Laffer gone wrong

[curious]

The whole idea of stimulating the economy with tax cuts is based on something called the Laffer curve. I saw Laffer, the economist who developed it, interviewed during the campaign.

He said that the idea of cutting taxes for a stimulous was applicable only on a certain portion of the curve, under specific circumstances. These were the circumstances that existed when Reagan implemented his tax cuts.

He also said that if the tax cuts worked, we would move to a different part of the curve, and the tax cut solution would no longer work, and that we have continued to apply it in the wrong circumstances.

I think the Republicans just latched onto the idea to give an academic justification to their desire to make the rich richer.l

 

[deanhills]

The whole idea of stimulating the economy with tax cuts is based on something called the Laffer curve. I saw Laffer, the economist who developed it, interviewed during the campaign.

He said that the idea of cutting taxes for a stimulous was applicable only on a certain portion of the curve, under specific circumstances. These were the circumstances that existed when Reagan implemented his tax cuts.

He also said that if the tax cuts worked, we would move to a different part of the curve, and the tax cut solution would no longer work, and that we have continued to apply it in the wrong circumstances.

I think the Republicans just latched onto the idea to give an academic justification to their desire to make the rich richer.l

I am puzzled by this! In addition to tax cuts we also have this enormous 1.2 trillion dollar loan, won't that have an indirect big impact on the curve? Things are so darn complicated however, and anything but transparent, I wonder how one can have a simple discussion about this at all as all of it completely boggles my mind! Everything goes as it is as you said in another posting that people are not acting rationally, they are rationalizing instead.

 

[curious]

Laffer said we are no longer in the section of the curve where tax cuts have the effect of stimulating the economy. So we've been doing the wrong thing. We're in the money supply and interest rates part of the curve now.

And yes, it is complicated. These guys all did PhDs in the subject and they don't know what is going on. How can we expect to comprehend it? It's sort of like trying to understand how every part of the space shuttle works using knowledge gained by getting a degree in 18th century French literature.

 

[deanhills]

Laffer said we are no longer in the section of the curve where tax cuts have the effect of stimulating the economy. So we've been doing the wrong thing. We're in the money supply and interest rates part of the curve now.

And yes, it is complicated. These guys all did PhDs in the subject and they don't know what is going on. How can we expect to comprehend it? It's sort of like trying to understand how every part of the space shuttle works using knowledge gained by getting a degree in 18th century French literature.

I'm more cynical than I've been ever before. I believe economists are being more and more creative so that all the facts can become less and less transparent, the more complicated, the more sins can be hidden behind it.

 

[The Parakeet]

That about makes sense from what I remember. The Reagan era was the end of the time period when we could just cut taxes to get more business. This was easy to spot when rising tax revenues didn't offset the cuts (they usually did, even with Kennedy's cuts).

Right now we are in a part where it should just require short term nudges from the money supply. That's why we were so messed up when the credit market froze and why we tried to so hard to convince them to start lending and grow the money supply.

 

[curious]

The problem with economics as a science or field of study is that it is very difficult to test theories and models. As one of my professors pointed out, there is no alternate universe where we can try lowering interest rates instead of increasing them, or raise taxes instead of leaving them the same.

All the economist can do is create a theory and see if it seems to explain behavior in the past, and if it impacts current policy, see if the results are as predicted. Even then, there are so many other variables that can't be predicted. For instance, econmic predictions of great labor shortages and dire consequences had no way of taking into account the massive entry of women into the workplace.

 

[The Parakeet]

Yeah. I believe it was well stated as this. All economic models are wrong. Some are useful.

Just about all economic theory has to make ridiculous assumptions to make it work. You have to assume perfect information, no entry barriers, etc. for a number of basic ideas. This makes it quite difficult at times to really see the truth.

As shown by our discussions in other threads, it also so easy to see one issue and come to many different conclusions about what was really wrong. That's why any social science is a royal pain.

 

[deanhills]

The problem with economics as a science or field of study is that it is very difficult to test theories and models. As one of my professors pointed out, there is no alternate universe where we can try lowering interest rates instead of increasing them, or raise taxes instead of leaving them the same.

All the economist can do is create a theory and see if it seems to explain behavior in the past, and if it impacts current policy, see if the results are as predicted. Even then, there are so many other variables that can't be predicted. For instance, econmic predictions of great labor shortages and dire consequences had no way of taking into account the massive entry of women into the workplace.

Thanks for quoting one of your professors, as at least that makes me feel a little less "dumb" about being perpetually confused by the millions of explanations. None of which really explains anything in a systematic clear way. I believe we are still in the grasp of the bubble. It has been reactivated by the 1.2-trillion package. It is like driving around in a beautiful shiny Rolls Royce, and not being able to keep up with the payments, and someone stepping in the breach, in fact totally paying off all of it by borrowing from the tax payers of the country. Not only do the Banks go on with business as usual, but they still have the same owners, the same management, the same "drivers" and it is business as usual.

