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July 16, 2011

Paul Krugman’s Statistical Reality

by Quincy

I have a saying: “When everyone around you seems crazy, it’s probably you.” Useful advice, to be sure.

Well, everyone around Paul Krugman seems to be misinformed:

Well, here’s a little secret: most voters don’t sit around reading Clive Crook columns or debating the Bowles-Simpson plan. They have a gut sense — things are getting better or they’re getting worse — and mainly vote on that basis. They’re not paying attention at all to this stuff.

Well, alright, not everyone. Just the vast majority of voters. Unfortunately for Krugman, this statement reveals something about him rather than the voters. Krugman is the one who is out of touch with reality.

How can that be? Isn’t Krugman formulating his ideas based on massive amounts of economic data? Kind of. He has access to more economic statistics than do most of us, but in aggregate “most voters” by far have the upper hand. Every voter has a checkbook to balance and ends that need to meet. Every voter gets to experience the economy first hand. In contrast, all Krugman has is a position that shields him from economic hardship and a glut of statistics.

Krugman lives in a statistical reality. People around him could be losing their jobs left and right, but as long as unemployment remained flat, Krugman would insist that there is no employment crisis. He could suddenly find his dollars not stretching as far, but as long as core inflation remained flat, Krugman would insist that there is no inflation. He could see small businesses closing left and right, but as long as the calculated regulatory burden upon them remained the same, Krugman would claim that they’re not over-regulated.

Now, checking one’s personal reality against the statistics is not necessarily a bad thing. In the first case, one might see people losing their jobs left and right when a factory closes down. Doesn’t mean there is a broader employment crisis. In the second, there could be local factors raising prices. In the third, it could be any number of local or temporary things hurting small businesses.

The problem comes when the statistics are at odds with the reality experienced by the vast majority of people. A reasonable person in that case would begin to question the statistics. Krugman, an academic at heart and a political hack by trade, bitterly clings to the statistics in the face of reality. The statistics tell him a story that he wants to believe: interventionist government is good for the economy. That is Paul Krugman’s statistical reality.

The reality of the current economy is pretty clear. Things are bad and getting worse. The only people to whom the bad news is unexpected are academics, journalists, and politicians. Krugman, arguably all three at once these days, desperately wants to believe that his statistical reality is the true one — so desperately, in fact, that he will insist that the experiences of millions of Americans are invalid and that the conclusions they draw from them are mere “gut instinct”.

Sorry Paul, when everyone around you seems misinformed, it’s probably you.


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57 Comments

  1. There’s a concept in Public Choice Economics called “rational ignorance” that basically says the same thing Krugman does. And Public Choice is a field that is largely dominated by libertarian/conservative oriented economists like James Buchanan

    Comment by Doug Mataconis — July 16, 2011 @ 1:08 pm
  2. Doug, the implication of the “gut feeling” remark is that most voters are operating in the absence of information about the economy. That’s an assumption that’s flatly wrong. The “gut feeling” possessed by the average voter is an unconscious aggregation of a lot of facts picked up from their environment.

    Krugman does have a point in arguing against the complex narratives weaved together by most pundits. There “rational ignorance” applies pretty well. But he bases this on a factually-wrong premise that “gut feels” of the majority of voters are of no informative value and that the right information (which he just happens to be offering) would be an antidote to the misconceptions of the majority.

    Not once does he question whether his statistical reality is the one that deserves to be questioned.

    Comment by Quincy — July 16, 2011 @ 1:51 pm
  3. >”Well, here’s a little secret: most voters don’t sit around reading Clive Crook columns or debating the Bowles-Simpson plan”. –Well, alright, not everyone. Just the vast majority of voters.

    Come on. The majority of Americans have trouble even remembering who the house speaker is. Do you really think the “vast majority” even know who Bowles and Simpson are, let alone sit around debating about what they do?

    Comment by jjrs — July 16, 2011 @ 3:11 pm
  4. jjrs, no I don’t. However, neither is necessary for a voter to develop an informed sense for how the economy is doing.

    Krugman is charging, incorrectly, that despite knowing how the economy is impacting them that they are misinformed. This just is not the case. Ordinary folks know how the economy is doing. Lately, they’ve had a better sense then the professional prognosticators in the media. Notice how often the media presents news as “unexpectedly” bad. Joe I-just-barely-managed-to-balance-my-checkbook-as-prices-continue-to-rise wouldn’t find any of this unexpected. That’s my point.

    Comment by Quincy — July 16, 2011 @ 8:20 pm
  5. Quincy,

    Like Doug, a mere few paragraphs into your post my brain was screaming “Rational Ignorance!” at me…

    I agree with your point that many aspects of Krugman’s official gov’t statistics don’t exactly jive with the reality people actually feel. When gas (here in CA) is still near $4/gallon, and food prices don’t seem to be anywhere near where they used to, discussions of where “core CPI” is or whether an iPad 2 is a hedonistic adjustment up from an iPad 1 for the same price rings hollow. And, frankly, I think those “official” statistics are designed to obfuscate the issue, so like you, I think Krugman purporting to take them at face value is pointing out the splinter in America’s eye while ignoring the beam in his own.

    However, I think when you start talking about things like default on our debt, debt ceiling, entitlement reforms, non-defense discretionary spending, etc, you start getting into topics that are far beyond what any normal individual can have a realistic “gut feeling” about. The issues at hand are too big and too removed from individual experience to be fully grasped without serious study — serious study that most normal Americans have not and will not undertake.

    At the end of the day, Americans will look at this battle and ask “did the government get us through it or not”. Specifically, the blame or credit will fall on Obama, but if there is “blame” to pass around, I think the GOP is playing chicken assuming it will rest solely on Obama. If we fail to reach a deal on the debt ceiling, there’s going to be more than enough blame to go around — we’re talking torches and pitchforks…

    Comment by Brad Warbiany — July 16, 2011 @ 8:57 pm
  6. Quincy-

    >”Krugman is charging, incorrectly, that despite knowing how the economy is impacting them that they are misinformed. This just is not the case. Ordinary folks know how the economy is doing.”

    At this point, you’re making the same argument he is: people don’t debate simpsons-bowles, but they have an idea of how the economy is doing based on their personal experience.

    Your whole argument that he lives in a statistical reality is nonsensical. You say thing like-

    >”People around him could be losing their jobs left and right, but as long as unemployment remained flat, Krugman would insist that there is no employment crisis. ”

    Actually, recently Krugman has complained more than anyone about unemployment. He constantly criticizes politicians for not focusing on it.

    >”He could suddenly find his dollars not stretching as far, but as long as core inflation remained flat, Krugman would insist that there is no inflation.

    He doesn’t deny some prices are rising. He disputes the reasons. China and India are booming even as we stay flat, and so commodities prices rise. But its not because the fed is debasing the dollar.

    The annoying this is people like Krugman stick to statistics because they get tired of the same roundabout opinions. They want to look at an objective reality. But when they do that, people just say, “oh, those are just ‘statistics’”, as if that somehow puts the information in doubt.

    Just another example of people choosing the facts they believe, and ignoring the rest. No wonder people can’t have an objective discussion about reality anymore.

    >

    Comment by jjrs — July 16, 2011 @ 9:29 pm
  7. Quincy,

    your post would be a lot sounder if you admitted your fight is with the economics profession and its statistical orientation,preoccupation and not just a personal bias against Krugman.

    It’s very ironic that you attack Krugman for telling voters his understanding of what is happening is based on fancy terms like liquidity traps, lower-bound interest rates, and deflation. It’s ironic because Krugman uses these terms to explain and fight (his words) for the unemployed. You obviously don’t believe that as you attack him for not supporting those hard hit by these economic times. Let’s say you are cynical.

    But can’t we agree that whatever Krugman thinks or doesn’t, nothing is being done in Washington to help those people hurt by this hard economy?

    No one that observes these matters closely would disagree with my latter statement.

    Comment by dazzer — July 17, 2011 @ 12:57 am
  8. jjrs,

    You say:

    Actually, recently Krugman has complained more than anyone about unemployment. He constantly criticizes politicians for not focusing on it.

    Went back an looked, and you’re correct. However, the solutions he presents shows he’s still completely out of line with reality on *why* businesses aren’t hiring. Business owners can’t predict how much a new employee will cost them, and all Krugman can suggest is more Keynesian stimulus which doesn’t address the long-term issues.

    You say:

    He doesn’t deny some prices are rising. He disputes the reasons. China and India are booming even as we stay flat, and so commodities prices rise. But its not because the fed is debasing the dollar.

    Funny how his interpretation of the statistics supports his political position, isn’t it? We’ve already had two rounds of Quantitative Easing, both supported by Krugman, but they had nothing to do with price increases being felt by consumers. In this case, though, I don’t blame Krugman as much as the multiple adjustments to the CPI formula in the last three decades to diminish the apparent inflation in the economy.

    The annoying this is people like Krugman stick to statistics because they get tired of the same roundabout opinions. They want to look at an objective reality. But when they do that, people just say, “oh, those are just ’statistics’”, as if that somehow puts the information in doubt.

    I’m not sure what about my point isn’t clear here. Statistics are not reliable indicators of reality. They can tell many stories depending on who is looking and with what worldview. The story one sees in them should be questioned when it’s completely out of whack with what’s happening out in the world. That time would be, well, right friggin’ now.

    The political establishment is leaning on a branch of economics, Keynesianism, that has repeatedly failed to produce accurate predictions of or remedies to economic woes. When it comes to his view of the broad economy, Krugman applies the faulty logic of the Keynesians to construct an understanding of reality from the statistics.

    From this, he comes to the amazing conclusion that we simply need more Keynesian intervention from government because we haven’t had enough. We had multiple economic bubbles in the last decade that all trace back to irresponsibly loose monetary policy, but Krugman’s solution to the pain of those bubbles is to loosen it further still.

    Reality and Krugman haven’t crossed paths in a long, long time on issues other than international trade.

    Comment by Quincy — July 17, 2011 @ 10:32 am
  9. dazzer,

    You say:

    But can’t we agree that whatever Krugman thinks or doesn’t, nothing is being done in Washington to help those people hurt by this hard economy?

    No one that observes these matters closely would disagree with my latter statement.

    Actually, anyone who knows the calculations that go into employing people at a company that needs to break even will wholeheartedly disagree with it. Here’s the correct formulation:

    Too much is being done in Washington to control the economy in the name of helping the unemployed. However, those actions have made the task of figuring out how much a full-time employee will cost the company all but impossible. Therefore, it’s safer not to hire at all and pass up opportunities for growth.

    So, to accuse me of being cynical for not toeing Krugman’s line is pure bunk. I want to see the unemployed have opportunities to work as much as anyone. I see a world, though, where the actions of government continue to stymie those opportunities and produce an ever-worsening employment picture.

    Comment by Quincy — July 17, 2011 @ 10:44 am
  10. Simple enough — Paul Krugman is an outstanding statistician, an excellent mathematician and a lousy economist.

    Making the data sing falsetto does not make him right. He doesnt’ have have a clue as to how value is created and doesn’t understand the vituous cycle of free choice in economic production and consumption.

    He cannot measure what he doesn’t understand.

    Comment by Let's Be Free — July 17, 2011 @ 5:28 pm
  11. Quincy-

    >Funny how his interpretation of the statistics supports his political position, isn’t it? We’ve already had two rounds of Quantitative Easing, both supported by Krugman, but they had nothing to do with price increases being felt by consumers.

    How is that his “interpretation”? That’s what core inflation is- inflation minus volatile goods that tend to yank up and down.

    His “interpretation” of it is entirely consistent with what it is. Now, you can claim that there’s a problem with core inflation, as it is calculated. But are you blaming him for inventing the commonly used statistic, too?

    For that matter, do you deny that the emerging markets of China and India are driving up some commodity prices? Do you deny that oil has been becoming gradually more expensive for years and years for reasons that have nothing to do with Ben Bernanke?

    Because if not, who gives a damn what his “political position” is? You’re so bent on political positions you’re ignoring basic facts about the state of the world. Why wave away those basic facts with your hand just to reduce the discussion back to petty politics?

    >”The political establishment is leaning on a branch of economics, Keynesianism, that has repeatedly failed to produce accurate predictions of or remedies to economic woes.”

    It is absolutely, categorically untrue to say that the political establishment is using Keynesianism right now, and Krugman complains about that fact constantly. The Obama proposal in the debt ceiling negotiations is over EIGHTY PERCENT cuts to services, and something like 14-17% tax increases, mostly in the form of closing loopholes for the rich.

    That is exactly the opposite of what keynesianism calls for. “Keyensianism” has become an all-purpose word for any and all economic plans that Ron Paul doesn’t approve of. The stuff you’re seeing with bernanke and quantitative easing is called MONETARISM, advocated by Milton Friedman, which Keynes actually saw as ineffective in situations like this. And until relatively recently, Friedman was seen as a good conservative economist.

    Comment by jjrs — July 18, 2011 @ 2:22 am
  12. Krugman is running into the problem of the limits on what he can know. There are 300 million people in this country, some happy, some sad, some prosperous, some poor. While one can use statistic to describe the collective it will never be 100% accurate for every individual. So he can claim, by the statistics, that the unemployment problem is not that bad but for those that have lost their jobs the unemployment problem is that bad.

    Krugman is sort of missing the forest for the trees but in reverse. He sees the forest but not a single tree. As long as he insists on putting the collective ahead of the individual he will come across the ‘unexpected’ when enough individuals don’t conform to his statistics.

    Comment by tkc — July 18, 2011 @ 8:05 am
  13. His “interpretation” of it is entirely consistent with what it is. Now, you can claim that there’s a problem with core inflation, as it is calculated. But are you blaming him for inventing the commonly used statistic, too?

    The commonly-used statistic is anything but indisputable, nor is it historically consistent. It’s been adjusted to lower apparent inflation multiple times since 1980.

    Shadowstats features an excellent page that shows what inflation looks like both the current basket of goods but without the seasonal adjustments as well as the 1980 basket of goods.

    For that matter, do you deny that the emerging markets of China and India are driving up some commodity prices? Do you deny that oil has been becoming gradually more expensive for years and years for reasons that have nothing to do with Ben Bernanke?

    I think they’re a part of it, to be sure, but certainly not all of it. It’s a pretty incredible claim that massive amounts of liquidity can be injected into an economy and cause zero inflation.

    Because if not, who gives a damn what his “political position” is? You’re so bent on political positions you’re ignoring basic facts about the state of the world. Why wave away those basic facts with your hand just to reduce the discussion back to petty politics?

    Because Krugman’s political position matters in how he interprets the statistics. There’s a powerful incentive to ignore monetary inflation precisely because it’s a negative side effect of printing large sums of money.

    It is absolutely, categorically untrue to say that the political establishment is using Keynesianism right now, and Krugman complains about that fact constantly. The Obama proposal in the debt ceiling negotiations is over EIGHTY PERCENT cuts to services, and something like 14-17% tax increases, mostly in the form of closing loopholes for the rich.

    Are you kidding me? Seriously? Are you living in some sort of alternate universe where the two stimulus packages, plus TARP, plus HAMP, plus the state bailouts didn’t happen? How many trillions have we flushed on stimulus under Bush and Obama?

    But because Obama is being forced to come down from the spending binge, you want to claim that the establishment isn’t Keynesian. Doesn’t matter that the baseline budget under debate includes billions in spending that originated in the stimulus packages, does it? Nope, despite a huge (and completely unaffordable) history of Keynesian misadventures since 2008, the token cuts put forth by Obama mean he and his economic team aren’t Keynesians. Ridiculous.

    That is exactly the opposite of what keynesianism calls for. “Keyensianism” has become an all-purpose word for any and all economic plans that Ron Paul doesn’t approve of. The stuff you’re seeing with bernanke and quantitative easing is called MONETARISM, advocated by Milton Friedman, which Keynes actually saw as ineffective in situations like this. And until relatively recently, Friedman was seen as a good conservative economist.

    Again, have the past three years of multi-trillion dollar stimulus not happened in your world? QE and QE2 have been only a small part of the larger government spending binge. As for whether Friedman would have advocated them, as I recall he did call for something similar in Japan in 1999. But, one monetarist banking trick within the broader context of Keynesian stimulus does not make the dominant train of thought monetarist.

    Comment by Quincy — July 18, 2011 @ 8:16 am
  14. >I think they’re a part of it, to be sure, but certainly not all of it. It’s a pretty incredible claim that massive amounts of liquidity can be injected into an economy and cause zero inflation.

    It’s a claim that’s been around since the 1930′s- it’s called a liquidity trap. The basic idea is if people are in debt and just trying to pay it down and not spending, and as a consequence businesses are cutting back and just not hiring, and if banks just sit on their cash and just don’t lend it….then it just won’t matter how much money you print, because it’ll just sit there unused anyway. Japan has had near 0% interest rates for a decade and near 0 inflation, because nobody will spend it.

