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honorman
Registered Member
Date Joined Oct 2002
Total Posts : 1137
| Posted 11/25/2003 8:28 AM (GMT -6) |   | | http://www.msnbc.com/news/997861.asp?vts=112520031119 | | Back to Top | | |
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DLW
Registered Member
Date Joined Apr 2003
Total Posts : 2457
| Posted 11/30/2003 12:53 PM (GMT -6) | | As Stimulus, Tax Cuts May Soon Go Awry
By LOUIS UCHITELLE
Published: November 30, 2003
AUDING the Bush tax cuts isn't easy. They have turned a comfortable budget surplus into a constraining deficit, and they are enriching the wealthy far more than families with only five-figure incomes.
The one mitigating factor is stimulus. The tax cuts are helping to revive the economy by putting more spending money into people's pockets. But even that will soon backfire.
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The stimulus is at its peak right now. During the fiscal year that ended on Sept. 30, the nation's taxpayers pocketed $117 billion, mainly from rebates and from reductions in paycheck withholding as lower tax rates went into effect. That $117 billion, which is the portion of the tax cut going only to individuals and not to companies, rises to $200 billion in the current fiscal year, the Congressional Budget Office reports.
Most of the windfall from both fiscal years is packed into the 12 months that started last summer and will end next summer. Not surprisingly, this front-loading of the tax cuts coincides with the improving economy. But then the payout declines gradually, snuffing out the stimulus - unless there is another big tax cut. Or as Chris Varvares, president of Macroeconomic Advisers, put it, "We have reduced the scope of using fiscal policy to cushion the economy in the next downturn.''
Tax cuts function as stimulus only when they increase the amount that people spend. If America's $10 trillion economy expands by $117 billion in a given year, to a total, say, of $10.117 trillion, there is growth. Among other good things, the additional spending on goods and services generates jobs for people entering the labor force as the population expands. And the rising demand for workers begins to absorb those who lost jobs during the 2001 recession and the weak recovery that followed. The unemployment rate thus falls.
The $200 billion flowing to taxpayers in the current fiscal year includes the second installment of the $117 billion they received the previous year and an additional $83 billion. If all $200 billion is spent on goods and services, then there is still work for the people hired a year earlier, as well as job creation to satisfy the additional $83 billion in spending. All else being equal, the economy expands to a total of $10.2 trillion.
A big chunk of the $200 billion will come to people as tax refund checks in the next six months - a timely shot in the arm in a presidential election year. Then the shrinking begins as the tax cuts run their course. For fiscal 2005, which starts next Oct. 1, just a month before the election, the tax windfall for individuals will total only $168 billion. There will be another drop in fiscal 2006, the Congressional Budget Office estimates, basing its calculations partly on the tax cuts themselves (80 percent will have been paid out by 2005) and partly on an assumption about how much taxable income the economy will generate.
The two play off each other. A $10.168 trillion economy, of course, is smaller than a $10.2 trillion one. The total production of goods and services declines and, with it, the need for workers. Their wages disappear and so does the revenue from taxing their pay. The stimulus aspect of the Bush tax cuts thus shifts into reverse.
Economists in the Bush camp argue that the tax-cut stimulus will continue anyway, in a different, supply-side format. With more of their profits exempted from taxes, entrepreneurs will increase their efforts in pursuit of lightly taxed wealth. The stimulus will shift to them, specifically to their investments and hiring. The new profits and wages will then be spent on goods and services, and the economy will grow. Rising demand will result from rising supply.
Hyped-up entrepreneurs are indeed a benefit, but when it comes to lifting the economy, 70 years of experience has demonstrated that rising demand is crucial, and must come first. Only then do suppliers really become active, to satisfy the customers knocking on their doors.
THE Bush tax cuts encourage this customer demand, though not efficiently. They work best if every dollar of forgiven taxes is spent. Unfortunately, only a third is being spent, according to Joel Slemrod and his colleagues at the Office of Tax Policy Research at the University of Michigan. The rest has been saved or used to pay down debt, the office found in recent surveys.
By this reckoning, the Bush tax cuts will not do much to lift the economy. The $117 billion in fiscal 2003 gives birth to only $40 billion in effective stimulus. Much more of the cuts, perhaps every nickel, would have been spent if the money had been channeled to the states instead, to pay the salaries of teachers who were fired to balance budgets. The economy surged in the third quarter, but as Mr. Slemrod notes, "the tax cuts were not a major part of that growth.''