 

[The Parakeet]

It's really more like the government buying 50% of your house so that you have the money to drive that Rolls Royce around. The Royce would also have to have been driving lots of people around the country beforehand...I think I strained the metaphor enough .

Pretty close though.

 

[curious]

Thanks for quoting one of your professors, as at least that makes me feel a little less "dumb" about being perpetually confused by the millions of explanations. None of which really explains anything in a systematic clear way. I believe we are still in the grasp of the bubble. It has been reactivated by the 1.2-trillion package. It is like driving around in a beautiful shiny Rolls Royce, and not being able to keep up with the payments, and someone stepping in the breach, in fact totally paying off all of it by borrowing from the tax payers of the country. Not only do the Banks go on with business as usual, but they still have the same owners, the same management, the same "drivers" and it is business as usual.

The difference is that the Rolls, and you, the owner, don't employ people. So if you lose your Rolls, you suffer, and maybe Rolls Royce suffers a little. But if a business that is critical to the functioning of the economy, like a major bank, or a business with a huge number of employees, like the car companies, goes under, the impact is devastating. If too many go under, you could destroy your ability to recover.

 

[deanhills]

The difference is that the Rolls, and you, the owner, don't employ people. So if you lose your Rolls, you suffer, and maybe Rolls Royce suffers a little. But if a business that is critical to the functioning of the economy, like a major bank, or a business with a huge number of employees, like the car companies, goes under, the impact is devastating. If too many go under, you could destroy your ability to recover.

Great, so why have US tax payer not been supplied with an exact list of the people about to suffer as a result of the large investment banks going bust? Exactly who are banking with large investment banks? I would cancel out all the little people, even the middle-income investors and would say that only the very wealthy as well as large corporations were investing with the large investment banks, AS WELL AS GOVERNMENT and Government officials. I still can't fathom how people could say OK to 1.2-trillion bail out when they did not have a very transparent list of exactly what debt we are talking about, and the exact list of debtors and who were going to loose money.

 

[curious]

Great, so why have US tax payer not been supplied with an exact list of the people about to suffer as a result of the large investment banks going bust?

Well, I bank with CitiBank, and CitiGroup got a bunch of money. So you have a start to your list. And at least one of my friends is with Bank of America. And my brother banks with Wachovia, which was acquired under pressure by Wells Fargo, which then got a lot of money. So now you have three!

Seriously, I think the list would include a lot of pension funds, which is a real problem.

 

[deanhills]

Well, I bank with CitiBank, and CitiGroup got a bunch of money. So you have a start to your list. And at least one of my friends is with Bank of America. And my brother banks with Wachovia, which was acquired under pressure by Wells Fargo, which then got a lot of money. So now you have three!

Seriously, I think the list would include a lot of pension funds, which is a real problem.

Good show. Think of course that a list of names would not be right from a confidential point of view. Just profiling. Have you thought about moving your funds to another bank?

 

[The Parakeet]

I posted a link in the other thread that CBO does seem to be compiling reports. The numbers are out there. I've seen them quoted in a number of news reports too. I'll keep my eyes on Wall Street Journal and CBO for any new stuff.

 

[curious]

Good show. Think of course that a list of names would not be right from a confidential point of view. Just profiling. Have you thought about moving your funds to another bank?

No. I want my money in one of the banks that is too big to fail. Besides, I don't have over the insurance limit so I don't have much to worry about.

 

[deanhills]

No. I want my money in one of the banks that is too big to fail. Besides, I don't have over the insurance limit so I don't have much to worry about.

Interesting. So does this mean that those investment banks which are less than big have not been baled out? Isn't that a bit unfair?

 

[The Parakeet]

Not really. It's just a loan. They have to pay it back sometime or face constant government intervention.

 

[deanhills]

Not really. It's just a loan. They have to pay it back sometime or face constant government intervention.

Again, all of this non-specific and invisible to the general Public. Really need open and fair information for everyone who is involved in the bail-out.

 

[The Parakeet]

Well it's pretty simple really. We own these banks. We bought shares and own X% of the bank, depending on how much cash they needed and what their shares were worth. I believe we bought some common stock and some preferred stock.

In these cases, we have a direct hand in the bank and can do all kinds of stuff to mess with them as punishment. We've already done some stuff by limiting bonuses. If they want to get out from under our thumb, they have to pay us back.

 

[curious]

Interesting. So does this mean that those investment banks which are less than big have not been baled out? Isn't that a bit unfair?

No, a lot of banks got bailed out. But they'll bail these out again, And again.

Unfair? The banks weren't fair.