Obama Needs Clintonomics

Reagan introduced a revolution in economic thinking into the practice of governmental finance. It was as important as the original introduction of fiat currency. One satisfied the natural demand for currency while the other maximized taxation by positioning the tax take inside the curve rather than succumbing to a natural inclination to go to the other side.

Political enthusiasm is once again raging at the grabbing at the carrot and must be halted. When crisis sets in it appears the every ancient economic dogma gets hauled out of the attic and dusted of. It isn’t just the gold crowd that we must fear who wish to replace fiat currency with a so called gold backed currency that will merely return our economy to an inflexible rapid cycle of boom and bust. And forget about frills like pensions and medical care. For that you will need a chicken coop in the back yard.

And the wacko left is eager for the good old days of grabbing control of productive assets to show what splendid managers they are by possibly imposing an even higher wage structure than has brought industry to its knees in the first place. I do not think that these people are ever capable of learning and should not be let out to rant on their soap boxes.

We have a president who appears deficient in economic depth as shown by his ready reach for the platitudes of the old left. There are folks who love such nonsense, but it is a poor basis for solving today’s problems.

This article is a restoration of Bill Clinton’s Economic reputation who did have a better grasp of economic thinking than either of his successors. Bush will be remembered not for the bubble economy that arose under his watch but his failure to even recognize the risks been run and for a singular lack of intellectual curiosity about it all. I suspect every mature mind warned against what was unfolding.

How in the desperate aftermath of the collapse of the credit bubble and all the related promises coming home to roost, we have a president who is not giving direction because he also knows and understands far too little. And bankers are the deer in the headlamps who can only see their capital disappearing and whose only solution is to throw money at it and hope somehow it will stop. They do not have a clue how to solve it. Yet their folly and financial gaming is destroying the wealth of their customers who are the only source of recovery.

Clinton made mistakes and so did Reagan, but they created a sound model for government finance and taxation. Try to go back to that and perhaps this will begin to turn around. Better still adopt my suggestions for foreclosure rules and let the American people turn this around.

Obama Needs Clintonomics — and Soon

By: Christopher Ruddy

CIA Director Leon Panetta has some urgent advice for President Obama: Read “Clintonomics” and use it!

Panetta’s advice is no secret. He is referring to a new book just out, “Clintonomics: How Bill Clinton Reengineered the Reagan Revolution,” (AMACOM) by Dr. Jack Godwin, a political scientist.

Here’s what Panetta said about “Clintonomics”: “This book is a must read for those struggling to figure out the present economic crisis.”

As we all know, Obama is one of those struggling.

Before Panetta assumed his CIA post, he had served as President Bill Clinton’s chief of staff. Panetta is a pragmatic man, not an ideologue.

So his praise for this new book should come as no surprise.

But what is surprising is that, as a Republican of the Reagan type, I couldn’t agree more with Panetta’s assessment.

Author Godwin’s basic point is that, contrary to widely held opinion, Clinton did not seek to turn back the economic policies of Ronald Reagan, dubbed “Reaganomics.” Instead, he embraced them and perfected them.

Godwin’s point of view is even more interesting because he served in the Clinton administration as deputy secretary of the Department of Interior.

When Clinton came to office in 1993, the economy was in a downturn.

“Clinton attributed the country’s less than optimum economic performance to low productivity, low growth, stagnant wages, unemployment, budget deficits, and high healthcare costs, among other things,” Godwin observes.

“He outlined the essential components of his economic plan: shifting our emphasis from consumption to investment; making public policy friendlier to workers and families; reducing the federal deficit and cutting government waste; reforming the tax code; and, of course, creating jobs.”

Clinton, in short, sought to put a happy face on Reaganomics. [Godwin points out that Reagan himself disliked the characterization that it sounded like an “aerobic exercise or fad diet.”]

Reagan strongly believed that “government is not the solution to our problem; government is the problem.” Though Clinton did not agree with that view, he did believe that government needed to be both improved and downsized.

Both Clinton and Reagan grasped the notion that the private sector, not the public one, is the primary productive engine of the economy.

