I’ve written several dozen times that I go out of my way to avoid ad hominem attacks, instead preferring to address the merits of a particular argument. Occasionally though, I read something so painfully rife with non-sequitur and logical fallacy, so absent any factual or analytical support that in crafting my reaction to it, despite my best efforts to the contrary, it’s simply impossible to respond without calling into question the author’s credibility and expertise in the topics at hand.
Earlier this week I came across one such piece, appearing in the Huffington Post entitled “Economic History Shows Clearly That Tax Cuts for Rich Hurt the Economy,” which I thought curious from the start, as the Author, Robert Creamer is cited as a “Political organiser, strategist, and author,” to say nothing of the fact that economists debate the effects of tax policy quite frequently, and consensus (if it can even be called that) is a relative word.
I’m not one to write-off an argument purely due to the apparent lack of qualifications of it’s author though, so I read the rest while trying to keep an open mind, giving Creamer the benefit of the doubt. I sincerely hoped to encounter a well-structured, well-argued essay supporting the article’s title, unfortunately the prose which followed only served to confirm my initial scepticism.
Just to be clear, as I’ve said several times before – most recently just this past week – one does not need a degree or even work experience in economics in order to intelligently discuss the field, however, that does not excuse one from penning a thinly-veiled political spin piece under the guise of well-researched analysis, which is exactly what Mr. Creamer (herein “the author”) has done. While a self-defeating practice, I don’t particularly mind people conflating politics and economics in their private views, but to do so in a public forum speaking as a subject matter expert is dishonest, at best.
To be sure, both Democrats and Republicans (and politicians of every stripe in between) are guilty of doing the same, but as the author himself insinuates in his article (discussed below), that doesn’t make it right. If I may speak normatively for a moment, one’s understanding (not lack thereof) of economics and economic data should inform his/her politics, not vice-versa. Alas, as I’ll discuss later, even Economics PhD’s allow their politics to influence their economics, even in the face of fairly clear evidence they’re views are suspect if not downright wrong.
That being said, follow me as I point out the flaws in each section of the article with the hope that after reading – as the title of this article says – you’ll be able to better separate uninformed political rhetoric from economic and demographic analysis rooted in facts and data.
**Just a note: this is not going to be a short article, if you haven’t already guessed.**
Let’s start here, which I think is an incredibly ironic if not downright hypocritical opening lede:
Just because you repeat something over and over doesn’t make it true. In fact, there is a body of empirical, historical evidence that proves clearly that tax cuts for the rich not only do nothing to spur economic growth — they actually do substantial damage to the prospects for economic growth.
As I mentioned earlier, the idea of consensus amongst economists (not politicians masquerading as them) on optimal tax policy and changes therein is a bit of a debate. On one hand, you have guys like Arthur Laffer who appear in the WSJ Op-Ed pages and argue, for example, that tax cuts often increase government tax receipts (oversimplifying, for more detail, see here or read one of his papers), a claim that I, myself have questioned and one that runs contrary to both popular belief as well as the one promoted in the author’s article. On the other, you have guys like Paul Krugman who, despite having PhD’s in Economics, promote more liberal economic policies than even the most bleeding-heart Legislators. Instead of listing a series of academic papers or articles from either side of the debate, I’d like to share some quick number-crunching I did this summer on data from the BEA and IRS (also see this from the IRS for the data in MS Excel format) on the effects of changes in tax policy for “the rich” (which we’ll refer to for our purposes as those in the top 1% of incomes).
Photo: Stone Street Advisors
Over the past 20-or-so years, GDP has increased 87% and the amount of money the top 1% pays in Federal income taxes has increased 377%, while the average tax rate for that group over that period has decreased 32%! So, to summarize: The tax rate on “the rich” has gone down, but the amount of money they pay in Federal taxes has gone up, as has GDP. I’m curious to see what data Creamer analysed prior to making the statement in the above quoted text. It seems pretty clear that his claim is rather easily refuted with only a cursory examination of publicly-available data from the Government.
Creamer’s article goes on to remind us of how rough the tax burden was on “the rich” (his definition, the meaning of which he fails to clarify) during earlier parts of the last century:
During World War II, the tax bite on wealthy Americans was close to punitive (the highest bracket was 91 per cent). But that didn’t hurt the economy; far from it. By war’s end, Americans were rolling in cash. The average weekly pay rose 83 per cent between 1940 and 1945. Many families had their first discretionary income.
In fact, this period — and the expansionary fiscal policy that helped finance the war — led to the longest sustained period of growth in American history and created the American middle class.
