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The Power of Tax Cuts

I mentioned in this morning's post about former President Bush's speech that tax cuts are a powerful thing. This is what I'm talking about:

Posted Image

It's from the economics textbook I use in my class showing the Dow Jones industrial Average from its beginning in 1896 until about 1999. Notice where it really begins to skyrocket? 1982, just months after the Economic Recovery Act of 1981 slashed taxes. The top rate would go from 70% to 50% in three years and the bottom rate from 14% to 11%.

I expect two things to be said about this:

1. It's all inflation.

Much of it is. However, the prime interest rate reached as high as 21.5% in 1982, so the initial take-off was not a result of loose money policy.

2. There was a crash in 1987.

Sure, but there was no recession. The economy remained strong despite the crash. It was basically a computer glitch. Investors took a little while to regain their confidence in the market again, but when they did, they didn't look back for a decade.

Look at the rest of the graph and think about the economic policies that caused the sideways pattern. Then look at the butt crack shaped pattern in the 70s. Whose economic theory were we following at the time? Whose are we following now?

If the 70s were butt, what makes us think the teens aren't going to be if we're following the same economic theory?

My Mind is Clean
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20 Comments On This Entry

What you're seeing is almost entirely due to growth in the tech sector.

Bear in mind that the Dow Jones Industrial Average is hardly "industrial" anymore. The DJIA is not, as the name implies, 30 "Industrial" companies, it is 30 "large" companies - companies that, by definition, have done well in whatever economy. Just look at who is on the Dow now - companies like IBM, Microsoft, HP, Intel, Cisco, Verizon, etc - none of whom were there prior to '79.

The Dow is a lopsided indicator because it BIRGs companies that succeed and CORFs companies that fail; Dow is the girl in high school that only goes out with the popular guy with a fat wallet - a clique that might or might not be indicative of the student body as a whole.

IMHO, what's MORE important than looking at the Dow itself is to look at what companies have come and gone and why. For instance, WHY have companies like HP and Intel been added whilst old-line companies like Citibank and GM were dropped?
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Adam Smithee, on 11 April 2012 - 10:17 AM, said:

What you're seeing is almost entirely due to growth in the tech sector.Bear in mind that the Dow Jones Industrial Average is hardly "industrial" anymore. The DJIA is not, as the name implies, 30 "Industrial" companies, it is 30 "large" companies - companies that, by definition, have done well in whatever economy. Just look at who is on the Dow now - companies like IBM, Microsoft, HP, Intel, Cisco, Verizon, etc - none of whom were there prior to '79. The Dow is a lopsided indicator because it BIRGs companies that succeed and CORFs companies that fail; Dow is the girl in high school that only goes out with the popular guy with a fat wallet - a clique that might or might not be indicative of the student body as a whole.IMHO, what's MORE important than looking at the Dow itself is to look at what companies have come and gone and why. For instance, WHY have companies like HP and Intel been added whilst old-line companies like Citibank and GM were dropped?

How much did high tech equipment cost in 1982 in today's dollars? Let's say we're just talking an Apple II. It cost about $2500 at the time. That would be about $5900 in today's dollars. Businesses were riding the wave of productivity that tech afforded. But where did the capital come from to buy these expensive gadgets?

The tax cut, that's where.
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Mr. Naron, on 11 April 2012 - 11:09 AM, said:

How much did high tech equipment cost in 1982 in today's dollars? Let's say we're just talking an Apple II. It cost about $2500 at the time. That would be about $5900 in today's dollars. Businesses were riding the wave of productivity that tech afforded. But where did the capital come from to buy these expensive gadgets?The tax cut, that's where.


Tax cuts, fueling consumer spending? Uh oh - you're getting dangerously close to demand-side economics.

But that's both the dirty little secret AND the hidden flaw of Reaganomics. The growth under Reagan, to the extent that it even was caused by the government, was less supply-side than it was merely keynesianism masquerading as supply-side. The trillions that Reagan dumped into defense funded the core R&D that ultimately made the components more affordable so that they could be purchased by consumers with their tax cuts.

The fatal flaw with keynesianism isn't that it doesn't work, but that it doesn't work for long. While it's nice that consumers went out and bought PC's with their tax refunds, what do you do for an encore when by, say, '87 or so, everybody likely to buy a PC had already bought one ?

Here's proof: show me any - ANY - innovation in the computer sector in our lifetimes, and I'll show you how it's directly tied to massive defense spending by Reagan in the '80s and/or to massive Apollo/Vietnam spending in the '60s.

