Tax Cuts, Unemployment, and Public Debt

An American citizen with an inquiring mind (IM):  Gadfly, in our last conversation (see “The ‘Inherited Economy’ Narrative,” August 16, 2012), we did some analysis regarding causes for the economic problem that President Obama and many others attribute to Bush policies.  In particular, we looked at tax cuts.  I was amazed that with some simple analysis of federal government data, there is no evidence to conclude the tax cuts had a causal effect on annual deficit spending during the Bush era.

Old Gadfly:  I agree, IM.  Nonetheless, how do you respond to those, especially President Obama, who claim, we can’t afford to pay for tax cuts for the wealthy?  And to make it sound even worse, President Obama even claims the tax cuts, that the government cannot afford to give away, led to trillions of dollars that “went to every millionaire and billionaire in the country.”

IM:  Good question, Gadfly.  The answer is simple:  Governments do not generate income—private sector corporations and individuals generate income through labor and investments.  Even those who work for the government, like President Obama, earn an income that is paid for in tax revenue.  To suggest that the government is paying money to millionaires and billionaires completely dismisses the reality that a government is funded by tax revenue--money that is generated by businesses and financial institutions in the private sector. 

Old Gadfly:  If the Bush tax cuts cannot be blamed on the government spending deficits and growing public debt, then are there other explanations?

IM:  Yes.  Contrary to the public narrative, there is strong evidence to support the claim that rising unemployment rates corresponded with decreasing tax revenue per capita.  In fact, after our conversation, I ran a Pearson correlation statistical test and found a strong negative correlation.  The correlation coefficient was r = -.67 with a probability of error at p < .0001.

Old Gadfly:  That is impressive, IM.  So at this point, we can reasonably conclude the decline in tax revenues was due to rising unemployment and not Bush tax cuts.

IM:  That is correct.  Now, in our last conversation, I also suggested debt was another factor contributing to the poor health of our economy.  Since then, I think the focus of our analysis should be the amount of government spending.

Old Gadfly:  How can we analyze government spending as a factor related to the health of our economy?

IM:  In preparation for today’s conversation, I already conducted more analysis.  For this phase in our analysis, I collected public domain data on annual federal government spending listed as outlays and annual surplus/deficits between 1987 and 2011.  This data was in Table 1.1 in the Fiscal Year 2013 Budget of the U.S. Government Historical Tables from the Office of Management and Budget.  I used the same unemployment data from the Department of Labor’s Bureau of Labor Statistics.

Old Gadfly:  What did you discover?

IM:  The graph (see below) shows a comparison between annual unemployment rates and annual surpluses or deficits.  The left vertical axis represents surpluses or deficits, and the right vertical axis represents unemployment rates, on an inverted scale. 

Old Gadfly:  The graph shows another obvious correspondence.  How would you describe the dynamics of the relationship?

IM:  The graph clearly indicates that, assuming all things being equal, if unemployment increases, so will government spending deficits.  To the contrary, as unemployment decreases, so do spending deficits.  I also ran a Pearson correlation statistical test with these two variables and found an even stronger negative correlation.  The correlation coefficient was r = -.93 with a probability of errors at p < .0001.

Old Gadfly:  Help me to understand something.  President Obama says that his Administration has created 4.5 million jobs in the private sector in the past 29 months (see the graph below).  That sounds like an achievement.  And it seems to correspond with the slight reduction in deficit spending between 2010 and 2011.

 

IM:  All I can say is the Obama-Biden campaign graph is a classic example of “Lies, Damned Lies, and Statistics.”

Old Gadfly:  Why do you make such a claim?

IM:  Because I have looked into the data from the Bureau of Labor Statistics and arrived at a completely different picture of reality.

Old Gadfly:  IM, you are impressing me with the quality of your sense of discernment (see Gadfly Corner article, Cogito Ergo Sum, August 9, 2012).  Tell me more about your analysis.

