Keynesian Multiplier

Posted by PITHOCRATES - September 3rd, 2012

Economics 101

At the Heart of Keynesian Stimulus Spending is the Keynesian Multiplier

Key to Keynesian economics is spending.  That’s the reason why governments everywhere embrace it.  Because Keynesian economics say government MUST spend money.  And that’s the kind of economics politicians like.  “I must spend?  Well, okay.  If you say so.  Forgive me, my constituents, for spending money I don’t have.  But it’s not me.  It’s our Keynesian economists saying we must spend.  And they’re smart.  Real smart.  They even have Ivy League degrees.  So who are we to question them?”

And it’s not just any kind of spending.  Well, actually, it is.  There’s nothing special about it.  You could pass a trillion dollar stimulus bill to pay people to dig holes with a shovel.  Fill them back in with the dirt they just shoveled out.  And then repeat.  Again and again.  Accomplishing nothing beneficial with these efforts.  But a Keynesian economist will approve of this spending and call it a good thing.  Why?  Because of trickle-down economics.  But of the Keynesian kind.

At the heart of Keynesian stimulus spending is the Keynesian multiplier.  That’s the ‘trickle down’ part.  But before we get to that we must discuss one other thing.  Savings.  Keynesians hate it.  They call money that leaks out of the economy into savings accounts wasted money.  Just as if you flushed it down the toilet.  This brings up another Keynesian concept.  The marginal propensity to consume (MPC).  Note the word ‘consume’.  This is what all that government spending is about.  Consumption.  Consumer spending.  Which is why Keynesians hate savings.  Because if people save their money they’re not spending it.  And not creating economic activity.

Politicians prefer Government Spending over Tax Cuts because People may Save Part of a Tax Cut

Now back to the multiplier.  When people receive money they do two things.  They save some of it.  And spend what they don’t save.  This is where the MPC comes in.  An MPC 0f 80% means that people will spend 80% of an amount of money they receive (paycheck, government benefit, etc.) and save 20% of it.  So they use 80% of that money to generate economic activity.  By spending it.  But it doesn’t end there.  Because what they spend other people receive as money.  And these people then save some of it.  And spend what they don’t save.  And so on.  At a MPC of 80% if a person receives $100 they will spend $80 and save $20.  Those who receive that $80 will spend $64 and save $16.  Those who receive $64 will spend $51.20 and save $12.80.  And on and on until people are only spending pennies.  In the end that original $100 will create a total of $500 in new economic activity.  Or five times the original amount.  So the Keynesian multiplier is five.  Or, mathematically, 1/(1-MPC) where MPC = 0.80.

Think of the multiplier as a pyramid of champagne glasses at a wedding.  As you pour champagne in the top glass it overflows into the next layer of glasses down.  When these glasses fill they overflow into the next layer of glasses below them.  The multiplier is kind of like that.  Starting by pouring into one glass.  By the time the champagne bottle is empty champagne fills many glasses.  And spilt champagne represents savings.  Or leakage.  That’s how the multiplier works.  Trickle down.  And the less champagne spilled the more champagne fills glasses.  As shown by the multiplier formula.  The larger the MPC is (as in the more people spend) the larger the multiplier.  In fact if they spent all of their money (an MPC = 1) the formula reduces to 1/0.  And what happens when you divide by zero?  You get infinity.  That’s right, according to the Keynesian multiplier equation if everybody spent all of their money and saved none there would be an infinite amount of economic activity.

In the Keynesian world it doesn’t matter what the money is spent on as long as it’s spent.  Even digging worthless holes is good enough to make this miracle of economic activity out of nothing work.  That’s why their advice is always for the government to tax, borrow or print money to spend.  Because spending is good.  And they prefer government spending over tax cuts to stimulate private spending.  Why?  When the government spends money that top champagne glass will have an MPC of 1.  The government will spend it all.  Less the administrative costs, of course.  Whereas an equivalent amount of money given to the people via a tax cut (letting them keep more of their earnings to spend) will not have an MPC of 1.  Because these people may do something foolish like save their money.  Or pay down debt.  Which is leakage.  Leakage reduces the multiplier.  And a lower multiplier reduces economic activity.

Governments Embrace Keynesian economics because it tells them to Always Spend More Money

It all seems too good to be true.  And there’s a reason for that.  Because it IS too good to be true.  And the proof is in the pudding.  The Seventies was the decade of unrestrained Keynesian economics.  And it didn’t work.  They spent like there was no tomorrow in the Seventies.  But all that Keynesian spending failed to pull the economy out of recession.  All it did was create high inflation.  So there was high unemployment AND high inflation.  Something that was impossible in the Keynesian universe.  But it happened.  Why?  Because they make a lot of assumptions to make their formulas work.  Like that MPC.  And their war on savings.  Their thinking is flawed.  Because savings ARE spending.  Someone’s savings is someone else’s investment.  And investments are spending.  Ever see It’s a Wonderful Life when the people were asking for their deposits back?  The savings and loans had some money.  But they didn’t have everyone’s money.  Then George Bailey (Jimmy Stewart) told his depositors where their money was.  And he ran down a list of all the new houses their savings built.  Thanks to their loans to those new homeowners.  Building those houses generated a lot of economic activity.  So savings are good.  They’re not leakage.  They cause real economic activity.

