GDP, Government Growth, And The Incredible Power Of Stupid

This posting has been a long time in the hopper. It started long long ago when Serioso wanted to get into a jousting match with me over GDP and Government. I could see a yawning black hole of days opening before me, and basically quashed it.

But now is an O.K. time to address a couple of points on GDP and Government.

First, what is GDP?

On the one hand, it is a single well defined formula:

http://www.investopedia.com/terms/g/gdp.asp

What is ‘Gross Domestic Product – GDP’

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. Though GDP is usually calculated on an annual basis, it can be calculated on a quarterly basis as well. GDP includes all private and public consumption, government outlays, investments and exports minus imports that occur within a defined territory. Put simply, GDP is a broad measurement of a nation’s overall economic activity.

Gross domestic product can be calculated using the following formula:

GDP = C + G + I + NX

where

C is equal to all private consumption, or consumer spending, in a nation’s economy, G is the sum of government spending, I is the sum of all the country’s investment, including businesses capital expenditures and NX is the nation’s total net exports, calculated as total exports minus total imports (NX = Exports – Imports).

But as with all things Economics, the devil is in the details. Note that “Government” is part of GDP. Does it really increase our net national wealth or produce valuable goods and services to drop bombs on another country and reduce them to rubble? Is the creation of an airport near the home town of a Senator, when nobody much goes there, a net gain, or a waste?

Then there is the question of “In what currency?”. This is the classical Economics Rubber Ruler problem. The $US today is about 5 ¢ of the Gold Standard Dollar. So for any long term view of things, you must use a ‘price deflator’. But which prices? Buggy Whips and Oxen? The 1956 Chevy? The 2016 Google Autonomous Car? All are “transportation” so involved in how to deflate the transportation portion of the package. Or ought we to use € or ¥ to measure the USA? Gold? As a commodity it bounces up and down like crazy, though very long term tends to be that one ounce will buy “A Gentleman’s Suit Of Fine Clothing”. Yet even gold and silver move as mining tech moves (and as central bank fads change…). Silver, once pegged at 16 oz per oz of gold, is now closer to 50:1 (and also bounces around). So even two metals can’t properly deflate the other.

So folks “fiddle with the GDP”. Reagan had the inflation numbers (and thus the deflator) “cooked” so that inflation would be smaller and folks expectation of pay rises reduced. Now there’s an adjustment needed for pre vs post Reagan. Some folks deflate one way, some another, others do other things. Which deflator from which years? Eh?

Then there are long discussions of GDP vs NNP (Net National Product) and a dozen other ways to try to measure our “productivity” of stuff and services.

Now, even here, we have the tricky problem of how to measure $US exports properly against ?Whatever? currency imports.. Are two equivalent cars to be net zero against each other as the Ford Focus is not much different from a Datsun? Or do we let market swings of $ vs ¥ decide? If George Soros is seriously attacking the British Pound, does that make their cars “worth less”? But setting that aside, there’s a bigger issue.

Generally, that NX Net Exchange can be worked out reasonably. C Consumption is pretty clear, but subject to the Broken Window Fallacy. Tossing a rock through my own window, then paying someone to fix it, increases GDP… my real wealth not so much… Government loves to fund “make work” and “political favor” projects with high B.W.F. quotients…

Which brings us to the G part. Government. Note this is not “Government ex-bombs” or “Government ex-Graft Paid to Egypt” or “Government ex-Senator Private Airport in Nowhere”… Want to raise GDP? Easy, start a Big Fat Do Nothing Good Program… Send $5 Billion to A Middle East Dictator? GDP up $5 Billion. That this consumes wealth and destroys economic well being? Who cares… Does “Shovel Ready” ring a bell? IF I have a program spending $1 Trillion to have folks with shovels dig holes, and another $1 Trillion for another group to fill them in (WPA – Works Program) at the end of the process, GDP went up $2 Trillion, but all I have is a load of tired people and worn out shovels. NOT a gain. This fallacy comes around a LOT in Government Programs.

The Wiki starts to touch on some of the issues of GDP and different ways to calculate it. (AND still ignoring the zoo of ‘sister acronyms’ that pop up in trying to fix it… GNP, GNI, NNP, NDP, etc. etc.) I’m not going to quote them in full, just a couple of main titles and first sentences to give a flavor of it all I’ve bolded a few bits.

https://en.wikipedia.org/wiki/Gross_domestic_product

Production approach

This approach mirrors the OECD definition given above.

Estimate the gross value of domestic output out of the many various economic activities;
Determine the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services.
Deduct intermediate consumption from gross value to obtain the gross value added.

Gross value added = gross value of output – value of intermediate consumption.
[…]
Income approach

The second way of estimating GDP is to use “the sum of primary incomes distributed by resident producer units”.

If GDP is calculated this way it is sometimes called gross domestic income (GDI), or GDP (I). GDI should provide the same amount as the expenditure method described later. (By definition, GDI = GDP. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies.)

This method measures GDP by adding incomes that firms pay households for factors of production they hire – wages for labour, interest for capital, rent for land and profits for entrepreneurship.
[…]
These five income components sum to net domestic income at factor cost.

Two adjustments must be made to get GDP:

Indirect taxes minus subsidies are added to get from factor cost to market prices.
Depreciation (or capital consumption allowance) is added to get from net domestic product to gross domestic product.

Total income can be subdivided according to various schemes, leading to various formulae for GDP measured by the income approach. A common one is:

GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less subsidies on production and imports
GDP = COE + GOS + GMI + TP & M – SP & M
[…]
Expenditure approach

The third way to estimate GDP is to calculate the sum of the final uses of goods and services (all uses except intermediate consumption) measured in purchasers’ prices.