    But let’s face it- in 2008, guys like Peter Schiff and Ron paul predicted that we would have hyperinflation by now. Krugman said QE2 wouldn’t really matter. Years later, we’re far closer to his version of events than we are to Schiff’s. And now we split hairs about the prices of wheat and oil…even though we KNOW there are logical reasons why those things could become more expensive internationally with or without bernanke. That stuff is more expensive worldwide, even in China. Is that Bernanke’s fault too? Even when its not being bought in dollars?

    >”Are you kidding me? Seriously? Are you living in some sort of alternate universe where the two stimulus packages, plus TARP, plus HAMP, plus the state bailouts didn’t happen? How many trillions have we flushed on stimulus under Bush and Obama?”

    Your idea of Keynesianism appears to be “the government spends a trillion dollars”. You get the spending money part, but not the economic theory. TARP was not keynesian. TARP was just the banks getting a ton of money, period. That action didn’t created jobs. It’s true that Obama wanted green jobs, etc. That would have been keynesian. People forget this, but in the end, his “stimulus” bill was mostly just tax cuts. Not Keynesian.

    But finally, if you think that the establishment is Keynesian, you think that the establishment is listening to Krugman, and he’s calling the shots. Not true. All Krugman ever does is whine that nobody ever listens to him. He’s basically a glorified newspaper columnist. He’s never hold an important position in a whitehouse, and never will. He hated TARP., and lobbied to force the banks to pay the money back. He argued from the beginning that Obama’s “stimulus” wouldn’t do much.

    Comment by jjrs — July 18, 2011 @ 12:07 pm
  15. jjrs,

    I’m losing patience with your definition of Keynesianism as something so narrow it hasn’t been tried. The stimulus packages were pure Keynesianism in theory, use government money to spur economic activity thereby getting out of the liquidity trap. Yes, it got twisted in Congress, what doesn’t? But, at their core, they were Keynesian. Hell, Obama continues *to this day* to spout the “jobs created or saved” fiction.

    But finally, if you think that the establishment is Keynesian, you think that the establishment is listening to Krugman, and he’s calling the shots. Not true. All Krugman ever does is whine that nobody ever listens to him.

    Actually, I never claimed that the establishment listened to Krugman. This country would be in it way worse if they did. I said that the establishment was generally Keynesian, and I stand by that. Hell, the only deviation from Keynes proper is the lack of will to raise taxes, but that’s political cowardice rather than a deviation of principle.

    But let’s face it- in 2008, guys like Peter Schiff and Ron paul predicted that we would have hyperinflation by now. Krugman said QE2 wouldn’t really matter. Years later, we’re far closer to his version of events than we are to Schiff’s. And now we split hairs about the prices of wheat and oil…even though we KNOW there are logical reasons why those things could become more expensive internationally with or without bernanke. That stuff is more expensive worldwide, even in China. Is that Bernanke’s fault too? Even when its not being bought in dollars?

    And you’re going to stick to that line, I see. Righto. What I see in the economy is a small but present monetary inflation. Schiff was over the top with his hyperinflation claims, but only because the banks were saddled with such low interest rates it wasn’t profitable to spew the money out into the economy. We dodged a bullet there. But enough liquidity has made it out into the economy not only to halt the immediate deflation but to prompt a small but real inflation.

    Also, the liquidity trap is completely insufficient explanation as to why companies aren’t hiring. Krugman’s solutions, as much as they can be called that, would massively exacerbate the real problem in America right now: regime uncertainty. Taxing yet more money away from the private economy and routing it through the political machine is going to make life that much harder on businesses.

    This ignores, of course, that many of “the rich” are *employers* themselves. Oops, you taxed away an extra $10,000 away from Dr. Smith. Nurse Jones lost her job because Dr. Smith couldn’t afford to employ her any more. But that money’s safe in the hands of the politicians now! They’ll be sure to direct it to the place it’ll do the most good.

    The stimulus didn’t fail because it wasn’t Keynesian enough. It failed because it’s not possible to know enough about the economy to know where to direct it. Those “shovel-ready” jobs we kept hearing about? Where’d they go? Turns out once we threw money at them, the truth came out. They were about as shovel-ready as a tunnel to Hawaii.

    And yet, I can already predict your argument. True Keynesians would be able to make those decisions and deploy the money so as to produce the fabled Keynesian multiplier to kick-start the economy. Why? It’s all I ever hear from Keynesians once you hit the bottom of their arguments.

    Rather than this debate over terms you seem so fond of, why not put your money where your mouth is? Based on your understanding of both Keynes and Krugman, how much would you tax out of the economy and where would you spend it to get the country out of the recession?

    Comment by Quincy — July 18, 2011 @ 6:19 pm
  16. >I’m losing patience with your definition of Keynesianism as something so narrow it hasn’t been tried. The stimulus packages were pure Keynesianism in theory, use government money to spur economic activity thereby getting out of the liquidity trap.

    No- again, you get the “government spends a ton of money” part. And I understand that for libertarians, that’s all they feel they need to understand about Keynesianism.

    But that in and of itself is not the theory. Keynes’ theory was that the government countered weak demand by investing in infrastructure by way of shovel-ready public works projects. How does giving a trillion to banks to stop them from going under satisfy that requirement?

    It’s true Obama wanted to do a lot of public works. He had all kinds of plans for public works projects, in terms of public transit, green energy, updating paper record systems to computerized, etc.

    How much of that actually came to pass? His stimulus bill was mostly tax cuts. What little he did have petered out in mid 2010 or so.

    There were all kinds of things planned, but it never really came to happen. The republican governors that swept in during the mid terms vetoed the high speed rail projects. In New Jersey, Chris Christie vetoed the planned second train line from NJ to NYC, which they arguably really needed.

    Beg to differ? Quick- what is the massive public works project going on right now thanks to Obama? You say the average guy has a good feel for this kind of thing. So where is it?

    The best you can do to justify the existence of public works you can’t really name is by looking at the stats for increased spending. But most of that is unemployment insurance, and other things the government is already obligated to pay out in these circumstances. There just isn’t a massive new pubic project out there.

    >And you’re going to stick to that line, I see. Righto. What I see in the economy is a small but present monetary inflation.

    Where, exactly? How is inflation in the past 2 years notably worse compared to, say 2004-2007? As I recall, gas prices were actually much worse before Obama took office. Was that even worse inflation? Did Bernanke using monetary expansion suddenly manage to bring the price of gas down?

    >This ignores, of course, that many of “the rich” are *employers* themselves. Oops, you taxed away an extra $10,000 away from Dr. Smith. Nurse Jones lost her job because Dr. Smith couldn’t afford to employ her any more. But that money’s safe in the hands of the politicians now! They’ll be sure to direct it to the place it’ll do the most good.

    This kind of thing ignores the 0 correlation to tax rates on the top 1% of earners and economic growth. The biggest economic expansion the US ever had was in the 50′s and 60′s. Quick- what was the upper bracket tax rate during that time?

    >Rather than this debate over terms you seem so fond of, why not put your money where your mouth is? Based on your understanding of both Keynes and Krugman, how much would you tax out of the economy and where would you spend it to get the country out of the recession?

    Me? First, I would restore tax rates on the rich to what they were under Ronald Reagan. Sound fair?

    Then, seeing as the US has some of the shittiest internet speeds in the first world, I would have public works projects to bring fiber optics to urban areas, and make the money back by leasing them out to private business. I would improve public transport on the east coast by bringing in those plans Obama had.

    The price of oil is rising again and is likely to get more and more expensive over the next 50 years. At the same rate, while there’s still a long way to go, some forms of renewable energy are becoming more cost effective. I would be very interested in exploring ways to encourage green energy. For example, tax breaks for people in rural windy areas who want to buy home turbines for wind power, and they can sell back their surplus to the grid.

    Why? Mostly because in my opinion those things really need to be done anyway.

    Comment by jjrs — July 19, 2011 @ 3:45 am
  17. As far as that “gut feeling” things go I recall sitting in Econ 101 class, all of 17 years old, being fed the algebra and theory of Keynesian economics. I literally understood the drivel; the Keynesian approach is quite straightforward, easy enough to explain and manipulate to get an “A” on a test. I could handle that. But in the back of my mind, even at that early age, I said to myself, this is nonsense.

    My “gut”, which was based on nothing more than observing how the world worked, told me that economic systems depend on processes, processes that encourage operators to make the right investments at the right times and in the right places in order to provide consumers and business what they need and desire, and to employ productivity the various factors of production to drive economic growth. I knew the processes that drove the economy were far too numerous, subtle, diverse and complex to be driven effectively by centralized government planning and spending, represented so nattily by the simplistic algebra of Keynesian economics. A year or so later when I read Milton Friedman’s book “Capitalism and Freedom” I began to understand the formal framework that embraced my beliefs. Krugman’s economic insights haven’t gotten much beyond the algebra that my gut rejected as a college freshman.

    And by the way, no economist was more empirical than Milton Friedman. He cut his economic teeth as a statistician at the Labor Department during the Great Depression and researched and wrote the seminal work “A Monetary History of The United States” with co-author Anna Schwartz. Friedman once said “Inflation is always and everywhere a monetary phenomenon”. Without increases in the money supply prices will rebalance for sure, but there is no inflation. That’s axiomatic. Anna Schwartz said it best about Krugman’s views as an economist, “he doubletalks throughout.”

    Comment by Let's Be Free — July 19, 2011 @ 7:22 am
  18. Mostly because in my opinion those things really need to be done anyway.

    No doubt you would have been in favor of massive funding of the Synfuels Corporation during the Carter presidency, would have been arm-in-arm with Bill Clinton’s Energy Secretary Bill Richardson who talking about wind farms was “excited that Enron developed this technology with technical contributions made by the department, and we look forward to continuing our collaboration with Enron for the development of their next generation wind turbine” and would have jumped on George Bush’s bandwagon to support massive funding and development of fuel cell research. Markets and individuals excercising their own free will are a much better judges than are politically powerful people or self-appointed intellectuals.

    Comment by Let's Be Free — July 19, 2011 @ 7:32 am
  19. jjrs,

    Really?

    It’s true Obama wanted to do a lot of public works. He had all kinds of plans for public works projects, in terms of public transit, green energy, updating paper record systems to computerized, etc.

    How much of that actually came to pass? His stimulus bill was mostly tax cuts. What little he did have petered out in mid 2010 or so.

    So, you actually admit that Obama wanted a Keynesian stimulus with shovel-ready jobs but failed to execute it?

    Beg to differ? Quick- what is the massive public works project going on right now thanks to Obama? You say the average guy has a good feel for this kind of thing. So where is it?

    Maybe this point is over your head, but philosophy is reflected in what is planned, not what is executed. Obama’s plans were Keynesian. His movement of the those plans through Congress into implementation were simply incompetent. But an incompetent Keynesian is still a Keynesian.

    Where, exactly? How is inflation in the past 2 years notably worse compared to, say 2004-2007? As I recall, gas prices were actually much worse before Obama took office. Was that even worse inflation? Did Bernanke using monetary expansion suddenly manage to bring the price of gas down?

    Not noticeably worse, but present. And where exactly did I claim the inflation from 2000-2007 wasn’t squeezing people the same way? Inflation was outstripping wages throughout the period, and it was that pressure that was forcing Americans to rely so heavily on debt.

    This kind of thing ignores the 0 correlation to tax rates on the top 1% of earners and economic growth. The biggest economic expansion the US ever had was in the 50’s and 60’s. Quick- what was the upper bracket tax rate during that time?

    Biggest economic expansion in history? By what measure, exactly? That’s a hell of a whopper right there. When you look at real GDP per capita, the largest two climbs are actually 1983-1990 and 1991-2000. The period of 1961-1970 came in third.

    Besides, you do realize that there’s a difference between a high, but steady tax rate and a tax increase, right? My scenario occurs in an *increase*, where a small business owner has less money due to taxes than he did previously.

    While you’re at it, if you’re going to talk about the period from 1950-1969, why don’t you look at the year over year tax rates? There was only one year in there when the rates went up, 1952. After the 1953 recession, they were lowered back to the 1950 level. From there, they continued to decline until they were more a third lower in 1966 than 1952.

    Your claim, based on the statistics, is that high tax rates show no correlation to employment. But you use a period in which taxes were reduced repeatedly.

    I remember saying something a few comments back about how statistics are open to interpretation. This is a perfect example. The one, single tax increase from 1950-1970 was followed by a recession. The tax hikes of 1936 were also followed by a recession in 1937. What story do those statistics tell?

    Me? First, I would restore tax rates on the rich to what they were under Ronald Reagan. Sound fair?

    Fair, and not terribly destrutive, but still need to consider some lower productivity. If you won’t admit that increasing taxes lowers economic output, then you’re living in a fantasy land completely unsupported by history.

    Then, seeing as the US has some of the shittiest internet speeds in the first world, I would have public works projects to bring fiber optics to urban areas, and make the money back by leasing them out to private business. I would improve public transport on the east coast by bringing in those plans Obama had.

    The price of oil is rising again and is likely to get more and more expensive over the next 50 years. At the same rate, while there’s still a long way to go, some forms of renewable energy are becoming more cost effective. I would be very interested in exploring ways to encourage green energy. For example, tax breaks for people in rural windy areas who want to buy home turbines for wind power, and they can sell back their surplus to the grid.

    Why? Mostly because in my opinion those things really need to be done anyway.

    Thus, Keynesianism is bound to failure. It’s not possible in a complex economy to understand which projects will be effective at spurring growth (by filling an actual economic demand left unfilled by a liquidity trap) and which will be ineffective (by spending money producing crap people wouldn’t bother with in any scenario). You didn’t even make the attempt. You looked at what you believe “really need[s] to be done anyway.”

    If the job doesn’t matter, simply that people are being employed doing it, then why *not* pay a million of the unemployed to dig holes in the desert and pay another million to fill them in again? Sure, the activity itself produced no economic value, but it got people paid and spending.

    Why don’t Keynesians propose the holes solution? They recognize that their projects have to have at least some economic output. But, then, they can’t admit that they’re incapable of choosing projects to fill real demand. They find things that people aren’t buying today without looking at the demand component. In fact, the normal Keynesian thing is to look at what they believe people *should* want but don’t and to start subsidizing it. Light rail, wind power? Classic examples.

    I’ve never heard a Keynesian answer that fundamental information problem that sits between them and effective interventions. Why? It’s not answerable. Human understanding has limits, and an economy of 300 million people is far beyond them. To claim that one has a true understanding of it based on highly distilled and adjusted statistics is hubris, pure and simple.

    Comment by Quincy — July 19, 2011 @ 8:59 am
  20. Quincy-

    >”Not noticeably worse, but present. And where exactly did I claim the inflation from 2000-2007 wasn’t squeezing people the same way?”

    You just made the whole argument that Obama/Bernanke and QE2 are currently creating inflation pointless, or at least indistinguishable from prior claims that Bush and Greenspan did. If you think the printing of money was just as bad before, then what difference does all this make?

    >”Biggest economic expansion in history? By what measure, exactly? That’s a hell of a whopper right there. When you look at real GDP per capita, the largest two climbs are actually 1983-1990 and 1991-2000. The period of 1961-1970 came in third.”

    Who’s playing games with statistics now? 83 and 91 were years immediately following recessions, so of course you see a surge during the recovery. Most of that is just regaining lost ground. If you look at growth in GDP historically, the reality is pretty clear-

    http://www.tradingeconomics.com/united-states/gdp-growth

    Look at the years preceding 83 and 91- the economy was just coming out from the hole! You’ll see a similar bump eventually from the awful slump of 2007/8. Will that signify a modern “economic boom”?

    Now look at the general growth rates between 1950-80, as compared to 80 to present, you’ll see that it was consistently higher.

    But beyond that stats- why not just use your common sense? You were the one saying that common sense trumps stats. Do you seriously believe that 1983 and 1991 saw the biggest explosions in wealth in US history? Seriously? The 1950′s and 60′s, where personal incomes doubled, and everyone got cars and TV’s, and the USA rose to become a world superpower….all that just paled in comparison to the phenomenal jump in quality of life that America saw in…1992? Seriously?

    >”So, you actually admit that Obama wanted a Keynesian stimulus with shovel-ready jobs but failed to execute it?”

    Actually, he just wanted those projects anyway, and actively campaigned on them. But when the crisis deepened, he wound up cutting back on most of that, and now he talks about deficit reduction. So when push came to shove, no, he didn’t press the Keynesian route. Now, he spends all his time talking about how he “gets” that the government needs to tighten its belt, and is making major concessions to the republicans in the debt ceiling talks, with cuts that far outweigh closure of tax loopholes. So its a little frustrating hearing that Keynesianism is to blame for this when its actively not being tried.

    When was the last time you heard Obama go on TV and make a call for trillions in government-created jobs? You probably read plenty of people who assume he does. But when was the last time you actually heard him say it?