Let’s return to that pyramid of champagne glasses.  Let’s say it takes 3 bottles of champagne to fill all the glasses in the pyramid.  If you pour the champagne back from the glasses into the bottles you will not have three full bottles of champagne.  Because of all that spillage.  Or leakage.  This is the same with Keynesian stimulus spending.  Stimulus money has to come from somewhere.  Whether government raises it with taxes, borrows it or prints it.  And like that champagne it just moves from one place in the economy to another.  With no net change in economic activity.  Higher taxes mean we have less money to spend.  If they borrow money they reduce private investment.  Because investors are buying government bonds instead if investing in businesses or entrepreneurs.  If they print money they cause inflation.  Which makes our money worth less and prices higher.  Which buys us less after the inflation than before it.  So whatever government spends there is a corresponding reduction in economic activity elsewhere in the economy.  Worse, when the government redistributes this money there is leakage.  Like the spillage of champagne.  For administrative costs.  Because politicians and government bureaucrats don’t work for free.

Printing money is especially harmful to the economy.  For it can cause a short-term boom in economic activity.  But by the time that new money works its way through the economy prices begin to rise.  Raising the cost of businesses.  Who have to raise their prices.  As they do their sales fall.  And they have to lay people off.  So the Keynesian stimulus spending to end a recession results in a new recession.  Which tends to be more painful than the first one.  So eventually a recessionary bust follows the artificial boom in economic activity.  Which brings those artificially high prices back down to normal market prices.  The greater the stimulus spending the higher those prices go.  The farther they have to fall.  And the more painful the recession.  Making the multiplier nothing but smoke and mirrors.  But governments still embrace Keynesian economics.  Because it is the only economic system that tells them to spend more money.  And they are always looking for something to justify more spending.

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JFK, Tax Cuts, Vietnam, LBJ, Great Society, Hippies, Race Riots, Keynesian Spending, Nixon, Carter and Ronald Reagan

Posted by PITHOCRATES - August 21st, 2012

History 101

Ronald Reagan would follow the Kennedy Example of Cutting Taxes to Grow the Economy

In 1961 West German Chancellor Ludwig Erhard gave John F. Kennedy (JFK) some good advice.  During JFK’s visit he told him not to make the same mistake the British had.  He told Kennedy NOT to follow their policy of high taxation.  Because it killed economic activity.  And economic growth.  England was suffering from her bad tax policy.  He urged the American president not to make the same mistake.

JFK heeded Erhard’s advice.  And cut tax rates.  This did not please liberals in his Democrat Party.  Who were all Keynesians.  And believed in large government interventions into the private sector.  Funded by large government expenditures.  Which in the Keynesian world you got in one of three ways.  Tax, borrow or print money.  You did not cut tax rates.  Which was blasphemous in Keynesian doctrine.  You never, ever, cut tax rates.  But Kennedy did.  Arguing that “an economy hampered by restrictive tax rates will never produce enough revenue to balance the budget—just as it will never produce enough jobs or enough profits.”

A message Ronald Reagan would give time and again some 20 years later.  And would follow the Kennedy example of cutting taxes to grow the economy.  Generating more tax revenue without having to cut spending.  The result of JFK’s ‘trickle-down’ economics were impressive.  He cut the top marginal tax rate from 91% to 70%.  And cut the 20% rate to 14% at the other end of the scale.  What did people do with these tax savings?  They saved.  And invested.  Savings rose from an annual growth rate of 2% to 9%.  Business investment from 2% to 8%.  New jobs grew at a rate of 100%.  And unemployment fell by one third.  With GDP rising some 40% in two years.  And despite cutting tax rates tax revenue rose.  The booming economy generating more tax revenue even at the lower rates.  Even more than the Keynesians said Kennedy was going to cost the government with his tax cuts.

The Social Upheavals of the Sixties, the Race Riots and his Unpopular Vietnam War all took their Toll on LBJ

Liberals love JFK.  But for none of these reasons.  They prefer to wax poetically about his fight to end economic and racial injustice.  Which were in reality low on his priority list.  Addressing civil rights only after trouble was escalating in the south.  But that’s the Left’s cherished memory of him.  And of Camelot.  The American royal family.  They don’t talk about JFK’s trickle-down economics.  His Bay of Pigs fiasco (the plan to oust Fidel Castro from Cuba that he withdrew support from after it met difficulty on the beaches).  His Cuban missile crisis (near nuclear war with the Soviet Union) which his indecision at the Bay of Pigs may have invited.   Or his war in Vietnam.  No.  They stay silent on the best part of his presidency.  As well as the worst parts.  And focus instead on the fairy tale that was Camelot.  Ignoring completely his excellent economic policies and the strong economy they gave us.  And all that tax revenue that poured into the treasury.  Yes, they may have liked having that money.  But they didn’t have to like how it got there.

Following JFK’s assassination Lyndon Baines Johnson (LBJ) ascended to the presidency.  An old school politician that knew how to make deals to advance legislation.  And boy did he.  He declared unconditional war on poverty.  And unleashed the Great Society to spend America out of poverty.  Keynesian to the core.  Pure demand-side economics.  Give poor people money which they will use to buy consumer goods.  That Keynesian consumption that was so crucial to a healthy economy.  So Johnson made good use of all that tax revenue JFK created with his tax cuts.  And LBJ’s Great Society consumed enormous amounts of that tax revenue.  As did JFK’s Vietnam War.  Now LBJ’s war.  Which LBJ escalated.  Government expenditures exploded during the Johnson administration.  And the spending obligations he put into place were only going to escalate future expenditures.  Oh, and we were also trying to land a man on the moon during this time.  All during a time when the world was changing.  When a bunch of filthy hippies began to protest anything that didn’t somehow gratify them (their rallying cry was sex, drugs and rock & roll).  And racial tensions simmered to the boiling point in our crowded cities.

The social upheavals of the Sixties.  The race riots.  The unpopular war on our living room televisions.  They all took their toll on LBJ.  The race riots especially hurt him as he had spent so much money on ending economic and racial injustice.  On a televised address he told the nation that he was through being the president.  He wasn’t going to run for another term.  And he wouldn’t accept a nomination for a second term.  He basically thanked an ungrateful nation.  And planned for his retirement.  Leaving a fiscal mess for the next president.  As well as a mess in Vietnam.  And the job for cleaning up these messes fell to Richard Milhous Nixon.

