Saturday, February 21, 2009

Stimulus / Economy Links

The role of the Fed - Video

Real Clear Economics- Shorting the Stimulus
Deregulation and the Financial Panic- WSJ
Santelli's Tea Party - Video
Faber- Boom & Bust WSJ
Obama's Rhetoric is the Real 'Catastrophe' -WSJ
Rush Limbaugh's Stimulus Plan-WSJ

Saturday, February 14, 2009

American Recovery and Reinvestment Act of 2009

Here you will find the transcript of questions and answers given during our president’s first press conference.

It seems that our president is taking the lead on promoting much more of a 'Keyenesian' style stimulus, with little interest in providing incentives through tax cuts.

“But as we've learned very clearly and conclusively over the last eight years, tax cuts alone can't solve all of our economic problems -- especially tax cuts that are targeted to the wealthiest few Americans. We have tried that strategy time and time again, and it's only helped lead us to the crisis we face right now.”

Of course tax cuts won’t solve all of our problems, but they are a very large part of the puzzle. While the package is including many types of tax rebates and credits, there is no indication that it will maintain the marginal tax cuts that Bush implemented early in his presidency. Nothing is mentioned about across the board cuts in corporate or capital gains taxes. History, economic theory, and empirical evidence indicate that in fact tax cuts for the very wealthy can be a very powerful tool in stimulating the economy.

Thomas Sowell provides data from the US Budget Historical tables ( I checked these ) indicating that with the Regan tax cuts, we saw revenue increases, not deficits or stagnation.

Lawrence Lindsey ( 1987) noted that for incomes greater than $200,000 per year, ( i.e. tax cuts for the rich) the Regan tax cuts lead to an increase in reported incomes and increased collections. For those earning > $200K per year, we saw the following increases in collections:

1982 – 3%
1983 – 9%
1984 – 23%

( see Lindsey, Lawrence B. 1987. “Individual Taxpayer Response to Taxcuts, 1982-1984.” J. of Public Economics 33 (July) 173-206 , also noted in: Robert Barrow. Macroeconomics- 5th Edition MIT Press 1997

And for the recent Bush tax cuts: ( see this from a recent WSJ)

"Taxes paid by millionaire households more than doubled to $274 billion in 2006 from $136 billion in 2003. No President has ever plied more money from the rich than George W. Bush did with his 2003 tax cuts. These tax payments from the rich explain the very rapid reduction in the budget deficit to 1.9% of GDP in 2006 from 3.5% in 2003." ( see historical tables link above )

Also, straight from the historical tables provided by the office of management and budget you will see that from 2004-2007 there was a 25% surge in tax revenues, ( in face of tax cuts) which was the largest 3 yr surge since 1966. ( again I checked the math)

Certainly ‘marginal’ tax cuts lead to increased economic activity and therefore increase tax revenues, both being remarkable indicators of success, not failure.

In another part of the press conference, President Obama seems unconvinced that there were problems with the New Deal policies implemented during the Great Depression:

“Now, you have some people, very sincere, who philosophically just think the government has no business interfering in the marketplace. And in fact there are several who've suggested that FDR was wrong to intervene back in the New Deal. They're fighting battles that I thought were resolved a pretty long time ago.”

However, many economists believe that Keynesian fiscal spending is the wrong answer to our problems, and that the interventions of FDR actually lengthened and deepened the depression in the 30’s. Below I provide the following links to supporting references.

Cole & Ohanion – recent (2004) research indicating FDR’s policies prolonged the depression

Cole & Ohanion
- previous published research, New Deal policies provided a 'negative shock' prolonging the depression.

Prescott: Published research -In the conclusion it is made clear that FDR's policies that made the depression ‘great’.

Barro - WSJ Notable and Quotable

Gary Becker - WSJ skeptical on fiscal stimulus.

Mario Rizzo on Keynes own admissions of fiscal stimulus limits.

Mankiw on how weak fiscal stimulus is vs tax cuts. (WSJ)

Barro more on the weakness of New Deal policies.


'John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies."
New York University economist

Thomas Sargent agrees: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."

Mankiw lists a number of prominent economists opposed to the stimulus such as (omitting some I listed above) Alberto Alesina, Eugene Fama, Robert Lucas, Kevin Murphy, Harald Uhlig, and Luigi Zingales-

200 more economists ( again some redundancy) that believe that the stimulus package is based on flawed economics:

“Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance.More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.”