The main reason I want to highlight this excerpt, specifically the latter part of it – is because its exemplar of one of the biggest fallacies I see repeated day-in and day-out in the financial/economic/political media. You cannot compare figures on tax rates, income, unemployment and the like from the post-war period, in which we (broadly) experienced the most significant technological and cultural revolution in a century, to the past generation or even the past decade. There exist FAR too many confounding factors at play that affected data from these periods to draw any reasonable comparison (although most pundits and commentators will continue to do so, much to my chagrin).
The article next leaps to – shocker – ignorant praise of tax policies put in-place by a Democrat President, Bill Clinton (as an aside, I’m Libertarian, not conservative, not by a long shot):
Or we can turn to the tax policy of the Clinton administration. In 1993, President Bill Clinton proposed a budget that raised taxes on the rich. Republicans predicted that its passage would lead to economic doom. They argued that the Clinton tax increase on the rich would lead to economic stagnation and unemployment. Instead, of course, the Clinton administration created 22.5 million jobs, of which 20.7 million — or 92 per cent — were in the private sector. His economic policy eliminated the federal deficit and left his successor — George Bush — with budget surpluses projected as far as the eye could see.
So history tells us pretty clearly that increased taxes for the rich don’t hinder economic growth. Now let’s look at historical evidence that the opposite proposition is true — whether tax cuts for the rich actually promote economic growth.
To see the fallacy in that argument all you have to do is go back to the Bush administration. For eight years, George Bush and the Republicans lowered taxes for the wealthy and cut back the regulation of big corporations and Wall Street — all based on the premise that these two policies would benefit the economy.
So, instead of saying that Cisco, HP, Dell, Apple, Yahoo, etc, created commercially successful products and services that created jobs in the 90’s, the author attributes those jobs to the deft tax policy moves by the Clinton Administration. This is yet another dishonest and spurious conclusion drawn by the author to support what seems to be a clearly liberal, anti-“wealthy” bend, nothing less. Witness (emphasis mine):
The New York Times reported last year that, “For the first time since the Depression, the American economy has added virtually no jobs in the private sector over a 10-year period. The total number of jobs has grown a bit, but that is only because of government hiring.”
In fact, in the eight years when George Bush and the Republicans in Congress passed two massive tax cuts, we saw a massive, secular decline in the creation of private sector jobs.
Of course it won’t surprise anyone that this decline was led by the reduction of American manufacturing jobs. There was a decline of 3.7 per cent in overall manufacturing jobs in the United States over the last decade ending in 2009.
Why are we losing manufacturing jobs? One significant reason is because it costs so much more to manufacture things in the U.S. than it does in many other countries, and one of the main drivers behind this is labour costs. Around the middle of the last decade, all of the Detroit “Big Three” were losing money on every car they sold, despite the fact that much of their manufacturing and assembly was already being done in Mexico (etc), while foreign automakers with plants in the South without union labour were profitably selling cars, trucks, and SUV’s (I distinctly remember this from an article in I believe the NY Times that I quoted for an assignment in college, apologies for not having a link). Liberals can’t complain about the loss of manufacturing jobs without acknowledging that Unions and the high wages they demand are part of the problem.
The author continues (emphasis his):
In fact, there is absolutely no evidence in the economic history of the last century that tax cuts for the rich increase economic growth. But there is evidence that they actually hurt prospects for economic growth — both in the short and long run.
Tax cuts for the wealthy function to reduce economic growth in two specific ways:
First, they amplify the tendency of income and wealth to concentrate in a small segment of the population. Throughout the entire period of Republican rule, all of the economic growth was siphoned off to the top two per cent. Real wages stagnated, and continued growth in the Gross Domestic Product was fuelled — for a time — by an expanding credit bubble that ultimately burst.
The problem is that to be sustained over time, economic growth must be widely shared. Otherwise, demand for new products and services stagnates; there is no incentive for businesses to invest, and economic growth itself stalls.
As we showed above, the first sentence there is simply untrue so I’m not going to re-visit that point. To his bolded point, I’d say that’s only one piece of the puzzle. One of the main drivers of financial success is education; another is choosing to go down an education/career path that, with lots of hard work and some luck, is likely to make one a good amount of money. Remember, many of the people who comprise “the rich” work a lot more than 40 hours a week, and many have graduate and doctoral degrees, not just undergraduate. In fact, as the WSJ pointed out just this week, more of “the rich” are making more of their money from working – as opposed to collecting passive income – today than ever before. Weird how we get different conclusions when we actually do some cursory research, huh? As you may have noticed by the way, this is not the first time the author presents only one piece of an argument without so much as acknowledging there any other factors at play. This will also not be the last.