When Nixon entered the Presidency all those Spending Obligations of the Great Society were Coming Due

Nixon had a lot of liberal tendencies.  He was actually a member of the NAACP since 1950.  Long before JFK or LBJ talked of civil rights.  He believed in New Deal economics.  Of the good government could do.  He was also an environmentalist.  Giving us the Environmental Protection Agency (EPA).  And giving us emissions standards for our cars.  He gave us the Occupational and Safety Health Administration (OSHA).  And a flurry of other regulations.  Not what you would expect from a Republican these days.  Of course, few probably know this.  But they probably do know about Watergate.  At least the word ‘Watergate’.  Which was pretty tame by today’s standards.  Spying on the political opposition.  Then lying about it.

When Nixon entered the presidency all those spending obligations of the Great Society were coming due.  The cost of LBJ’s Great Society really hit the Nixon administration hard.  Enormous amounts of money were flowing out to poor people (so they could spend it and buy consumer goods).  To the war in Vietnam.  To the Cold War.  To the space program.  To the enlarged federal government.  Government spending was going off the chart.  But it wasn’t having the affect on the economy the Keynesians said it would.  They were taxing, borrowing and printing money like good little Keynesians.  But they were devaluing the dollar in the process.  And igniting inflation.  Worse, the U.S. dollar was the reserve currency of the world.  Foreign nations pegged their currency to the U.S. dollar.  The U.S. pegged the dollar to gold.  As the Americans devalued the dollar, though, the foreign countries traded their dollars for gold.  Gold began to fly out of the country.  So Nixon did what any responsible Keynesian would do.  Instead of playing by the rules of the game he changed the rules.  And decoupled the dollar from gold.  The Nixon Shock.  Ushering in the era of unfettered Keynesian economics.  Deficit spending.  Growing debt.  High inflation.  High unemployment.  Stagflation.  And malaise.

Jimmy Carter would see the worse of LBJ’s Great Society.  As it left his economy in a mess.  Despite all of that government spending.  And Carter suffered because he, too, was a Keynesian.  He believed in that GDP formula where GDP equaled the sum of consumption, investment, government expenditures and net exports (exports – Imports).  And the formula clearly states that the way to increase GDP (and increase the number of jobs) was to increase government spending to give money to people so they could buy consumer goods (increasing government spending and consumption in the formula).  It was simple arithmetic.  But the formula left out about half of all economic activity.  The intermediate business spending that takes place before any consumer goods enter our stores.  Think of things consumers don’t buy.  Like railroad track, blast furnaces, construction front-end loaders, etc.  Economic activity that JFK encouraged with his tax cuts.  As Ronald Reagan did so, too, some 20 years later.  Which is why the JFK and the Reagan economies were far better than any Keynesian administration.

Even after more than a decade of unfettered Keynesian spending consumption was only 34% of all economic activity in 1982.  Even though official GDP figures reported it at 65%.  Why the discrepancy?  Intermediate business spending.  The stages of production before consumer goods.  Coming in at 54% of real economic activity in 1982.  Which is why the tax-cut policies of JFK and Ronald Reagan worked.  And the spending policies of JBJ, Nixon and Carter didn’t.  Trickle-down works.  Because it creates jobs.  And those lower tax rates generate higher tax revenues because more people are working and paying taxes.  All things a Keynesian wants.  But they will reject them because they resulted from the ‘wrong’ policies.  Because Keynesians want to tax, borrow and print.  Regardless of their effect on the economy.

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Ronald Reagan’s Reaganomics Increased GDP and Tax Revenue, Decreased Unemployment and Tamed Inflation

Posted by PITHOCRATES - August 8th, 2011

Ronald Reagan’s Supply-Side Reaganomics caused an Economic Boom

Politics is a struggle.  Between those on the Left.  And those on the Right.  And nowhere is it more partisan than when it is about one subject.  ReaganomicsRonald Reagan‘s supply-side economics.  Of the Austrian School.  That the Left belittles as trickle-down economics. 

His tax cuts during the Eighties sparked an economic boom.  No one denies this.  In fact, life was very good during the Eighties.  So good that the Left denounce those years as the Decade of Greed.  “Yes, a lot of people got rich,” the Left says.  “But at what cost?”  And then they point to those ‘soaring’ Reagan deficits.  Peaking at about $221.2 billion in 1986.  Or about $358.3 billion adjusted for inflation.  (Pretty tame by today’s standards.  Barack Obama has one in the $1.6 trillion neighborhood.)  But did Reagan cause them with his tax cuts?

To answer this question we look at historical GDP (gross domestic product).  And tax receipts.  From the Seventies and the Eighties.  From the heyday of Keynesian economics.  After the Nixon Shock in 1971. That ended the ‘gold standard‘.  When Nixon said, “I am now a Keynesian in economics.”  And through Reaganomics.  All dollar amounts are constant 2005 dollars (shown in billions).  These are graphed along with the top marginal tax rate, inflation and the unemployment rate.

(Sources: GDP, tax revenue, top marginal tax rate, inflation, unemployment)

Inflation Eroded GDP and Raised Unemployment in the Seventies

There are two relatively flat plateaus on the GDP graph.  Flat or falling GDP growth indicates a recession.  One starting sometime after 1972.  The other one around 1979. 

Both of these correspond to a spike in the inflation rate.  This happens because inflation erodes GDP.  By raising prices.  Higher prices mean we buy less.  Which means less GDP.  And higher prices tend to inflate business profits.  Where profit gains are from inflation.  Not from selling more stuff.  Which means less GDP.