Thus Clinton offered a “New Covenant,” which Godwin writes “was indeed based on an old idea — the idea that with opportunity comes responsibility. Clinton wanted to create a leaner, not meaner government . . . In practice, this meant downsizing the federal government, cutting unnecessary and wasteful spending, and bringing down the deficit.”

I can hear the Gipper applauding Clinton’s sentiment.

Clinton is even quoted as saying that he was “the man who downsized the government more than President Reagan did.” This is true.

Democrats have long complained that Reagan gave us huge budget deficits and grew the national debt dramatically.

This also is true.

Some on the left even saw a conspiratorial overtone to the Reagan deficits. Reagan ran up huge deficits to prevent the Democrats from funding new entitlement programs, so the theory went.

Although Reagan did run up the national debt wildly, it had nothing to do with entitlements. Reagan repeatedly stated, before and after his election in 1980, that he would opt for large deficits if he needed them to bankroll his military buildup to counter the Soviet Union.

Indeed, Reagan’s plan worked. The massive military buildup not only helped defeat the Soviet empire but also left the U.S. a sizable “peace dividend” in the 90s.

Ronald Reagan set the stage for Bill Clinton. Clinton’s brilliance was in realizing the gift he had received from the Reagan years. He easily could have moved to shift the “peace dividend” from declining defense expenditures to social programs. But he didn’t.

Instead, he reduced the growth of government, ultimately leaving his successor, George W. Bush, a budget surplus.

When Clinton came into office, he tinkered with nationalizing healthcare with the so-called “Hillarycare” program. But Congress thwarted his plans.

It was the best thing that ever happened to Clinton. After the healthcare debacle, he moved to the center. He adopted a bipartisan approach and even worked with Newt Gingrich in some areas, including welfare reform and cutting the capital gains tax.

“Bill Clinton launched his campaign to end welfare as we know it because he . . . believed millions of people were trapped in the system,” Godwin notes.

“When Clinton signed welfare reform legislation in 1996, he passed the greatest test of federalism, according to the standard set by Ronald Reagan himself.”

Clinton argued that entitlement programs do not work if the government does not require something in return from the recipient. He often referred to “the politics of entitlement” as a way of criticizing his own party.

“Some, but not all, in the national Democratic Party have placed too much faith in the whole politics of entitlement, the idea that big bureaucracies and government spending, demanding nothing in return, can produce the results we want,” he said in a speech.

“We know that is simply not true. There is a limit to how much government can do in the absence of an appropriate response by the American people at the grass-roots level.”

Clinton’s approach is starkly different from President Obama’s. With strong majorities in the House and the Senate, Obama has brushed aside a bipartisanship approach. And unlike Clinton, he clearly favors the public sector over the private sector in restoring economic growth.

As Godwin says, Clinton’s governing philosophy was the logical corollary to the Reagan Revolution, stressing fiscal discipline and the end of big government.

“In public, Clinton positioned his governing philosophy as the antidote to Reaganomics,” Godwin writes. “In fact, Clinton and Reagan are fellow travelers separated more by party affiliation than political ideology.”

Barack Obama does have something to learn from Bill Clinton and “Clintonomics.”

Many Republicans have been reevaluating the Clinton years and realizing, as I have, that the country prospered under a more centrist approach. Obama should take the advice of his CIA director.

Sarah Pallin is Presidental Timber

I have no doubt that we are going to see Sarah Palin run for the presidency and likely win the presidency. The lady has the right instincts, loves to tell stories and is sharp enough to be a quick study as demonstrated by how she decisively broke the political logjams in her own state. She is a communicator on the same level as Clinton and Reagan.

The fact that she is inexperienced in foreign affairs and in economic thinking is hardly a handicap, particularly when she has eight years to pick up the appropriate high level education. The only presidents who actually came to the job since Nixon fully prepared in those areas was Reagan and his vp George Bush in both economics and foreign affairs. Clinton was a fast study and Carter was not. The second Bush delegated for far too long and appeared to never grasp the enormity of what was happening. Obama is intellectually saddled with the fool’s gold of leftist economic theory as well as some of the more ardent believers. His thinking appears to be dangerously linear and this is not the time to mature intellectually. He will however, do very well on the foreign affairs portfolio because he seems able to make others to step down from confrontation. At least he is showing up with a bouquet of roses rather than packing for bear.