Saturday, February 07, 2009



Recently I was involved in a discussion regarding the constitutionality of national health care. Someone pointed out that it was constitutional on that same basis as Social Security, based on the supreme court’s decision Helvering v. Davis (1937) The justification was based on the General Welfare clause in Article 1 Section 8 of the US Constitution:

‘The Congress shall have power to lay and collect taxes, duties, imposts and Excises, to pay the debts and provide for the common defence and general welfare of the United State’

This is followed by a listing of the ‘enumerated’ powers of the federal government. The court decided that the federal government could collect taxes and use them for providing social security , as it was interpreted that the phrase ‘general welfare’ was open ended and implied that congress could do anything that promoted the public good. Further, it admitted that ‘general welfare’ was an ambiguous term, and it was not the place of the courts to decide its meaning, but that it should be left to the discretion of the congress. This is perhaps the most damaging aspect of the decision. Not only did it decide congress could do most anything it wants as long as it promoted the ‘common welfare’ but it was up to congress to police itself with regards to constitutionality. This decision turned the concept of separation of powers and federalism on its head. Further, it was in direct contradiction to what the founders implied when they drafted the constitution.

According to James Madison, the term ‘general welfare’ was meant to generalize about the specifically enumerated powers in A1 Section 8 of the Constitution.

‘With respect to the two words "general welfare," I have always regarded them as qualified by the detail of powers connected with them. To take them in a literal and unlimited sense would be a metamorphosis of the Constitution into a character which there is a host of proofs was not contemplated by its creators. If the words obtained so readily a place in the "Articles of Confederation," and received so little notice in their admission into the present Constitution, and retained for so long a time a silent place in both, the fairest explanation is, that the words, in the alternative of meaning nothing or meaning everything, had the former meaning taken for granted.’ - letter to James Robertson from James Madison

Above he states that the term ‘general welfare’ is defined by the other powers in A1 S8 and means nothing more. He was also perplexed that those opposed to the constitution had the fear that the term ‘general welfare’ would give congress unlimited power, when similar wording appeared in the weaker Articles of Confederation, which they supported.

More is said of this in Federalist # 41:

‘It has been urged and echoed, that the power to lay and collect taxes, duties, imposts, and excises, to pay the debts, and provide for the common defense and general welfare of the United States amounts to an unlimited commission to exercise every power which may be alleged to be necessary for common defence or general welfare.

‘But what would have been thought of that assembly, if , attaching themselves to those general expressions , and disregarding the specifications which ascertain and limit their import, they had exercised an unlimited power of providing for the common defense and general welfare?’

It appears that in Helvering v. Davis brought to bear the worst fears that the anti-federalists had anticipated, and is clearly counter to the intention of our founders. Madison in fact believed that this fear was unfounded and that the anti- federalists were being silly, grasping for straws, looking for some far fetched reason to oppose the adoption of the constitution, because he was certain that it was self evident that ‘general welfare’ was defined by the enumerated powers and nothing else. He stated that the belief of anything else was a ‘misconstruction.’

‘No stronger proof could be given of the distress under which these writers ( meaning the antifederalists) labor for objections, than their stooping to such a misconstruction.’

To clear up this confusion, and straighten out the ‘misconstruction’ that they presented, Madison adds the following, also from federalist #41:

‘Nothing is more natural nor common than first to use a general phrase ( like common welfare) and then to explain it and qualify it by a recital of particulars.’

i.e. the phrase ‘general welfare’ is defined and explained by the enumerated powers of government that follow in Article 1 Section 8 of the constitution.
Thomas Jefferson also was an advocate of this position as he states in a letter to Albert Gallatin in 1817:

‘Congress has not unlimited powers to provide for the general welfare, but only those specifically enumerated.’

Finally from Federalist # 45 Madison states:

‘The powers delegated by the proposed constitution to the federal government are few and defined.’

By that logic, if ‘general welfare’ takes on the meaning implied by Helvering v Davis, then the federal governments delegated powers would not be few, and if ‘common welfare’ is not determined by the specifically enumerated powers in the constitution, then it is not defined. In Helvering, the courts make a terrible error in ruling that the powers of the federal government can be defined any way congress desires based on the ‘general welfare clause.’