    >”It’s not possible in a complex economy to understand which projects will be effective at spurring growth (by filling an actual economic demand left unfilled by a liquidity trap) and which will be ineffective (by spending money producing crap people wouldn’t bother with in any scenario). You didn’t even make the attempt. You looked at what you believe “really need[s] to be done anyway.” If the job doesn’t matter, simply that people are being employed doing it, then why *not* pay a million of the unemployed to dig holes in the desert and pay another million to fill them in again?

    You actually just answered your own question. First you said “Keynesian economics cannot possibly anticipate where jobs are needed.” Then, in the next breath, you say “why *not* pay a million unemployed to dig holes?”

    Well, if the job doesn’t matter, then infinite wisdom on precisely what is needed is not required. So you might as well invest in real things that can help the country, but that private industry can’t really provide. In the 1800′s, the US went into a lot of debt for infrastructure in terms of railroads and transportation. Eventually, those investments wound up paying off big time.

    The funny thing is, people in the US decry the folly of government intervention, even as China eats the US alive. China is an ultimate example of the government controlling an economy.

    Comment by jjrs — July 20, 2011 @ 2:54 pm
  21. jjrs -

    There’s only one thing in your post that’s worth responding to, because it so thoroughly debases everything you’ve said up to this point:

    The funny thing is, people in the US decry the folly of government intervention, even as China eats the US alive. China is an ultimate example of the government controlling an economy.

    The human cost of China’s economic progress under the Communist Party has been staggering. It’s a humanitarian disaster. But you, probably parroting Tom Friedman, point to that engine of human suffering as an example of economic progress?

    We can talk about economic philosophies all day long, but the suggestion that human lives and dignity are a reasonable price to pay for economic progress is disgusting, depraved, and profoundly immoral.

    There’s nothing else to say. There’s no excuse or reason for your position on China other than ignorance or immorality. I really don’t give a shit which it is, quite honestly.

    I’m done wasting my time with you.

    Comment by Quincy — July 20, 2011 @ 5:33 pm
  22. Hey, don’t look at me- I don’t approve of China’s actions at all.

    But it’s satisfying to see that your arguments have been stripped down so thoroughly that you’re left with nothing more to say, and have to flee in a pretend huff.

    Comment by jjrs — July 20, 2011 @ 6:06 pm
  23. jjrs,

    I said I was done wasting my time with you, I lied.

    Hey, don’t look at me- I don’t approve of China’s actions at all.

    Bullshit. You made a statement that was beneath contempt. The least you could do is spare us the excuses.

    As for me having things to say, I have plenty but again, why should I waste my time? You’ve already proven your style of argument is “ignore, distort, and repeat” and that any further discussion with you will result in us talking past each other. You’ll never convince me, I’ll never convince you. That’s that.

    If me giving up first and showing well-deserved disgust with your position on China makes you think you won, then fine. I am not responsible for what conclusions you jump to. But only one of us leaves this argument with clean hands, and here’s a hint: it ain’t you.

    Comment by Quincy — July 20, 2011 @ 7:14 pm
  24. I’m a pretty typical bleeding-heart liberal disgusted with China’s human rights record, bro. Liberals get accused of a lot of stuff, but being cool with China’s track record on that front is not one them.

    But go ahead- ignore everything I wrote and continue to repeat that I’m pro-China. Just shows you’ve got nothing to say and can’t answer my last reply to you. As soon as I pulled the numbers you ran off.

    Comment by jjrs — July 20, 2011 @ 7:35 pm
  25. jjrs,

    Sorry to burst your bubble, but these two statements are fundamentally irreconcilable:

    The funny thing is, people in the US decry the folly of government intervention, even as China eats the US alive. China is an ultimate example of the government controlling an economy.

    I’m a pretty typical bleeding-heart liberal disgusted with China’s human rights record, bro. Liberals get accused of a lot of stuff, but being cool with China’s track record on that front is not one them.

    But go ahead- ignore everything I wrote and continue to repeat that I’m pro-China.

    Leftists who decry China’s economic record but cheer every time they get a big public works project done or clock in with some gonzo GDP numbers are reprehensibly hypocritical. When the totalitarian corporatism of the Chinese Communist Party results in jailed dissidents or dead bodies, they’re against it. When the same totalitarian corporatism produces economic results they find attractive, they’re for it. It’s the exact same totalitarian force at work and it’s wrong in *all* instances.

    So, yes, I call you a supporter of China because you used the economic results of their totalitarian acts to argue for government intervention in this country. You made the argument and it showed your support for the Chinese economic regime. Any questions?

    As soon as I pulled the numbers you ran off.

    It wasn’t because of that, despite the positive effect on your ego it would have. Just because you’ve got me pissed and I’m not in the mood to let an immature little gloat stand, here were my actual reasons. I was:

    1. Disgusted by your China argument (still am, for the reasons above)
    2. Losing patience with your arguments in general. “Ignore, Distort, Repeat” gets old.

    Why do I call it that?

    Let’s start with IGNORE:

    - Regime uncertainty? Nothing.

    - How’s about the fact that you got caught advocating for a tax *increase* by pointing to a period of high, but *decreasing* taxes? Dead silence.

    - The tax increases immediately preceding the recessions of 1937 and 1953? Nope, nothing there either.

    - My use of the Real GDP per Capita data series to refute your claim that 1950-1970 was the most rapid period of growth in US history? Nope, not a word.

    Let’s move on to DISTORT:

    - How about my assertion that Keynesians can’t pick economically viable projects? You tried to turn that one on it’s head by quoting a rhetorical question out of context. I never said the project doesn’t matter. In fact, I used the holes in the desert example to assert that it matters very much.

    If you’d answered my actual point, you would have had to address the fact that Keynesians have nothing more than their opinions to guide where the government spending should be.

    - How about comparing 1950-1980 to 1992? That’s a whopper right there, for two reasons:

    1. You’re comparing an apple to a bread crumb. A thirty year period vs 1992? WTF?
    2. You changed your frame of reference. Suddenly, 1950-1970 became 1950-1980.

    If you did an honest comparison in the quality of life differences between 1950 and 1980 vs. 1980 and 2010, your point would be a draw at best. But you didn’t.

    - In the same vein, I was perfectly clear about using the Real GDP per Capita data series to rank the *periods* of 1991-2000, 1983-1990, and 1961-1970. Suddenly, in your response, periods became single years because the latter allowed you to make a point.

    (Mea culpa here for not linking to the series. It’s from the FRED data and available here: http://research.stlouisfed.org/fred2/series/USARGDPC )

    Now, the REPEAT part should be obvious, so I won’t go into detail.

    After having to put up with four comments worth of this crap, you’ll forgive me for being impatient with it. I’m a libertarian, not a saint.

    Comment by Quincy — July 20, 2011 @ 9:48 pm
  26. > “Sorry to burst your bubble, but these two statements are fundamentally irreconcilable:”

    On the contrary. How does pointing out that China’s economy has done very well despite considerable government intervention in any way contradict opposition of their human rights record? As proof I don’t approve of China’s government despite their economic rise, here’s a blog post I wrote in August 2010 that deals with this very issue-

    http://jeff-fukuoka.blogspot.com/2010/08/free-society-and-free-markets-dont-have.html

    But on the other hand, I would say that your own statements are contradictory. On one hand, you deride the foolish government for being so vain as to think they can influence the economy. Foolish mortals! Don’t they realize they’ll just lead their nation to certain economic ruin?

    On the other, you freak out when someone points out china has had no problem making money under an entirely non laissez-faire government. So which is it? Is government intervention always doomed to failure, or just horribly immoral, every bit so much under FDR as under China?

    >
    > “Let’s start with IGNORE:
    >
    > – Regime uncertainty?  Nothing.”

    Um, what? What do you mean, and when did you say anything about regime uncertainty anyway? I just did a search on the word and this is the first time you’ve mentioned it.

    >” – How’s about the fact that you got caught advocating for a tax *increase* by pointing to a period of high, but *decreasing* taxes?  Dead silence.”

    Got caught? Until now, you didn’t say jack about it. But now that you have- you mean the plummet in the top tax rate from 91% down to 70 by the end of the 60′s?

    Dude- the top tax rate now is like 35%, half that. By your logic that lower tax creates growth, shouldn’t we have had an explosion in prosperity right now?

    >
    >” – The tax increases immediately preceding the recessions of 1937 and 1953?  Nope, nothing there either.”

    Again, you never said any of this. But now you mention it, while it’s true some middle class income taxes fell in the 50′s, the top bracket rate stayed more or less the same (89-91%). Even in the 60′s, they never went lower than 70.

    So why freak out when Obama wants to adjust them in the 30′s range? It doesn’t make any sense.

    >
    > “- My use of the Real GDP per Capita data series to refute your claim that 1950-1970 was the most rapid period of growth in US history?  Nope, not a word.”

    Allow me to point to your own ignore- my actual, you know, link to the actual increases in GDP. You never said a word about it.

    >
    > “Let’s move on to DISTORT:
    >
    > – How about my assertion that Keynesians can’t pick economically viable projects?  You tried to turn that one on it’s head by quoting a rhetorical question out of context.  I never said the project doesn’t matter.  In fact, I used the holes in the desert example to assert that it matters very much.”

    You might have been being rhetorical about digging those holes in the desert, but Keynes wasn’t. This is going to enrage you beyond belief, but Keynes ACTUALLY DID put out a thought experiment where doing just that (digging and refilling ditches) helped the economy out of recession. Don’t believe me? Look it up- conservatives usually love bringing it up as an example of what an idiot he was.

    Now of course, Keynes would rather have seen the money put to good use- preferably stuff that the private sector can’t handle as well, such as building interstate highways. But the point stands- the theory is that the government picks up the slack when demand sags. It has nothing to do with orchestrating what the economy “need”s, item for item or project for project. How would that even stand as a theory?

    > 1.  You’re comparing an apple to a bread crumb.  A thirty year period vs 1992?  WTF?
    > 2.  You changed your frame of reference.  Suddenly, 1950-1970 became 1950-1980. > If you did an honest comparison in the quality of life differences between 1950 and 1980 vs. 1980 and 2010, your point would be a draw at best.  But you didn’t.

    The 1970′s is when US GDP year-by-year growth began to slack off. But sure, I’ll gladly take either 1950-1980 vs 80-2010 or 1950-70 vs 80-2000. Do you really think cutting out the 2000′s would HURT my case? Dude, I left the past decade out of it out of sympathy for you!

    Refer to my own link, which you previously ignored and compare.

    But beyond the stats- WTF? Ask your parents how their quality of living was in the 50′s and 60′s. And even if you want to stick to claiming that 80-2000 improved the quality of people’s lives more, explain how the greatest expansion in that period came under Clinton, after both he and George H Bush RAISED taxes. Republicans said it would bring economic ruin. They were wrong.

    And what of the 2000′s? W Bush cut taxes for the wealthy. Did we see a boom? LOL! Talk to anyone who lived through the 60′s or bought a home and raised a family during that time, and see if they think life was easier for people in the last decade…much lower income taxes for the wealthy notwithstanding.

    Comment by jjrs — July 20, 2011 @ 11:51 pm
  27. jjrs,

    Holy crap. You just ROYALLY beclowned yourself.

    On the other, you freak out when someone points out china has had no problem making money under an entirely non laissez-faire government. So which is it? Is government intervention always doomed to failure, or just horribly immoral, every bit so much under FDR as under China?

    My “freak out”, which would more correctly be termed righteous indignation, was a clear and unambiguous statement that China’s interventions came at too high a price in human lives and dignity. Using a repressed people to provide artificially-cheap labor for favored corporations is a crime against humanity, and that is exactly the economic model adopted by China. The fact that they’ve integrated certain market principles into their totalitarian society to attract corporations does not mean they have free markets nor that their economic results are separable from the repression of their people.

    And yes, to answer a point in your blog post, conservatives and libertarians who point approvingly to China’s economy piss me off just as much as leftists who do.

    Um, what? What do you mean, and when did you say anything about regime uncertainty anyway? I just did a search on the word and this is the first time you’ve mentioned it.

    7/18/11 – 6:11 PM. Do you need me to point out the paragraph, too?

    Got caught? Until now, you didn’t say jack about it. But now that you have- you mean the plummet in the top tax rate from 91% down to 70 by the end of the 60’s?

    7/19/11 – 8:59 AM. I pointed out, correctly, that the tax burden dropped by 1/3. The top rate didn’t quite make that mark, but you’re still ignoring that tax rates were dropping across the board.

    Dude- the top tax rate now is like 35%, half that. By your logic that lower tax creates growth, shouldn’t we have had an explosion in prosperity right now?

    Yet again, you can’t tell the difference between a tax *rate* and a tax *increases* and *decreases*. Since I’ve said it twice, I’m not going to bother explaining it *again*.

    Again, you never said any of this. But now you mention it, while it’s true some middle class income taxes fell in the 50’s, the top bracket rate stayed more or less the same (89-91%). Even in the 60’s, they never went lower than 70.

    So why freak out when Obama wants to adjust them in the 30’s range? It doesn’t make any sense.

    7/19/11 – 8:59 AM, again. And to address your weasel word some, it’s bull****. Taxes fell *across the board* from 1950-1966.

    And again, there is an economic difference between tax rates and tax increases. If you can’t understand this, why do you even bother talking about economics?

    Allow me to point to your own ignore- my actual, you know, link to the actual increases in GDP. You never said a word about it.

    OK, I looked. Sorry I did, too, because I can’t even begin to comprehend why you think the graph you link to proves anything about actual increases in GDP. It’s a graph of *percent increases* year over year! As Inigo Montoya said, I do not believe that means what you think it means.

    If you want to talk about actual increases in GDP, look at a data series that actually shows *increases in GDP*. Here are two:

    FRED Real GDP: http://research.stlouisfed.org/fred2/series/GDPCA?cid=106
    FRED Real GDP per Capita: http://research.stlouisfed.org/fred2/series/USARGDPC

    Now, both of these disprove your case. In no possible reads of these charts does 1950-1980 show better growth than 1980-2010.

    But, before you try to argue that your data series is the correct one, consider the following: What’s the percent increase from 2 to 4? It’s 100%, right? How about from 4 to 6? It’s only 50%. How about 6 to 8? It’s only 33%. Increases of 2 each time, but as the base gets higher, the percentage is lower.

    It should be blatantly obvious now that percent increases are *meaningless* without know what the basis of the percent increase is. From the FRED Real GDP data series, the GDP in 1950 was $2,006 billion. The GDP in 2010 was $13,248 billion. Now, an increase of $200 billion would be 10% over 1950 GDP but just 1.5% over 2010 GDP. So, which represents a bigger net gain for the economy, 2% over 2010 or 10% over 1950?

    By the way, there’s a reason I prefer to use GDP per Capita as a measure of growth, it controls for population. In addition to the problem with using percentages to talk about growth amounts pointed out above, your graph also fails to control for the significantly higher population growth rate from 1947-1966. ( http://www.npg.org/facts/us_historical_pops.htm )

    The 1970’s is when US GDP year-by-year growth began to slack off. But sure, I’ll gladly take either 1950-1980 vs 80-2010 or 1950-70 vs 80-2000. Do you really think cutting out the 2000’s would HURT my case? Dude, I left the past decade out of it out of sympathy for you!

    Refer to my own link, which you previously ignored and compare.

    As pointed out above, this entire assertion collapses because you used the worst possible graph to try and prove your point. Use the right data series, as I pointed out above, and the picture changes entirely.

    Coming away from the statistics though, the period of growth from 1950-1980 featured more stuff, but more of the same stuff. Here’s off the top of my head: Houses? Pretty much the same from 1950-1980. Cars? Qualitatively worse in 1980 thanks to 1970s-era regulations. Phones? Changed from rotary dials to buttons, but still plugged into the wall. (Some would argue that direct dial made them worse.) TV? Black and white to color, 3-5 channels to 30-50 channels. Music? LPs were the highest quality medium throughout, though 8-tracks and cassettes provided some measure of portability. Oh, and the radio. Typewriters? The Selectric was cool and all, but functionally it wasn’t a quantum leap above it’s predecessors. Cameras? The big thing was the Polaroid–lousy picture quality, but instant gratification. Health care? There were significant improvements in care, but generally the same things that killed you in 1950 killed you in 1980.

    The period from 1980-2010? Rampant and incessant innovation that created things we couldn’t even dream of before 1980. Houses? OK, these are pretty much the same, if bigger and jammed closer together. Cars? Immensely better than cars from 1980. Phones? You go from 12-buttons and plugged in the wall to a friggin’ iPhone. TV? HDTV, TiVo, DVD and Bluray players, on-demand video, not to mention hundreds of channels. Music? LPs and cassettes to digital music players. Streaming music that caters to personal taste instead of cookie-cutter radio stations. Typewriters? Dead. Replaced by the infinitely superior personal computer. Cameras? The period saw not one but *two* technological revolutions. The first was high-quality autofocus, the second was digital. Health care? Cancer and heart attacks killed in 1980, and are routinely survived with high quality of life today. Joint replacements that allowed full recovery? Unheard of in 1980, commonplace today. AIDS? Discovered in the mid-80s, and already so aggressively attacked it’s gone from being a death sentence to being a chronic problem.