But that leads to the problem we have today: The Dems use the flaws in Reaganomics as an indictment of supply-side, when in fact this should be an indictment of Reagan's demand-side approach... But the Republicans have left the barn door wide open by clinging to the illusion that Reaganomics was supply-side.
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Correlation is not causation and what you are doing is picking a snippet where tax cuts corresponded with growth.

Anyone can do that to prove just about anything.

2000's was economically disastrous decade, with zero real per capita growth, a first in three decades. It also happens to be the decade with some of the lowest effective personal and corporate taxes. Conversely, we had higher tax rates and collected higher % of GDP during the 90's (aka roaring nineties).

Tax cuts are not magic.
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Mr. Naron, on 11 April 2012 - 11:09 AM, said:

Adam Smithee, on 11 April 2012 - 10:17 AM, said:

What you're seeing is almost entirely due to growth in the tech sector.Bear in mind that the Dow Jones Industrial Average is hardly "industrial" anymore. The DJIA is not, as the name implies, 30 "Industrial" companies, it is 30 "large" companies - companies that, by definition, have done well in whatever economy. Just look at who is on the Dow now - companies like IBM, Microsoft, HP, Intel, Cisco, Verizon, etc - none of whom were there prior to '79. The Dow is a lopsided indicator because it BIRGs companies that succeed and CORFs companies that fail; Dow is the girl in high school that only goes out with the popular guy with a fat wallet - a clique that might or might not be indicative of the student body as a whole.IMHO, what's MORE important than looking at the Dow itself is to look at what companies have come and gone and why. For instance, WHY have companies like HP and Intel been added whilst old-line companies like Citibank and GM were dropped?
How much did high tech equipment cost in 1982 in today's dollars? Let's say we're just talking an Apple II. It cost about $2500 at the time. That would be about $5900 in today's dollars. Businesses were riding the wave of productivity that tech afforded. But where did the capital come from to buy these expensive gadgets?The tax cut, that's where.


So no tax-cut, no technological progress? Right?
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Behold the power of debt!

National Debt tripled in 80's and ushered an era of prosperity and market growth...here are some graphs.


:biglaugh:
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Adam Smithee, on 11 April 2012 - 01:59 PM, said:

Mr. Naron, on 11 April 2012 - 11:09 AM, said:

How much did high tech equipment cost in 1982 in today's dollars? Let's say we're just talking an Apple II. It cost about $2500 at the time. That would be about $5900 in today's dollars. Businesses were riding the wave of productivity that tech afforded. But where did the capital come from to buy these expensive gadgets?The tax cut, that's where.
Tax cuts, fueling consumer spending? Uh oh - you're getting dangerously close to demand-side economics.But that's both the dirty little secret AND the hidden flaw of Reaganomics. The growth under Reagan, to the extent that it even was caused by the government, was less supply-side than it was merely keynesianism masquerading as supply-side. The trillions that Reagan dumped into defense funded the core R&D that ultimately made the components more affordable so that they could be purchased by consumers with their tax cuts. The fatal flaw with keynesianism isn't that it doesn't work, but that it doesn't work for long. While it's nice that consumers went out and bought PC's with their tax refunds, what do you do for an encore when by, say, '87 or so, everybody likely to buy a PC had already bought one ?Here's proof: show me any - ANY - innovation in the computer sector in our lifetimes, and I'll show you how it's directly tied to massive defense spending by Reagan in the '80s and/or to massive Apollo/Vietnam spending in the '60s.But that leads to the problem we have today: The Dems use the flaws in Reaganomics as an indictment of supply-side, when in fact this should be an indictment of Reagan's demand-side approach... But the Republicans have left the barn door wide open by clinging to the illusion that Reaganomics was supply-side.

The point of supply side is to free up capital for what the economy needs, not for what a politician thinks it needs. That's the difference.

The problem is that spending wasn't kept under control. Reagan couldn't force Congress to balance the budget.
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AntonToo, on 11 April 2012 - 02:06 PM, said:

Correlation is not causation and what you are doing is picking a snippet where tax cuts corresponded with growth.Anyone can do that to prove just about anything.2000's was economically disastrous decade, with zero real per capita growth, a first in three decades. It also happens to be the decade with some of the lowest effective personal and corporate taxes. Conversely, we had higher tax rates and collected higher % of GDP during the 90's (aka roaring nineties).Tax cuts are not magic.

The certainly aren't magic, and no one claimed otherwise. There are limits to the power of tax cuts, and we reached those limits in the 2000s. And that's also where non-core inflation caught up to us in the form of various bubbles. However, without the tax cuts, we'd be in worse shape.

Causation is easy to show, as I already mentioned to Adam. When capital is freed up for what the eoconomy needs as opposed to the needs of government, you get growth. And, of course, there are limits.

