* GDP grew in three main phases, slow, fast and slow, corresponding to phases of CPI growth, inflation being the dominant component of GDP growth. The GDP growth in excess of inflation and population growth represents supra-subsistance purchase of goods and services, ie prosperity or life style. US prosperity in the present decade (2002-2012) is about twice that in the 1950s. Why aren't we grateful? Probably because most of the increased prosperity was for the richest citizens; little of the increased prosperity was shared by average workers -- this shown in the Top 1% Income Share plot of Fig 4. The dynamics of wealth distribution are examined by Robert Reich.
* Comparing Figs 1 and 2, one sees that prosperity declined between 1978 and 1982, when oil prices and interest rates were highest and GDP growth was fastest; and prosperity improved between 1982 and 1988 when oil prices and interest rates were falling, government spending was elevated and GDP growth was slowing. Given these data, one cannot attribute the Reagan prosperity to tax cuts, and one cannot look to GDP growth as a measure economic health. Do economists, pundits and politicians know this?
* There are some (but not enough) negative-feedback loops from dependent variables back to independent variables, antagonizing departures from a steady state--in the face of economic disturbances such as technological advances, international trade, educational outcomes, wars, resource variations, immigration, social justice, labor movements, etc. The feedbacks may be market forces (prosperity back to oil price), interventions (inflation and employment rate back to interest rates, government debt back to tax rates and government spending), regulatory (resource reserves and environment back to exploitation). Political doctrines distort these feedbacks.
* Employment rate (inverse of unemployment rate shown in Fig 2) is seen as a more sensitive and reliable index of economic health than prosperity shown in Fig 1. Nevertheless, comparing the two, one sees that the prosperity plot is meaningful. For example, the long employment recovery from 1958 to 1968 corresponds to a steeper prosperity rise from 1960 to 1969, likewise for 1982 to 1988 and other intervals.
* The unemployment plot looks almost like a delayed version of the interest-rate plot (CMT = Constant Maturity Treasury), and it looks almost like a delayed version of the oil-price plot in direction though not in amplitude. One can even see a correlation between government spending and economic health. Given these apparent dynamics regardless of tax rates, I conclude that the 1980s recovery would surely have occurred without the tax cuts, whose undeniable effects were massive government debt and social imbalance.
* As seen in Fig 4, Reagan's tax/spending policies increased the income share of the already wealthy, the richest 1% of Americans now getting 18% of income, a 2.25x increase from pre-Reagan years. The average 1%er now receives 25x what the average 99%er receives, ie the average 1%er receives about $500/hour or $4000/day. (Is this correct?) This was a deliberate policy to increase capital formation for the sake of entrepreneurialism. My experience is that businesses start and grow when paying customers have unmet needs and desires. More capital sloshing among the hedge funds contributes little if anything to economic health.
* Rich people don't know what's good for them. When they take power and rig tax rates to enrich themselves at the expense of budget balance, they don't feel satisfied, since their increased wealth gets them little they couldn't already afford and their social peers grow richer with them as a cohort. If at the same time they do nothing for average citizens, they are condemned as greedy. With all that power, they failed to arrange a just sharing of the benefits of technology with and among laborers. Now that everyone has smart phones and social media, there is a growing risk of civil unrest. Carried interest could become the cause celebre of unemployed and demoralized workers demanding restoration of economic justice.
* Laborers don't know what's good for them. They blackmail managers into wages and benefits that may not be sustainable. They should accept a base-pay/profit-sharing formula that ensures that their jobs endure as long as possible, in America.
* Fig 5 shows reveneues and expenditures causing the debt seen already in Fig 3. In passing, it is worth noting that we got through the Korean War, Vietnam War and the Great Society with modest revenues, modest expenditures, modest deficits, relatively good employment and declining debt/GDP. It seems to me that Reagan's tax cuts might have been a simple-minded response to more people earning into the highest bracket and complaining about it to their government buddies, top rate being 70%, this resulting in revenues 20% of GDP. It would have been better to leave the tax rates unchanged and to index the tax brackets to CPI so as to move revenues toward 20% of GDP, where it would have prevented the unbridled growth of debt. Any scientist or engineer could accomplish this if so commissioned, but Congress cannot be trusted to do it. The effects of this fine tuning are shown in the green Debt plot, where it is seen that our debt/GDP today would be a manageable half what it actually is, less than twice what it was in 1980. Without the housing-bubble collapse of 2007, government debt would be only 30% of GDP as it was before Reagan's tax cuts.
* Now, what about that Fiscal Cliff. As argued above, the 1980s recovery could be explained by falling interest rates, falling oil prices and increased spending, one or more of these initiating every recovery. While tax cuts might have contributed to the recovery, there is no evidence that they did. The even bigger recovery of the 1990s was again anticipated by falling interest rates, falling oil prices and some extra spending. The increases of income tax rate and capital-gains tax rate of the late 80s and early 90s clearly did not constitute a fiscal cliff. And the tax cuts of the early 2000s did not prevent the economic collapse of 2007. Since government debt is getting to be a serious problem and since there is no evidence that tax cuts ever had a beneficial effect or that tax hikes ever had a harmful effect on economic health, we should let the Bush tax cuts expire for all earning more than $100k/y or for everybody.
* With a model accounting for the influence of independent variables on dependent variables, one could estimate the sensitivity of any dependent variable to any independent variable. The above considerations support the view that economic-health measures (employment, prosperity) are extremely insensitive to tax rates. Any detrimental effect of the expected tax hike on economic health could be easily compensated by a modest regulatory or spending adjustment.
* The looming economic threat is not a tax hike; it's the European cash-flow imbalance that might lead to a sudden drop in European buying power.
Update: A 2017 expert analysis essentially agrees with the above, as does a more recent one.
David M Regen
Recreational Utopian
xmsdavidr@gmail.com