    Oh, one last little thing: the Internet. While some like to claim that the government is responsible for the internet we know, it’s simply not the case. Yes, ARPANET laid down some of the basic technical principles (shifting from leased line connections to packetization, best-effort data transmission, the concept of a protocol stack, and DNS), but it provided very limited capabilities that *stayed* limited through the 1980s. It was when people in the 1990s started trying to get rich (or in the case of open source, just do something really cool for the benefit of their fellow man) by creating new applications for the underlying technology that the modern internet was created. The innovations here are far too numerous to list, but even a simple blog platform like this one would have been nigh-impossible without private innovation.

    So, yeah, based both on the statistics and common sense, 1980-2010 trumps 1950-1980 as a period of economic growth and quality of life improvement. Besides that, the nature of the progress is telling. The high-tax period saw incremental improvements on the same stuff, but many fewer new inventions. The low-tax period saw many new inventions. The best explanation is that the world in which people could get rich and keep it motivated them to work a hell of a lot harder and *take risks*. Without those risks, we would all be poorer (and more than likely, not be having this conversation on a blog).

    You might have been being rhetorical about digging those holes in the desert, but Keynes wasn’t. This is going to enrage you beyond belief, but Keynes ACTUALLY DID put out a thought experiment where doing just that (digging and refilling ditches) helped the economy out of recession. Don’t believe me? Look it up- conservatives usually love bringing it up as an example of what an idiot he was.

    Yes he did. And it doesn’t enrage me, it proves my point that Keynes was not considering things he should have been in how an economy works. I can have more patience with him than I have with people who are running around spouting his philosophy now because, primarily, we have 80 years of economic history to prove his theories were deficient. For starters, Milton Friedman’s work pretty well demolishes the assertion that FDR did anything but exacerbate the Great Depression with his incessant interventions.

    Now of course, Keynes would rather have seen the money put to good use- preferably stuff that the private sector can’t handle as well, such as building interstate highways. But the point stands- the theory is that the government picks up the slack when demand sags. It has nothing to do with orchestrating what the economy “need”s, item for item or project for project. How would that even stand as a theory?

    I’m not sure whether to even waste the effort explaining this one or not, considering you obviously didn’t even read half the stuff I previously wrote. You know what? It’s not worth the trouble of broadening this conversation even further. Milton Friedman and Hayek cover this territory way more eloquently than I ever could, and they’re both dead so they wouldn’t have to put up with your answers.

    Going back to my original post, your responses here have been an amazing proof of my point of a statistical reality. You’re arguing from a world that is not close to the real one. You ignore multiple facts, statistical and otherwise, that point out flaws in your interpretation. Your entire argument about high taxes causing higher growth comes from taking the wrong chart and misreading it. How you got there I don’t know, but I’ll take a guess: You had an assertion to prove, and kept digging until you found a chart that looked like it would prove your point.

    Would you like to quit this game now?

    Comment by Quincy — July 21, 2011 @ 8:48 am
  28. I’d point out two things:

    1) In a continuation of Quincy’s point about GDP percentage gains, there’s a reason why China can sustain 8-10% annual GDP gains — BECAUSE THEY’RE STARTING FROM A VERY LOW POINT. It’s a lot easier to improve peoples’ quality of life in measurable ways when your start point is barely removed from the third world than in the US, where “poverty” means air conditioning, TV, a cell phone and a car.

    2) You can’t remove China’s economic success from their humanitarian abuses. You know why? When China wants to put a new dam in a certain location, or a new highway, they evict the people living there. There’s not even a legal case about whether such eminent domain is justified. They just do it, and you’d better move before they bulldoze your home. When they want to put a new coal-fired power plant next to a residential area, they don’t have to fight NIMBY’s and fill out environmental assessment reports. They just do it, and you might want to invest in some breathing masks. They’re willing to trod right over their people in the furtherance of economic growth, and thus their economic growth is a CONTINUATION of their human rights abuses, not an exception thereof.

    Comment by Brad Warbiany — July 21, 2011 @ 9:24 am
  29. “>Holy crap. You just ROYALLY beclowned yourself.”

    Glad to have you back!

    >”Going back to my original post, your responses here have been an amazing proof of my point of a statistical reality. ”

    The irony is that it is you who is using a statistical reality, not me. This-

    >”It should be blatantly obvious now that percent increases are *meaningless* without know what the basis of the percent increase is. From the FRED Real GDP data series, the GDP in 1950 was $2,006 billion. The GDP in 2010 was $13,248 billion. Now, an increase of $200 billion would be 10% over 1950 GDP but just 1.5% over 2010 GDP. So, which represents a bigger net gain for the economy, 2% over 2010 or 10% over 1950?”

    You’re playing statistical games, and you just answered your own question.

    According to YOUR statistics- America’s economy saw a bigger gain in 2010 than it did in 1950.

    Think about that for a minute. And ask yourself…Are you crazy?

    Yippee! Our economy did Bammo in 2010! Better than 1950! Things are just getting better, better better all the time! Yessiree! A line going stright up to the sky every year, with just a little flattening out or nick down once in a while?

    In fact, all these complaints about America going down the toilet are misguided! Yup indeed! I mean sure, we have a teeny little movement down in 2008, but so what in the grand scheme of things! Why, all the recessions seem to do is keep us flat a teeny bit before we continue to rise on up!

    That is the PERFECT example of an “alternate statistical reality”. Yes, its true that the economy is so big now that even a small increase amounts to billions and billions more. So what?

    If you’re so sure life is getting better, better better almost every year without fail, why not just quit your blog and stop complaining? Look, according to your own stats, there’s really nothing to complain about. The economy marches along at a great place regardless of tax rates, political party, or anything else.

    And let’s not forget your own IGNORE/DISTORT pattern- you claimed the biggest points of expansion were 83 and 91. YOUR OWN GRAPH shows that that was just recovery from recessions. Did you say a word about that? Nope. Just weaseled out of it.

    So who’s living in a statistical reality now?

    >”Yes he did. And it doesn’t enrage me, it proves my point that Keynes was not considering things he should have been in how an economy works.

    So you admit you knew it. So in other words, YOU were being dishonest when you accused ME of “Distortion”.

    For the final time-Keynes did not expect governments to perfectly engineer ever little detail of a recovery. That wouldn’t even function as a theory, as the engineering would differ case by case.

    >”Oh, one last little thing: the Internet. While some like to claim that the government is responsible for the internet we know, it’s simply not the case. Yes, ARPANET laid down some of the basic technical principles (shifting from leased line connections to packetization, best-effort data transmission, the concept of a protocol stack, and DNS), but it provided very limited capabilities that *stayed* limited through the 1980s. It was when people in the 1990s started trying to get rich (or in the case of open source, just do something really cool for the benefit of their fellow man) by creating new applications for the underlying technology that the modern internet was created. ”

    More than anyone realizes, this is kind of the hidden American way- Public spending, private profit.

    I don’t deny that the internet couldn’t have become what it is without the private sector, and for that matter, even just ordinary citizens like yourself writing about their interests and passions.

    But big daddy government played a big role in founding the technology. And it happened in the 60′s.

    >”So, yeah, based both on the statistics and common sense, 1980-2010 trumps 1950-1980 as a period of economic growth and quality of life improvement.”

    All your improvements point to information technology, which has been great. But this ignores the absolutely fundamental changes that took place after the 50′s. So many so that it’s a little difficult to imagine.

    Let’s look at a typical run-down kitchen circa, say 1990 or 2000. We’ve got a fridge, an indoor plumbing sink, a stove, and maybe a garbage disposal.

    Now compare that to a kitchen circa 1950-1960. With the exception of the microwave oven (which still appeared before 1970), they’re more or less the same.

    But now let’s go back to 1900, or even say 1910. What do you have then?

    Hardly any refrigeration. Sometime no electricity. Much less plumbing. People had iceboxes, wells and outhouses.

    Absolutely no comparison. So its frustrating to hear, “but don’t you see? the economy grew 1% last year, and that expansion is every bit as big!”

    The statistical method you’re using reduces to compound interest on old returns. The 1% gains look big because of the enormous principle sum they’re calculated off of. But it ignores that progress has actually slowed to a crawl in some fundamental respects.

    But back to the stuff that HAS gotten better- namely information technology. It’s funny you should bring that up, because the US has some of the slowest and most expensive broadband internet in the world, despite having one of the least regulated government.

    In another era, the government might have used the unemployed to lay fiber optic lines, much in the same way they helped lay down power lines for rural areas generations ago. But that’s not happening. It’s too big a project for any private company to undertake.

    >”Krugman’s solutions, as much as they can be called that, would massively exacerbate the real problem in America right now: regime uncertainty.

    I still don’t get what you mean by “regime uncertainty” I’m taking it you mean confidence in the government?

    Yup, the US is doomed to fail. People will stop lending them cheap cash by way of low-interest treasury bonds.

    Oh wait, what’s that? US treasury bonds are cheaper than ever before? Dear god, a 5-year one is only paying 1-2% interest, that’s practically nothing!

    http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2011

    Now adjust the slider to see what rates have been historically. Much higher.

    Yup, for all the talk of crisis, the lack of “regime uncertainty” among investors seems unfair even to me. When people get scared of the stock market, they run to Uncle Same. Not away from him.

    Comment by jjrs — July 21, 2011 @ 1:11 pm
  30. jjrs,

    You can’t tell the difference between a period of time and a point in time. When you do stumble upon the concept of a period of time, you still can’t keep your frame of reference consistent.
    You refuse to admit that your misuse of percentages completely undermines your point. You still don’t admit that you couldn’t tell the difference between a tax rate and a tax increase. And finally, you couldn’t even be bothered to Google “regime uncertainty” and so made up a bogus meaning for it to make a point.

    It amazes me that you think you have a prayer of convincing anybody with such sloppy arguments. It really does.

    Comment by Quincy — July 21, 2011 @ 3:39 pm
  31. May I remind you, it is you who has written the post, and you who is charged with trying to convince others. Let’s review how you’re doing-

    You decry those that live in a “statistical reality”….and then use statistics to show that 2010 saw solid growth compared to 1950.

    I couldn’t think of a more perfect example. Look at the world around you. How’s the unemployment rate? How’s investment? How’s buying power and quality of life for the median income?

    Again- are you completely and totally nuts?

    Ask your parents about life in the 50′s and 60′s. Add the 70′s too, if you want to quibble about “time frames”. Ask them if it was harder or easier for the common man on a middle class income to afford a home, a car, raise a family. Ask if it was still possible for a household to only have one earner.

    And tax rates on the wealthy were 70% at their lowest rate. But let’s just look at the fact that was cut from a staggering 91- and ignore that it was still over double what is paid today! I guess the cutting is the only thing that matters, let’s just ignore what the actual rates were, because that’s totally irrelevant, I suppose.

    Utterly amazing. I could go on, but just that takes the cake. We have seen who lives in a “statistical reality”, and it is you.

    Comment by jjrs — July 21, 2011 @ 4:34 pm
  32. jjrs,

    Again, you try to attribute a position to me I flatly do not hold by taking two periods of time that I compared and saying my comparison was between two isolated years. That’s completely dishonest and every damn time you do it, I will call you on it. End of story.

    As for the state of the economy in 2011, it’s bad and getting worse. I made the argument very early on that this was due to regime uncertainty, which you first ignored then made up a definition for. Yet because I honestly compared two equal time periods, you say I don’t care about unemployment.

    And, yes, I addressed the high tax rates by pointing out that they decrease innovation by reducing the incentives to take risks. That was the reason I said I would take the progress of the low-tax era over that of the high-tax era.

    In short, the reason I probably appear nuts to you is that you’re inventing my positions as you go and twisting my words to fit. Completely sloppy, dishonest, and unconvincing.

    By the way, I am welcome to hearing from others whether I’ve convinced them or not.

    Comment by Quincy — July 21, 2011 @ 6:22 pm
  33. You’re quick to call dishonesty. So let’s clarify your position and avoid any misunderstandings. Agree of disagree-

    The greatest economic expansions in US history were 83-1990 and 1991-200.

    Correct? Fair summary of your opinion?

    Agree or disagree-

    Economically, the quality of life was measurably better for most Americans between 83-90 and 91-2000 than it was between 1961-1970, which according to you, was only the third greatest economic expansion.

    Correct? A fair representation of your beliefs?

    Comment by jjrs — July 22, 2011 @ 1:51 am
  34. jjrs,

    If having to call you out for distorting my positions *four damn times* is being quick to call dishonesty, then yes, I’m quick to call dishonesty.

    The first time you distorted my position, it could’ve been a mistake. The second, still could’ve been a mistake. The *fourth*? Especially after detailed refutations of the distortions? You’ll pardon me for thinking it was intentional. I must’ve been completely unreasonable.

    The greatest economic expansions in US history were 83-1990 [sic] and 1991-200 [sic].

    Correct? Fair summary of your opinion?

    The only thing you got right was correctly citing the time periods instead of talking about single years. Other than that, your statement is completely off the mark–incredibly more expansive than I ever argued or claimed to have evidence for.

    I can understand how you could have interpreted my statement that way before I cited the exact data series used. (That failure to cite was sloppiness on my part, I’ll admit.) However, since I clarified the data series I used 9 comments up the thread, there’s little excuse for you to attempt to attribute that statement to me at this juncture.

    Economically, the quality of life was measurably better for most Americans between 83-90 and 91-2000 than it was between 1961-1970, which according to you, was only the third greatest economic expansion.

    Closer, but still significantly broader than I intended to claim. The correct formulation of my opinion here is:

    When you look at the FRED Real GDP per Capita data series, which starts in 1960, the largest two climbs are actually 1983-1990 and 1991-2000. The period of 1961-1970 came in third.

    This is my original statement, by the way, only with added clarification of the data series.

    Now, to address my method of interpretation… Here’s a question for you: Is a person better off with an increase in wealth of $10 or $50? Does it matter if the increase of $10 is an increase of 10% while the increase of $50 is only an increase of 5%? I honestly can’t think of a reason it would.

    Why do I bring this up? I made use of a per capita data series for a reason: It represents the portion of output of the US economy per person. Therefore, increases represent the growth of the portion of output of the US economy per person.

    Based on that, arguing that 1961-1970 was a better period for people than was 1983-1990 or 1991-2000 is to argue that in increase in output of $5,539/person (1961-1970) is better than that of $6,479/person (1983-1990) or $8,917/person (1991-2000).

    (Numbers calculated from the values here: http://research.stlouisfed.org/fred2/data/USARGDPC.txt , which is the data behind the Real GDP per Capita graph I linked to earlier.)

    Now, again, I’m constrained by the data series to post-1960, so this is (and was only ever intended to be) merely a partial refutation of your original assertion that 1950-1970 was the biggest period of economic growth in history.

    That was my point, now explained in painstaking detail so there’s no possible chance of it being misunderstood. I am not making, nor did I ever try to make, any more of the Real GDP per Capita data series than it actually contains.

    Comment by Quincy — July 22, 2011 @ 3:31 am
  35. >”Based on that, arguing that 1961-1970 was a better period for people than was 1983-1990 or 1991-2000 is to argue that in increase in output of $5,539/person (1961-1970) is better than that of $6,479/person (1983-1990) or $8,917/person (1991-2000).”

    I’ll take it on good faith that you don’t just see this as a statistical game, but rather take those numbers as providing meaningful measures of economic prosperity.

    So based on your numbers, you would say that the economy was, overall, better off between 1991-2000 than it was between 1961-1970. Correct?

    And I would also expect that for your statistic to be meaningful and not just a numbers game, we could further define and measure prosperity by metrics such as real buying power of the median income, correct?

    Feel free to back out and claim that that interpretation oversteps your original claims. But I must say, if you don’t think your statistic can even lead you to state that much, it would leave me wondering why you bothered to bring it up in the first place.

    By the way- you attribute the gains between 1961-70 to the tax cuts that took place during that period. Correct?

    Comment by jjrs — July 22, 2011 @ 4:21 am
  36. jjrs,

    There you go again. Ignore and distort.

    You in no way address my point about the flaws of using percentages to interpret the GDP per Capita data series and immediately proceed to read the broadest possible interpretation into my statement. Again.

    And I would also expect that for your statistic to be meaningful and not just a numbers game, we could further define and measure prosperity by metrics such as real buying power of the median income, correct?

    Actually, no. Before you suggest using median income to compare the time periods under discussion, you should have Googled it. The observation range in the US begins in 1967.

    Now, if you’ve got data that show that 1961-1970 was better for people despite the smaller increase in GDP per capita than the latter two periods, show it. I’m not going to go out and do your research for you.

    Feel free to back out and claim that that interpretation oversteps your original claims. But I must say, if you don’t think your statistic can even lead you to state that much, it would leave me wondering why you bothered to bring it up in the first place.