In economics, most things produced are produced for sale and then sold. Therefore, measuring the total expenditure of money used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP. Note that if you knit yourself a sweater, it is production but does not get counted as GDP because it is never sold. Sweater-knitting is a small part of the economy, but if one counts some major activities such as child-rearing (generally unpaid) as production, GDP ceases to be an accurate indicator of production. Similarly, if there is a long term shift from non-market provision of services (for example cooking, cleaning, child rearing, do-it yourself repairs) to market provision of services, then this trend toward increased market provision of services may mask a dramatic decrease in actual domestic production, resulting in overly optimistic and inflated reported GDP. This is particularly a problem for economies which have shifted from production economies to service economies.
Components of GDP by expenditure
U.S. GDP computed on the expenditure basis.

GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X – M).

Y = C + I + G + (X − M)

And that is just the Wiki. Once you get into The Literature, there’s even more “stuff” done to / with GDP trying to find The One True Number. IMHO, it doesn’t exist. But Serioso had another idea.

So here’s that email that’s been festering in my “moderation” queue for way too long (over a year):

Originally from this thread:

https://chiefio.wordpress.com/2015/02/27/carping-comment-seriousoly/

Serioso
2015/03/04 at 3:05 am

Which GDP, you ask. It really doesn’t matter, so long as you use the same dollars for tax receipts and national product. Use constant dollars or use current dollars, the result is the same if you use the same type of dollar in numerator and denominator. That’s one of the advantages of using ratios.

I never said anything negative about the Laffer curve, and I never proposed to “toss [it] out.” Indeed, reading the reference you provided, I see that Laffer himself believes we are on the productive (low tax rate) side of the curve, far from the point of maximum tax revenue.

The fact remains that income tax revenues declined as a percentage of GDP after the Reagan tax rate cut. A change of one in 8 or 9 is far from trivial. And the fact that GDP does not include voluntary work (etc.) is irrelevant when looking at a large change in a small time period.

The question, I suppose, is whether you can explain the decrease. Or, if not explain it, see it.

Essentially doesn’t care at all about how GDP is figured, what adjustments and all might be in it, how cooked the deflators are, that it does not reflect real wealth creation, etc. etc. Just divide it and things are fine…

His position is, roughly, we have lots of room for more taxes to be sucked out of the economy, so let’s get to taxing and spending!

My position is, roughly, we are on the ragged edge of collapse due to too much taxing and spending and the peak of the Laffer Curve is likely behind us. I’ve had several postings with data supportive of that POV, so you can find that backing matter if you look under the economics tags.

Most importantly, I think “GDP Ex-Government” is the most important for illustrating why more tax and spend is a Very Bad Idea.

Found A Good Example GDP -ExG

So after some looking, I found this very clear example of why GDP Ex-G is what matters.

http://wjmc.blogspot.com/2013/12/us-rolling-10-year-gdp-growth-ex.html

Dr William J McKibbin

Sunday, December 29, 2013

US 10-year Moving Average GDP Growth Ex-Government Spending (1958-2013)
The chart below depicts US economic growth as measured by GDP excluding government spending on a 10-year moving average basis since 1958. Note that GDP growth ex-government spending has been trending downwards since 1982, and that economic growth excluding government spending is now hitting historic lows.

US 10-year GDP Growth ex-Gov Spending 1958-2013

US 10-year GDP Growth ex-Gov Spending 1958-2013

I didn’t see in his posting if this was ‘real $’, ‘constant $’, deflated, whatever… I’m going to assume some kind of deflator used given the long time period. (You can see how just saying GDP is a very slippery slope of assumptions…)

Note that as of now, real?GDP-exGovt is about 2% growth (well, really as of 2013 and a 10 year average… so likely even less now) and about equal to our Inflation Target by The Fed. Now we also know that the inflation numbers are cooked (ex-anything_that_goes_up_fast…), so I think a more careful analysis might well find we are at about Zero Real GDP Growth ex-government, which is about what the Average Joe and Jane has been experiencing.

Raise Taxes and Spend more, will rapidly suck that last 2% (that might be inflation-fictional anyway) out of the non-Govt economy and put us in the Greek Puerto Rico Spain Toilet right quick (as they say in Texas).

And that, in a nutshell (though a big one, I admit ;-) is why “which GDP” and even which parts of GDP and how you fiddle with GDP and … why that matters. And why we can’t take a 2% bigger tax bite going into the G part of that equation and leaving the part that makes real economic growth and real wealth creation.

Dr. McKibben sums it up nicely:

The US is in desperate need of greater private sector growth now. The public sector should yield accordingly to private sector priorities in order to accommodate this necessary structural change in the US economy. The government cuts I envision will require a determined reassessment of both US social welfare and defense budget needs sooner rather than later.

I think that generalizes to the EU and UK as well.

A Sidebar On Stupid

IMHO, the core problem is The Incredible Power Of Stupid.

Stupid people are often stupid and usually know it. Very Smart people often do very stupid things, and don’t know it. I’d rather have more structurally slow folks who have learned to be careful, and fewer Very Bright Idiots Acting Stupid.

THE genius of The Private Economy and competition in capitalism is that businesses can and do fail. We limit the size and scope of Stupid and rapidly prune Bad Ideas. Not so in Government. In Government, Stupid can, and does, run rampant for generations. Just look at Common Core as the most recent clear example. It is a lousy way to teach. (Spouse and I both have teaching credentials and have run classrooms, we know this business). Prior to Common Core and the Federal Department of Education, schools were run locally, and generally well. I got a great education then. Now? It’s horrid. And nearly nothing can stop it as it gets worse. Despite some Presidential Candidates saying they will kill off the Fed Dept of Education, I’ll believe it when I see it. Departments rarely go away, and when they do, someone else usually picks up what they were doing and just the name changes…

Believe it or not, “Stupidity Studies” is a part of Economics:

https://en.wikipedia.org/wiki/Carlo_M._Cipolla

Carlo M. Cipolla (August 15, 1922 – September 5, 2000) was an Italian economic historian. He was born in Pavia, where he got his academic degree in 1944.