But liberals never admit there are limits to the power of government spending, do you?
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AntonToo, on 11 April 2012 - 02:16 PM, said:

Behold the power of debt!National Debt tripled in 80's and ushered an era of prosperity and market growth...here are some graphs. :biglaugh:



Democrats controlled the House the entire time, and you know it. That's always the go to for you guys agaisnt Reagan. That is some weak, weak sauce.
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Mr. Naron, on 11 April 2012 - 02:29 PM, said:

AntonToo, on 11 April 2012 - 02:16 PM, said:

Behold the power of debt!National Debt tripled in 80's and ushered an era of prosperity and market growth...here are some graphs. :biglaugh:
Democrats controlled the House the entire time, and you know it. That's always the go to for you guys agaisnt Reagan. That is some weak, weak sauce.


You are missing the point - my spurious claims that debt caused the growth is at least as well supported as your argument that tax-cuts did it.
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AntonToo, on 11 April 2012 - 03:42 PM, said:

Mr. Naron, on 11 April 2012 - 02:29 PM, said:

AntonToo, on 11 April 2012 - 02:16 PM, said:

Behold the power of debt!National Debt tripled in 80's and ushered an era of prosperity and market growth...here are some graphs. :biglaugh:
Democrats controlled the House the entire time, and you know it. That's always the go to for you guys agaisnt Reagan. That is some weak, weak sauce.
You are missing the point - my spurious claims that debt caused the growth is at least as well supported as your argument that tax-cuts did it.

Ah, you were making an even weaker point. Again, the debt (caused by Democrats incase you missed it the first time) was a function of too much spending. The effects of government spending isn't nearly as beneficial as freeing up money for free market decisions. The economy prospered not because of the debt, but in spite of it.

Look at the completely ineffective use of government spending and debt during the New Deal. It didn't work. Plus taxes were increased to pay for it. FDR took money out to use according to a centralized plan. Reagan freed it up for the free market to use. It worked in Reagan's case, not in FDR's.

Again, no one is claiming that there's no limit to what tax cuts can do. But they are powerful.
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Mr. Naron, on 11 April 2012 - 02:29 PM, said:

AntonToo, on 11 April 2012 - 02:06 PM, said:

Correlation is not causation and what you are doing is picking a snippet where tax cuts corresponded with growth.Anyone can do that to prove just about anything.2000's was economically disastrous decade, with zero real per capita growth, a first in three decades. It also happens to be the decade with some of the lowest effective personal and corporate taxes. Conversely, we had higher tax rates and collected higher % of GDP during the 90's (aka roaring nineties).Tax cuts are not magic.
The certainly aren't magic, and no one claimed otherwise. There are limits to the power of tax cuts, and we reached those limits in the 2000s. And that's also where non-core inflation caught up to us in the form of various bubbles. However, without the tax cuts, we'd be in worse shape.Causation is easy to show, as I already mentioned to Adam. When capital is freed up for what the eoconomy needs as opposed to the needs of government, you get growth. And, of course, there are limits.But liberals never admit there are limits to the power of government spending, do you?


Even if we accept absolutist notion that government spending is never better then private spending there is still the downside of huge debt build up under-taxing causes.

After decades and decades and decades of back and forth it is quite clear that Americans do want government to spend far more then what taxes it has been collecting can sustain.

The tax-cuts-on-credit is not a demonstration of the power of tax cuts, but a very bad form of Keynesianism that makes for disastrous long term policy.

Instead of smoking the one-day-we-will-cut-enough-spending-to-pay-for-tax-cuts-we-get-today crack Republicans should work to balance the budget first and foremost. That means raising some tax and cutting some spending - the balanced approach democrats are willing to accept.
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AntonToo, on 11 April 2012 - 03:56 PM, said:

Mr. Naron, on 11 April 2012 - 02:29 PM, said:

AntonToo, on 11 April 2012 - 02:06 PM, said:

Correlation is not causation and what you are doing is picking a snippet where tax cuts corresponded with growth.Anyone can do that to prove just about anything.2000's was economically disastrous decade, with zero real per capita growth, a first in three decades. It also happens to be the decade with some of the lowest effective personal and corporate taxes. Conversely, we had higher tax rates and collected higher % of GDP during the 90's (aka roaring nineties).Tax cuts are not magic.
The certainly aren't magic, and no one claimed otherwise. There are limits to the power of tax cuts, and we reached those limits in the 2000s. And that's also where non-core inflation caught up to us in the form of various bubbles. However, without the tax cuts, we'd be in worse shape.Causation is easy to show, as I already mentioned to Adam. When capital is freed up for what the eoconomy needs as opposed to the needs of government, you get growth. And, of course, there are limits.But liberals never admit there are limits to the power of government spending, do you?
Even if we accept absolutist notion that government spending is never better then private spending there is still the downside of huge debt build up under-taxing causes.After decades and decades and decades of back and forth it is quite clear that Americans do want government to spend far more then what taxes it has been collecting can sustain.The tax-cuts-on-credit is not a demonstration of the power of tax cuts, but a very bad form of Keynesianism that makes for disastrous long term policy.Instead of smoking the one-day-we-will-cut-enough-spending-to-pay-for-tax-cuts-we-get-today crack Republicans should work to balance the budget first and foremost. That means raising some tax and cutting some spending - the balanced approach democrats are willing to accept.