    Wow, you’re an arrogant little one, aren’t you? For the number of blatant mistakes you’ve made so far in this discussion, I would drop the damn attitude. It’s completely unjustified.

    Besides, I explained *in detail* exactly why I brought it up and what I believed it would prove. Again, why you swagger in here with your attitude when you’re left wondering about the blatantly obvious is beyond me.

    By the way- you attribute the gains between 1961-70 to the tax cuts that took place during that period. Correct?

    Again, why the overly-broad interpretation of my position? Taxation is only a single influence on the performance of the economy. But, yes, I would (and have already) argued that it is the decreases in taxes across the board that were contributing to positive growth while the still-high levels of taxation were a drag on economic activity by inhibiting risk-taking and entrepreneurship. The difference in volume and rapidity of technological innovation between the high-tax period of 1950-1980 and the low-tax period of 1980-2010 are powerful proof of this.

    Speaking of, since we’re bouncing back to the technological subject, let’s look at your assertion about Government’s role in the internet:

    But big daddy government played a big role in founding the technology. And it happened in the 60’s.

    I hear this myth a lot, and it’s simply not true. Certain technologies that underpin the internet came from university research and were first used in the ARPANET. That’s a true statement. I even named them: shifting from leased line connections to packetization, best-effort data transmission, the concept of a protocol stack, and DNS. I realize that I omitted an important one: E-mail.

    But, *not one* of these comes from the 1960s. They date from the late 1970s at the earliest. Nor do the computers we use to get on to the internet bear any resemblance to those in use by big government and big business in the 1960s and 1970s. The personal computer is fundamentally different in design from the big mainframes bought by government in the 1960s.

    In fact, given the multiple strands of computing innovation at the time, the personal computer has a closer evolutionary connection to video games than mainframes. The Apple II was basically a video game with a general-purpose operating system instead of a game in ROM. A visual interface with real-time responses to user inputs? That’s a video game, not a mainframe. All modern PCs are video games in this respect, too.

    Moreover, the physical heritage of the Apple II has nothing to do with mainframes. The graphics system is a direct descendant of Wozniak’s work on Breakout. The need to make the machines as affordable as possible, in conjunction with Wozniak’s devotion to creating a machine with the fewest chips possible, brought the Apple II to a low enough level of complexity to make production runs of unprecedented scale possible.

    The mainframe-to-mainframe leased line connections in use in the 1960s would *never* have given rise to the internet as we know it, nor do they have much to do with it. The internet thrives as a massive network of PC-scale machines (even modern servers are closer to PCs than mainframes) using routed packets. The routed packets have their origin within ARPANET. PC-scale machines originate entirely outside government.

    It’s not possible to know the technology and claim that big daddy government in the 1960s had a damn thing to do with it.

    Comment by Quincy — July 22, 2011 @ 9:00 am
  37. >”There you go again. Ignore and distort.. You in no way address my point about the flaws of using percentages to interpret the GDP per Capita data series and immediately proceed to read the broadest possible interpretation into my statement. Again. …”Besides, I explained *in detail* exactly why I brought it up and what I believed it would prove. Again, why you swagger in here with your attitude when you’re left wondering about the blatantly obvious is beyond me.”"

    You understand why I keep asking you about this, right? I’m trying to figure out exactly what you think your statistics mean in terms of real life before I criticize your interpretation any further.

    Because I still don’t understand what your actual, qualitative claim is, in terms of the real world. Can we say that, say a family of 4 with the median income in the 90′s was substantially better off than in the 60′s?

    Now if not, don’t just get angry and indignant again. Just explain what you think you can say from those statistics, instead.

    Why? Because if I don’t know exactly what you’re claiming in real life terms, i can’t argue the point, because you’ll just get angry again and accuse me of distorting your position.

    So what is your position here? Was the average person better off or not? Why or why not? Again, don’t get mad- its a pretty fair question in my opinion.

    2. >”Biggest economic expansion in history? By what measure, exactly? That’s a hell of a whopper right there. When you look at real GDP per capita, the largest two climbs are actually 1983-1990 and 1991-2000. The period of 1961-1970 came in third.

    Just to clarify your methods here- are you defining “greatest climbs” as the longest points between two recessions?

    3. >”But, yes, I would (and have already) argued that it is the decreases in taxes across the board that were contributing to positive growth while the still-high levels of taxation were a drag on economic activity by inhibiting risk-taking and entrepreneurship.”

    Quick question for you- Both Bush I and Clinton raised taxes leading up to and in the early years of the comparison 1991-2000 expansion period. So we can agree that raising taxes does not always have an unequivocally negative effect on the economy, correct?

    3.>” Your claim, based on the statistics, is that high tax rates show no correlation to employment. But you use a period in which taxes were reduced repeatedly.”

    A) My claim was that there was no correlation between tax rates for the top income bracket and economic growth. You responded by talking about cuts, and disputed my interpretation that the actual rates themselves matter.

    Is your position that whether or not taxes happen to be going down or up serves as a better indicator of what will happen to the economy than the actual rates themselves? No distortion here- that’s genuinely what it’s seemed like.

    Most importantly-

    B) You responded by producing a statistic whereby even the most meager of economic expansion -even under, say, 1%- can still produce gains that appear to be “greater” than previous years, because the percentage gain is calculated off of the larger principal.

    Question- can you see why I would view that as an unfair interpretation of the data, and a good example of a “statistical reality”? You’ve basically defined the stats in such a way that you can’t possibly lose.

    Unless of course, you consider that by the end of his term, even Obama may well have on paper added more to real GDP than similar time frames in the 50′s or 60′s: using your stats, since the economy is larger today, he can add much less proportionately after regaining lost ground, but as long as it rises more in absolute terms, that’s a win for him, using your logic. Correct?

    You tend to get angry and accuse others of falsehood pretty quickly, so I have no doubt that last bit will bait you into a rage again. But that certainly appears to be a logical extension of your argument: expansion in absolute terms matters, proportionate expansions relative to prior time periods doesn’t. Correct?

    Comment by jjrs — July 22, 2011 @ 11:16 am
  38. jjrs,

    You understand why I keep asking you about this, right? I’m trying to figure out exactly what you think your statistics mean in terms of real life before I criticize your interpretation any further.

    You were previously asking me to answer critiques based on obvious distortions of what I originally said. I have no patience for that and called you out on them rather than playing your game.

    Now that you’ve asked the question without the distortion, let me answer your question by combining two points I’ve previously made:

    1) Using the per capita data series shows that there was more wealth in the economy per capita at the end of 1991-2000 than there was at the end of 1961-1970. Based on this, I’m advancing the claim that this resulted in people being better off.

    2) Innovation is an economic good on its own, not to mention the impact it has on wealth creation. Given the change in technology from 1961-1970 vs. either 1983-1990 or 1991-2000, I would argue that people were vastly better off at the end of the latter two periods due to increased innovation and the advent of life-improving goods that wouldn’t exist without that innovation.

    In conclusion, yes, absolutely.

    Because I still don’t understand what your actual, qualitative claim is, in terms of the real world. Can we say that, say a family of 4 with the median income in the 90’s was substantially better off than in the 60’s?

    Given that we’re talking about growth over the periods, the claim cannot be statistically evaluated with median income as one of the variables. The data does not exist before 1967. Again, Google is your friend.

    However, if you ask me whether a family of 4 at the median income was better off in the 60s than the 90s based on the facts I can speak to, then I’d day absolute for the reasons I outlined above.

    Just to clarify your methods here- are you defining “greatest climbs” as the longest points between two recessions?

    No, I’m defining the greatest climbs as the greatest increases in output amount per capita (as opposed to percentage) from the end of one recession to the start of the next.

    Quick question for you- Both Bush I and Clinton raised taxes leading up to and in the early years of the comparison 1991-2000 expansion period. So we can agree that raising taxes does not always have an unequivocally negative effect on the economy, correct?

    Flip my statement about high but decreasing taxes around to fit low but increasing taxes. You’ll have my answer.

    Besides, I’ve repeatedly cited the negative effect that high vs. low tax rates have on risk taking and entrepreneurship and how that translates to growth.

    A) My claim was that there was no correlation between tax rates for the top income bracket and economic growth. You responded by talking about cuts, and disputed my interpretation that the actual rates themselves matter.

    Is your position that whether or not taxes happen to be going down or up serves as a better indicator of what will happen to the economy than the actual rates themselves? No distortion here- that’s genuinely what it’s seemed like.

    One, yes I did point out that the was a confounding factor in your analysis, and it stands as a valid dispute.

    As for my position on tax rate changes vs. tax rate levels and the effect of each, I’ve made it perfectly clear more than once.

    Question- can you see why I would view that as an unfair interpretation of the data, and a good example of a “statistical reality”? You’ve basically defined the stats in such a way that you can’t possibly lose.

    No, I haven’t defined the stats so I can’t possibly lose. I’ve chosen a data series, accurately assessed its meaning, and drew a set of conclusions from it that were thoroughly explained and logically-coherent.

    You’ve proven unwilling understand why reading real GDP per capita (which is adjusted for both inflation and population) as a percent instead of an amount is the wrong thing to do, despite having it explained to you multiple times.

    Unless of course, you consider that by the end of his term, even Obama may well have on paper added more to real GDP than similar time frames in the 50’s or 60’s: using your stats, since the economy is larger today, he can add much less proportionately after regaining lost ground, but as long as it rises more in absolute terms, that’s a win for him, using your logic. Correct?

    One, the data set does not extend before 1960, so it’s out of the comparison range. How many times have I had to point this out now? Five? Six?

    Two, if the Obama government managed to deliver a higher real GDP per capita increase over his term than a similar period in history, then yes, it would be a win. I’d be celebrating. I just don’t think it’s going to happen.

    Real GDP per capita declined in the first year of Obama’s term. The real GDP per capita data series ends in 2009, so I’m going to have to extrapolate a little. The population is still increasing, while GDP growth in 2010 was just enough to recover the loss of 2009. Given the two facts, GDP per capita will be lower in for 2010 will be lower than 2008. So, half way into his first term, he’s working on a net loss.

    Given the problems that the economy has with regard to hiring that I’ve pointed to in previous comments, the prospect of strong enough GDP growth over the next several years (assuming Obama gets re-elected) to allow his term to compare favorably to other presidential terms with regard to real GDP per capita is very weak. Nothing I’d bet on.

    You tend to get angry and accuse others of falsehood pretty quickly, so I have no doubt that last bit will bait you into a rage again. But that certainly appears to be a logical extension of your argument: expansion in absolute terms matters, proportionate expansions relative to prior time periods doesn’t. Correct?

    Again, aside from blasting your China assertion for points I (and Brad) have been perfectly clear about, I have given you more than enough opportunity to correct your dishonest rhetorical ways.

    But that certainly appears to be a logical extension of your argument: expansion in absolute terms matters, proportionate expansions relative to prior time periods doesn’t. Correct?

    Again, you extend my argument in a way I didn’t nor wouldn’t. So, why should I answer it?

    Comment by Quincy — July 22, 2011 @ 1:57 pm
  39. Because I still don’t understand what your actual, qualitative claim is, in terms of the real world. Can we say that, say a family of 4 with the median income in the 90’s was substantially better off than in the 60’s?

    Yes, undeniably and absolutely.

    BUT — and it’s a big one — you have to compare apples to apples…

    Would a family at the median income level of the 1990′s have an easier or harder time living at the standard of living of the same family in the 1960′s?

    In the 1960′s, families often lived one 1 income, with a father working every day and a wife at home with the kids. They lived in a small house, and the kids most likely shared bedrooms. They probably had one household car, and one household television. They had a single phone in the house, hooked up to the wall and had to pay outlandish rates for long distance. Their vacations were limited to where they could drive to and cram the entire family into a single dingy hotel room. They may or may not have air conditioning, and that stay-at-home mom was probably washing clothes in a [relatively] expensive washing machine and hanging them out on the line in the backyard to dry. They don’t eat out at restaurants very often. They’ve got health insurance through Dad’s work, but of course it’s the 1960′s, so actually getting many things treated might not even be possible.

    Now ask me whether that life would be easier or harder to support today? Easier! Take a look at a comparison of hours worked required to by common Sears catalog items from 1975 to 2006. Pretty much across the board, people have to work less hours to be able to afford things than they did in that stretch.

    So if a comparable family tries to live on the median income today [note, I'm using today rather than the 1990's because some of the technology used, such as the prevalence of cell phones and the internet, weren't around then] compared to the 60′s, what will be different? Well, they’ll probably have one much higher quality car than they did then. Their small house will likely have air conditioning, a washer/dryer, a dishwasher, and two cell phones — not iPhones, mind you, but the ones that just make calls (and screw the kids, they don’t need phones). Since they’re only on the median income, we’ll assume they maybe only have two televisions, signed up for basic cable. Since they’re only on the median income, we’ll assume the house has only one computer, and one [lower-tier] broadband connection. They likely still go out for dinner rarely, although more often than the 1960′s family. They can probably eek out a modest family vacation, but given that they’re on the median income, probably can’t afford an elaborate vacation, maybe just somewhere that Southwest flies and a stay in a budget hotel (two rooms, of course). Healthcare eats up a lot more of the budget than it did in the 1960′s, but even if someone in the family gets cancer, it’s likely that it’s treatable if caught early.

    Now, the problem is that this isn’t how the family wants to live. They don’t want a small house. They don’t want only one car. The wife doesn’t want to stay at home with the kids. So they both get jobs, both work their asses off, and do everything in their power to keep up with the Joneses. They buy a big-screen HDTV to impress the neighbors, lease a BMW rather than finance a Hyundai, and make sure they’re keeping up with the local fashions. They keep their kids placated by TV’s, headrest DVD players and Xbox 360′s rather than telling them to go to the local library or — God forbid! — actually go outside and play.

    If a 2010 median family wants to live a nice simple existence, they can certainly live a comparable or better standard of living than 1960′s median family. The problem is that as wealth has increased, the definition of what we all consider a middle class existence is LIGHT-YEARS beyond what it was in the 1960′s. We demand so much more, but complain how hard we have to work to live in a wondrous world full of things that DIDN’T EVEN EXIST BACK THEN.

    Yes, 1990′s or 2011′s family has it better than 1960′s family had it. The fact that they’re so much less satisfied with it is their own fucking fault.

    Comment by Brad Warbiany — July 22, 2011 @ 2:37 pm
  40. Brad- that’s a good post and the kind of “real terms” talk I’ve been looking for here. And your point is well taken.

    But I want to ask an entirely honest, non-hostile question-

    If you re-run that scenario to include a top 1% earner in the 1960′s, and compare it to a top 1% earner today…how does it play out? How easily can they play out the 60′s version of luxury, and how much is left over afterwards for new types of excess?

    I don’t want to argue about whether or not they deserve what they earned, we can save that argument for another day. But if you see a schism between the average person’s life in comparison to theirs, what accounts for it?

    I just went to the census bureau and downloaded family income info all families- http://www.census.gov/hhes/www/income/data/historical/families/index.html

    I played around with the data in JMP and plotted the upper limit of the second quintile with the lower limit of the top 5%, and came up with this-

    http://i.imgur.com/heeWC.png

    (but of course, feel free to play around with the excel sheet yourself).

    You can see that while the median (or near median) family is doing a little better, and can afford a 60′s lifestyle,

    The obvious point here is that income taxes fell for the rich. But the gap that’s widening is to big for even that to explain. This is the top 5% of families, but even if we were looking at the top 1% (where the gap would likely be even wider still), their income tax only got slashed from 70% down to about 35 today.

    So when you look at it that way, it makes more sense why people are so bitter about what they don’t have. There’s a better life to be had, and you’re reminded of it every time you turn on the TV and see people living large.

    The top 1% -hell, even just the top 5- is equipped to buy all that new stuff by an order of magnitude. The mid quintiles, not so much.

    Again, we’ll run around in circles if we fight about whether people deserve what they earn. But why the schism? Why such a smaller share for the average person these days?

    Comment by jjrs — July 22, 2011 @ 3:30 pm
  41. jjrs,

    I’ll let Brad handle most of it, but I just want to address this:

    The obvious point here is that income taxes fell for the rich. But the gap that’s widening is to big for even that to explain. This is the top 5% of families, but even if we were looking at the top 1% (where the gap would likely be even wider still), their income tax only got slashed from 70% down to about 35 today.

    Assume you make $20,000/year in 1950. At this rate, your tax rate goes up from 56% to 78% on every dollar earned. Your $1000 raise from $19,000 to $20,000 gave you $440 in after-tax income. A prospective $1000 raise from $20,000 to $21,000 gives you just $220 in after tax income.

    As taxes go down, this disincentive to work harder and take risks for more money goes down as well. This is especially true for entrepreneurs, whose income is entirely dependent on how much value they produce for their business.