The political bashing of Sarah Palin has mostly run its course and that is now fading from people’ memories. And negatives cannot be used twice in politics to any effect. This means that her wonderfully powerful positive image that is unbeatable gives her the upper hand in any run for the presidency. Middle class America wants her and wants her to simply have a bit more experience which she will get over the next four to eight years.

Obama ended Hillary’s political hopes. Now his natural successor is standing in the wings.

Palin's Popularity Soars in Alaska

Thursday, March 19, 2009 8:19 PM

Alaskans aren’t fazed much by the ongoing Sarah Palin-bashing taking place in the Lower 48 -- a new poll indicates the governor’s popularity remains sky high among voters in her home state.

Anchorage-based pollster Hays Research Group says its March survey shows 61.3 percent -- nearly two out of every three Alaskans -- feel either “very positive” or “positive” about Gov. Palin.

Palin triggers a negative reaction from about one-third of Alaskans, however. The poll found some 32.7 percent of Alaskans rate Palin as either “somewhat negative” (12.5 percent) or “very negative” (20.2 percent).

Only 6 percent are undecided about her, suggesting that the GOP governor tends to evoke strong feelings one way or the other. The poll of 400 Alaskans has an error margin of plus or minus 4.9 percent.

Anchorage pollster Ivan Moore reported similar results in January. His survey showed Palin’s favorability rating at 63 percent.

Palin’s popularity has fallen well off her peak level of 89 percent. Palin reached that highpoint in an Ivan Moore survey conducted in May 2007, about 15 months before she was named GOP Sen. John McCain’s vice presidential running mate.

Laffer Curve Applied and Oil Rationing

The original article by Laffer in 2004 is much longer and investigates a great deal of the history of tax cuts in general and what is now known as the Laffer Curve. Its prehistory may be mature, but it was Arthur Laffer and importantly, Ronald Reagan who finally rewired finance ministers worldwide to understand the meaning of this curve as applied to public policy.

Historic resistance to this paradigm came from the simple inability of most of the population to intuit second order mathematics. A linear argument is always more beguiling even if it is the road to wrack and ruin, Its successful application has delivered twenty five years of sustained economic growth here and abroad, as well as government budget surpluses. It has only been halted because the bankers got drunk one night and listened to their greed and threw the regulatory governors away on the financial system, which was poorly structured to start with.

However, dear reader, understanding this curve and matching it to the current state of taxation policy will inform you as well as any finance minister of the future condition of the economy.

We have a progressive income tax system, and we have a series of turn over taxes. The latter responds directly to the ebb and flow of the economy, and recently in Canada’s case led directly to the ballooning of governmental revenues and the paying down of deficits for the first time almost in living memory.

However, the progressive nature of the income tax has led to tax creep as incomes have risen. This has also happened elsewhere, including the USA. That is why it is possible for politicians to offer tax cuts every couple of years or so.

To bail us out of the current disaster, the policy calls for strong deficit funding of present capital programs including bailouts and financial infrastructure recapitalization which is clearly falling into place just as fast as possible. It also calls a cut in taxation ahead of the expected economic rebound to give the economy the maximum running room. We can expect a rapid recovery of government revenue surpluses as the economy swings back into motion.

The Oil Problem

The problem we do not control is the price of oil which is draining liquidity out of the North American economy. Much of this is a massive tax on USA business that is not been repatriated in country and is instead sloshing around looking for a home and not all been directly reinvested. We have lived with a lot of this for a long time. What we cannot live with is volatility such as drained the blood out of the country last summer and accelerated the developing crash.

All solutions are ugly. The best solution is to put a ceiling on the amount of money that will be spent on foreign oil. That guarantees shortages and this must be coordinated with a simple rationing system that obviously gives supply priority to industry and transportation. Last on the list will be the private automobile for luxury driving.