Biography

As a young man, Cipolla wanted to teach history and philosophy in an Italian high school, and therefore enrolled at the political science faculty at Pavia University. While a student there, thanks to professor Franco Borlandi, a specialist in Medieval economic history, he discovered his passion for economic history. Subsequently he studied at the Sorbonne and the London School of Economics.

Cipolla obtained his first teaching post in economic history in Catania at the age of 27. This was to be the first stop in a long academic career in Italy (Venice, Turin, Pavia, Scuola Normale Superiore di Pisa and Fiesole) and abroad. In 1953 Cipolla left for the United States as a Fulbright fellow and in 1957 became a visiting professor at the University of California, Berkeley. Two years later he obtained a full professorship.

Humorous essays

Cipolla produced two tongue-in-cheek essays on economics, circulated (in English) among friends in 1973 and 1976, then published in 1988 (in Italian) under the title Allegro ma non troppo (“Forward, but not too fast”, “Happy but not too much”, from the musical, “Quickly, but not too quick”).

The first essay, The role of spices (and black pepper in particular) in Medieval Economic Development, traces the curious correlation between spice import and population expansion in the late Middle Ages, postulating a causation due to a supposed aphrodisiac effect of black pepper.

The second essay, The Basic Laws of Human Stupidity, explores the controversial subject of stupidity.
Stupid people are seen as a group, more powerful by far than major organizations such as the Mafia and the industrial complex, which without regulations, leaders or manifesto nonetheless manages to operate to great effect and with incredible coordination.

These are Cipolla’s five fundamental laws of stupidity:

1. Always and inevitably everyone underestimates the number of stupid individuals in circulation.

2. The probability that a certain person (will) be stupid is independent of any other characteristic of that person.

3. A stupid person is a person who causes losses to another person or to a group of persons while himself deriving no gain and even possibly incurring losses.

4. Non-stupid people always underestimate the damaging power of stupid individuals. In particular non-stupid people constantly forget that at all times and places and under any circumstances to deal and/or associate with stupid people always turns out to be a costly mistake.

5. A stupid person is the most dangerous type of person.

Corollary: a stupid person is more dangerous than a pillager.

As is evident from the third law, Cipolla identifies two factors to consider when exploring human behaviour:

Benefits and losses that an individual causes to him or herself.
Benefits and losses that an individual causes to others.

By creating a graph with the first factor on the x-axis and the second on the y-axis, we obtain four groups of people, with an additional category either existing in its own right or drawn from the members of each previous category whose position with respect to both axes is least extreme:

Intelligent people (top right), who contribute to society and who leverage their contributions into reciprocal benefits
Naive people (top left), who contribute to society but are taken advantage of by it (and especially by the “bandit” [q.v.] sector of it); note, however, that extreme altruists and pacifists may willingly and consciously (rather than “naive[ly]”) accept a place in this category for moral or ethical reasons
Bandits (bottom right), who pursue their own self-interest even when doing so poses a net detriment to societal welfare
Stupid people (bottom left), whose efforts are counterproductive to both their and others’ interests
Helpless/ineffectual people (center)

Cipolla further refines his definition of “bandits” and “naive people” by noting that members of these groups can either add to or detract from the general welfare, depending on the relative gains (or losses) that they cause themselves and society. A bandit may enrich himself more or less than he impoverishes society, and a naive person may enrich society more or less than he impoverishes himself and/or allows himself to be impoverished. Graphically, this idea is represented by a line of slope -1, which bisects the second and fourth quadrants and intersects the y-axis at the origin. The naive people to the left of this line are thus “semi-stupid” because their conduct creates/allows a net drain of societal welfare; some bandits may fit this description as well, although many bandits such as sociopaths, psychopaths, and non-pathological “jerks” and amoralists may act with full knowledge of the net negative consequences to a society that they neither identify with nor care about.

Distribution of Stupid vs Intelligent vs...  and their economic contribution

Distribution of Stupid vs Intelligent vs… and their economic contribution

To the right side, productivity for self, to the left, loss.
To the top, productivity for others, to the bottom, loss.

The classical “maker vs taker” expanded a bit. Upper right are the intelligent Makers who increase real wealth for all. To the upper left, those who are not yet able, such as children or others who take more than they make, but not from malice or stupidity. To the bottom right, the classical Villains of the left. Rapacious bankers, industrialists shitting on your land to increase their wealth, etc.

But what is most interesting is that classical view ignores the bottom left. What Cipolla shows, is that they are more damaging than the bandits. They impoverish both others AND themselves. When Greenpeace shuts down a coal plant in England, their lights go out too…

Now my corollary to Cipolla is simply this:

Government is dominated by Stupid.

Folks don’t get fired. It never “goes out of business” for doing something stupid. The folks running it get there via a Liars Popularity Contest, not any actual wealth building skill or economic understanding. The Stupid, it grows…

Private Enterprise is naturally self pruning. While it has some “bandits”, it has more “intelligent” wealth creators. At core, it is an enforced meritocracy, (though sometimes takes a lot longer than expected to manifest… look at Yahoo…)

IMHO, that explains much of the current Global Malaise.

Globally, Government has consumed the Real Economy productive capacity / growth. The “fix” they propose is Yet More Government Spending… which will increase GDP, but not improve the economy. So The Stupid keep doing that, and drive us ever further into debt and stagflation.