    Going back to the example of the personal computer, it’s likely that if taxes had not come down from 1950s levels, there wouldn’t have been enough of an incentive for Steve Jobs to lure Steve Wozniak away from HP to found Apple. It was a risk. Woz was giving up a good engineering job at an established company to take a shot in the dark founding a company. Had the incentive not been there, Woz would likely have been a respected engineer at HP, but certainly would never have make it into the top income bracket.

    To get the Apple II done, Woz worked tirelessly, pushing himself to the absolute limits of his talents to create a masterpiece of engineering that changed the world. Would he have done that if he were a salaried upper-middle class engineer working on projects doled out by management? Probably not.

    This disincentive to work and take risks explains quite well why the top median incomes are grow more the lower taxes are.

    Before we continue, let’s make sure we are clear on the difference between individual income and wealth. When most people think of “the rich”, they target those with high incomes but then they then refer to behaviors associated with those with high wealth.

    High incomes are incentives to work and take risks when they would significantly improve one’s wealth. If you’ve got $100,000 in assets, then a $100,000 annual after-tax income will be an excellent incentive to work. If you’ve got $100,000,000 in assets, $100,000 is much less of an incentive to work.

    So, if I’m already rich, passing up opportunities for high incomes is a lot less impactful than if I’m poor. By discouraging high incomes, very high income taxes make it rational for the non-rich to seek low-risk income situations that offer no hope of becoming rich but offer “just enough”. By contrast, lower income taxes produces an incentive for the non-rich to take risks and work hard and dream big.

    Which economy would you rather live in, one where by virtue of birth and your parents’ accumulated wealth you’re doomed never to be more than a middle-class worker or one where taking risks and working hard offer the chance of a high income and being one of “the rich”?

    Comment by Quincy — July 22, 2011 @ 5:05 pm
  42. 2 things there-

    >”Had the incentive not been there, Woz would likely have been a respected engineer at HP, but certainly would never have make it into the top income bracket. To get the Apple II done, Woz worked tirelessly, pushing himself to the absolute limits of his talents to create a masterpiece of engineering that changed the world. Would he have done that if he were a salaried upper-middle class engineer working on projects doled out by management? Probably not.

    First, you probably picked the wrong two guys to make an example out of there. Steve Jobs may well be a different story, But do you really think Wozniak was primarily driven by money? He’s a good example of somebody who gets fixated doing what he loves. He wanted the freedom to make his own computer.

    But more to the point- evidence indicates that not just Wozniak, but even Jobs, lean democrat. They certainly seem to have made some nice contributions to the party-

    http://www.newsmeat.com/ceo_political_donations/Steve_Wozniak.php

    http://www.newsmeat.com/fec/bystate_detail.php?city=Cupertino&st=CA&last=Jobs

    Second Apple was founded in the 70′s, generally not considered an amazing time for capitalists by free market types. Hell, Carter was president for most of Apple’s early years.

    And more to the point- your own real GDP graph shows that real GDP has grown in a near-linear fashion since 1960. (and before that, too- the data is out there if you care to look). It’s true we have fewer but longer recessions in the modern economy, though most consider that the work of the fed. And even if you want to claim that for Reagan, it seems like pretty thin gruel for why income should become so skewed toward the top 1%. The most remarkable thing about your real GDP graph is how with the glaring exception of 2008, it ultimately seems to just to continue up, up and up, regardless of who is in office. Do you really believe if say, Obama Senior had gotten elected in 1980, it would suddenly careen downward? Main difference now is disproportionately less of it goes to the common person compared to before. Changes in income for the median quintiles just haven’t shown the same sexy spike since then.

    >”Which economy would you rather live in, one where by virtue of birth and your parents’ accumulated wealth you’re doomed never to be more than a middle-class worker or one where taking risks and working hard offer the chance of a high income and being one of “the rich”?”

    Basically what you’re asking is, would you rather play it safe, or bet on yourself and gamble on hitting the jackpot?

    I think Steve Jobs and Steve Wozniak proved in the 70′s that you don’t need Reaganism to do that, and that its perfectly possible to strike out and do such a thing under a president like Carter. But even if they hadn’t, the answer is that I would look at the most prosperous country overall, and see where I would be most likely to be fortunate. No, I would not got to a country with a staggeringly rich top 5% and large segments of poor people. I would go to where I had the best chance at earning a good income.

    You know why? because I don’t do what I do for the money. I do it because I love it. It’s not about my ego- I make the money I need to support a family in the future and keep the lifestyle I want. If I have health care, savings for retirement, a nice place in a good city and enough disposable income, after that it’s all just scorekeeping. I know it seems romantic striking out into the world and doing the whole fountainhead/atlas shrugged thing. But I don’t see why the average person should have to play blackjack with their own fortune. This isn’t a movie.

    Comment by jjrs — July 22, 2011 @ 7:49 pm
  43. Quincy,

    I’m not sure that most average people adjust their work based on tax rates. I know that for myself, I’m constantly pushing to do more and grow more in my career, and if I can make $10K more but at the end of the day I’ll only take home $2K more, if the move is good for my career I’ll gladly take *MORE* responsibility even though the money isn’t huge.

    As a general rule, human nature always wants more. I think Woz probably would have tried to push Apple regardless of the return, as I think he probably believed in what he was doing.

    jjrs,

    If you re-run that scenario to include a top 1% earner in the 1960’s, and compare it to a top 1% earner today…how does it play out? How easily can they play out the 60’s version of luxury, and how much is left over afterwards for new types of excess?

    So when you look at it that way, it makes more sense why people are so bitter about what they don’t have. There’s a better life to be had, and you’re reminded of it every time you turn on the TV and see people living large.

    It’s an interesting question. There have been numerous studies (such as this one) suggesting that people gauge their self-worth NOT on their absolute standard of living, but on their relative standard of living.

    So we can argue all day about whether high incomes are earned, and all day about the difference that Quincy points out between high incomes and high wealth. But I don’t think that has anything to do with your question.

    Yes, people are less happy with their lives, and more jealous, when they watch the Kardashians and the Real Housewives, and all these other non-representative shows on TV. The *downside* to globalization is that even if you’re in the top 5% of income in the US, you have a lot more visibility into what the top 1% have [and by definition what you don't have].

    Does that mean that income inequality in this country is some horrendously unfair situation? Or does it mean that the greater visibility of what happens at the top makes people who were happy with a 1960′s lifestyle suddenly unhappy with a significantly better 2011 lifestyle? I think it’s the latter.

    Comment by Brad Warbiany — July 22, 2011 @ 11:19 pm
  44. You ever see the Louis CK bit “Everythings Amazing & Nobody’s Happy”? You’d probably really like it. It’s hilarious and kind of hits at what you were saying

    http://www.youtube.com/watch?v=8r1CZTLk-Gk

    Relative vs. Absolute income- It’s an interesting question. I definitely think people judge their worth in relative terms rather than absolute. I think there’s an instinct in people to compete for status. In a society with large income inequality, you can end up in a situation where the majority of people feel bitter and as if they fall short of some kind of ideal all the time.

    >”Does that mean that income inequality in this country is some horrendously unfair situation? Or does it mean that the greater visibility of what happens at the top makes people who were happy with a 1960’s lifestyle suddenly unhappy with a significantly better 2011 lifestyle? I think it’s the latter.

    Well where’s the contradiction between those two possibilities? Why can’t it be unfair that the majority of wealth generated since the early 80′s or so has gone disproportionately to the top 1-5%, and that it messes with everyone else psychologically, too?

    “Fair” is a tricky concept, and impossible to debate. But I would argue that there are actually objective reasons why you would want to live in a more equal society. About a year ago I did a correlation between the gini index (income equality measure) and violent crime rates, and found a pretty solid correlation. This paper here seems to get similar results-

    linkinghub.elsevier.com/retrieve/pii/S0165176507000201

    And beyond the stats, I personally just find that more equal countries are more pleasant places to live. It’s true Japan has its problems, but income is still more equal, and as a result you have more of a sense that everyone is in it together. There’s a general sense of trust with your neighbors and even strangers, because in a sense, you’re all kind of in the same boat. You don’t have to worry about getting mugged, partly because while there are poorer people, in a general sense you’re all at relatively equal levels.

    I like parts of Europe for the same reason. Even I think Sweden is overtaxed, but a place like say, Germany is a good compromise. Good shopping, abundance on par with the US, and cheap if you know where to look. Solid economy under the circumstances. Cheap education and a therefore highly educated work force. Good paid vacation benefits, but not over the top. And nobody can accuse them of being slackers.

    But on the other hand, the States- there are some good places, but there are other neighborhoods that are just scary to go through. You can be on a nice street in Brooklyn, turn a corner and wind up in the wrong place, and suddenly you feel a lot less safe. There’s another extreme, I know. But overall, I would rather live in places where the income brackets are close enough that there’s no reason for someone in a lower one to mug me. Aside from the moral and fairness issues, it just makes for a more pleasant world to live in.

    Comment by jjrs — July 22, 2011 @ 11:55 pm
  45. Brad,

    I’m not sure that most average people adjust their work based on tax rates. I know that for myself, I’m constantly pushing to do more and grow more in my career, and if I can make $10K more but at the end of the day I’ll only take home $2K more, if the move is good for my career I’ll gladly take *MORE* responsibility even though the money isn’t huge.

    When it comes to working for someone else, you raise a good point. Often, when working for someone else, the after-tax number is usually all we think about because of tax withholding. If you don’t see the $8K, it’s harder to miss it. Looking at it that way, I would probably take the same deal (albeit grumpily).

    Now, eliminate tax withholding. You accept more responsibility, take home $10k more and then have to cut uncle same a check for $8k. Would that be as cut and dry a choice?

    jjrs,

    First, you probably picked the wrong two guys to make an example out of there. Steve Jobs may well be a different story, But do you really think Wozniak was primarily driven by money? He’s a good example of somebody who gets fixated doing what he loves. He wanted the freedom to make his own computer.

    Actually, yeah, you’ve got a point about Woz. I went back and reread the section of his autobiography and I was crossed up on his motivations. That said, without Jobs, would Woz have had the opportunity to leave HP for a startup at all? At 1950 tax rates, which were significantly higher than 1970s tax rates, do you think Jobs would have even bothered with the risk of a startup? He’s a businessman, always has been.

    No, I would not got to a country with a staggeringly rich top 5% and large segments of poor people. I would go to where I had the best chance at earning a good income.

    From a quantitative standpoint, there is no evidence that the higher incomes of the top 5% of earners in any way impacts income levels of the lower quintiles. In the data series you presented, all 5 data series move generally together, indicating that increases and decreases are being caused by something that affects all income levels similarly. Given the significant decrease in the last two years, my guess at the driving factor is demand for labor.

    But given the subsequent discussion about relative vs. absolute income, I think you and I would define “good” very differently.

    Relative vs. Absolute income- It’s an interesting question. I definitely think people judge their worth in relative terms rather than absolute. I think there’s an instinct in people to compete for status. In a society with large income inequality, you can end up in a situation where the majority of people feel bitter and as if they fall short of some kind of ideal all the time.

    Sorry, but I’m a living counterexample to this. My calculation of my economic well being is very much attuned to absolute income. If I have enough income to satisfy my needs and enable me to do what I want in life, I’m completely satisfied. The fact that someone has way more stuff than me doesn’t even begin to bug me.

    I’m very much a typical geek when it comes to how I regard social status. It plays very little role in my decision making, economic and otherwise.

    When I say something is cool, I use the word to mean I find it really interesting. Doesn’t matter a whit to me whether anyone else in the world finds interesting. If I do, it’s cool to me.

    I buy clothes because they look like I want them to look, not because they signal a certain social status. Hell, I’ve had more than one friend accuse me of being allergic to anything fashionable. Not far from the truth, either. I tend to prefer a clean, crisp appearance over one with all the peculiar excesses of modern fashion.

    Now, being a geek, I like technology. Most people assume I’ve got the latest and greatest at home. Not even close. I have stereo system from the Ford administration, a TV that’s old enough to be in college, a laser printer that predates American Idol, and a pair of computers that are five years old. The stereo system has an incomparable sound for the kind of music I listen to, so the it definitely stays. The TV, despite being low-resolution, displays very vivid colors and very deep blacks. To my eye, that makes for a more satisfying picture than more pixels. The laser printer is built like a tank, it’s easy to clear paper jams out because the paper path is very simple, and it delivers impeccable black and white prints. And the computers, well, they’re tuned to run just the way I like them to. Replacing them would just be a headache.

    In the same five years I’ve had the computers, though, I’ve gone through six cell phones. I kept upgrading because each phone didn’t give me an experience I was happy with. The Nokia I started with? Well, that one broke. The one I replaced that with? Didn’t do e-mail. The HTC Wizard I replaced it with? Did e-mail but was slow, clunky, and had terrible battery life. The Blackberry I replaced that with? Had great battery life and was quick and responsive, but didn’t have a camera and the screen was so-so. The Blackberry I replaced that with? Excellent screen and had a camera, but the browser was crap. The Droid X I replaced that with? Great. The hardware is perfect for me, and after modifying Android to suit my needs it does everything I want very well. Until I find a phone that does everything I want to do with a phone significantly better, I’m going to stick with this even if I have people calling it “that old thing” because I’m still carrying it around in 2015.

    One might read that and argue, well, he’s got it pretty good if he can afford six cell phones over 5 years…

    Absolutely do. I’ve worked myself into a good job (from the bottom up) that pays well enough for me to have a high level of economic satisfaction and I’m thankful I had the opportunity to do that. There’s still a few things I want to do for myself, but life ain’t worth living without something to strive for.

    Well, what if he didn’t have it so good? Maybe he’d be more prone to being unsatisfied because other people had more than he.

    Nope. When I was in college, I supported myself primarily by playing weddings and funerals for a semester. I had an unusual class schedule that made it difficult to get a regular job. Had to do 2-3 a week every week to pay the bills. It was a constant struggle, always jockeying to line up the next gig. Couldn’t afford a car, so I got around on the bus and by bumming rides off my friends. Barely, barely made ends meet with a bare bones lifestyle.

    But, even though I was playing for wedding ceremonies that cost more than I’d earned in the last two years, I never once got bothered by the fact that they had more than I did. Not once.

    Of course, I wasn’t happy with my situation by any means, but it was because I knew the things I wanted to do and have that I couldn’t yet afford to, not because they had more than I did.

    Now, because I’m a living counterexample doesn’t mean that examples don’t exist and that they don’t cause problems.

    So, if you’re going to address those problems, you need to make sure you’re defining them well. Income and apparent wealth are not necessarily linked. Let me describe two people I know. One wears expensive, fashionable clothing every day, walks around with the latest gadgets, drives a late model luxury car, and lives in a nice condo. The other walks around in blue jeans and flannel shirts, drives an older model Ford F150, has a cell phone that only makes calls, and lives in a 1970s tract house.

    Now, you’ve probably already figured out where I’m going with this. The one with the expensive stuff is making $75k, which just barely puts him in the top 30% of incomes. The one driving the F150? Makes over a half a million a year, which puts him in the top 1% of incomes.

    Of these people, which one would be more likely to trigger negative feelings and behavior from those oriented to social status? I know enough poor people to bet that they’re gonna be bitching about the BMW, not the half-million-dollar income that gets prudently saved and invested to allow a business to continue running and creating jobs.

    When you’re looking up from beneath, you judge who’s rich and who’s not on the basis of the stuff they have. If you are prone to bitter feelings about people you perceive to be wealthier, you’re going to judge it based on their consumption, not their income.

    I’d argue that the bitterness you’re attributing to income inequality is really consumption inequality. When a 73rd %ile income can enable such conspicuous consumption, it’s time to rethink whether the gap between the top 5% and everyone else is the cause of the negative feelings of those prone to them. The decreasing cost of luxury goods plus the general upward trend in inflation-adjusted incomes up until 1999 plus easily-available consumer credit have enabled people who in 1980 would’ve been solidly middle class to buy rich people stuff.

    Comment by Quincy — July 23, 2011 @ 5:55 am
  46. jjrs,

    I love that Louis CK bit. He’s one of my favorite comedians.

    Well where’s the contradiction between those two possibilities? Why can’t it be unfair that the majority of wealth generated since the early 80’s or so has gone disproportionately to the top 1-5%, and that it messes with everyone else psychologically, too?

    “Fair” is a tricky concept, and impossible to debate. But I would argue that there are actually objective reasons why you would want to live in a more equal society. About a year ago I did a correlation between the gini index (income equality measure) and violent crime rates, and found a pretty solid correlation. This paper here seems to get similar results-

    “Fair” is a very tricky concept. Fair depends on ideological first principles that are not consistent across people. You’ve stumbled into a libertarian blog where liberty is valued more highly than equality. We’re simply speaking different languages here.

    Relative standard of living might not be as wide of a gap in western Europe as it is in America. But on many measures, absolute standard of living is lower in Europe than in is in America. If you want to compare the same metric I used above, hours worked [by, say, someone at the median income] to obtain a certain lifestyle, I’d say they have to work more hours in Europe to have the same standard of living than someone would in America.