IM:  Since 1977, the lowest unemployment rate was 4.0% in 2000.  The public narrative does not credit six years of a Republican-led Congress that insisted upon balancing the federal budget and welfare reform that moved many unemployed individuals into the workforce.  As we have already discussed, the dot.com bubble burst and other factors led to a recession with rising annual unemployment rates of 4.7%, 5.8%, and 6.0% for the years 2001, 2002, and 2003, respectively.  Also, recall in our discussion on August 16, 2012 (see “The ‘Inherited Economy’ Narrative”), we discussed how the Bush Administration called for income tax and capital gains tax cuts across the board (not just for the wealthy).  Consequently, in 2004, unemployment rates began to improve:  5.5% in 2004, 5.1% in 2005, 4.6% in 2006, and 4.6% in 2007.  The resulting improved unemployment rates had two beneficial effects:  an increase in individual tax revenues generated (see “The ‘Inherited Economy’ Narrative,” August 16, 2012) and a reduction in federal spending deficits.

Old Gadfly:  I still do not see why you refer to the Obama-Biden claim as “Lies, Damned Lies, and Statistics.”

IM:  Let’s take a look at the raw data from the Bureau of Labor Statistics.  There are certain data points we should consider:  2003, 2007, 2008, 2009, 2010, and 2011. 

·         The year 2003 is important because it represents the peak of the recession President Bush inherited. 

·         The year 2007 is important because the Democrat Party gained significant majorities in both Houses of Congress. 

·         The year 2008 represents President Bush’s last year in office.

·         Starting with the year 2009, the Democrat Party controlled the Executive and Legislative branches of government. 

·         The year 2010 is important because it was the last year the Democrat Party controlled the White House and both Houses of Congress. 

·         Finally, the year 2011 is important because this represents the year the Republican Party took control of the House of Representatives.

To simplify the discussion, I created a chart to demonstrate what actually happened regarding jobs lost and gained during the years mentioned above.

  

Old Gadfly:  What do you conclude from this data?

IM:  First of all, I cannot determine how the claim 4.5 million jobs created comes from.  An old friend of mine once told me that the Mayor of Phoenix boasted about the large population increases taking place during his tenure in office; but, what he failed to tell the public is that for every five people that moved to Phoenix, three moved away.  I think this may be a good analogy.  Somehow the Obama Administration seems to count new jobs gained, but does not count jobs lost.  Secondly, if you simply calculate the net jobs gained or lost between Bush’s last year in office from the number employed at the end of 2011, the number is 5,493,000 fewer Americans employed in the private sector.  This is a significant loss of jobs, not a gain.  Now, if you use the Bureau of Labor Statistics figure for the number employed in July 2012 (which does not reflect what will be reported as the annual unemployment rate for the entire year 2012), the number employed is 142,220,000.  This calculation still represents a net loss of 3,142,000 jobs between the end of 2008 and the end of July 2012.  A net loss of over 3 million jobs is not what the Obama Administration wants to admit.  Thus, they advance lies and damned lies under the cloak of manufactured statistics.

Old Gadfly:  But when the Obama-Biden campaign claims 4.5 million jobs in the past 29 months, it looks like they don’t want us to look at the number employed after Obama’s first year in office.  By using the end of 2010 figure of 139,064,000 employed and the July 2012 figure of 142,220,000, there seems to be a net gain of 3,156,000 employees.

IM:  I agree.  So, even if you manipulate the numbers this way, the Obama-Biden campaign claim is still over 1.3 million more than what the actual data reveals.  Quite frankly, for two years, President Bush had to contend with a hostile, anti-business Democrat Congress.  So, it is disingenuous to disregard data earlier than 2010.  Also disingenuous is the manner in which the Obama Administration plays down the growth in federal sector jobs.  In their recent budget, the Administration admits to a “slight increase” in nonmilitary federal jobs, from 1.9 million in 2008 to 2.1 million in 2010, explained on p. 9 of the Historical Budget Tables for 2012.  This “slight increase” represents a 10.5% expansion of federal government jobs, when unemployment rates in the private sector have ranged from 8.2% to nearly 10%.