Under-taxing? Are you serious? Try over spending. And the American people don't want the overspending, they're constantly kicking the over spenders out of office only to get shafted by the next group of overspenders who pretended to be fiscally responsible when out of power.

It's only Keynesian if meant to stimulate the economy. The Reagan cuts weren't meant to be mere stimulus but a restructuring of the tax conde in order to create an environment for sustained growth. If Reagan was a Keynesian, he would have howled like a stuck pig at Volcker's tight money policy. But he didn't. He was man enough to take the political beating he took when the economy went back into recession due to extremely high interest rates.

Every time the GOP falls for the raise some taxes, cut some spending line, they get the football yanked out from in front of them. Except for when Clinton was pres and Gingrich was speaker. Why can't we have that kind of bargain? Because the Dems aren't acting in good faith. They are more partisan now than they've ever been in my lifetime.
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Mr. Naron, on 11 April 2012 - 04:03 PM, said:

AntonToo, on 11 April 2012 - 03:56 PM, said:

Mr. Naron, on 11 April 2012 - 02:29 PM, said:

AntonToo, on 11 April 2012 - 02:06 PM, said:

Correlation is not causation and what you are doing is picking a snippet where tax cuts corresponded with growth.Anyone can do that to prove just about anything.2000's was economically disastrous decade, with zero real per capita growth, a first in three decades. It also happens to be the decade with some of the lowest effective personal and corporate taxes. Conversely, we had higher tax rates and collected higher % of GDP during the 90's (aka roaring nineties).Tax cuts are not magic.
The certainly aren't magic, and no one claimed otherwise. There are limits to the power of tax cuts, and we reached those limits in the 2000s. And that's also where non-core inflation caught up to us in the form of various bubbles. However, without the tax cuts, we'd be in worse shape.Causation is easy to show, as I already mentioned to Adam. When capital is freed up for what the eoconomy needs as opposed to the needs of government, you get growth. And, of course, there are limits.But liberals never admit there are limits to the power of government spending, do you?
Even if we accept absolutist notion that government spending is never better then private spending there is still the downside of huge debt build up under-taxing causes.After decades and decades and decades of back and forth it is quite clear that Americans do want government to spend far more then what taxes it has been collecting can sustain.The tax-cuts-on-credit is not a demonstration of the power of tax cuts, but a very bad form of Keynesianism that makes for disastrous long term policy.Instead of smoking the one-day-we-will-cut-enough-spending-to-pay-for-tax-cuts-we-get-today crack Republicans should work to balance the budget first and foremost. That means raising some tax and cutting some spending - the balanced approach democrats are willing to accept.
Under-taxing? Are you serious? Try over spending. And the American people don't want the overspending, they're constantly kicking the over spenders out of office only to get shafted by the next group of overspenders who pretended to be fiscally responsible when out of power.It's only Keynesian if meant to stimulate the economy. The Reagan cuts weren't meant to be mere stimulus but a restructuring of the tax conde in order to create an environment for sustained growth. If Reagan was a Keynesian, he would have howled like a stuck pig at Volcker's tight money policy. But he didn't. He was man enough to take the political beating he took when the economy went back into recession due to extremely high interest rates.Every time the GOP falls for the raise some taxes, cut some spending line, they get the football yanked out from in front of them. Except for when Clinton was pres and Gingrich was speaker. Why can't we have that kind of bargain? Because the Dems aren't acting in good faith. They are more partisan now than they've ever been in my lifetime.


Talk is cheap - You guys keep talking how all these tax-cuts will get paid for but somehow THEY NEVER DO. Republicans have yet to do get ANY serious cutting passed, on the contrary, after six years of Republican control there was EXPANSION, not shrinking of spending.

Decades and decades of same old BS and you dreamers still wake up thinking that your tax-cutting will get paid for with spending cuts, any day now. It never has, but somehow this time everything is totally different.