The only real answer is to reduce the size of Government, and with it the Power Of Stupid and move all of us, collectively, from lower left to upper right as the Stupid have less control of resources and economic direction while the competitive space prunes for the Intelligent to run private enterprises.

Bandits? Yes, there will always be Bandits. That’s what anti-trust and fraud laws are for…

So there you have it. And why I could not fit it into a snappy reply a year ago in an off topic discussion.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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27 Responses to GDP, Government Growth, And The Incredible Power Of Stupid

  1. philjourdan says:

    The only real answer is to reduce the size of Government, and with it the Power Of Stupid

    That should be printed on the top of every ballot – but the politicians would never allow it. They thrive on stupid.

  2. JP Miller says:

    In short, that’s why I am a lbertarian (small “l”). Nice essay, EM.

  3. Ian W says:

    I have a hypothesis that if the number of government regulations were to be graphed against the 10 year ex-Government GDP it might well show an inverse relationship. The power of stupid indeed.

  4. Terry Jay says:

    Economic growth will be inverse to the number of pages in the Federal Register.

  5. Larry Ledwick says:

    It is not only government but any large organization that tends to creep toward stupid. I think it is mostly a manifestation of the peter principle aggravated by any system that tends to create tenure for senior employees. That means the the smart, creative ambitious employees tend to move on to other jobs leaving behind the less ambitious some of which are smart and creative but just not interested in moving and some who are truly stupid and can’t make the cut to get hired in their current level at a new company. Over time that tends to concentrate the employee population at the top with the stupid, limited foresight, afraid to move (or those who’s only ambition is to climb this one ladder).

    That is why I left the State, I got overwhelmed by the stupid and ladder climbers who did not care how much damage they did to the organization and or the interests of the people we were supposedly serving. I figured it was a better professional move to walk away than to strangle someone or have a stroke/heart attack at my desk from dealing with all the “game of thrones” political crap by the ladder climbers.

    They successfully drove out almost everyone who was interested in doing their job for the benefit of the people.

  6. Graeme No.3 says:

    A great article. Back in 1958 C. Northcote Parkinson (in The Law and the Profits) calculated that when the government took more than 36% of the GDP that the economy suffered and as the Govt. take rose there would be stagnation. The problem is that as the tax share rises the real economy switches to ‘black money’ which I observed in 1977 in Sweden. This makes any calculation very difficult.

    E.M.S. if you don’t have a copy of this book and would like one, e-mail me a suitable drop point and I will mail you a copy. I think you will enjoy it.

  7. Serioso says:

    While I must say that it’s very nice to see my commentary given new life, you still haven’t answered (or even addressed) my question, which is why income tax revenues declined as a percentage of GDP following the Reagan tax rate cuts. That is what the Laffer curve would predict if we were on the tax-heavy side of the peak, which, as I noted, Laffer himself says we are not. I take it you think you know better than Laffer. I think the data say otherwise.

  8. M Simon says:

    Taxing and Spending? How about regulating. A hidden tax. Getting rid of 90% of air pollution is a good. Getting rid of 99% may be good. Getting rid of 99.9% may not be much of a gain. Getting rid of 99.99% is expense with negative return.

    Case in point – we got the lead out of electronic solders and now our electronics have reliability problems from tin whiskers. For high reliability devices – lead is still allowed. Heart pacemakers is one. Getting lead out of paint and gasoline was a net gain. Taking it out of electronic solder was a net loss.

  9. M Simon says:

    That is what the Laffer curve would predict if we were on the tax-heavy side of the peak, which, as I noted, Laffer himself says we are not.

    Reality knows better than both you and Laffer.

  10. M Simon says:

    Then there is the classic ins vs outs problem. Let us take cannabinoid medicine as an example. Suppose when fully implemented it reduced medical costs by 25%. Would that be a gain or a loss? Well the medical establishment might see it as a loss. GDP would see it as a loss. People might see it as a gain.

    One example: suppose cannabinoid medicine lowered the cost of curing some (all?) cancers to a few hundred dollars (not counting diagnostics) vs tens to hundreds of thousands. Are we ahead or behind? The people not dying of cancer (or burdened by the expense) might see it as a gain. GDP would see it as a loss.

    And thus you have Big Pharma as one of the big supporters of “Drug Free America” They have only your best interests at heart. Just ask their accountants.

    http://www.cureyourowncancer.org/dennis-hills-story-beating-prostate-cancer-with-cannabis-oil.html

    The Human Endocannabinoid System Meets the Inflammatory Cytokine Cascade
    http://www.whale.to/a/human5.html

  11. cdquarles says:

    I note that none of these folk *ever* understand what the Austrian school teaches about human action. I also note that no one *ever* considers ‘regulations’ as taxes. I do understand why government spending gets added back, since the government took purchasing power out of the economy via taxes and regulations (redundant).

    As an aside, trying to mathematize economics has been nothing but evil, in my opinion. There is no such thing as an inflation rate. There is such a thing as an inflationary expectation. Governments monkeying with money (and credit *is* a form of money) fuels it.

  12. M Simon says:

    We are at the bottom of a Kondratieff Cycle. The ins vs the outs is quite obvious. Think of all the impediments the horse and buggy people put in the way of the automobile when that technological change was underway.

  13. cdquarles says:

    @ M Simon,

    I think you’re wrong about ‘Big Pharma’ when it comes to cannabinoids (which are tainted by the government sponsored ‘studies’ used to maintain fear. Drugs are not bad. People doing bad things with them is. Back to my point, Big Pharma would take the base chemicals and systematically modify them to change the side effect profile so more people would be able to benefit from them.