Old Gadfly: I see what you mean.  So far, we have talked about tax cuts and unemployment rates in relation to government spending deficits.  Do you have any insights on other factors that explain how the deficits contributed to our public debt?

IM:  Absolutely.  The most significant factor is government spending.  Keep in mind that while the Constitution requires Congress to pass a government budget, there has been no congressionally approved budget during President Obama’s tenure, even with a Democrat-controlled Congress.  My next chart depicts government spending (left vertical scale) between 1987 and 2011 in constant 2011 dollars.  The right vertical scale reflects spending for human resources (i.e., entitlements controlled by the Department of Health and Human Services) and defense (Department of Defense).  As you can see, entitlement spending has risen significantly and clearly accounts for the lion’s share of extra government spending.

    

Old Gadfly:  It looks like most of government spending is linked to entitlements, and in 2011 our government spent approximately 2.5 trillion dollars on these entitlements.  This probably reflects why Niall Ferguson recently (Newsweek, August 19, 2012) said, “Welcome to Obama’s America: nearly half the population is not represented on a taxable return—almost exactly the same proportion that lives in a household where at least one member receives some type of government benefit. We are becoming the 50–50 nation—half of us paying the taxes, the other half receiving the benefits.”

IM:  And in the process of pandering to an entitlement class for political purposes, the Obama Administration has put our nation at grave risk.  When accounting for inflation, the Bush Administration added 3.08 trillion dollars to the public debt over an eight year period.  In just three years of his first term, President Obama has added 5.04 trillion dollars to the public debt.

Old Gadfly:  So, does your analysis indicate any political party effect on the economy?

IM:  A Republican President with a Republican Congress mitigated the effect of the recession they inherited in 2001.  Yet, I do not recall either the President or any members of Congress complaining about “the recession they inherited.”  They simply collaborated to get our economy back on track by keeping earned income in the private sector to grow jobs.  The charts we’ve discussed clearly reflect the effect of the Democrat worldview that the government controls the economy and must therefore control private sector business through stifling regulation.  This view has not inspired the private sector to invest cash reserves into expanding business and the jobs that would be created in the process.  Despite claims to the contrary, Republicans are not anti-government—they are for limited government.  Perhaps in a future conversation we can discuss how Democrat politicians, in collaboration with a liberal media, shaped a public narrative to demonize President Bush and by affiliation the Republican Party.  I believe the politically manufactured public narrative between 2001 and 2006 accounts for the major shift toward a Democrat Congress in 2007, with some of that momentum carrying over to the presidential campaign in 2008. 

Old Gadfly:  This has been a very enlightening conversation, IM.  But, before we bring it to an end, I must say the most encouraging phase on your graphic discussed in our conversation on August 16 (see “The ‘Inherited Economy’ Narrative”) seems to be during the 1992 to 2000 timeframe.  How would you account for this dynamic?

IM:  I have always read and heard that this good news picture was President Clinton’s handiwork.  But, based on my own critical analysis of the situation, I think President Clinton demonstrated what an excellent surfer he was when he brilliantly anticipated the economic wave being generated by other factors.

Old Gadfly:  This topic seems to be taking us away from today’s theme about tax cuts, unemployment, and public debt.  Why don’t we start our next conversation with your assessment of President Clinton’s economic surfing skills.  Until then, keep in mind that we want our discussion to relate to today’s contest regarding political visions for America.

IM:  That sounds like a good plan, Gadfly.  I also want us to eventually talk about some other topics that we’ve touched upon in our conversations, such as:  a manufactured public narrative, the Center for American Progress’s white paper on Bushonomics, the housing crisis, financial sector deregulation, etc.

Old Gadfly:  Let’s plan on it.  Thank you for the wonderful discussion, IM.  I’m ready for a glass of wine.

The "Inherited Economy" Narrative

An American citizen with an inquiring mind (IM):  Gadfly, I keep hearing one presidential candidate, who happens to be the incumbent, say he wants to “press forward” on his policies.  He also says his opponent wants to return to past policies that got our nation into the trouble he’s trying to fix.  The voter has a choice to stay the current course or to regress.

