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View Diary: Tax policy and financial crisis (15 comments)

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    During the 1946-1970 period, when growth was fast and taxes were high, the budget was balanced during peacetime.

    We had a sizable deficit in 1968 because of the Vietnam war.  Johnson put through a tax increase and the defict was wiped out in 1969, despite a raging war.  So fiscal restraint remained in place from the end of WW II until 1970.

    Then came the deficit-loving Republicans Nixon and Ford, the later who ran the highest peacetime deficit in history up to that time.  Carter came in and slashed the deficit.  He also appointed Volcker and gave him the mandate to crush inflation.  He did and Carter lost the election.  Had he been re-elected, the deficit would have been vanquished by the end of his second term; the country would not have expereinced the degree of deindustralization forced by the high interest rates and strong dollar of the 1980's (both the result of Reagan-Bush deficits).  We could have gotten another Democratic Fed chief in 1986 instead of that Randian Alan Greenspan.

    Instead we got two more deficit-loving Republicans in office who broke Ford's record for peacetime deficits.  (And to add insult to injury we got the odious Alan Greenspan).  Clinton comes in and finishes what Carter tried to do (he got two terms and so was able to do it).  Then Bush comes in and we are back to Republican deficits.

    Now I do NOT advocate that Obama worry about the deficit.  I am sick of Democrats fixing things so the Republicans can waltz in and fuck things up again.   He should deal with the crisis and use it to pass his agenda (health care, green jobs and education).  But after he does that he should use the deficit as an excuse to hike taxes on the rich through the roof and to slash the military.
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    I believe you and I agree that we should raise taxes.  But your mechanism is simply wrong.  When the government runs a surplus it's not "sequestering" the money.  It goes to pay down debt, that is, right back into the economy.

    In the linked article I showed that lower taxes on investment DO stimulate most kinds of investment--just not the kind that generates jobs.  This type of investment reflects interest rates (low interest rates stimulate job-creating investment).  

    A good example of how low taxes stimulate non-job-creating investment consider capital gains taxes. They were cut in 1997 and in 2003 and what happened immediately afterward?  Huge increases in capital gains in stocks (after 1997) and in real estate (after 2003) creating enormous asset bubbles.  The collapse of the second of these bubbles has caused our current financial crisis.  Thus we can say that the financial crisis was directly produced by the stimulation of investment caused by tax cuts in 1997 and 2003.  There can be no better example of how tax cuts can stimulate "malinvestment" which was the principal cause of the pre-New Deal depressions.

    Do you think that two "once in a century" bubbles just three years apart "just happened"?  You don't think that the fact that tax changes intended to produce rising asset prices that happened just before the rising asset prices of the bubbles is just a coincidence?  You don't think those tax cuts worked to push stock and housing prices up?  Is this what you are arguing?

    http://www.safehaven.com/...

    •  Wha? (0+ / 0-)

      >During the 1946-1970 period, when growth was fast and taxes were high, the budget was balanced during peacetime.<<br>Twice, both by Eisenhower, both causing short recessions the congress threw money at.

      >Carter came in and slashed the deficit.  He also appointed Volcker and gave him the mandate to crush inflation.<</p>

      I'll bet you weren't trying to live on wages through that one. It was a doozy.

      >You don't think that the fact that tax changes intended to produce rising asset prices that happened just before the rising asset prices of the bubbles is just a coincidence?  You don't think those tax cuts worked to push stock and housing prices up?  Is this what you are arguing?<</p>

      Frankly, no. I think the relentless deregulation of financial markets and Allen Greenspan's maintenance of artificially low interest rates encouraged successive bubbles in first high tech, then housing and, as that burst, in commodities causing our current mess.

      "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

      by johnmorris on Wed Dec 03, 2008 at 06:10:58 PM PST

      [ Parent ]

      •  Huh? (0+ / 0-)

        Here's a graph of deficits/surpluses as a % of GDP.
         http://www.marktaw.com/...

        You can see then huge WW II deficits in the 1940's.  You can see a blip of surplus as tax caused by demobilization and continuation of high FDR's policy of high tax rates on the rich.  Then from about 1950 to 1974 the budget was essentially balanced.  This 24 year period saw the best sustained growth in our nation's history.

        How did deregulation produce the stock market bubble?  Margin levels did not change.  Explain how regulation changes made people buy stock in worthless companies like Pets.com, or drive the NASDAQ to 5000?

        •  The repeal of (0+ / 0-)

          the Glass Steagall act, in 1999, allowed financial companies to merge and commercial banks to issue bonds and broker stock offerings. The resulting glut of Initial Public Offerings was the fundamental cause of the stock explosion. Prior to that, several tiers of deregulation had stimulated the same kind of minor speculative bubbles through the 90's. Greenspan's championing of the bond market led Clinton and Rubin to lean toward stocks for stimulus. People buy what's offered, worthless or not.

          "If I pay a man enough money to buy my car, he'll buy my car." Henry Ford

          by johnmorris on Fri Dec 05, 2008 at 09:21:06 PM PST

          [ Parent ]

          •  New issues (0+ / 0-)

            do not make the prices of established stocks rise.  An IPO craze can cause excessive bullishness in specific market sectors like the 1983 PC boom, the late 1950's 'tronic boom, or the late 1960's "go-go" era.  The larger market is unaffected.  

            This is not what happened in the late 1990's.  The term "tech wreck" is a misnomer used to obscure what really happened.  By the end of the 1990's GE's multiple rise to the ridiculous level of 50!  Fifty times earnings for 118 year old company.  The P/E on the S&P500 reached 30! by the end of the 1990's.  There were no regulations before the New Deal and stocks never got remotely as overvalued as they did in the 1990's.  The market P/E at the 1929 peak was 20, that in 1987 was about 22.  Thirty P/E at a market peak is unprecedented, but then so is a capital gains tax cut in the face of a market P/E over 20.  

            New IPOs cannot make stocks of established companies rise.  How does deregulation cause ordinary people to buy stock in established companies like GE, Microsoft, Walmart and Intel in 1999?  That doesn't make any sense.

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