In fairness though, I will agree (at least partially) with the author that unless economic growth is shared across the income spectrum, it’s largely unsustainable and not the kind of growth we should pursue, but again, there’s other factors at play, like education and other demographic/societal issues; tax policy is again only one small piece of the puzzle.
To further his agenda, the author continues:
Fundamentally, economic growth is about the development of processes and technologies that increase productivity. But these do not occur when wealth is concentrated and labour prices are cheap. They occur when new growth is shared and wages are high.
A high-wage economy leads to major long-term economic dividends because:
- It incentivizes companies to invest in higher-productivity technologies that increase overall productivity and provide real economic growth.
- It creates customers with spending power to drive economic growth. There is a natural tendency of market economies to use low-cost labour and increase profits. That’s good for each company’s bottom line, but it kills off the goose that lays the golden egg by reducing the buying power of its ultimate customers — the people who work for all the companies in the economy combined.
This is particularly amusing because the development of processes and technologies that increase productivity generally have done so by reducing the need for manual and human labour. Automobile assembly robots, electronic funds processing, the internet and almost all of our technological achievements over the past 50 or so years have significantly increased productivity but they have done so by largely replacing humans in the supply chain, yet we still have a not-insignificant chunk of our population that for several reasons has failed to adapt their skill sets to this more automated reality.
The point is gains in productivity from technological/procedural improvements will shift “high wage” jobs away from tasks that can be automated and towards jobs that require a higher level of customisation/dynamicism. Think-tanks and academics have written at great length about higher education and labour force make-up by skill sets so I’ll leave it to the reader to explore this at their leisure as it’s a bit tangential to my main goals in writing this. Ultimately, though, labour cannot expect to continue to be useful (employed at the same pay rate) in the midst of societal and technological change without continuously adapting it’s skill set to be useful given those changes. labour and tax policies that encourage the workforce to be stagnant and cling to antiquated roles/skills (ones where they have no comparative advantage) is counter to economic growth, end of story.
Interestingly enough, the author actually touches upon some of these very ideas, except he utterly fails to do so in a fair, reasonable way (italic highlights are mine, bold are his):
Second, tax cuts for the rich starve the public sector of funds that are necessary to assure long-term growth. Tax-cut activist Grover Norquist was quite explicit when he championed the Bush tax cuts that he intended to deprive government of resources so it could be “drowned in a bathtub.”
Historically, tax cuts for the rich have been used — quite intentionally — to create deficits that make it politically difficult for government to do three things that are critical to sustaining growth over the long run:
First of all, as the table I cited above shows, while tax rates on “the rich” have gone down, tax receipts from them have gone up. Any deficits are the result of mis-matched government spending, not lower tax rates. Any claim to the contrary is disingenuous.
He continues (emphasis mine here):
- Tax cuts for the rich shortchange investments in education that are the major engine of most long-term increases in productivity, and hence real economic growth. Education is the major factor that makes the workforce more productive. It underlies all of the scientific discoveries and technological advancement that boost productivity. America’s commitment to universal public education is responsible — more than any other single factor — for our economic success over the last century. And more than any other factor, the massive growth of the Chinese economy is rooted in the exponential increased level of its people’s education. The Chinese are turning out more graduate engineers each year than the rest of the industrial world combined. Starving our schools and universities will do more damage to our long-term economic prospects than anything else we could do. Yet it is a direct consequence of tax cuts for the rich.
This is a massive non-sequitur, plain and simple. Again, liberals claim that we need more money for something – in this case education – without looking at how that money is used. A few years ago I had arguments with some young teacher friends of mine about how the teachers’ unions are bad for education and bad for the country. Back then, my remarks were met with staunch opposition and parroting of typical liberal defence of unions. Fast forward a few years and municipalities are short on cash and these same young, highly-educated (graduate and post graduate degrees) teachers are in danger of losing their jobs so that older, more expensive, tenured teachers with less incentive to work hard to educate our children can keep their jobs. Teachers unions have directly contributed to higher education costs and kept the quality of education provided from rising, despite the government throwing significant chunks of money at the problem.
Tax cuts for “the rich” have had – in the author’s jaundiced eyes – further negative effects:
- Tax cuts for the rich restrict government’s ability to invest in new public infrastructure that is another major factor in assuring long-term growth. Roads, rail lines, airports, sewer and water systems, sanitation, public health — all of these are critical foundations for economic success. Yet over the Bush years, all of them were starved for cash — both by Bush’s wars and by his tax cuts for the rich.