Old Gadfly:  What is your question?

IM:  For whom should I vote?

Old Gadfly:  Can you not think for yourself?  What do you know about the situation?

IM:  Except for Fox News, the Wall Street Journal, and a small handful of other news sources that seem to try to examine strengths and weaknesses of both candidates, most of the news networks, such as ABC, CBS, NBC, CNN, and MSNBC, and newspapers such as The New York Times, the Los Angeles Times, and The Huffington Post, and magazines such as Time and Newsweek seem pretty comfortable with the incumbent.

Old Gadfly:  Yet, you seem to want a deeper understanding of which candidate has a better grasp on how to handle the economy.  Let’s think through this topic, the economy.  What’s wrong with it?

IM:  I’d say there are two major problems—sustained high unemployment and increasing national debt.

Old Gadfly:  O.K., let’s focus on these problems for now.  What do you think caused these problems?

IM:  According to the prevailing public narrative, Bush policies got us into this mess.  Some people refer to them as Bushonomics.  Even the tax-exempt, nonpartisan think tank, The Center for American Progress, published a white paper on it.  But I found some issues with the paper (I think you and I will have a future conversation on this paper), and when I tried to learn more about the Center at the “About Us” tab, I was a little discouraged about the objectivity of the white paper.  Especially disappointing about the “About Us” description was the part that said, “We develop new policy ideas, critique the policy that stems from conservative values, challenge the media to cover the issues that truly matter, and shape the national debate.”

Old Gadfly:  What’s disappointing about the statement?

IM:  I have two concerns with it.  First, while not all Americans embrace conservative values, as a liberal democracy we preach tolerance of different views, especially if they do not affect my individual liberty.  Otherwise, we sacrifice some freedoms when policymakers impose values that stem from egalitarianism, which infringes upon some individual freedoms to promote equality as an outcome.  Second, challenging the media and shaping the national debate sounds like subtle encouragement of censorship or the unbridled tactic of engineering public sentiment (there will be a future blog on engineering public sentiment).  Also, it is an example of the “framing” you described in your August 9, 2012 blog entry.

Old Gadfly:  I do not disagree with your observations.  But, let’s get back to the economy and start with tax cuts.  Since you are not a Copernican drone (see my inaugural blog posting, "Cogito Ergo Sum," on August 9, 2012, in which I describe this label), I want you to do some analysis.  One of the good things the federal government does is collect data. 

·         Go to the Internet and download the Fiscal Year 2013 Budget of the U.S. Government Historical Tables from the Office of Management and Budget. 

·         Now, go to Table 2.1 for tax revenue generated.  Let’s start building a database for the years 1987 through 2011. 

·         We will want to normalize the data to account for inflation and population growth.  To adjust the revenue data for the years 1987 through 2011 in constant fiscal year 2011 dollars, visit the inflation calculator at the U.S. Department of Labor’s Bureau of Labor Statistics.

·         For population growth, go to the US Census Bureau for the population data.  Unfortunately, there is no single file that captures these data. There are three files:  1900 to 2002, 2003 to 2009, and projections for 2010 and 2011. 

·         Let’s identify the years that top marginal individual income tax rate changes were imposed.  We can get these data from The Tax Policy Center, sponsored by the Urban Institute and The Brookings Institution.

·         Let’s also include maximum long-term capital gains tax rates.  This set of data is also available from the Tax Policy Center, sponsored by the Urban Institute and The Brookings Institution.

·         Finally, collect unemployment data form the Department of Labor’s Bureau of Labor Statistics.

IM:  This seems like a lot to digest.

Old Gadfly:  Let’s just graph what the individual income tax revenue in constant dollars per capita looks like between 1987 and 2011.  Let the left hand axis reflect tax revenue and the right hand axis indicate unemployment rates (inversed for easier comparison).

IM:  The graph (see below) shows increases and decreases.  But, what is striking about the graph is that there seems to be a very close correspondence between employment rates and tax revenue generated.