    The reason for this is that America has [and has had for a long time] a higher average annual GDP growth rate than most European nations. This might not make a difference year-to-year, but over a few decades, 1% difference in GDP growth rate can make a HUGE difference.

    You talk about “fair”, I talk about a tradeoff. We can make a tradeoff between robust GDP growth and a robust welfare state. We can’t have both. I prefer GDP growth, because it will mean a better life for me in the future (I’m 32) and for my young kids when they grow up. America is the richest country in the world; we can certainly “afford” a robust welfare state. That doesn’t exactly make it a good long-term idea.

    Comment by Brad Warbiany — July 23, 2011 @ 6:49 am
  47. Quincy,

    When it comes to working for someone else, you raise a good point. Often, when working for someone else, the after-tax number is usually all we think about because of tax withholding. If you don’t see the $8K, it’s harder to miss it. Looking at it that way, I would probably take the same deal (albeit grumpily).

    Now, eliminate tax withholding. You accept more responsibility, take home $10k more and then have to cut uncle same a check for $8k. Would that be as cut and dry a choice?

    My thoughts on withholding were published as early as 6 years ago. Eliminating withholding would lead to a revolt that would make the current debate over the debt ceiling look like tiddlywinks.

    But I’m not sure I believe the premise that even someone who is self-employed will regularly choose to work less hard due to higher tax rates. Most self-employed people are pretty driven, and those who are driven towards growth will usually try to jump any hurdle in front of them. What I do believe is that the high tax rates suck money out of productive GDP-growth-increasing uses and funnels it to non-growth uses. It’s not that high tax rates make the employer *not want* to hire and invest and grow. It’s that high tax rates make it IMPOSSIBLE to do so because the money is no longer there.

    Comment by Brad Warbiany — July 23, 2011 @ 7:10 am
  48. Oh, I should point out that there are multiple types of self-employed people. Some are driven by the desire to make a living and not work for someone else. Others are driven by the desire to build ever-bigger businesses. They’re two different mindsets.

    My dad is an architect, and was self-employed my entire life. At no point that I can remember did he have more than two employees, and the bulk of my life he’s had only one draftsman working for him. His business is a “lifestyle” business, not a growth business. He wanted to make a nice living doing the kind of jobs he wanted to do, and it was more about the freedom to do what he wanted than the reward of building a business empire.

    The people who are interested in “growth” or “empire-building” businesses are a different breed. I don’t think high tax rates dissuade them from *trying* to grow their businesses — I’m not sure putting brick walls in front of them would dissuade them from *trying* to grow their businesses. However, as I state above, high taxes suck the capital that they need to grow their businesses and employ workers out of their pockets, and hurts their capability to grow more than their desire to grow.

    Comment by Brad Warbiany — July 23, 2011 @ 7:20 am
  49. Brad,

    Great points on the effects of high taxes on small business.

    What I was trying to figure out what was why the high-tax era saw so many fewer startups that grew to have significant impacts on the economy than the low-tax era. That’s a perfectly sensible explanation.

    Comment by Quincy — July 23, 2011 @ 10:29 am
  50. Quincy-

    >”That said, without Jobs, would Woz have had the opportunity to leave HP for a startup at all? At 1950 tax rates, which were significantly higher than 1970s tax rates, do you think Jobs would have even bothered with the risk of a startup? He’s a businessman, always has been

    Steve Jobs? I think he was born an entrepreneur and would remain one rain or shine, day or night, 50′s or 70′s, 20′s or 90′s. I don’t think the tax rate or much else would make a lick of difference to him, really. I think in the 50′s, he would have been out there selling personal mainframes, or devising more convenient cars. At the turn of the last century, he would have hunted down Nicola Tesla and come up with something we’d still be using today.

    I know a couple entrepreneurs in Canada and Sweden with annual income in excess of $300,000 US a year (before tax). The striking thing about them is how little the punitive tax rates seem to change who they are, fundamentally.

    Yeah, they’ll bitch about the taxes if you start them on it. But they’re businessmen and they would never be anything else. They give orders, they don’t take them. They make their own path. They want to decide their own destiny. Would either of them say, “hmmm, top rate is a little high…ah screw it, I’ll just live a life of mediocrity”?

    Nope, not them. Like I said, I just want a good standard of living. But they’re different, and always would be. Money is part of it, but beyond that, there’s something else that makes them behave the way they do.

    Even a cut-throat guy like Bill Gates. For somebody who hypothetically wouldn’t have built an empire under a higher tax rate, he sure does spend a lot of time giving his money away, and urging other billionaires to do likewise.

    Brad-

    >”The people who are interested in “growth” or “empire-building” businesses are a different breed. I don’t think high tax rates dissuade them from *trying* to grow their businesses — I’m not sure putting brick walls in front of them would dissuade them from *trying* to grow their businesses. However, as I state above, high taxes suck the capital that they need to grow their businesses and employ workers out of their pockets, and hurts their capability to grow more than their desire to grow.”

    Here’s what I don’t get- growing your business is tax DEDUCTIBLE, right? So why this fixation on the idea that taxes on post-expenditure PROFITS hurts expansion?

    On the contrary- in my experience, it seems like it actually helps expansion, because it encourages entrepreneurs to write off as many things as possible. Say your business makes a profit of 200,000 dollars. Look, if you hire another person for 50k, tax won’t prevent you from doing that. On the contrary, you just wrote off 50k. You only pay tax on what you keep after you’ve made all your expenditures.

    My above-mentioned entrepreneur friend writes off absolutely everything. His BMW is in his company’s name. He’ll take me out for dinner and when it’s time to pay say “nah, I got it- you’re giving me good advice so this counts as a business expense”. Its like that all day.

    >”But on many measures, absolute standard of living is lower in Europe than in is in America. If you want to compare the same metric I used above, hours worked [by, say, someone at the median income] to obtain a certain lifestyle, I’d say they have to work more hours in Europe to have the same standard of living than someone would in America.”

    I’m sorry, but this isn’t necessarily accurate, not if you look at standard of living to include things like leisure time, health care and provisions for your family. First, while US per capita income is higher, Germany is competitive, within the top 15 worldwide- 47,000 vs 36,000.

    http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita

    But let’s take a look at the quality of life received for that 11,000 difference- rather than working harder for that, Germany is working less. Despite Real GDP rising consistently over the past decades with the exception of the crash ( http://research.stlouisfed.org/fred2/series/DEURGDPR?cid=32273 )

    and despite rising compensation ( http://research.stlouisfed.org/fred2/series/DEUCOMPQDSNAQ?cid=32273)

    Germans are actually working less, not more- ( http://research.stlouisfed.org/fred2/series/DEUAHWEP?rid=204 )

    This was a quality of life decision. Germany mandates 4 weeks paid vacation per employee, plus 9-13 bank holidays.

    -But you get more for your money still. As you know, health insurance can cost families something like 12,000 a year. In Germany, you have that covered.

    -There’s also much cheaper higher education, so you won’t go broke over student loans. This leads more people to seek higher education and improve their skills.

    -You get 14 weeks 100% paid maternity leave, plus another 12-14 months at 65% pay

    - 12-14 months PATERNITY leave, at 65% pay

    - Although they lag behind the rest of Europe, decent, affordable public day care

    And beyond all that, its just a nice place to be, generally. The shopping is excellent, and prices are pretty cheap.

    It’s a lifestyle choice, to an extent. But if you make 11 grand less but have health care covered, have close to 5 weeks vacation, have a cumulative 2 1/2 years leave between you and your wife per child…well, I’m not saying its a trade-off everybody would make. But it’s not so black and white which is better, either.

    Personally, I would much rather raise a family in Germany than in the US. Don’t have to worry about fighting over what gets covered by insurance if the kid is sick. Don’t have to save $100,000 plus in their college funds, because they can get a good education for much cheaper. Know that I can have long summer vacations with them and enjoy their childhood, rather than just working all the time to pay for it.

    Comment by jjrs — July 23, 2011 @ 1:05 pm
  51. A couple more things-

    >”Sorry, but I’m a living counterexample to this. My calculation of my economic well being is very much attuned to absolute income. If I have enough income to satisfy my needs and enable me to do what I want in life, I’m completely satisfied. The fact that someone has way more stuff than me doesn’t even begin to bug me. I’m very much a typical geek when it comes to how I regard social status.”

    Well, me too. But I don’t think that describes most people.

    >”When you’re looking up from beneath, you judge who’s rich and who’s not on the basis of the stuff they have. If you are prone to bitter feelings about people you perceive to be wealthier, you’re going to judge it based on their consumption, not their income.”

    I would argue that that turns into a matter of semantics. Yes, a rich person who wears the same clothes as you and behaves the same way but just saves most of his income will inspire less jealousy than someone who flaunts it. But inevitably, if you have a social class that has 5-30 times the income as everyone else as opposed to, say, double or triple, you’re going to see a divide develop.

    Now, we can talk about things in terms of psychology, and how people should get over comparing themselves to others, etc. But its important to look at the quantitative changes in income distribution over the past few decades. Something really is changing.

    >”I’d argue that the bitterness you’re attributing to income inequality is really consumption inequality. When a 73rd %ile income can enable such conspicuous consumption, it’s time to rethink whether the gap between the top 5% and everyone else is the cause of the negative feelings of those prone to them. The decreasing cost of luxury goods plus the general upward trend in inflation-adjusted incomes up until 1999 plus easily-available consumer credit have enabled people who in 1980 would’ve been solidly middle class to buy rich people stuff.

    Actually, no. If you want to talk in terms of flat screen TV’s and iPods, then fine. But as far as the full deal goes, it has never been harder for the average, median-income person to afford a truly rich person’s lifestyle, at least not since the 1920′s. The difference between the average and “rich” is vast now, more so than it has been in several generations.

    In 1979, 3 years after Jobs and Wozniak founded apple, the median household income in 2007 dollars was 44,000 for the middle fifth. The top 1% average household income was $346,000, or about 8 times as much. (And this seems like a pretty fair definition of “rich” to me. I don’t know about you, but making 8 times as much as anyone else strikes me as a decent financial incentive to work hard)

    But In 2007, median household income had rose to 55,000. But for the top 1%, it was now $1,319,000…about 32 times as much.

    That is a massive, massive gap. It doesn’t matter how many credit cards you own- nobody can simulate the difference on an ordinary salary, no matter how much of a bitter show-off they are.

    This takes us back to the turn of the century. Let’s look at buying power historically-

    If you went back to Lincoln’s time, you would likely find life pretty horrible no matter how much money you had to throw around. If you went to 1910-1920, things would be different. The technology for the staples of modern life- indoor toilets, electricity, telephones, automobiles- already existed. The problem was the common man couldn’t afford most of those things. And so the rich literally lived in a different world to an extent. Their homes were radically, fundamentally better.

    By the 50′s, that had changed. The rich generally didn’t have huge houses with servants by then. While they dressed well, they didn’t dress so much better that they were clearly above the common man (think Marie Antoinette in full regalia walking past the riff-raff). A common guy could get all the same basic things- a car, a home with indoor plumbing, electricity, etc. The difference between the rich and the poor was fundamentally like the difference between a chevrolet and a cadillac- sure, the cadillac was nicer, but you could get to the same place in either vehicle. There would be a nice neighborhood with bigger houses, but fundamentally, you all co-habited the same planet.

    That’s starting to change again. Now the rich have G4 jets, multiple homes, helicopters to fly them from wall street to the Hamptons…its turning into a separate world again.

    Like your graph shows, its not because US GDP is suffering- with the exception of this dip and a few recession-long lags, its rose more or less constantly. But less and less of the gains that have come since 1979 have fell in the hands of the average person. The bulk of it is going to a new social class.

    Comment by jjrs — July 23, 2011 @ 3:56 pm
  52. jjrs,

    Where were all those startups in the high-tax era that went large and made life better through innovation? Apple and Microsoft are the exception, not the rule.

    If you’re going to argue the position that high taxes actually *enable* companies to grow, I’d like the answer to that question.

    On the contrary- in my experience, it seems like it actually helps expansion, because it encourages entrepreneurs to write off as many things as possible. Say your business makes a profit of 200,000 dollars. Look, if you hire another person for 50k, tax won’t prevent you from doing that. On the contrary, you just wrote off 50k. You only pay tax on what you keep after you’ve made all your expenditures.

    Wow. Are you really that naive about why business owners make investments?

    Assume all else is equal between these two economies except tax rates.

    Steve is a sole proprietor who runs a flower shop. In our low-tax land, this puts him at a 25% marginal rate. In our high-tax land, this puts him in at a 70% marginal rate. He has a family, and needs to make $40,000 in income after taxes a year to support them. Everything above that can go back into the business.

    So, already, in the high-tax scenario, Steve’s business needs to make more money above and beyond business expenses to make his personal ends meet. Writing off these personal expenses as business expenses, by the way, is a form of tax evasion.

    In the high-tax environment, Steve has $1,000 in profit to reinvest in the business, while in the low-tax environment he has $2,000 in profit.

    Steve wants to hire another part-time employee at $25,000 a year to increase the hours of operation from 40 per week to 60 per week. He expects to make $30,000 pre-tax from the spend. He needs $2,000 to make the initial hire before he can expect to see returns off it.

    In the high-tax environment, he’s $1,000 short, so he needs to borrow.

    He hires the employee 3/1. Over the next nine months, the employee costs $18,750 and the increased hours produce $23,750 in income–more than Steve estimated. Cool.

    In the low-tax environment, this leaves Steve with a $5,000 profit to pay tax on. In the high-tax environment, he’s got to go back and pay the bank $1,000 plus interest (let’s say, $25) before he turns a profit of $3,975.

    So, before he even takes a tax hit on the profit from the investment, he’s already at a disadvantage in the high-tax environment.

    In the low-tax environment, Steve is left with $3,250 after taxes and supporting his family. In the high-tax environment, he’s left with only $1,192.

    Now, assume Steve wants to invest in a point of sale system to allow him to take credit and debit cards. It costs $10,000 and he expects to make $12,000 in revenue from it. Steve needs to finance the balance. In the low-tax environment, he needs to finance $6,750, while in the high-tax environment he needs to finance $8,808.

    Steve buys the system and has it up and running on 2/1. It meets his revenue estimates perfectly, producing $11,000 in income over 11 months. He fully repays the amount he finances, $7,000 after interest in the low-tax environment and $9,100 in the high-tax environment.

    So, before taxes in that year, he has $4,000 in the low-tax environment. In the high-tax environment, he has $1,900.

    Can you honestly still argue that businesses are more able to expand under a high tax regime than a low-tax one?

    Comment by Quincy — July 23, 2011 @ 4:18 pm
  53. >”Where were all those startups in the high-tax era that went large and made life better through innovation? Apple and Microsoft are the exception, not the rule.”

    Well of course they’re exceptions. They’re 2 of the most profitable companies in the world. They’re the exceptions at everything. And yet these are the types of companies we always bring up when we try to discuss ingenuity and give exemplars of good capitalism.

    >If you’re going to argue the position that high taxes actually *enable* companies to grow, I’d like the answer to that question.

    I’m not. Even liberal economists like Krugman will concede that cutting taxes can spur the economy, at least in some cases. But what I don’t agree with is that the notion that an economy with higher taxes will always, without exception, as a fundamental law of nature, lead to lower growth than an economy with higher ones, and vice versa. As if taxes are the only thing businesses care about, and the sole vice that stops everyone from succeeding everywhere, or even trying.

    >”Wow. Are you really that naive about why business owners make investments? Assume all else is equal between these two economies except tax rates. Steve is a sole proprietor who runs a flower shop. In our low-tax land, this puts him at a 25% marginal rate. In our high-tax land, this puts him in at a 70% marginal rate. He has a family, and needs to make $40,000 in income after taxes a year to support them. Everything above that can go back into the business. So, already, in the high-tax scenario, Steve’s business needs to make more money above and beyond business expenses to make his personal ends meet.”

    See, this strikes me as pretty thin gruel if its supposed to be the black and white evidence that higher taxes are going to lead to sure and certain economic destruction.

    Yes, if you draw a line in the sand that you need a net 40k to go back to your family, you’re going to have less to put back in your business. Even I can figure out that much. But is that it? That’s the whole argument? The whole rationale for why taxes are choking the economy to death and returning us to the dark ages?

    I mean look- if Obama proposed doubling the income tax for the top 1%, you would screaming blue murder. You would be saying it would be the end of the united states as we know it. You would be saying that the whole country would soon sink into the ocean, smoldering in fire from coast to coast as it went.

    Except- your own graph shows that GDP went up just fine at those rates. Talk about how rates were being cut during that time all you want, it won’t change the bottom line that the rates at their lowest for the top were still double what they are now.

    Except- Both Bush I and Clinton raised taxes, and this was followed by what is in your own opinion the second biggest economic expansion in US history. Huh?