A couple of important things happen though. There is a turn over price, becomes a defacto ceiling that everyone recognizes as the point of long term diminishing returns. It should make a run up such as was delivered last summer nearly impossible and certainly far more costly to sustain.

Much more importantly, American Industry will have no choice but to move heaven and earth to replace oil as a secure energy source. The gasoline car will make its exit from the mass market in a couple of years instead of slowly with lots of foot dragging.

And because the USA had so far to go, it becomes the global standard for solutions to the energy problem.




June 1, 2004

The Laffer Curve: Past, Present, and Future

by Arthur B. Laffer
Backgrounder #1765

http://www.heritage.org/Research/Taxes/bg1765.cfm

The story of how the Laffer Curve got its name begins with a 1978 article by Jude Wanniski in The Public Interest entitled, "Taxes, Revenues, and the `Laffer Curve.'"1 As recounted by Wanniski (associate editor of The Wall Street Journal at the time), in December 1974, he had dinner with me (then professor at the University of Chicago), Donald Rumsfeld (Chief of Staff to President Gerald Ford), and Dick Cheney (Rumsfeld's deputy and my former classmate at Yale) at the Two Continents Restaurant at the Washington Hotel in Washington, D.C. While discussing President Ford's "WIN" (Whip Inflation Now) proposal for tax increases, I supposedly grabbed my napkin and a pen and sketched a curve on the napkin illustrating the trade-off between tax rates and tax revenues. Wanniski named the trade-off "The Laffer Curve."

I personally do not remember the details of that evening, but Wanniski's version could well be true. I used the so-called Laffer Curve all the time in my classes and with anyone else who would listen to me to illustrate the trade-off between tax rates and tax revenues. My only question about Wanniski's version of the story is that the restaurant used cloth napkins and my mother had raised me not to desecrate nice things.

The Historical Origins of the Laffer Curve

The Laffer Curve, by the way, was not invented by me. For example, Ibn Khaldun, a 14th century Muslim philosopher, wrote in his work The Muqaddimah: "It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments."

A more recent version (of incredible clarity) was written by John Maynard Keynes:

When, on the contrary, I show, a little elaborately, as in the ensuing chapter, that to create wealth will increase the national income and that a large proportion of any increase in the national income will accrue to an Exchequer, amongst whose largest outgoings is the payment of incomes to those who are unemployed and whose receipts are a proportion of the incomes of those who are occupied...

Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more--and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.

Theory Basics

The basic idea behind the relationship between tax rates and tax revenues is that changes in tax rates have two effects on revenues: the arithmetic effect and the economic effect. The arithmetic effect is simply that if tax rates are lowered, tax revenues (per dollar of tax base) will be lowered by the amount of the decrease in the rate. The reverse is true for an increase in tax rates. The economic effect, however, recognizes the positive impact that lower tax rates have on work, output, and employment--and thereby the tax base--by providing incentives to increase these activities. Raising tax rates has the opposite economic effect by penalizing participation in the taxed activities. The arithmetic effect always works in the opposite direction from the economic effect. Therefore, when the economic and the arithmetic effects of tax-rate changes are combined, the consequences of the change in tax rates on total tax revenues are no longer quite so obvious.

Figure 1 is a graphic illustration of the concept of the Laffer Curve--not the exact levels of taxation corresponding to specific levels of revenues. At a tax rate of 0 percent, the government would collect no tax revenues, no matter how large the tax base. Likewise, at a tax rate of 100 percent, the government would also collect no tax revenues because no one would willingly work for an after-tax wage of zero (i.e., there would be no tax base). Between these two extremes there are two tax rates that will collect the same amount of revenue: a high tax rate on a small tax base and a low tax rate on a large tax base.

http://www.heritage.org/Research/Taxes/images/35038257.gif



The Laffer Curve itself does not say whether a tax cut will raise or lower revenues. Revenue responses to a tax rate change will depend upon the tax system in place, the time period being considered, the ease of movement into underground activities, the level of tax rates already in place, the prevalence of legal and accounting-driven tax loopholes, and the proclivities of the productive factors. If the existing tax rate is too high--in the "prohibitive range" shown above--then a tax-rate cut would result in increased tax revenues. The economic effect of the tax cut would outweigh the arithmetic effect of the tax cut.