Niebuhr thought that sustained moral energy in politics depended on religion's power to mobilize reason along with self-transcending love. The prophetic tradition, meanwhile, gave Jews and Christians some protection against the temptation to identify their social causes with God's will. Lincoln's second inaugural address expressed the prophetic insight, "The almighty has His own purposes." | | Back to Top | | |
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DLW
Registered Member
Date Joined Apr 2003
Total Posts : 2457
| Posted 12/2/2003 5:42 AM (GMT -6) | | The Unemployment Myth
By AUSTAN GOOLSBEE
Published: November 30, 2003
CHICAGO
The government's announcement on Tuesday that the economy grew even faster than expected makes the current "jobless recovery" even more puzzling. To give some perspective, unemployment normally falls significantly in such economic boom times. The last time growth was this good, in 1983, unemployment fell 2.5 percentage points and another full percentage point the next year. That's what happens in a typical recovery. So why not this time? Because we have more to recover from than we've been told.
The reality is that we didn't have a mild recession. Jobs-wise, we had a deep one.
The government reported that annual unemployment during this recession peaked at only around 6 percent, compared with more than 7 percent in 1992 and more than 9 percent in 1982. But the unemployment rate has been low only because government programs, especially Social Security disability, have effectively been buying people off the unemployment rolls and reclassifying them as "not in the labor force."
In other words, the government has cooked the books. It has been a more subtle manipulation than the one during the Reagan administration, when people serving in the military were reclassified from "not in the labor force" to "employed" in order to reduce the unemployment rate. Nonetheless, the impact has been the same.
Research by the economists David Autor at the Massachusetts Institute of Technology and Mark Duggan at the University of Maryland shows that once Congress began loosening the standards to qualify for disability payments in the late 1980's and early 1990's, people who would normally be counted as unemployed started moving in record numbers into the disability system — a kind of invisible unemployment. Almost all of the increase came from hard-to-verify disabilities like back pain and mental disorders. As the rolls swelled, the meaning of the official unemployment rate changed as millions of people were left out.
By the end of the 1990's boom, this invisible unemployment seemed to have stabilized. With the arrival of this recession, it has exploded. From 1999 to 2003, applications for disability payments rose more than 50 percent and the number of people enrolled has grown by one million. Therefore, if you correctly accounted for all of these people, the peak unemployment rate in this recession would have probably pushed 8 percent.
The point is not whether every person on disability deserves payments. The point is that in previous recessions these people would have been called unemployed. They would have filed for unemployment insurance. They would have shown up in the statistics. They would have helped create a more accurate picture of national unemployment, a crucial barometer we use to measure the performance of the economy, the likelihood of inflation and the state of the job market.
Unfortunately, underreporting unemployment has served the interests of both political parties. Democrats were able to claim unemployment fell in the 1990's to the lowest level in 40 years, happy to ignore the invisible unemployed. Republicans have eagerly embraced the view that the recession of 2001 was the mildest on record.
The situation has grown so dire, though, that we can't even tell whether the job market is recovering. The time has come to correct the official unemployment statistics to account for those left out. The government agencies that can give us a more detailed and accurate picture of the nation's employment situation — the Census, the Bureau of Labor Statistics and the Bureau of Economic Analysis — need additional funds and resources from Congress to do their jobs.
Otherwise, announcements about a rebounding economy will continue to show only half the picture. Take the revised numbers released by the Commerce Department on Tuesday. They showed that output in the third quarter grew at a rate of 8.2 percent, an extraordinary pace, and productivity grew even faster. Almost no one noted, though, that Social Security also announced the latest data on disability applications. Almost 200,000 people applied in October — up 20 percent from the previous month — tying the highest level ever. Despite the blistering growth of the economy, the invisible unemployment problem continues.
We didn't have a mild recession and a jobless recovery. We covered up a deep recession and will need a sizable bit of recovery just to get us back to the point the unemployment rate suggested we already were. As the Red Queen said to Alice in "Through the Looking Glass": "Here, you see, it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"
Austan Goolsbee is professor of economics at the University of Chicago Graduate School of Business.
Niebuhr thought that sustained moral energy in politics depended on religion's power to mobilize reason along with self-transcending love. The prophetic tradition, meanwhile, gave Jews and Christians some protection against the temptation to identify their social causes with God's will. Lincoln's second inaugural address expressed the prophetic insight, "The almighty has His own purposes." | | Back to Top | | |
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