Inflation is one half of the business cycle.  Which is a boom-bust cycle.  A booming economy.  And a busting recession.  Inflation.  And deflation.  Growth.  And recession. 

During growth there’s inflation.  Prices go up as more people want to buy the same things.  Bidding up prices.  The unemployment rate falls.  Because businesses are hiring more people.  To expand.  To meet this demand. 

When they expand too much there’s too much stuff on the market.  People can’t buy it all.  So prices go down.  To encourage people to buy.  And businesses cut back.  Lay people off.  With fewer people working there’s fewer people to buy that excess supply.  So prices fall more.  And businesses lay more people off.  To reflect the falling demand.  Which increases the unemployment rate.

The business cycle, then, corrects prices.  And readjusts supply to demand.  Keynesian economics was going to change this, though.  By removing the recession part.   Through permanent inflation.  At least, that was the plan.  The two plateaus in the GDP graph shows that the business cycle is still here despite their best efforts.   

And the Keynesians only made things worse.  By causing double-digit inflation.  By creating more demand than existed in the market.  People used that easy money.  To buy things they wouldn’t have otherwise bought.  Creating ‘bubbles’ of inflated prices.  Which are corrected by recessions.  And the greater the bubble, the greater the recession.

Easy Monetary Policy (i.e., Printing Money) made Inflation Worse in the Seventies

Government spent a lot during the Seventies.  A lot of that was Keynesian spending paid for with easy monetary policy (i.e., printing money).  Something governments can only do.  They are the only ones that can say, “Use these paper bills as legal tender.  We guarantee it.”

Making fiat money is easy.  But there is a cost.  The more you make the more you devalue your currency.  That’s the cost of inflation.  Money loses some of its purchasing power.  The greater the inflation the greater loss of purchasing power. 

They printed a lot of money during the late Seventies.  So much that the dollar lost a lot of its purchasing power.  Hence the double-digit inflation.

Paul Volcker was a Federal Reserve chairman.  He started in the last year of Jimmy Carter‘s presidency.  And remained chairman for about 8 years.  He raised interest rates severely.  To constrict the money supply.  To pull a lot of those excess dollars out of circulation.  This caused a bad recession for Reagan.  But it killed the double-digit inflation beast.  This sound money policy was a tenet of Reaganomics.  Which was an integral part of the Eighties boom.

Reagan’s Tax Cuts Increased both GDP and Tax Revenue

The hallmark of Reaganomics, of course, is low taxes.  Reagan cut the top marginal tax rate.  He dropped it from 70% to 28% in four cuts.  After the first cut GDP took off.   Because rich people reentered the economy. 

They weren’t parking their money in investments that helped them avoid paying the top marginal tax rate.  They were starting up businesses.  Or buying business.  Creating jobs.  Because the lower tax rates provided an incentive to earn business profits.  And not settle for lower interest income.  Or capital gains. 

For business profits can be far greater than interest earned on ‘income tax avoiding’ investments.  Such as government bonds.  And if we don’t penalize rich people for risk-taking they will take risks.  Create another Microsoft.  Or Apple.  But they are less likely to do that if they know we will penalize them for it.  And that’s what a high marginal tax rate is.  A penalty.  Remove this penalty and they will choose risky profits over safe interest every time.  And make a lot of jobs along the way.

And this is what they did during the Eighties.  Their ‘greed’ created a boom in employment.  A rising GDP.  Accompanied with a falling unemployment rate.  Rich people were pulling their money out of tax shelters.  And putting it into businesses.  Where they could make fat profits.  And making fat profits in business requires employees.  Jobs.  Unlike making money with safe tax-sheltered investments. 

Tax revenue increased.  There were more business profits.  And more business income taxes on those profits.  There were more jobs.  More employees in the workforce.  Paying more payroll taxes.  And more personal income taxes

Successful businesses made more rich people.  And more rich people pay more income taxes than fewer rich people.  A lot more.  The top marginal tax rate was lower.  But there were more businesses and people paying taxes.   Because the lower rates created more taxpayers.  And richer taxpayers to tax.  Which increased overall tax revenue.

Tax Revenue Increased under Reaganomics but Government Spending simply Increased More

So to summarize the data during Reaganomics, GDP grew, tax revenue grew, unemployment fell and inflation was tame.  All the things you want in a healthy economy.  And this all happened when the top marginal tax rate was cut from 70% to 28%. 

So, no, the Reagan deficits were NOT caused by the Reagan tax cuts.  That’s a myth created by the Left to revise history.  To recast the successful policies of Ronald Reagan as failures.  So they can continue in their tax and spend ways.

Those deficits were a spending problem.  Not a revenue problem.  For tax revenue increased after the tax cuts.  So why the deficits?  Because government spending simply increased more.

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LESSONS LEARNED #55: “Liberals are all for trickle-down economics as long as the wealth trickles down from those who support liberals.” -Old Pithy

Posted by PITHOCRATES - March 3rd, 2011

 JFK Governed as a Conservative

We’ve had two ‘trickle-down’ administrations in recent times.  Both JFK and Ronald Reagan were proponents of supply-side economics.  Between these two administrations we had a few Keynesians (LBJ, Nixon, Ford and Carter).  JFK and Reagan cut tax rates.  The Keynesians never lowered the tax rate lower than JFK’s.  Reagan did.  But not the Keynesians.

JFK was a Democrat.  But he governed as a conservative.  He was strong on defense.  Even got us into Vietnam to prevent the dominoes from falling in Southeast Asia.  And he was business friendly.  But that doesn’t stop Democrats from loving him, though.  Most probably don’t know anything about his conservative side.  They think about Camelot.  Jackie.  John John.  “Ich bin ein Berliner” (the big Cold War speech after the Soviet Union built the Berlin Wall).  Landing a man on the moon and returning him safely.  “Ask not what your country can do for you; ask what you can do for your country.”  And the civil rights stuff.  Not that he was a hawk when it came to war (Bay of Pigs-sort of, Cuban Missiles Crisis and Vietnam).  And a tax cutter.