Moving from total tax revenues to budgets, there is one expenditure effect in addition to the two effects that tax-rate changes have on revenues. Because tax cuts create an incentive to increase output, employment, and production, they also help balance the budget by reducing means-tested government expenditures. A faster-growing economy means lower unemployment and higher incomes, resulting in reduced unemployment benefits and other social welfare programs.

Over the past 100 years, there have been three major periods of tax-rate cuts in the U.S.: the Harding-Coolidge cuts of the mid-1920s; the Kennedy cuts of the mid-1960s; and the Reagan cuts of the early 1980s. Each of these periods of tax cuts was remarkably successful as measured by virtually any public policy metric.

Prior to discussing and measuring these three major periods of U.S. tax cuts, three critical points should be made regarding the size, timing, and location of tax cuts.

Size of Tax Cuts

People do not work, consume, or invest to pay taxes. They work and invest to earn after-tax income, and they consume to get the best buys after tax. Therefore, people are not concerned per se with taxes, but with after-tax results. Taxes and after-tax results are very similar, but have crucial differences.

Using the Kennedy tax cuts of the mid-1960s as our example, it is easy to show that identical percentage tax cuts, when and where tax rates are high, are far larger than when and where tax rates are low. When President John F. Kennedy took office in 1961, the highest federal marginal tax rate was 91 percent and the lowest was 20 percent. By earning $1.00 pretax, the highest-bracket income earner would receive $0.09 after tax (the incentive), while the lowest-bracket income earner would receive $0.80 after tax. These after-tax earnings were the relative after-tax incentives to earn the same amount ($1.00) pretax.

By 1965, after the Kennedy tax cuts were fully effective, the highest federal marginal tax rate had been lowered to 70 percent (a drop of 23 percent--or 21 percentage points on a base of 91 percent) and the lowest tax rate was dropped to 14 percent (30 percent lower). Thus, by earning $1.00 pretax, a person in the highest tax bracket would receive $0.30 after tax, or a 233 percent increase from the $0.09 after-tax earned when the tax rate was 91 percent. A person in the lowest tax bracket would receive $0.86 after tax or a 7.5 percent increase from the $0.80 earned when the tax rate was 20 percent.

Putting this all together, the increase in incentives in the highest tax bracket was a whopping 233 percent for a 23 percent cut in tax rates (a ten-to-one benefit/cost ratio) while the increase in incentives in the lowest tax bracket was a mere 7.5 percent for a 30 percent cut in rates--a one-to-four benefit/cost ratio. The lessons here are simple: The higher tax rates are, the greater will be the economic (supply-side) impact of a given percentage reduction in tax rates. Likewise, under a progressive tax structure, an equal across-the-board percentage reduction in tax rates should have its greatest impact in the highest tax bracket and its least impact in the lowest tax bracket.

Timing of Tax Cuts

The second, and equally important, concept of tax cuts concerns the timing of those cuts. In their quest to earn after-tax income, people can change not only how much they work, but when they work, when they invest, and when they spend. Lower expected tax rates in the future will reduce taxable economic activity in the present as people try to shift activity out of the relatively higher-taxed present into the relatively lower-taxed future. People tend not to shop at a store a week before that store has its well-advertised discount sale. Likewise, in the periods before legislated tax cuts take effect, people will defer income and then realize that income when tax rates have fallen to their fullest extent. It has always amazed me how tax cuts do not work until they actually take effect.

When assessing the impact of tax legislation, it is imperative to start the measurement of the tax-cut period after all the tax cuts have been put into effect. As will be obvious when we look at the three major tax-cut periods--and even more so when we look at capital gains tax cuts--timing is essential.

Location of Tax Cuts

As a final point, people can also choose where they earn their after-tax income, where they invest their money, and where they spend their money. Regional and country differences in various tax rates matter.