Old Gadfly:  Since Bush tax cuts, both top marginal tax rates and capital gains rates, are singled out as causing the recession, let’s position them on the graph to see what effect they had on revenue and unemployment rates.

IM:  This is what the graph looks like with tax cut changes.

IM:  Bush took office in 2001.  That year, top marginal tax rates were reduced by 1%.  This change seemed to have no effect on the sharp decline in employment and revenues following the recession stemming from the dot com bubble burst.  Two years later top marginal tax rates were reduced by 3.6% and capital gains tax rates were reduced by less than a percent.  This seems to have slowed the unemployment rate and the loss of tax revenues.  The following year, 2004, capital gains taxes were reduced by 5%.  Unemployment rates improved from 6.0% in 2003 to 4.6% in 2007.  Revenue per capita rose from $3,287 in 2004 to $4,185 in 2007.  However, the year 2007 saw a sharp decline both in employment rates and tax revenue with no tax rate changes.

Old Gadfly:  What happened in 2007?

IM:  I don’t know.

Old Gadfly:  Any changes in Congress?

IM:  From 1994 through 2006, the Republican Party controlled both houses of Congress.  In 2007, the Democrat Party assumed significant majorities in both houses of Congress.

Old Gadfly:  Could political party dominance in Congress have such an impact on employment?  After all, the Democrat Party claims to be the advocate for labor.

IM:  You raise two separate points.  First, political party matters when considering pro- or anti-business sentiment.  Businesses generate jobs in the private sector.  Senator Reid received an 18% rating from the Chamber of Commerce in 2010.  Congresswoman Pelosi received a 0% rating from the Chamber in 2010.  It is safe to say the two Democrat leaders in Congress were not pro-business.  On the other hand, Congressman (now Speaker) Boehner received a 100% rating in 2010.  Your second point regards labor.  To a Democrat, labor means an employee protected by union membership.  Employment, on the other hand, is a broader concept that includes employees that may or may not be affiliated with a union.

Old Gadfly:  According to your graph, there was a reversal of trends for both revenue and unemployment rates in 2010.  Were there any changes to account for this trend?

IM:  There were no tax rate changes, but the Senate lost some seats to Republicans and Republicans gained a significant majority in the House of Representatives.

Old Gadfly:  Your observations seem to align with your inference about political parties and their effect on business in the private sector.  In the final analysis, do your findings prove anything?

IM:  Technically, no.  However, aside from a preponderance of public narrative rhetoric, there is no evidence that Bush tax cuts caused the recession.

Old Gadfly:  Then why does Obama keep saying he inherited a recession caused by Bush policies?

IM:  Perhaps to deflect attention from the real causes.

Old Gadfly:  We covered (and perhaps, in the process, uncovered a more accurate picture) a lot in this conversation.  Let's address the debt issue in our next one.

Cogito Ergo Sum ("I Think, Therefore I Am," Descartes)

What is the rationale for this blog?  The blog presents reflective and analytical articles by Old Gadfly about a world that is becoming increasingly absurd and ripe for catastrophic unintended consequences. 

We inherited libraries and artifacts of great wisdom and methods for scientific inquiry.  We enjoy the conveniences stemming from technology.  Yet, we seem to be losing a collective capacity to reason--to think clearly, to discern the finer qualities of distinction among differences. 

In his 1944 book, The Road to Serfdom, F. A. Hayek warned against the pathologies of political correctness, we currently witness and experience, in his chapter, “The End of Truth.”  Hayek observed that in societies sliding toward, or completely overcome by, totalitarianism, it is not sufficient for citizens to acknowledge (i.e., to tolerate without affirmation or advocacy) values prescribed by the political elite; to the contrary, members of society are expected to spontaneously and emotionally react to anything that challenges or threatens those values.  Have you ever encountered a situation when another person gets angry about something you said?  It happens a lot nowadays.

