Supply side economics and tax policy

[bumab]

Originally Posted by Biochemist

The largest element (and really the only one I was talking about) is the impact of a reduction of GDP. This report has the estimated impact of that element at about $500 billion as of the end of 2003. The impact on New York (in terms of direct damage repair) is variously estmated from $60 billion to over $100 billion, depending what one might include.

Good point, I was forgetting that. Ascribing it to the terrorists may be a little misleading (really it was the US's paranoia), but I guess it's not all that unfounded.

Originally Posted by Biochemist

None of the above includes the cost of homeland security outside of New York, or the direct cost of the war itself.

Good. That was my concern.

Originally Posted by Biochemist

I did not intend to suggest that the war is cost effective, but only that the cost of war should be considered in light of the cost of another attack.

A valid point. Thanks for the info.

[Qfwfq]

Originally Posted by Biochemist

I'm not quite sure what you mean, Q. US federal debt is denominated in dollars, and we pay interest in dollars. It is true that the internationaly currency markets will affet the trading prices of US bonds, but the aggregate debt burden remians the same in dollars.

I meant that I was talking about foreign debt which I understood to be the greatest part of that trillion dollars. We all know why they held the US$ low for quite a while!

I also quite agree with Bumab, how do you estimate the cost of 911, or iow the damage it caused? I tend to think the damage was very much inflated, and the estimates of it even more. I think this because I'm not an economist. The economist I agree with is Hume, I say that money is nothing but paper, it only represents actual values, especially as many investments are speculative and not productive. Suppose one day you put a bomb right smack in Wall Street, destroying exactly the NYSE and nothing else, what would you estimate the damage as being?

IMV, in such cases most of the damage to the economy is what people make it to be. That bomb would totally disrupt the system and cause all kinds of consequences even though it hadn't really touched much. What I mean is, most of the consequences are due to how things are organized and the nature of the market based economy, and I consider this to be so concerning 911. It should be a lesson. This is how I see it, now hang me...

[Biochemist]

Originally Posted by Qfwfq

I meant that I was talking about foreign debt which I understood to be the greatest part of that trillion dollars. We all know why they held the US$ low for quite a while!

I must be thick, but I still don't know what you mean, Q.

I also quite agree with Bumab, how do you estimate the cost of 911, or iow the damage it caused? I tend to think the damage was very much inflated

Maybe. But the estimates are reasonable. Did you get a chance to glance at the link that I posted above?

IMV, in such cases most of the damage to the economy is what people make it to be.

This is absolutely true. But this is REAL damage, not theoretical damage. If all US consumers stopped spending completely for three months, it would be an economic crisis. This is not theoretical. Ergo, the impact of consumer behavior on the market is real. The difficulty lies in establishing causality. There is little doubt that the post 9/11 economy was worse than the pre 9/11 economy. The magic is determining how much of that decline was due to 9/11.

This is how I see it, now hang me..

I am much more in favor of floggings. So much more public fervor. And still an opportunity for a repeat performance.

[Qfwfq]

Originally Posted by Biochemist

I must be thick, but I still don't know what you mean, Q.

Hmmmm, surprising. It's a well known monetary policy manoeuvre, that countries have often used for a temporary benefit.

Originally Posted by Biochemist

Maybe. But the estimates are reasonable. Did you get a chance to glance at the link that I posted above?

Uhm, sorry, I didn't look at it because I don't doubt the content being what you said.

Originally Posted by Biochemist

But this is REAL damage, not theoretical damage.

I did not say it's theoretical rather than real. Sure, the impact of consumer behavior on the market is real, and that's a great part of post 911 just like in other times. This time, like the Great Depression, it was triggered by a stock market crash, although the causes of that in '29 were different. There isn't much difficulty in establishing causality and determining how much of that decline was due to 9/11, there's no doubt that the twin towers were the cause.

What, then, was my point???

Actually, it isn't all that hard.

Originally Posted by Biochemist

I am much more in favor of floggings. So much more public fervor. And still an opportunity for a repeat performance.

[Biochemist]

Originally Posted by Qfwfq

Hmmmm, surprising. It's a well known monetary policy manoeuvre, that countries have often used for a temporary benefit...

I am not sure what you meant when you said "they" held the US currency low. Were you talking about US central bankers or foreigners?

The US Federal Reserve manages US monetary policy by targeting US inflation. This is only slightly impacted by foreign reserves. Foreigner investment in US securities (or direct foreign purchase of US currency) takes some money out of circulation and hence tends to put downward pressure on money supply. The US Federal Reserve would respond by increasing money supply (mostly by buying back US denominated bonds with US dollars). But the greater drivers for money supply intervention are inflation metrics and the quantities of economic activity in the US.