    [Chemist/pharmacologist/toxicologist talk: Dose and route make the medicine and dose and route make the poison. One man’s poison is another man’s cure. Since we are talking chemistry, dilution *is* the solution to pollution (though I wish people would define terms).]

  14. E.M.Smith says:

    @Serioso:

    Because it is a Mu! question.

    The Laffer Curve is about revenue not revenue as a percent of GDP, for starters.

    http://www.laffercenter.com/the-laffer-center-2/the-laffer-curve/

    The Laffer Curve

    The Laffer Curve is one of the main theoretical constructs of supply-side economics, and is often used as a shorthand to sum up the entire pro-growth world view of supply-side economics. However, the Laffer Curve itself simply illustrates the tradeoff between tax rates and the total tax revenues actually collected by the government.

    So as soon as you conjoin it with GDP you bring in ALL those other loose ends and definitional issues. Then, furthermore, you miss the whole point of the Laffer Curve that it is dynamic scored per economic growth. You get more revenue because GDP increased.

    As drawn, the Laffer Curve shows that at a tax rate of 0%, the government would collect no tax revenue, just as it would collect no tax revenue at a tax rate of 100% because no one would be willing to work for an after-tax wage of zero. The reason for this is that tax rates have two effects on revenues: one is arithmetic, the other economic. The arithmetic effect is static, meaning that if rates are lowered, the tax revenues per dollar of tax base will be lowered by the amount of the decrease in the rate, and vice versa for increasing tax rates. In other words, this is what happens when a hypothetical 1% tax collects $1 million, so people assume that a 2% tax would collect $2 million… and a 5% tax would collect $5 million. Likewise, under the same scenario people would similarly assume that a .5% tax rate reduction would collect only $500,000.

    The economic effect recognizes the positive impact that lower tax rates have on work, output, and employment, which provide incentives to increase these activities.
    By contrast, raising tax rates penalizes people for engaging in these activities. The Laffer Curve demonstrates what happens when the economic and arithmetic effects collide, explaining why a tax increase may reduce taxed activity and raise less revenue than otherwise predicted, just as a tax cut may increase taxed activity and raise more revenue than otherwise predicted.

    Importantly, the Laffer Curve does not say whether a tax cut will raise or lower revenues, nor does it predict that any and all tax rate reductions would necessarily bring in more total revenues. Instead it says that tax rate reductions will always result in a smaller loss in revenues than one would have expected when relying only on the static estimates of the previous tax base. This also means that the higher the starting tax rate, the more dramatic the supply-side stimulus will be from cutting the tax rate. It is possible that this economic effect will swamp the arithmetic effect, causing an actual increase in tax revenue.

    However, the Laffer Curve does not say that “all tax cuts pay for themselves” as many people claim. What is true is that tax rate cuts will always lead to more growth, employment, and income for citizens, which are desirable outcomes leading to greater prosperity and opportunity. There is, after all, more to fiscal policy than simply maximizing government revenue.

    So how do I “address your question” when it is simply put “not even wrong”? You have a nonsensical mushing together of taxes with percentages of GDP. Laffer is about revenue in absolute terms and growth of economic activity in general.

    So the Reagan years had tax cuts, and the economy boomed. That’s just a fact. Revenues went up. How much was it as a percent of GDP? Who cares? It’s not part of the question.

    Under Obama we’ve had nice high taxes, easy Fed Money, and lots of regulations; and the most dead economy in living memory (with no single quarter at all over 3% growth beating all other modern presidents in the ‘last place economy’ award…) Now realize, too, that the 1.x% and 2.x% GDP growth we DID have was heavily weighted by a doubling of the national debt and record Federal Spending so largely consists of Government Expenditures, and you can see why that graph of “near zero GDP Growth ex-Government” matters.

    Your proposed solution is more taxing and more Government Spending and that can only drive to lower absolute revenues, more borrowing / debt, and a greater share of the GDP being Government. (Sort of the whole point of this article. BTW, you might want to read the rest of it…) and at that point, non-Government GDP growth goes negative. It is a bad parasite that kills the host.

  15. E.M.Smith says:

    Just to put some specific numbers on it… Reagan was president from roughly 1981-1989. It did take a year or two for his economic changes (and laws) to be enacted. So below are the ’81 to ’89 numbers. Note that ’82 was a recession year, so ’83 revenues dipped, then the rush hit…

    http://www.taxpolicycenter.org//statistics/federal-receipt-and-outlay-summary

    Receipts 
    Current Dollars   2009 Dollars    %GDP
    
    599.3                   1364.2              19.1
    617.8                   1308.3              18.6
    600.6                   1211.3              17.0         
    666.4                   1285.3              16.9
    734.0                   1366.2              17.2
    769.2                   1401.8              17.0
    854.3                   1513.6              17.9
    909.2                   1558.2              17.6
    991.1                   1635.8              17.8
    

    So % GDP takes a hit from 19.1% down to 16.9, then recovers back to 17.x% and stabilizes.

    Revenue in current $ goes up by about 1.5x from about $600 B to almost $ 1000 B.

    Revenue in constant 2009 $ dips into the recession to $1211 B, then climbs to $1635.8 Billion

    So the next reason you can see why “As %GDP” doesn’t matter (not just the fact that it isn’t the definition) is that nearly nothing happens as a %GDP while actual revenue goes up by about 1.65x or 65% increase (more or less).

    Fully in keeping with the Laffer Curve prediction. A nice big tax cut caused tax revenues to bloom by a huge amount. That’s what it means to be on the wrong side of the Laffer Curve and cut tax rates and get more revenue.

    The GDP grew a lot, so the %GDP held pretty much static at 17ish from $600.6 B revenue to $991.1 Billion revenue.