I realize that many potential readers may be incapable of comprehending the reflection and analysis in these blog entries.  Most of these people are what I call Copernican drones, and some are the product of a public school educational system that spends more time prescribing what to think instead of how to think.   These Copernican drones lack the functional capacity to pollinate the world with enduring ideas based on their own creative thinking or critical analysis.  Nicolaus Copernicus only published one book in his lifetime—On the Revolutions of the Celestial Spheres--and it sparked a scientific revolution.  In the introduction to his book, there is a discussion about Copernicus’s reluctance to officially publish his analysis and theory of the solar system.  He knew that it would receive harsh criticism--not from the few who would take the time to digest his work first hand, but from the “drones among bees” who claim to be experts but only repeat what other drones such as themselves have written in newspapers and magazines (in other words, sound bites such as those we hear on the nightly news, or read in newspapers or magazines like the modern era’s Newsweek). 

Even our academics seem to be losing a capacity for lucidity and depth of reasoning.  Am I incorrect in assuming that academia should be that one sector in our society where knowledge is advanced through reasoning (i.e., spatial reasoning, conscious thought, and language) that takes place in the neocortex of our brains?  Yet, this “neocortex” function of academia is subordinate to a political orientation that derives from what Paul MacLean (in his book, The Triune Brain in Evolution) calls the “paleomammalian complex” portion of our brains where the functions of long-term memory, emotion, and motivation take place.  By the way, this is where political framing originates and resonates.  Frankly, today’s hubristic scholarship is devolving to mere flotsam, drifting on the surface of an immense ocean of potential knowledge.  To cite just one example, read the work of George Lakoff, whose publications represent mostly old wine in new bottles.  The wine in Lakoff’s case is normative—it prescribes a world the way he (and those who subscribe to the same politically correct values) thinks it should be.  Lakoff even claims, in his book Thinking Points:  A Guide for Progressive Framing, that it is the frame that matters—if facts fit, great; if not, then the facts do not matter.  Scholars such as this do not discover the truth; they create it.  You’ll read more about this type of emotionally-grounded thinking in future blog entries.

The blog approaches topics from a gadfly perspective.  Socrates was known by two metaphors:  a gadfly and a midwife.  As a gadfly, Socrates challenged many “truths” of the day that were based on assumptions about reality.  Many assumptions can be myth or fact—true or false.  In today’s political narratives, the frame is more important than actual fact.  This may explain why a prominent national politician can feel safe in encouraging the voting public “to pass it [Obamacare] so you can know what’s in it.” 

Socrates also saw his role as an educator to be similar to the role of a midwife--one who facilitates the birth of grand and noble ideas (that can pollinate the world).  Notice, Socrates did not teach others what to think.  He shaped their ability to think for themselves. 

The blog’s primary objective is to challenge many of today’s narratives, advanced by the political elite (mostly politicians, journalists, and artists from Hollywood who believe life should imitate art).  If, in the process of presenting the reflections and analysis, readers find alternative ways of seeing things through a less distorted lens than the prevailing narrative, then this will be a nice objective as well.  New understandings can liberate us from the chains of our illusions, described so eloquently in the cave allegory in Plato’s The Republic.  Unfortunately, too many of our citizens are complacently content to remain chained to illusions  because they may be reinforced by normative delusions of reality.  This observation includes those who are afraid to test assumptions.  We know who they are.  Some reveal this form of bondage when they say: “let’s agree to disagree.”

Most of the reflection and analysis contained in this blog are based on material in a manuscript (currently being written) entitled, Reflections on the Contest in America.  This blog was created to connect with minds that have the capacity to reason before November 2012.  We live in a perilous time.  If a majority of the self-determining citizens of America do not stem the current drift of our Nation, we will discover the real consequences of our failure as cautioned by Hayek in The Road to Serfdom and documented by Hannah Arendt in her book, The Origins of Totalitarianism.   

Most of the reflections and analysis in future entries to this blog will be presented in the form of a conversation.  Meet our conversationalists:  IM (a fictitious inquiring mind) and Old Gadfly (me).  Old Gadfly encourages your inputs to the conversation.