The exchange rate of the US dollar is established in the foreign exchange markets. It does not have too much direct effect on US inflation. However, a protracted drop in US dollar value (as at present) does increase exports, since US denominated products are relatively cheaper overseas. But this short term gain is offset by the tendency of investors to stop buying dollar denominated investments when the currency is dropping. Essentially, foreigners stop buying bonds (denominated in dollars) to buy goods (denominated in dollars).

Overall, things work better (for everybody) if the currency relationships are stbale over the long term. We just can't figure out yet how to make the world work that way.

[bumab]

Originally Posted by Qfwfq

I tend to think the damage was very much inflated, and the estimates of it even more. I think this because I'm not an economist. The economist I agree with is Hume, I say that money is nothing but paper, it only represents actual values, especially as many investments are speculative and not productive. Suppose one day you put a bomb right smack in Wall Street, destroying exactly the NYSE and nothing else, what would you estimate the damage as being?

I completely agree. While Bio makes a good point- this imaginary monetary damage does get translated into real economic damage through people buying less, traveling less, etc., it's almost like it gives the terrorists too much credit. "Terrorists caused us a trillion dollars with their attack! It's their fault!" While it's true that damage would not have been done if there was no 9/11 attack, the cause was us. Shifting the blame simply lets us feel OK about the damage, since it wasn't our fault. It's an idealistic position, to be sure, however...

Originally Posted by Qfwfq

What I mean is, most of the consequences are due to how things are organized and the nature of the market based economy, and I consider this to be so concerning 911. It should be a lesson. This is how I see it, now hang me...

True.

[Biochemist]

I really wanted to get back to the original question in post #1:

Why do you suppose that the media rejects the notion reducing tax rates (at least for the upper brackets) actually increases federal revenue? This appears to be true, in spite of the overwhelming evidence including the current windfall from the most recent US tax rate reductions.

[Qfwfq]

I can't say much about why the media should or shouldn't be of this opinion, but certainly tax needn't be the only way for a country to raise public money and income tax isn't the only form of taxation. I don't know the details but reducing one tax might end up bringing more money in some other way. Or, maybe, Bush reduced those taxes but he also sold lots of cherries by the roadside and made lots of dough that way.

Exactly how did the federal revenue increase?

Originally Posted by Bio

I am not sure what you meant when you said "they" held the US currency low.

I'm not concerned with the details of how "they" caused devaluation but I'm damn sure it was "they" that caused it. Thatcher was also fond of this type of thing. Many other countries have done it too. In this case there was the need to reduce the foreign debt. Being denominated in US$, as you also said, the lower dollar also made the debt lower. If, for instance, you export at prices not denominated in US$ but instead get more dollars because the dollar is lower, you're paying the debt easier. It's obvious that there are pros and cons, they wouldn't want to put the dollar arbitrarily low and keep it there, but they do decide when it's an advantage to devalue to a certain measure and for how long. I was talking about foreign debt, not foreign reserves, nor about inflation so much.

Originally Posted by Bio

The exchange rate of the US dollar is established in the foreign exchange markets.

Does that mean they have no influence on it? You must be joking!

[Biochemist]

Originally Posted by Qfwfq

Exactly how did the federal revenue increase?

Decreasing top income tax rates increases income tax revenue. This phenomenon is often referred to as the "Laffer Curve", named after the economist Art Laffer. There is a tax rate where governmental income is maximized. At rates above or below that, it decreases. The optimal rate is thougt to be somewhere in the mid 30% range in the US. Raising rates above that decreases revenue from the higher brackets. If we decrease rates on the higher brackets, revenue goes up from the higher brackets.

I'm not concerned with the details of how "they" caused devaluation but I'm damn sure it was "they" that caused it.

I still have no idea who you are talking about. What"'they"?

...Being denominated in US$, as you also said, the lower dollar also made the debt lower.

Not for the US. It would make it lower for foreign bondholders

If, for instance, you export at prices not denominated in US$ but instead get more dollars because the dollar is lower, you're paying the debt easier.

Sorry, Q. I am confued. I don't understand your connection between foreign exchange pricing and US debt.

Does that mean they have no influence on it? You must be joking!

Not much. Broad policiy issues (like money supply and interest rate decisions made by the US Federal Reserve) probably are 95% of the influence. But those decision are primarily focused on controlling dollar inflation. Typically, when the US economy slows, the feds drop rates to encourage investment and revitalize the economy. When rates drop, the dollar is less attractive for foreign investgors, and the foreign exchange rate falls. It pops back up when the fed raises rates again in a stronger economy. I am not sure what point you were making.

The Fed does occasionally directly intervene in foreign exchange markets (buying or selling dollars) but the effect seldom last for more than a day or two. This is mostly for looks, not for any real policy or economic gain.

[Qfwfq]

Originally Posted by Biochemist

When rates drop, the dollar is less attractive for foreign investgors, and the foreign exchange rate falls.

Isn't this what Greenspan did? I did not mean direct intervention.