LBJ may have been JFK’s vice president but he was no JFK.  Kennedy wanted to build a strong economy and he believed that started with making a business-friendly environment.  Which he did.  Johnson, on the other hand, was a big, old school, liberal.  To him businesses were just cash piñatas for the government to whack.  He wanted their money.  Because he wanted to spend it.  And boy did he.  He exploded the role of government in our lives.  Increased taxes.  Increased regulation.  And increased the government bureaucracy.  He called it his Great Society.  And he gave FDR‘s New Deal a run for its money.

JFK’s Tax Cuts Stimulated Economic Activity

When Kennedy became president, there was a bit of a recession going on.  Unemployment got as high as 6.7% in his first year.  And the top marginal tax rate was 91%.  When he looked at the two the answer was obvious to him.  With a top marginal tax rate of 91%, there was little incentive to invest.  If your earnings exceed a certain amount, you only kept 9 cents of each additional dollar?  So why bother?  Like Billy Joel said, “You can pay Uncle Sam with the overtime.  Is that all you get for your money?”  Or like George Harrison said, “There’s one for you, nineteen for me.  Cause I’m the taxman.”   

No one likes paying taxes.  Especially confiscatory taxes.  It’s why the Beatles left the UK.  All you need may be love.  But even hippies want to keep their money.  And JFK understood this.  High taxes discouraged investment.  And drove some business away.  So he put together an economic plan that included cuts in the tax rates.  He brought the top marginal rate from 91% to 70%.  And how did that work?  Not too bad.  Based on the numbers.

In the four years following his tax cuts, tax receipts increased 41%.  So he brought more money into Washington by cutting tax rates.  And it gets better.  The unemployment rate went down 33% (from 5.7% to 3.8%).  And GDP increased 35%.  In the technical language of economists, these numbers are awesome.

The LBJ/Nixon Policies End the JFK Economic Expansion

Well, the party wasn’t going to last.  Thanks to Lee Harvey Oswald.  JFK was dead.  Assassinated.  And LBJ took the oath of office in Air Force One before leaving Texas.  Who can forget the image of a grief-stricken Jackie as Johnson took the oath?  Much like with the assassination of Lincoln, the consequences of that action was to forever change the country (we all wonder how Reconstruction would have gone with Lincoln).  JFK was gone.  LBJ was in.  And he was bringing his Great Society with him.  And the size of government would never be the same.

Johnson raised taxes in his last 2 years to pay for the massive federal spending.  Nixon cut them.  He brought the top marginal rate back to the Kennedy level.  But he didn’t cut spending.  And to keep up with the spending he started printing money.  Gold started flying out of the country so he decoupled the dollar from gold, igniting inflation.  The heady days of the JFK economic expansion were over.  Looking at a period that included the last 2 years of LBJ’s term and Nixon’s 6 years, it’s not a pretty picture.

Tax receipts soared 77% to pay for all that government spending.  And, not surprisingly, the unemployment rate soared, too.  It went from 3.8% to 5.6% (an increase of 47%).  GDP shot up an impressive 80%, too.  Landing on the moon, Vietnam and the Great Society created a lot of economic activity.  But that economic activity wasn’t real.  It was a bubble.  Paid for with high taxes and printed dollars.  So prices were high thanks to inflation.  And a lot of us didn’t have a job.  And this is what Carter got when he entered office.  Malaise.  Stagflation (high unemployment and high inflation).  And something we called the misery index (the sum of the unemployment and inflation rates).  Carter was not going into the 1980 election with a lot going for him.  And the Iranian Hostage Crisis didn’t help any either.

Ronald Reagan Cuts Taxes, Stimulates the Economy and Wins the Cold War

Then came Ronald Reagan.  He put Carter out of his misery by winning the 1980 election.  Then rolled up his sleeves.  And got to work.  When he came into office the top marginal tax rate was 69%.  By the time he left it was 28%.  The Left called him reckless and irresponsible.  That he ran high deficits.  And exploded the federal debt.  Well, yes, both of these did increase during the Reagan years.  But it’s not because of the tax rate cuts.  Those were caused by spending more money than the treasury collected.  And, believe you me, the treasury really raked it in during the Reagan presidency.

In 1981, tax receipts were about $600 billion.  In 1990 (adding in the first year of George H.W. Bush), tax receipts were about $1 trillion.  In other words, the Reagan tax rate cuts increased tax receipts by 72%.  The treasury collected more tax dollars at the lower tax rates.  So there is no way no how you can blame deficits and debt on the Reagan tax rate cuts.  And it gets better.

During the Eighties, the unemployment rate fell 26%.  And the GDP rose 86%.  Lower tax rates.  Higher tax revenue.  Lower unemployment.  And a surge in economic activity.  Wow.  Can it get any better?  Why, yes.  Reagan spent the Soviet Union into defeat in the Cold War.  They just couldn’t keep up.  Caused a lot of trouble on the other side of the Iron Curtain.  Long story short, after his presidency, Eastern Europe would be free of Communism.  And the Berlin Wall would be no more. 

Supply-Side Economics Works

The moral of this lesson?  Supply-side (aka, trickle-down) economics works.  It worked for JFK.  And it worked for Reagan.  What doesn’t work is the Keynesian economics of LBJ, Nixon, Ford and Carter.  They grew government.  Increased government spending.  Giving us higher taxes, higher unemployment, higher inflation and malaise.  The only thing that trickled down was their misery.