    If you want to get into that whole “deflator” issue, you can do the same comparison with the “constant 2009 $” and find it’s “only” about a 21% growth, so there is a fairly strong inflation number used in the deflator. (Those were very high inflation years and Volker IIRC had to jump The Fed up to something like 16% interest rates. I bought some ‘strips’ when it was clear rates were going to tumble in about the middle somewhere and made out like a bandit ;-)

    So, in summary:

    The real question of Laffer Curve is “Did REVENUE rise with a tax cut?” And it did, nicely. The Deflator issues is present, but even in real $ the REVENUE rose as the economy grew gangbusters. As a %GDP, revenue was about static, as that’s what is fully to be expected since the whole point of the Laffer Curve is that it causes increased economic activity to raise revenue from a lower rate.

    As per what Laffer thinks of which side of the peak we are on: That just needs its own long list of specifics. When did he say it? About which economy? In what context? etc. etc. Basically, I don’t “debate” with assertions without context. IMHO, the Reagan Years showed we were on the “less rate is more tax revenue” side, then. For a while after that we were OK, but now are well back into too high a tax rate territory and way too much debt / spending (that is a stealth tax not showing up in the tax rate numbers…) So that needs to convert to an “effective tax rate” by including the impact of huge deficit spending, unfunded liability, etc. etc. coupled with massive money printing. IMHO that real effective tax rate is way to the wrong side of the Laffer Curve Peak and it is demonstrated by the strong decay of Private Sector Growth as %GDP in Real Terms. Which, you will note in the above graph, shot up in most of the Reagan Years, took a dip at the end, then has been in steady decline through all of the Clinton, Bush, etc. years as they spent like crazy on the credit card and went back to raising tax rates.

  16. What is taxed and the rate at which it is taxed has obvious consequences. The Amsterdam property tax based on the width facing the street led to very narrow houses, and the window tax produced houses with very few windows. If you want something to be happen less (see alcohol, tobacco etc.) then you tax it more. People adjust what they do to pay less taxes, and when they adjust then the tax take goes down and so the tax laws change again to something that has not been as heavily taxed before. The Laffer curve simply formalises something that we all know qualitatively and allows some quantitative calculations.

    Tax production and production will go down, and the same happens with jobs. Governments must know this in principle, after all when they want something to be taken up (such as solar panels or house insulation) they give subsidies and when they want less CO2 to be produced then they impose a Carbon tax.

    Countries such as Ireland attract businesses by having a low corporation tax. Hong Kong had such a vibrant business because some enlightened British Civil Servant set the maximum tax-rate at 10%, so businesses there had a lot more money to re-invest in growing their businesses rather than giving it to the government.

    The GDP calculation does seem to have a lot of fudge involved. I find it pretty unbelievable. What’s maybe more useful is how many hours the average worker has to work to get enough to live to a “reasonable” standard. Money is after all an analogue of man-hours, and what we pay for something reflects the number of man-hours involved in making it (why automation will take over as and when it becomes possible). Tax, in this analogue, is what proportion of your time you spend working without profiting from it. At 10% tax, it’s not worth the risk of avoiding it, but as the tax rate gets higher then it becomes more worthwhile paying clever accountants to find a way around it. The result at the moment is that the über-rich tend to pay less in real terms than the average worker, at least to the government – their accountant’s bills will be pretty high. Calculating what the real proportion of the average producer’s time is spent working for the government is difficult, since a lot of the taxes tend to be hidden. I suspect it’s somewhere over the 60% range for the makers in both Europe and the USA (a lot of the workers work for government or non-manufacturing jobs one way or another so though they may be working hard they aren’t actually making goods to sell). Very obviously the wrong side of the Laffer curve, therefore, and a reduction in tax rates would stimulate productivity and thus collect more tax than currently. A sudden increase in productivity in one country, though, requires them to find customers to sell it to in other countries, leading to job-losses in those countries and thus fewer people being able to afford to buy them after a while.

    Also fairly obviously a further increase in taxes will push the makers into Going Galt and a decrease in goods produced, real wealth and tax revenue.

    Some people may challenge the 60% figure I gave. Yep, it’s a bit of a guesstimate, but it could also be a lot higher than that. These days, if I took my car to the garage to get it fixed I’d be charged around 10 times the cost per hour than the mechanics who do the job actually take home after taxes and deductions. When I was at Xerox, my charge-out rate was around 11 times my rate per hour and around 15 times what I took home – yep, they probably added a fair profit on that over what it cost them. Still, I encounter that ~10x rate quite a bit which implies that the real tax rate may be up to 90%, and that makers thus probably work 90% of their time for *someone else*. Worth thinking about, though I can’t really provide more than qualitative feelings about the disparities. Actual productivity per hour these days is very high, but the majority seems to get swallowed in the system. Unless you can find more consumers (who can pay you), though, there’s no real point in making more goods.

  17. Larry Ledwick says:

    60% is just about right when you add up all the various forms of tax.
    Federal income tax, state income tax, sales tax on everything you buy, excise taxes on some things you buy, property tax on property owned (or hidden the fraction of costs of goods and services required to pay the sellers property taxes). Taxes masquerading as fees (car registration, license tags, recycling fees on old tires and batteries, health insurance buy it or pay a tax penalty, fees on cell phones so the government can subsidize other people cell phones, mandatory social security taxes – which you or your family may never collect or get any benefit from if you have the bad luck to die early, inheritance taxes ). Even more insidious is that much of your income is taxed several times, at multiple locations and times. You take a cut off the top for things like social security out of your pocket plus your employer pays an equal cut (which otherwise he could pay you), then the government levies the basic income tax, the the money that is left over at take home pay is taxed again at sales tax rates.
    When I do a detailed list of all those my numbers come out to about 55% here in the US and I am sure I am missing some hidden fees/taxes.