    So does cutting taxes give small businesses more to spend, even putting aside the obvious fact that all their expenditures are tax-deductible anyway? Well sure. But does this therefore mean that cutting taxes again and again and again should be the #1 priority for the future of an economy and country, bar nothing?

    Well, no. I just don’t see it. Literally I don’t, looking at your own graphs, and your own opinion about 1991-2000. It’s a matter of personal priorities.

    Comment by jjrs — July 23, 2011 @ 4:38 pm
  54. jjrs,

    Well of course they’re exceptions. They’re 2 of the most profitable companies in the world. They’re the exceptions at everything. And yet these are the types of companies we always bring up when we try to discuss ingenuity and give exemplars of good capitalism.

    In the low-tax era (1981-2010), is the emergence of these kinds of companies nearly as exceptional? I don’t think so. That’s my point.

    But what I don’t agree with is that the notion that an economy with higher taxes will always, without exception, as a fundamental law of nature, lead to lower growth than an economy with higher ones, and vice versa. As if taxes are the only thing businesses care about, and the sole vice that stops everyone from succeeding everywhere, or even trying.

    Good, neither do I. Taxes are *a* factor that makes it harder for business to grow, for the reasons both Brad and I have pointed out. They are not they only one, and in the current recession taxes have *nothing* to do with the lack of growth. It’s an unemployment recession.

    See, this strikes me as pretty thin gruel if its supposed to be the black and white evidence that higher taxes are going to lead to sure and certain economic destruction.

    That was the beginning of a scenario to show the impact of higher-versus-lower taxes on the ability of a business to grow, in response to your assertion that higher taxes encourages business owners to put money back into their businesses rather than keeping it for themselves.

    If you read through the scenario as a scenario, it shows that the constraint of lower after-tax profits due to high tax rates actually *do* make it more difficult for a business owner to grow the business.

    I mean look- if Obama proposed doubling the income tax for the top 1%, you would screaming blue murder. You would be saying it would be the end of the united states as we know it. You would be saying that the whole country would soon sink into the ocean, smoldering in fire from coast to coast as it went.

    I still don’t understand why you think attributing positions to me that I don’t hold is a technique I will find either honest or convincing. It should be perfectly clear I find it is offensive and demolishes your credibility.

    My actual position on this has been stated so many times in this thread I won’t repeat it here.

    Except- your own graph shows that GDP went up just fine at those rates. Talk about how rates were being cut during that time all you want, it won’t change the bottom line that the rates at their lowest for the top were still double what they are now.

    You don’t believe that there’s much of an difference between tax increases, I do. Can we leave this as an agree to disagree?

    So does cutting taxes give small businesses more to spend, even putting aside the obvious fact that all their expenditures are tax-deductible anyway? Well sure. But does this therefore mean that cutting taxes again and again and again should be the #1 priority for the future of an economy and country, bar nothing?

    Yes, cutting taxes gives small businesses more to spend, hiking them gives small businesses less to spend. Absolutely.

    No, since this is *not* a tax-related recession, the best thing to do would be leave taxes alone. This is a recession being driven by unemployment. What we should be doing right now is addressing the root causes of unemployment.

    Well, no. I just don’t see it. Literally I don’t, looking at your own graphs, and your own opinion about 1991-2000. It’s a matter of personal priorities.

    Not surprising, since you’re looking for a straw man you created out of my arguments that never existed anywhere outside the confines of your own skull.

    Going back to an earlier comment, I also want to address this:

    By the 50’s, that had changed. The rich generally didn’t have huge houses with servants by then. While they dressed well, they didn’t dress so much better that they were clearly above the common man (think Marie Antoinette in full regalia walking past the riff-raff). A common guy could get all the same basic things- a car, a home with indoor plumbing, electricity, etc. The difference between the rich and the poor was fundamentally like the difference between a chevrolet and a cadillac- sure, the cadillac was nicer, but you could get to the same place in either vehicle. There would be a nice neighborhood with bigger houses, but fundamentally, you all co-habited the same planet.

    So, there was no class of flamboyantly rich people during the period? Really? The old-money families gave up their yachts and mansions and their servants? What exactly were the Kennedys and Rockerfellers up to in this period?

    Now, could it be possible that the reason the top 5% in the fifties held a much smaller share of total income was because the top 5% of income earners were not the elite rich of the period? What if, instead, the elite rich were maintaining their lifestyle by using assets accumulated before WWII?

    If you don’t think that’s possible, let’s do a little thought experiment. Next year, top tax rates jump back up to 90%. How would that effect the elite rich?

    Would Sergey and Larry suddenly not have the GoogleJet? Would Larry Ellison lose the megayacht? Would the Kennedys sell Kennebunkport? Probably not.

    Would the bottom end of the elite rich, who can’t sustain the lifestyle without a high-income drop out of the elite rich? Yes.

    But the social stratification between the now smaller population of elite rich and everyone else would still be present while entry into the elite rich would be more difficult by any means other than birth. The result would be more dynasty families.

    The only way to really bring the level of the elite rich down would be to confiscate some portion of the existing wealth as well as high income taxes to prevent them from reaccumulating it. (Note I absolutely, positively do NOT endorse such a course of action. I’m merely pointing out that that’s how the result could be achieved.)

    Comment by Quincy — July 23, 2011 @ 9:37 pm
  55. Well I apologize for the hyperbole. But sometimes it seems like tax cuts are all anyone with certain political leanings can talk about (that, and abolishing the fed for the gold standard). The year is 2000, and the federal government is finally running a surplus? To hell with using it to pay off the deficit, let’s have tax cuts for the rich! Economy dips and that surplus evaporates? Let’s still have tax cuts! Economy bad and deficit higher than ever? Well, this contradicts the 2000 position, but let’s solve that by having more tax cuts still! It’s like this magic cure-all elixir rain or shine, one situation or the exact opposite..

    >In the low-tax era (1981-2010), is the emergence of these kinds of companies nearly as exceptional? I don’t think so. That’s my point.

    Emergence of tech, PC and internet companies such as Google, etc? I can think of one big reason why those mostly emerged after the early 80′s. And as a hint, it doesn’t have anything to do with tax cuts.

    Perusing through the fortune 500 (irritating standalone page by standalone page), the top 10 companies are all things like Ford, Bank of America, GM, Walmart, energy concerns like Exxon, and (ducks for cover) Fannie Mae- all established well before 1981. When I do see newer companies (IBM and Hewlett Packard make the top 20) they are…based on technology that didn’t even exist until relatively recently.

    So to answer your question- the reason you’re seeing more companies like Google in the past 30 years is most likely because they provide services that people hadn’t even dreamed of before the modern era.

    > So, there was no class of flamboyantly rich people during the period?  Really?  The old-money families gave up their yachts and mansions and their servants?  What exactly were the Kennedys and Rockerfellers up to in this period?

    Well it’s funny you should bring up the Rockefellers and the Kennedys, because you just named two family dynasties that were established at the turn of the century, before income taxes were high and before the estate tax was established. In Kennedy Sr’s case, the much of the fortune was likely made through dealings that would be considered illegal later. What they were up to during that period was a phenomenally higher tax bracket. I doubt Rockefeller Sr. would have objected much, as he was a noted philantrophist who gave away 10% of his salary to charity even as a young man before he hit it big, but by the 1950′s, the heirs of those families were paying 91% income tax and likely tax on inheritances from the old men. So no, while they were still very wealthy, they went through extreme forms of taxation during that time period, even as the common man gained fantastic ground.

    >Would the bottom end of the elite rich, who can’t sustain the lifestyle without a high-income drop out of the elite rich? Yes.

    Well look, obviously there needs to be some sense to any proposals. If you jacked it up to something like 90 people making 300K a year would have double the take home; obviously that makes no sense. For starters, there should probably be a new top 0.1% bracket, as the divide between your run of the mill top 1% and your upper top 1% is actually also very wide now.

    But at any rate, would it kill anyone making 1.3 million a year to have their personal income tax hiked up from 33% to, say, 40 (which is more than Obama is proposing to do by the way)? Well, no. Not really. The top rate was at 40% through the 90′s, and as you’ve said yourself, the economy did just fine then.

    Comment by jjrs — July 23, 2011 @ 11:59 pm
  56. Well I apologize for the hyperbole. But sometimes it seems like tax cuts are all anyone with certain political leanings can talk about (that, and abolishing the fed for the gold standard).

    Thanks for the apology.

    The year is 2000, and the federal government is finally running a surplus? To hell with using it to pay off the deficit, let’s have tax cuts for the rich!

    I rather agree with you here. I think the economic growth advantages of the small, single tax cut were overplayed and it didn’t end up paying for itself through increased economic growth.

    That said, I do believe recovery from the 2001 recession would have been slower without them, and the faster growth offset some of the revenue lost through the rate cut.

    Also, the assumption that spending wouldn’t have caught up to surplus revenues is not born out by history. Even Clinton’s own 2001 budget proposed increase spending that consumed most of what would have been the surplus.

    Perusing through the fortune 500 (irritating standalone page by standalone page), the top 10 companies are all things like Ford, Bank of America, GM, Walmart, energy concerns like Exxon, and (ducks for cover) Fannie Mae- all established well before 1981. When I do see newer companies (IBM and Hewlett Packard make the top 20) they are…based on technology that didn’t even exist until relatively recently.

    OK, so, of the companies you cite, all but two (Walmart and HP) were founded and grew significantly *before* the high-tax era. (I discount Fannie Mae from this analysis given it’s exceptional relationship with the federal government.)

    None of the companies you cited were founded at the peak of the high-tax era: 1942-1955, in which all but the lowest tax bracket paid a marginal rate greater than 50%. HP, founded very close to the beginning of this peak-tax era, didn’t begin to grow significantly until the 1960s.

    So far, you’ve posted nothing that refutes the position that it is more difficult to grow a company during an era of high taxation vs. a low one.

    So to answer your question- the reason you’re seeing more companies like Google in the past 30 years is most likely because they provide services that people hadn’t even dreamed of before the modern era.

    This ignores a key component of innovation: the losers.

    Let’s look at search engines. Was Google the first? No. It was a relative latecomer to the game. Lycos, Altavista, Excite, Yahoo! (a web directory, but competing with search engines), Dogpile, Inktomi, HotBot, Ask Jeeves. All of these came *before* Google.

    All but one rose to prominence at one point only to fall to being a bit player after Google came along. But, each of these contributed to Google’s success by trying things that seemed like good ideas but turned out not to be. If two-thirds of those companies hadn’t been there, how many more mistakes would Google have made? Would one of them have been fatal?

    Look at the MP3 player. Another case of important losers. In most people’s minds, MP3 players came into existence with the iPod. But the iPod came a full three years after several small companies created the MP3 player market.

    When sales proved to be lackluster after an initial surge, makers started getting information as to why: limited storage, clunky interfaces, slow transfer speed, dismal battery life.

    A couple of players in the early market tackled the storage space issue by using 2.5″ hard drives. This created players that were just a little to big.

    It was only with this information that Apple could make the iPod. Large capacity, fast data transfers, longer battery life, a 1.8″ hard drive, and a sleek, simple interface combined to make *the* winner in the space.

    This is why risk-reward tradeoffs and the ability to build companies are so important. Big successes come from many failures. When risks are poorly rewarded and building companies is more difficult, fewer companies attempt to innovate, and so fewer failures occur. Without the information from these failures, successes are more difficult.

    Well it’s funny you should bring up the Rockefellers and the Kennedys, because you just named two family dynasties that were established at the turn of the century, before income taxes were high and before the estate tax was established.

    Of course I did. That was my *point*. Even with the high income taxes, they were not stopped from continuing to live the elite rich lifestyle based on the the wealth accumulated before the high-tax period.

    At a certain point, one gathers enough wealth to become basically self-sustaining without any external income. Larry Ellison is a perfect example of this.

    Well look, obviously there needs to be some sense to any proposals. If you jacked it up to something like 90 people making 300K a year would have double the take home; obviously that makes no sense. For starters, there should probably be a new top 0.1% bracket, as the divide between your run of the mill top 1% and your upper top 1% is actually also very wide now.

    My point was, and still is: if you believe the elite rich lifestyle is a driver of class-based strife and want to use taxation to diminish the elite rich lifestyle, it is not possible to do via the income tax alone.

    What the beginning of the high-tax era created was a bunch of dynasty families like the Kennedys and the Rockerfellers. These families continued to live the elite rich lifestyle despite the massive diminishing in the ability to accumulate wealth through personal income because they were already wealthy.

    Ushering in a new high-tax era would do the same. The elite rich group is smaller, but still extant. Entry into it through personal income is several times more difficult, while entry into it through birth is just as easy.

    On that basis alone, I would resist a new high-tax era a la the 50s and 60s because I would not want to have the kind of glass ceiling it creates for those not in the elite rich.

    But at any rate, would it kill anyone making 1.3 million a year to have their personal income tax hiked up from 33% to, say, 40 (which is more than Obama is proposing to do by the way)? Well, no. Not really. The top rate was at 40% through the 90’s, and as you’ve said yourself, the economy did just fine then.

    A 7% top bracket increase wouldn’t kill anyone, and would still keep the country in a generally low-tax zone. My personal rule of thumb to differentiate between low-tax and high-tax for purposes of economic impact is 50%. Nothing hard and fast about that, just a rule of thumb (if anyone can suggest another one, I’m happy to hear it).

    The increase would cause a temporary decrease in growth and, very importantly, increase unemployment as small businesses affected by the higher tax rate have less money available to hire or retain employees. But once the impact made its way through the economy, it wouldn’t matter terribly much.

    Considering this is an recession based on unemployment, anything that would cause it to go up is unwise at this point.

    Comment by Quincy — July 25, 2011 @ 12:48 am
  57. >”Of course I did. That was my *point*. Even with the high income taxes, they were not stopped from continuing to live the elite rich lifestyle based on the the wealth accumulated before the high-tax period.”

    To an extent, of course they were. Look, it makes a difference if the Rockefeller family is taxed at 91% versus 25. Period. Sure, they could still afford big houses and nice things. Why shouldn’t they? The goal here isn’t to stop the google founders from having extravagant lifestyles. The goal is not to completely destroy the Kennedys or Rockefellers, or crush their spirit to innovate, a la chairman Mao. Yes, their families were still relatively (and I stress relatively) very rich in the 50′s too.

    But I don’t think you fully appreciate the kind of wealth divide I’m trying to talk about here. Maybe because you haven’t seen it. “Big House” doesn’t quite cut it as a description. The funny thing is, for all the Kim Kardashians on TV, most people don’t really understand how the highest income bracket people can live today. Its a different world, and its kept private.

    Anyway, about taxes and the crushing of the will to innovate and take risks- I don’t think its as clear cut as “for every percentage you raise the taxes of the wealthy, a job dies”. I can’t speak for entrepreneurs, but I can speak for myself. Consider this-

    Say last year I made 150,000 dollars profit on my quite successful small business. Say my family lives well and saves for retirement adequately on 100,000.

    Now I have decisions I have to make on whether I want to expand. Although my core business is doing quite well, the economy is down and people aren’t buying like they used to, so there’s a bit of a risk there. I’m not obligated to put the money back in my business. In fact, if I put my mind to it, there are a number of nice things I could buy with the extra money. I could put a down payment on a cottage, for example.

    Now suppose the income tax rate for income over 100,000 increases, and the income I earn over 100k will now be taxed at a considerably higher rate than the first 100k. How does that incentivize me?

    Again, I can’t speak for a budding Bill Gates, Steve Jobs or Rockefeller. But me? I would be more likely to put those extra profits back in my business as a result, not less.

    Why? Because if I don’t, a big share of that money is just going to be wasted and go back to the government, lost to me in every way (save for very indirect benefits). If I use it to expand, I can at least write it off as a tax deduction and make use of it somehow. Even if the expansion isn’t profitable, at least I’ll have the shot. If I just let it get taxed, it goes away.

    Again, that’s just me. But there is some empirical evidence that that kind of scenario might be closer to what we’re seeing right now. The Wall Street Journal (not exactly known for its liberal propaganda) recently did a poll of businesses (job creators) and asked why they don’t expand. The main reason? Consumers aren’t buying right now, and demand is low.

    So instead, they sit on their cash. So it appears the problem is not that the “the government is taking money I could be putting into my business”. It’s that right now, businesses aren’t sure anyone will bite if they do. So instead, they hold on to their profits and wait for better times.

    Now sure, if I spend it as personal income and put the money in a yacht, that’ll help the economy too. But right now we’re in a situation where a very small percentage of the population receives 70% of the new wealth generated. There are only so many G4 jets and helicopters they can buy. In a recession, a lot of that capital just stays in the bank, where its safe.

    Again, this is NOT an argument that taxes boost the economy. Just to illustrate that the “tax hike = deadly blow to the economy” isn’t so clear cut.

    Anyway, not trying to get in the last word, just giving my opinion. It’s been interesting talking to you guys, even if it got a little heated at times.

    Comment by jjrs — July 27, 2011 @ 3:07 pm

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