So if trickle-down can fill the federal coffers why do liberals hate it?  Because those who support supply-side economics are typically in the private sector.  Have jobs.  Don’t belong to a union.  And don’t need any help from government.  You put that all together and the answer is clear.  These people don’t lobby liberals.  So what good is their wealth when no part of it makes its way to liberal pockets?  Like Big Labor?  Or public sector unions?

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FUNDAMENTAL TRUTH #55: “Liberals are all for trickle-down economics as long as the wealth trickles down from those who support liberals.” -Old Pithy

Posted by PITHOCRATES - March 1st, 2011

 Under Carter it was ‘in Government we Trust’

Mention Ronald Reagan in a room full of liberals and no doubt you’ll hear some derisive comment about trickle-down economics.  You see, liberals don’t like Reagan.  They liked Jimmy Carter.  But hated Ronald Reagan.  Because Reagan dared to say the king was wearing no clothes.  Metaphorically, of course.  But not Carter.  He clung onto the illusion of Big Government as the people’s savior.  Though a practicing Baptist, for Carter it was ‘in government we trust’.

Carter was a one term president.  Liberals may have liked him but the rest of the country didn’t.  Granted, he came into office with some pretty bad economic problems.  He can thank LBJ‘s Great Society for that.  The greatest explosion of government spending since FDR‘s New Deal.  And then Nixon decoupling the dollar from gold didn’t help.  The left doesn’t much care for Nixon, either.  Which is funny.  Because he governed as a liberal.  He spent money and grew government.  And when he decoupled the dollar from gold he called himself a Keynesian (i.e., a Big Government guy when it came to economics).  Carter’s misfortune was to follow all of this financial devastation.  Well, that, and the fact he didn’t have a clue about how to fix things.

Reagan did.  “Government isn’t the solution to our problems, government is the problem,” Reagan said in 1981.  And the warning Klaxons went off throughout liberal-land.   There was imminent danger.  And his name was Ronald Reagan.  You see, Carter did all the right things.  For those on the left.  And what did he get?  High inflation.  High interest rates.  And high unemployment.  They measured the economy with the misery index as we wallowed through the stagflation of the Carter years.  During the 1980 presidential campaign, Reagan asked the simple question heard round the world.  Are you better off now than you were 4 years ago?  Reagan went on to win the election.  So the answer was ‘no’.

Reagan Fixed the Economy and Fired Air Traffic Controllers

Reagan cut tax rates.  And the economy eventually exploded.  We said goodbye to stagflation.  And the misery index.  They were relics of the Carter years.  It was a new morning in America.  People had jobs.  They were happy.  Optimistic.  And this infuriated liberals.  Because Reagan’s conservatism flew into the face of everything they held dear.  And then came PATCO

The Professional Air Traffic Controllers Organization.  A federal government union.  They went on strike in 1981.  Which was against the law.  Government unions could not go on strike.  The strike shut down much of air traffic in the U.S.  This was big.  No business travel.  No sports travel.  No vacations.  No mail.  A small group of some 11,000 controllers shut down air travel.  And greatly disrupted the economy.  Reagan ordered them back to work per the law.  They refused.  He fired them.  And the left howled.

So you can see why liberals hate Reagan.  He was a destroyer and debunker of liberalism.  And the people loved him.  He won reelection with 49 states.  The man was more popular than sliced bread.  Worse, people were happy.  Whistling a happy tune while they went on their merry way.  Which is all well and good if you’re one of the ones whistling.  But when you’re part of that tiny 20% of the population that wants to run the other 80%, there was nothing to whistle about.  Reagan had become liberal enemy number one.

Reaganomics Replaces Failed Keynesian Economic Policies

So they attacked.  Then.  And now.  And they zero in on those tax rate cuts.  Sure, they say, the tax cuts stimulated the economy, but at what cost?  Huge deficits and a skyrocketing debt.  This, of course, is not true.  The cuts in the tax rates nearly doubled tax receipts.  The Democrat House (Tip O’Neil and his fellow Democrats had the power of the purse) just went on a spending spree with all that cash pouring into Washington.  Remember, all spending bills originate in the House of Representatives.  Defense.  Entitlements.  And all discretionary spending.  And when tax receipts nearly doubled with cuts in the tax rates, it proved that Reagan was right.  And liberals were wrong.

But they keep repeating the lie.  Hoping that if people hear it enough people will believe it.  Then they move on to trickle-down economics.  Supply-side economics.  Reaganomics.  They love to disparage this term.  Despite the fact that under Reaganomics, the 1980s was one of the most prosperous periods in American history.  So what is supply-side economics?  Well, think of it this way.  When do you live better?  When you have a job?  Or don’t have a job?  It’s pretty hard to pay your bills if you don’t have a job.  You can’t buy gasoline.  Food.  Clothes.  Electronic toys.  Etc.  So I think most will agree that life is better when we have a job.  And where do jobs come from?  From businesses.  That are pursuing a profit.  If they can make a profit they expand their businesses.  And hire more people.  Thus creating more jobs.  And this is supply-side economics in a nutshell.  They’re economic policies that are business-friendly to encourage their growth.  So they will hire more people.

Makes sense.  To the sensible.  But not to a liberal.  Because liberals are Keynesians.  They want to redistribute the wealth.  Take money from the rich.  And give it to the poor.  They believe that is how you create economic activity.  By giving other people’s money to other people so they can spend it.  And we tried it.  Under LBJ, Nixon, Ford and Carter.  Didn’t work.  Liberals will blame everything under the sun why it didn’t work.  But never the ideology itself.  Which is flawed.  Because higher taxes reduce profits.  Which hinders business expansion.  Which hinders job creation.  Which hinders economic activity.  And this is exactly what happened under LBJ, Nixon, Ford and Carter.  Which is why Carter was a one term president.