    Here in the US a professional earning 100,000 a year pays 6.2% ss tax, and so does the employer (ie 12.4% of total payroll cost of the employee), then gets to pay 28% on the taxable remainder, then here in Colorado we pay an 4.63% to the state, then all the remaining cash with very minor exceptions gets taxed at about 7% in sales taxes in most jurisdictions plus hidden fees.
    12.4+28+4.63+7 = 52.03
    That is just what I can easily document on the funds paid for gasoline you pay a much higher federal and state excise tax than the normal sales tax.

    If you don’t own a home, have huge medical bills or otherwise qualify for a deduction on taxes your net total taxation is easily over 50% and probably closer to 60% if you could tabulate all the little bites taken from your purchasing power. Unfortunately this tax burden falls almost entirely on the middle income producers who are most productive. The lower 50% of the income brackets pay essentially no Federal and State income taxes and only get hit with the sales and excise taxes and hidden fees. The very rich who work to minimize taxes thanks to their financial leverage can in most cases lower their net federal tax rate to compare to a low payed worker.

  18. A small point to add since I find it amusing…. In the UK there is a popular movement to tax the banks, tax Starbucks, tax Google, tax Apple etc.. What seems to be missed is that this would increase the cost of banking (you think they’re going to swallow the charges and reduce their own bonuses and pay?), the cost of a coffee, put more ads on the screen (thus raising the end cost of the goods advertised), increase the cost of the already-premium boxes Apple sells etc….. Sure, the government _might_ reduce the direct taxes on people because they’re getting more from the companies (but it’s more likely they’ll find something else to spend that extra income on), but that zero-sum game is the most benign option.

    Meantime, Larry, each time you’re taxed it’s on what’s left after the last tax, so you can’t just add percentage points but have to multiply them. On the other hand, the companies that make the stuff you buy have to pay taxes which add to the cost of the ex-factory item. In the retail chain this is multiplied by a factor of 4-8 to give the retail cost that you then pay, and each step of the retail chain puts the cost up a bit more than basic profit because they have to pay tax on it… ends up as a lot of hidden taxes. Another hidden tax is inflation, which erodes the money you have in the bank (use it or lose it). And of course if you happen to die with some saved money, yep it’ll get taxed. If you have real estate, then it’s obvious you have value that can be taxed, which is maybe why Gold, and other precious things that can easily be hidden away from prying eyes, is perennially popular with the rich.

  19. E.M.Smith says:

    Yeah, I did kind of gloss over that whole “Cost Of Goods Sold” being partly taxes… a large part… so when C consumption has $1000 item in it, really about $500 of that is various levels of fees, taxes, etc. It gets captured / accounted in total G Government expenditures, but then you have a double accounting as it shows up in both… Part of what’s wrong with using GDP…

    IMHO (and without enough proof) that is why “no government long survives once taxes are 50%”. Because at that point, the part of C that is indirect tax starts to hit 50% too and you really are nearer 75% than 50% and… the spiral decent into hell begins…

    And that, also IMHO, is why “real” (inflation adjusted so some accounting of the inflation tax) GDP-ex-Government (so you’ve subtracted that part that is spent by the government, however they got it) shows a more accurate state of affairs. And right now, ti’s about zilch.

    And that is why if G increases another 2%, it will make rGDP-exG growth negative and it all falls down… because either taken as direct taxes, or inflation, or indirect stealth taxes via corporate levy; it will make shrink, not growth. Once shrink begins, the G part doesn’t shrink and becomes an increasingly dominant part of the formula (showed examples of that in an earlier post using real economies… probably ought to find a link… IIRC it was Greece or Spain… G held constant but as C plummeted, the Debt as % of GDP skyrocketed and shoved them into debtors prison…)

    We are teetering on the edge of that now, with Debt/GDP too high (still recoverable, barely) and unfunded liabilities now impossible to meet; with tax (as rate or total take) on the edge of ‘declining revenue with increasing tax rates’ and an unrecoverable spiral of more going to the already unmanageable debt level, Private Enterprise packing up and leaving, and no “middle class” money to support the C going forward. Not a whole lot more and that spiral starts the unwind of the US Economy and all those loverly Senator Portfolios and Congress Critter Portfolios and Presidential Pensions become fond memories…

    The Fed barely managed to stop the implosion with several $Trillion of emergency tap dancing, but now the music is slowed, the band is packing up, and the taps are worn out. They simply can’t stop dancing, but they can’t toss another $4 Trillion or so at things either. And GM announced Cadillac sales down something like 15% … Cue the Fat Lady, her number is about to begin and she is wanted on stage…

    Still (barely) time to fix it, IMHO; but not as long as the Modern Monetary Theory folks are in charge and the Dimocrats and Republicrims are running the show… The really GOOD news is that Greece, Spain, (several others), and Puerto Rico are “going there” first, and with luck it will scare the poop out of TPTB enough they will realize it didn’t work as expected… The UK might dodge it too, if they bail for the EU in a big June Brexit.

    If not, I’d put the EU as first down the chute (southern parts first) and followed by their dependent states all over “The 3rd World”, then China on the rocks as demand falls away (already started with sales figures down and layoffs being done) and finally the USA / Canada / Australia when everyone they sell to is “out to lunch”. Massive money printing driving all the currencies to dust, and folks just finding ways to bail.

