put another way, that big jump in growth came before the US was in the war, but as an administration whose policies had already generated several years of very rapid growth since 1933 took an increasing role in the economy. Apparently the economic policies followed were good enough to overcome even tax rates that were significantly above optimum.

Growth peaked between 1941 and 1942 and then began to shrink. In part, as we saw, that was because tax rates got too far above optimum. In part, on the other hand, it is because too much of the country’s labor pool was shipped abroad to fight in the war. But regardless… if the war had been a catalyst for jumpstarting the economy, the peak would not have occurred when it did… and growth would not have started accelerating so many years before the country’s entry into the war..

There’s one more myth that is worth tackling. That myth is that there was some sort of stupendous economic boom following WW2. And it only makes sense that there would be such a boom – the GIs came home, tax rates were cut in 1946 and again in 1948, government spending dropped, and rationing and price controls went by the wayside. And as Figure 1 shows, real GDP had a post-war nadir (I always wanted to use that word!!!) in 1947, and recovered after that. But it is important to put that recovery into context.

The graph below shows the rate of growth from 1947 (the bottom) to 1950 – the post-war miracle, as it were – and it compares it to the rate of growth from 1933 (the bottom of the Great Depression) to 1936, the heart of the New Deal.

Figure 3
Figure 3.

As Figure 3 shows, there really is no comparison between the two recoveries. Whereas during the post war recovery, the economy grew almost 13% over three years following the bottom, it grew almost three times faster following the bottom in 1933. And from the previous post, we saw what happened during the rest of the 1930s. We’ll see what followed the post-War recovery in the next post on this series.

As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel at gmail period com.