Trickle-Down is Okay as long as it Fills Union Coffers

The funny thing is that the left often supports trickle-down economics.  Whenever they are supporting the UAW.  They support high pay and benefits for unskilled labor on the assembly line.  Because it stimulates the economy. Yes, we pay these people a lot.  But they go out and spend that money.  And that pumps a lot of money into the local economy.  We’ve all heard these arguments.  Whenever liberals are defending high union wages and benefits.  Of course, liberals got so greedy that they killed the golden goose.  Assembly plants left the country.  Robots replaced workers on the line.  The few jobs remaining have nice wage and benefit packages.  But at what cost?  Hundreds of thousands of jobs were lost in the deal.  A terrible cost as jobs drive the economy.  The more the better.  While fewer higher-paid jobs just don’t help anyone but the few who have those jobs.

It’s the same thing with public sector workers.  No one has a better salary and benefit package.  For many it’s like getting two paychecks for one job.  For every dollar in pay they get something like $0.75 in benefits.  Mostly health care and pensions.  Teachers are often some of the greatest beneficiaries when you factor in all the time off they get.  There’s a reason why these public sector workers strike and never quit these ‘horrible’ jobs.  Because they can’t find a better job.  So when states and cities have trouble balancing their budgets because of out of control health care and pension costs they raise taxes.  Make the rest of us live on less.  To save these jobs.  For these good people.  Sure, we pay them a lot.  But they go out and spend that money.  And that pumps a lot of money into the local economy.

So that kind of trickle-down economics is okay.  But Reaganomics was nothing but tax breaks for the rich paid for by the working poor.  While fat union pay and benefits stimulated local economies.  A double standard?  Yes.  But there is a difference.  Trickle-down from job creators doesn’t generate a lot of union dues.  Trickle-down from union workers and the public sector do.  That’s why the liberals support unions.  Because liberals get a lot of that dues money.  And loyal foot soldiers to advance their agenda.

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LESSONS LEARNED #38: “Repeating a lie doesn’t make it true.” -Old Pithy

Posted by PITHOCRATES - November 4th, 2010

Liars Lie

Lying works.  Political spin.  Poetic license.  Fibbing.  Slander.  Libel.  Call it what you’d like.  Politicians lie.  Because it works.  Especially when you can’t win in the arena of ideas.  If they can’t win the philosophical debate what do our politicians do?  Attack the messenger, not the message.  If the history doesn’t validate their policies what do they do?  Revise history.  It never changes.  The only thing that does is the people hearing the lies.

Presidents may dream, but the House of Representatives controls the purse.  That’s why there are numerous battles between Capitol Hill and the White House.  Between Speakers of the House and presidents.  Some of the big partisan battles in recent times?  Tip O’Neil and Ronald Reagan.  Tom Foley and George H.W. Bush.  Newt Gingrich and Bill Clinton.  Nancy Pelosi and George W. Bush.  When different political parties hold the White House and the Hill, the partisanship escalates.  And the lies get more brazen.  Especially on the political fringe.

Some lies bordered on the ridiculous.  Like Ronald Reagan created AIDS to kill homosexuals.  That George H. W. Bush flew to Iran on an SR-71 to meet secretly with the Iranians during the 1980 presidential campaign.  Why?  To negotiate with the Iranians to keep the American hostages until after the election.  That George W. Bush blew up the Twin Towers to start a war that would let him invade Iraq.  No doubt there was some political damage from these lies.  But the lasting damage from these ridiculous lies pale in comparison to the Big Lies that the Left perpetuates to this day.

Trickle-Down Economics

Ronald Reagan was president from 1981 until 1989.  When he entered office, the economy was in the toilet.  Double digit inflation.  Double digit interest rates.  Unemployment at 7.1%.  Reagan wanted to cut taxes and spending.  The Democrat controlled Congress wanted to increase federal spending to ‘stimulate’ the economy (ala Keynesian economics).  The Congress fought him.  But Reagan used the bully pulpit and appealed directly to the American people.  They liked his message which brought pressure down on Congress.  They gave a little.  Reagan got his tax cuts.  The top marginal rate went from 70% down to 28% by the time he left office.  The result?  The economy boomed.  They call it the Decade of Greed.  Because we were very materialistic and greedy.  And people lived well.

Yes, but at what cost?  That’s what the Left always says to refute Reaganomics.  What they deride as trickle-down economics.  They point to military spending.  They point to Reagan’s deficit spending.  And the growing federal debt.  The Left says this is what Reagan’s tax cuts have given us.  Growth and prosperity at the expense of future generations.  Which is perhaps the greatest lie of the 20th century.  But because the Left has repeated it so often, a lot of people accept it as fact.  Even though the numbers refute this grand lie.

When Reagan entered office, federal tax receipts were $517 billion.  When he left office in 1989, federal tax receipts were $991 billion.  This is an increase of 91.7%.  Or, to look at in another way, tax receipts in 1989 were 1.9 times the amount they were in 1980.  That’s almost double.  So, despite the great lie of the 20th century, Ronald Reagan’s tax cuts did NOT cause deficits or increase the debt.  Cuts in the tax rates brought MORE money into the federal treasury.  Excessive federal spending caused the deficits.  Federal spending increased from $590.9 billion in 1980 to $1,143.7 billion in 1989.  That’s a 93.6% increase.  Spending, too, almost doubled.  In other words, spending increased 1.9% more than tax receipts by the end of Reagan’s second term.  Washington was awash in money.  They just spent it faster than it came in.

Blame the excessive spending on Cold War defense spending or domestic spending.  The point is moot.  Because it doesn’t change the fundamental truth that Reagan’s tax cuts INCREASED federal tax receipts.  Or the lesson learned that tax cuts stimulate the economy.  Anyone saying otherwise is lying and trying to revise history.

