at the Novi Expo (
Donald R. Byrne, Ph.D.
Professor of Economics
Editor/Founder: Economic Newsletter for the New Millennium
I would like to begin with
some history. When FDR was campaigning against Herbert Hoover, he argued
more vigorously for tax increases than did Hoover. For what purpose was
he proposing these tax increases? To lower the deficit in the Federal
budget brought on by the beginning of the Great Depression. Of course, once
The cause of the deficit was not low tax rates but the collapse of the tax base due to the onset of the Depression!
…fast forward to the 21st Century
We currently hear similar cries from naysayers that the taxes should be raised and not lowered. They argue that the Bush tax cuts already legislated must be repealed; and that the federal deficit poses the most serious problem.
History is replete with examples that economic growth is the way to eliminate deficits in the Federal budget. You grow out of deficits and not tax your way out of them. As economic growth occurs, the tax base grows. Taxes grow at a faster rate than government spending for any given fiscal structure. In past years, this more rapid rise in taxes was referred to as the fiscal drag.
In the days of Eisenhower and Kennedy, economic advisors warned of growing stagnation unless the tax rates were cut and the fiscal drag reduced. Those of more liberal persuasion would have preferred large increases in government spending, especially of the transfer payment variety. Congress usually agreed and cut the tax rates to promote faster economic growth.
And now from pages of my newsletter…
There have been claims and counter claims that the Fed mistakenly caused the economic downturn that ended with the recession of 2001. In the very first issue of this newsletter, the editors argued that the economic downturn which began in 1999 and culminated in the recession of 2001 was primarily the result of several years of a rising ratios of federal taxes (receipts) to GDP, a very large trade deficit resulting from an overvalued dollar and also beginning in 1999, a monetary policy change that brought to the economy, monetary restraint. All three contributed to bringing an economy that was growing at a real growth rate of over 7% in 1999, to a trough of a negative 1.3% annual rate in 2001. The large trade deficits began in the early 1980s, the increasing tax burden in the early 1990s while the monetary restraint occurred in 1999–2000.
There is plenty of blame to go around. A former Treasury official takes the credit for influencing upward federal taxes as the cause of declining inflation but does not seem to connect that reasoning to the economic collapse beginning in 1999. No credit for eliminating inflation is given to increasing competition, which is the most fundamental cause of the elimination of the inflationary bias. The trade deficit is rarely mentioned as an eventual co-cause of the economic slowdown. Now criticism of the Fed’s role is receiving more press.
Federal tax cuts, a depreciating dollar in foreign exchange markets (is easing the trade deficit), and the FOMC - now assuming an accommodative stance (brushing aside fears of inflation as the economy begins to expand at very high real rates), are all contributing to the current vigorous economic expansion. Productivity gains have been great and large numbers of highly skilled and experienced laborers are ready to be called back to new jobs after becoming structurally unemployed. Structurally unemployed individuals represent a rising percentage of total unemployed – even though the unemployment rate is falling. This reinforces the assertion that a fall in the unemployment rate is a lagging indicator of economic recovery/expansion.
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