    I do think there’s still time to dodge that. But it will require “facts not in evidence” about the ability of our leaders to: a) Have Clue about how the real economy works and abandon their fantasies. b) Use it, despite the fact they have to give up some of their ill gotten gains. i.e. move from the “stupid” and “bandit” quadrants to the “upper right”… Like I said, facts not in evidence… I doubt they can do that.

  20. M Simon says:

    cdquarles 3 May 2016 at 5:51 am

    Big Pharma will never be able to “fix” cannabis. The receptors are the receptors. Second is the “entourage effect” mixtures of cannabinoids are synergistic. The cheapest way to make the mixtures for what ails you is selective breeding.

    Third: the American economy depends on Prohibition to balance the books. A bit I wrote on that:
    https://hotgas.net/2016/04/trillion-dollar-drug-war-scam/

    I have a piece on cannabinoid medicine coming out there in the next few days. You might want to watch for it.

  21. cdquarles says:

    And the receptors are chemicals, so, yes, they *can* fix them. That’s exactly what modifying the base chemical does to alter the side effect profile. I have a chemistry background, so pardon me if I prefer refined and defined chemical mixtures over a ‘who knows’ any day.

    How in the heck could Prohibition balance the books? I will look at your link, for I do agree that Prohibition is more evil than the direct misuse of drugs. Yeah, I think Abraham Lincoln had something to say about criminalizing vices (as did Ayn Rand).

    Interesting link. Some of it I agree with and some of it I don’t. Spies have been using intoxicants and honeypots forever, in terms of human governmental history.

  22. M Simon says:

    cdquarles 3 May 2016 at 5:51 am –

    Yes. Dose makes the poison. DEA Judge Young estimated (in 1988) that the lethal dose for cannabis was 40,000 lbs smoked in 15 minutes. Now that was maybe 10% THC. So if the cannabis was 100% it would be 4,000 lbs in 15 minutes.

    I have seen numbers for pure THC since which estimate 10 to 100 grams would be lethal. Minimum effective psychoactive dose is on the order of 5 mg. So 2,000 to 20,000 times the minimum dose. I have read of cancer cures that suggest a gram a day. So you are still at least 10X away from a lethal dose. And the suggestion is to work your way up to the 1 g a day level.

    Judge Young said cannabis was one of the least toxic medicines known to man. That is probably still true.

  23. M Simon says:

    cdquarles 3 May 2016 at 11:46 pm

    It is no longer “who knows?” – There are companies that will provide assays. At least two that I’m familiar with. Probably more. It is why when you go to a medical cannabis store they have so many strains. The underground has done significant work to find out what works.

  24. E.M.Smith says:

    Since M. Simon has decided to turn this into a cannabis thread too, and since I’ve also sat on a bunch of his (off topic) cannabis comments on Yet Another Thread, and since I’ve not managed (despite my best efforts) to get a decent Cannabis Summary posting up, I’ll just post those older O.T. comments here and at least get the “moderation queue” a bit more serviced… ( I guess it is impossible to exepect folks to be disciplined enough to keep at least near, if not on, a particular topic when they have a hot button…)

    Without further comment:

    Originally posted to:
    https://chiefio.wordpress.com/2015/02/03/fox-and-cnn-to-some-extent-on-the-wrong-side-of-vaccination/

    M Simon
    And this will really make you nuts:

    http://healthland.time.com/2011/09/08/marijuana-slims-pot-smoking-linked-to-lower-body-weight/

    If I was to hazard a guess about all this I’d say not enough omega3s in the diet.

    M Simon
    Re: autism

    http://www.autismsupportnetwork.com/news/autism-treatment-marijuana-madness-8763721

    Originally posted to:
    https://chiefio.wordpress.com/2014/12/07/eu-wankers-gone-mad/

    M Simon
    Larry Ledwick says:
    8 December 2014 at 2:12 am

    This is WTF they are smoking. And why.

    http://www.naturalnews.com/046994_cannabis_cancerous_tumors_miracle_baby.html#

    Originally posted to:
    https://chiefio.wordpress.com/2014/10/28/the-present-eu-economic-problem-and-the-incipient-usa-one/

    M Simon

    What the NIH says: Further research and especially, clinical trials will further demonstrate the usefulness of medical cannabis. As legal barriers fall and scientific bias fades this will become more apparent.

    Notice the bit about “scientific bias” heh. I believe I was making that point. Links to that statement and other NIH links at:

    http://classicalvalues.com/2014/11/a-deficiency-disease/

    We use plant medicine ALL the time for deficiency diseases. Vitamin C. And we have learned that the whole plant is more efficacious than a pill. Although the pill can be a booster.

  25. M Simon says:

    Chief,

    The biggest impediment to finding the Truth is “legal barriers”. But there is a tell on what is likely. Big Pharma is a significant backer of cannabis prohibition. Why oppose something that is not a significant threat to the industry? The other big backers are the alcohol (drinking) industry. And that is obvious. Tobacco was also at one time in the mix but got shamed out of it. Because TOBACCO.

    I have an article coming up at another site that runs down some of the potential economic benefits of cannabinoid medicine. The Israelis are already on track – researching a very big medical cost – Alzheimer’s. The results so far – very promising. And they are not the only ones looking into that. The science is pretty solid. Alzheimer’s is an endocannabinoid deficiency disease. That would be $225 billion a year saved if cannabis was totally effective.

    But my point is this – suppose it worked? Suppose it cut medical costs in the US ($2.9 trillion a year) by 25%. Bad for GDP. Suppose it is much better than that and reduced costs by 75%? We would as a nation be officially much poorer. GDP would drop 5% from 25% effectiveness and 15% from 75% effectiveness.

    And another tell – Trump claims he can set our economic house in order. He is 100% for medical cannabis. Maybe he knows something. Medical costs are a bigger hit to the Federal budget than Social Security.

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