Even Reagan the conservative hero saw the rivers of red ink after initial tax-cuts and military spending expansion. But unlike current conservatives he has made adjustments and has raised many taxes to try to get grip on the spiraling out of control deficits. And whether he meant it or not, the trillions of dollars in deficits in fact did stimulate the economy. Whether he meant or not this was a form of Keynesianism: growing debt to prop up the economy. Embracing doing this in LONG TERM, decade, after decade, after decade is not even Keynesianism, it's just plain ol' crazy.

There is no greater critic of the current state of conservative fiscal position then the guy who used to be Reagan's very own supply side, deregulation, low taxes loving budget director:


RAZ: You seem to suggest that many of our economic troubles are the result of Republican economic policies over the past few decades. You are a Republican. You are a conservative. Why do you think Republicans are largely to blame?

Mr. STOCKMAN: Because the Republicans abandoned their old-time fiscal religion in favor of two theories, which I think are now proving to be both wrong and highly counterproductive and damaging....

...The second thing was the perversion of supply side. Yes, there was a good idea that in certain circumstances, lower tax rates will encourage economic activity and savings. But when you make it a religion, when you make it a catechism and you say you cut taxes no matter what the circumstance, what the season, what the condition, then I think the whole idea has been perverted.

By getting off track over the last 30 years, the Republican Party has basically given up its historic view that the key thing was financial discipline, financial responsibility, and that we had to live within our means. Today, we have two free lunch parties and as a result, we're borrowing ourselves into grave danger with each passing month and year.
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Mr. STOCKMAN: We've had a rolling referendum on what we want in government and what we don't, ever since the first Reagan spending cut program - which I was part of in 1981. And it seems pretty clear to me that by 2010, we've decided a lot of things that cost a lot of money, the American people want. I might not agree with that but apparently, they do.

So we're spending $3.8 trillion in defense, non-defense, entitlements, everything else, and we're taking in only 2.2 trillion. So we got a massive gap. You have to pay your bills; you can't keep borrowing from the rest of the world at that magnitude, year after year after year. So in light of all of those facts, I say we can't afford the Bush tax cuts.


http://www.npr.org/t...oryId=129052425
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Anton, have I not blamed the GOP for spending too much? Talk about the same old BS. I don't give a crap about David Stockman or any other self-serving CYA former administration hacks. What kills me about people like Stockman is that they know that people will listen to them if AND ONLY IF they attack tax cuts.

It's the spending, Anton. The spending.
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Mr. Naron, on 11 April 2012 - 10:41 PM, said:

Anton, have I not blamed the GOP for spending too much? Talk about the same old BS. I don't give a crap about David Stockman or any other self-serving CYA former administration hacks. What kills me about people like Stockman is that they know that people will listen to them if AND ONLY IF they attack tax cuts.It's the spending, Anton. The spending.


Except Stockman has been saying this all along and advised as much to Reagan when it became clear that realistic spending cuts cannot possibly make up the budget gaps.
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AntonToo, on 12 April 2012 - 02:21 PM, said:

Mr. Naron, on 11 April 2012 - 10:41 PM, said:

Anton, have I not blamed the GOP for spending too much? Talk about the same old BS. I don't give a crap about David Stockman or any other self-serving CYA former administration hacks. What kills me about people like Stockman is that they know that people will listen to them if AND ONLY IF they attack tax cuts.It's the spending, Anton. The spending.
Except Stockman has been saying this all along and advised as much to Reagan when it became clear that realistic spending cuts cannot possibly make up the budget gaps.

And that's because Democrats wouldn't cut spending. Look, we've been over this again and again. Obviously tax cuts are going to result in budget gaps if spending increases more than any extra revenue the tax cuts might bring in. That's not in dispute. The question is over whether or not the spending is justified. You have to start from the principle that government should only take from the taxpayer what is absolutely necessary. Just assuming that it's all absolutely necessary is what has gotten us where we are now.

I'd be happy to support tax increases if I thought this was an honest process.
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Mr. Naron, on 12 April 2012 - 02:30 PM, said:

Obviously tax cuts are going to result in budget gaps if spending increases more than any extra revenue the tax cuts might bring in. That's not in dispute.


Holy Christ - this is 2012 now and you still don't know that reducing taxes (short of VERY special situations Bush's taxes certainly do not fall under) reduces receipts???

Tax cuts don't "increase revenue" they REDUCE them.

How can any serious conversation take place when your side is full of this sort of economic nonsense?
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It's an equivalent of Democrats or liberals trying to argue that spending does not increase deficits.

" Obviously spending programs are going to result in budget gaps if tax-cuts are too deep to offset any extra revenue the spending will bring in. That's not in dispute."

:sheep:
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