Here I’ll at least agree with the author that the dual wars in Iraq and Afghanistan are not very good uses of our limited financial resources. Is it important to fight terrorism and ensure our national security? Absolutely, but we have to get our own house in order before we can start ordering around others’. Aside from the money spent on the wars, again, as we’ve shown again and again, government’s budget decisions are the primary factor infrastructure improvements have been delayed, not tax cuts for the rich.
As we near the end of the author’s piece, we encounter a bit of a straw-man argument, when he says:
And just in case you hear someone say that a dollar spent on tax cuts to the rich is a good way to stimulate the economy, here’s a fact from Mark Zandi, chief economist for Moody’s.com, who was also an economic adviser to John McCain:
For every dollar spent on making the Bush tax cuts permanent, you get $.29 of increase in the GDP. For every dollar spent to extend unemployment benefits you get $1.64 increase in the GDP. In other words, a dollar spent on unemployment compensation gets 5.6 times more boost to the GDP than a tax cut for the rich.
The reason is simple. When you’re in a recession, the problem is that demand is too low, so spending that increases demand really boosts the economy, since it creates demand that entices businesses to hire people who then spend more money and create more jobs — and so on.
But when you give tax breaks to the rich, they don’t spend most of those breaks like a family that needs unemployment. They save and invest a substantial portion. But in a recession you don’t need more savings or investment, you need more demand.
Firstly, where is that Zandi quote/figure from? I don’t see a hyperlink to a paper, press release, or speech, so we don’t know the context and related information surrounding the numbers attributed to Zandi. Second, the argument that increased demand for goods & services will get us out of recession is an incomplete one, one that I touched-upon last week. To quote myself, “While Per-Capita Disposable Personal Income is down slightly from where it peaked in the 2nd quarter of 2008 (in 2005 dollars; in current-dollars it was at it’s highest point this most recent quarter), it’s certainly still a huge part of GDP, as a matter of fact, per-capita personal spending was higher in the most recent quarter (2010q3) than it was in right before the S&P 500 peaked on October 9, 2007!”
Put simply: the disposable income is there, but the existence of disposable income does not, in and of itself, create demand for goods & services. Perhaps the author should have considered the possibility that consumers are using their money for other purposes, like paying down debt. Since it peaked two years ago (12/2008), revolving consumer debt outstanding has decreased 19% (-16.4% using the seasonally adjusted data) or $187 billion through October. I feel like this is so obvious I shouldn’t have to point it out, but to be clear: a dollar of disposable income can be spent on paying-down debt or on buying goods/services, but not both.
Finally, the author concludes:
But that’s exactly what those “deficit hawks” in the Republican Party are proposing. After running around the country for months campaigning about “runaway deficits” they propose to borrow $700 billion additional dollars to finance more tax cuts for the rich. And at the same time, last week the Republicans voted in the House to block extension of unemployment benefits that really would boost economic growth. They are happy to borrow more money to make their rich patrons richer — but they refuse to borrow any money to provide unemployment benefits that not only allow middle-class families who have lost their jobs through no fault of their own to keep their heads above water, but actually do turbocharged the economy…
The Republican proposal to make the rich richer is just plain wrong. If they succeed, the price will be paid by our children, who must pay the debt. But it will also be paid by all of us today in the form of lost goods and services that will never be created because so many people who are willing and able to work can’t find jobs.
As I mentioned towards the beginning of this article, I’m neither a Democrat nor a Republican, and as such, I don’t particularly agree with either side’s “solutions” to our economic malaise. While unemployment benefits are important part of keeping our economy from collapsing and those out of work (and more importantly those who’ve paid unemployment taxes) from having to scavenge for basic necessities, making those benefits available as cash payments for up to two years or more is a bit much, I think.
Just walking/driving around NYC and North NJ, I see A LOT of immigrants from Central and Southern America mowing laws, doing landscaping, working construction, and making deliveries yet oddly-enough, I see very few people who appear to be U.S. citizens (anecdotal experience and conversation confirm these observations) doing these jobs. What incentive do unemployed Americans have to get off the couch and work when the Government is paying them to sit around and “look for work” do nothing? The answer is not much, if any. If the government wants people to get back to work it has to make sure businesses have the proper incentives to hire and employees have the proper incentives to seek work. Pointing fingers & complaining about tax policies isn’t going to get anything accomplished; on the contrary, the longer politicians and people who fancy themselves ones ignore economic reality the harder and more painful it’ll be when it finally comes time to pay the piper.
 As this is not an academic paper, this data and methods of analysis are admittedly not up to the standards required for publication as such. The fact remains, however, that the official Government #’s easily and quickly disprove a claim represented in Creamer’s article as a god-given truth based-upon some unknown and undisclosed “empirical evidence.”
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