Thursday, January 12, 2012

Goo-Goo Economics

The chair of the President's Council of Economic Advisers--Alan Kreuger--spoke at the Center for American Progress, today. In his speech, he reiterated the goals of the administration, when it comes to the economy: tax the rich at a higher rate, extend the payroll tax breaks, and extend unemployment benefits.

Of course, we already know that increasing tax rates on the wealthy will not--as a matter of course--increase revenues. And we know that extending the payroll tax breaks as a means of creating jobs is nonsense. And that the one demonstrable consequence of extending unemployment benefits is increasing unemployment. Still, this is the plan, the strategy, the White House is sticking to as a means of growing the economy: policies that may or may not increase government revenues (and even if revenues were increased, that wouldn't mean economic growth), will not create jobs, and will increase unemployment. Brilliant.

To be fair though, the real objective--via these policies--is actually the reduction of income inequality. And that is what will lead to economic growth. Supposedly. Kreuger, as evidence for his argument, pointed to the gini coefficient, noting that:
Our income tax system is less progressive than that in other countries. This chart shows the Gini coefficient for OECD countries, with the blue bars indicating inequality in before-tax income and the red bars inequality in after-tax income. The difference in the height between the bars is a measure of how much the tax code reduces inequality. Of all the OECD countries, only Chile, Korea, and Switzerland have tax systems that reduce inequality by less than the U.S.
 And he provided a handy-dandy chart, as well:

So, if I'm understanding Kreuger correctly, in order to grow the economy we need to get our gini coefficient more in line with that of...Italy? No, that can't be right. Spain? I don't think so. GREECE? Any country in the EU? Because as we all know, the EU is a raging success story, with money to burn...

Beyond that, Kreuger also says the following:
Now, I could see why someone could support tax cuts for top income earners if they had materially benefited the U.S. economy, but the macro evidence is clear that the economy did not perform better after last decade’s tax cuts than it did after taxes were increased on top earners in the early 1990s.
That's a fascinating position to take, given that macro evidence clearly shows the current administration's policies failed to check the growth in unemployment and failed to spur on the economy. Of course, when someone says that about the administration's policies, the retort is always "it would have be much worse, without those policies (like the Stimulus bill)." Yet in the case of  the Bush tax cuts, it is assumed that no other factors matter.


Cheers, all.


  1. We're gonna need a boatload of gravlax, then...

  2. It would be interesting to add charts of unemployment (over relatively long periods of time) and growth of GDP. At one point I checked the GDP growth rates for US vs. some other states (if I remeber correctly for France Denmark and some others). Frnace had chronically slower growth rate than US, while Denmark had comparable growth rates. I didn't check unemployment, but from what I remeber, EU had far higher chronic unemployment rates than US (before the current crisis).
    Shadow, Sweden is significantly different in its model from the classical European model (or US for that matter).

  3. I've always favored hard work as a means of reducing income inequality, but I suppose the tax code works too.