Wither on the Vine

The Reagan decade ended prosperously.  Reaganomics were a success.  Which was a threat to those with a vested interest in Big Government.  But people liked Reagan.  And only agreed to vote for George H.W. Bush when he made the infamous ‘read my lips – no new taxes’ campaign pledge.  But Bush was no Reagan.  He wasn’t as conservative.  Or as charismatic.  He couldn’t sell conservative America (center-right) his less than conservative policies (center-left).  The Left, seeing he was no Reagan, maneuvered him into a position favorable to them on the deficit.  The Republicans wanted to cut spending.  The Democrats, of course, wanted to raise taxes.  And with the Democrats in control of the House, he caved.  He raised taxes.  And when he did, he became a one-term president.  The American people were so angry when he reneged on his ‘read my lips – no new taxes’ pledge, the third party candidate in the 1992 presidential campaign, Ross Perot, got 18.9% of the popular vote.  No third party candidate did better.  Exit polling shows he drew equally from both Bush and Clinton, though only 20% of his voters were liberal.  The rest were conservatives and moderates.  Perot brought a carnival atmosphere to the campaign.  Charts and props made for good TV.  This spectacle, though, drew critical attention away from Clinton’s past.  Parts of which moderates would have found objectionable.

Clinton ran as a centrist.  He lied.  As liberals are wont to do during a campaign in a center-right country.  Once in office, he swung to the left.  The American people were angry.  As people are wont to be when lied to.  At the 1994 midterm elections, the people spoke.  And gave both houses of Congress to the Republicans.  Newt Gingrich became the Speaker of the House.  He co-authored the Contract with America which was a Republican pledge to return America to a conservative path.  It appealed to the American people.  It’s what swept the Republicans into power.  And it scared the Left.  So they attacked it.  Called it the Contract on America.  And they attacked Newt Gingrich.  With a vengeance.

In 1995, Gingrich discussed an alternative to Medicare.  Number crunchers projected Medicare (and Social Security) to go into the red a decade or two out.  Medicare (and Social Security) is a big federal expenditure and a political third rail.  The Left uses the elderly as political pawns whenever they can.  Because that’s what Big Government does.  Get people dependent on Big Government and then scare the hell out of them by saying the Right wants to take their benefits away.  Gingrich was discussing high-deductible health insurance plans and tax free Medical Savings Accounts (MSAs).  The MSAs included an annual federal subsidy for seniors.  The plan would be appealing to seniors, Gingrich thought, because they could get better health care coverage with a private plan.  The MSAs and the federal subsidies would make it affordable.  Better care without paying more.  Who wouldn’t want that?  Once people made this choice voluntarily, they would move out of Medicare into a private plan.  Those comments in 1995 included this:

What do you think the Health Care Financing Administration is? It’s a centralized command bureaucracy. . . . Now, we don’t get rid of it in round one because we don’t think that that’s politically smart and we don’t think that that’s the right way to go through a transition. But we believe it’s going to wither on the vine because we think people are voluntarily going to leave it — voluntarily.

Wither on a vine?  Talk about a hanging softball.  There was no way the Democrats weren’t going to whack that one out of the park.  It quickly became ‘Medicare benefits’ and NOT the inefficient ‘centralized command bureaucracy’ that was going to wither on the vine.  The Left ran with it.  Another grand lie.  Repeated it at nauseam.  And scared the seniors.  Gingrich’s days were numbered.  And Clinton had a new enemy to demonize.  Which came in handy when no one wanted his policies.

The Lies that Keep on Giving

Big Government depends on getting as many people dependent on government as possible.  Medicare (and Social Security) is one program that does this very well.  And when Gingrich dared to threaten it, they destroyed him.  With a grand lie.  Like the grand lie that tax cuts stimulate deficits, not the economy.  Perpetuating these lies enables unsustainable government spending.  Threatens the future of all Americans.  And the longer it takes for the truth to come out, the deeper the hole we dig ourselves into.

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Let the Lying Begin

Posted by PITHOCRATES - September 8th, 2010

Labor Day has passed.  And you know what that means?  That’s right.  The kids are back in school.  But it’s not all good.  It also marks the beginning of the election season.  And the lying has already begun.  Well, it’s been going on since, well, the late 18th century.

The economy sucks.  There are no jobs.  But that’s no surprise, is it?  A Keynesian in the White House.  Keynesians in charge of both houses of Congress.   And if there is anything a Keynesian knows how to do is to kill an economy.

Andrew Mellon advised Warren Harding to cut taxes.  He did.  And we got the Roaring Twenties.  FDR gave us a decade long depression with his economic policies.  LBJ’s Great Society gave us, ultimately, the stagflation of the 1970s.  Ronald Reagan’s tax cuts gave us the ‘Decade(s) of Greed’.  The Left condemned the first decade.  But they praised the second decade.  Lucky Clinton.  Well, until that blue dress.

Keynes got it right.  Sort of.  You stimulate the economy with fiscal policy.  But not by tax and spending.  You stimulate by making the business environment more favorable for business.  This creates jobs.  Lowers unemployment.  And brings in great big piles of money to the government.

But what you will hear this election season is that we’re not going back to the failed economic policies of the past.  We’re not returning to ‘trickle-down’ economics.  And they’ll say that with righteous indignation.  Even though the economy was a helluva lot better with those ‘failed’ policies.  You know why?  Those policies work.  Their policies don’t.  But their policies give them more power.  Policies that work don’t.  And they know that.  So they lie.  To better themselves at our expense.

You’d think they’d be happy just to get the great big piles of money with a bustling economy.  But they’re not.  They want the power.  To satiate their great big egos.  And to establish themselves as a permanent upper class.

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