We've Got a Taxing Problem...

The taxing and overall spending data below is from the OECD statistics portal. Military spending data is from the World Bank. Non-defense spending data was provided by the power of subtraction.

The upper table lists each OECD member nations' taxing and spending in rank order. Lower rankings mean lower taxing or spending. The lower table is the raw data relative to GDP.

As it can be plainly seen, the US does not have a spending problem, and certainly not a non-defense spending problem. We DO have a taxing problem and a military-industrial complex problem. With the third lowest taxes and the second highest military spending, it is no wonder we have a large debt. Our overall and non-defense spending are both well below the norm, especially for a nation as rich as ourselves, and are not significant contributors to the gap between our spending and revenues.

 

Spending/Taxation Rank (1 lowest, 34 highest)

 

Country	Tax	Spending	Military	Non-defense
Australia	5	5	24	5
Austria	27	27	5	29
Belgium	32	31	10	31
Canada	12	15	16	16
Chile	2	2	32	1
Czech Republic	19	12	13	14
Denmark	34	34	19	34
Estonia	18	7	23	6
Finland	28	32	20	32
France	29	33	27	33
Germany	22	18	14	17
Greece	11	30	30	27
Hungary	25	24	7	26
Iceland	21	19	1	20
Ireland	8	20	3	22
Israel	17	16	34	10
Italy	31	26	21	23
Japan	7	11	8	11
Korea	4	3	31	3
Luxembourg	23	10	4	12
Mexico	1	1	2	2
Netherlands	26	25	17	25
New Zealand	14	23	11	24
Norway	30	14	22	15
Poland	15	13	25	13
Portugal	13	22	26	21
Slovak Republic	10	6	12	9
Slovenia	24	28	18	28
Spain	16	17	9	18
Sweden	33	29	15	30
Switzerland	9	4	6	4
Turkey	6	8	28	7
United Kingdom	20	21	29	19
United States	3	9	33	8

Spending/Taxation as a fraction of GDP

 

Country	Tax	Spending	Military	Non-defense
Australia	25.6	36.9	1.9	35.0
Austria	42.0	50.5	0.9	49.6
Belgium	43.5	53.3	1.1	52.2
Canada	31.0	44.1	1.4	42.7
Chile	19.6	24.7	3.2	21.5
Czech Republic	34.2	43.0	1.2	41.8
Denmark	47.6	57.6	1.5	56.1
Estonia	34.2	38.3	1.7	36.6
Finland	42.5	55.0	1.5	53.5
France	42.9	56.0	2.2	53.8
Germany	36.1	45.3	1.3	44.0
Greece	30.9	51.8	2.7	49.1
Hungary	37.9	49.6	1.0	48.6
Iceland	35.2	47.3	0.1	47.2
Ireland	27.6	48.1	0.6	47.5
Israel	32.4	44.6	6.8	37.8
Italy	42.9	49.9	1.6	48.3
Japan	27.6	42.0	1.0	41.0
Korea	25.1	30.1	2.8	27.3
Luxembourg	37.1	42.0	0.6	41.4
Mexico	18.8	22.8	0.5	22.3
Netherlands	38.7	49.8	1.4	48.4
New Zealand	31.5	49.5	1.1	48.4
Norway	42.9	43.9	1.6	42.3
Poland	31.7	43.6	1.9	41.7
Portugal	31.3	49.3	2.0	47.3
Slovak Republic	28.3	38.2	1.1	37.1
Slovenia	37.5	50.7	1.4	49.3
Spain	32.3	45.2	1.0	44.2
Sweden	45.5	51.2	1.3	49.9
Switzerland	28.1	33.8	0.9	32.9
Turkey	25.7	39.0	2.3	36.7
United Kingdom	34.9	48.5	2.6	45.9
United States	24.8	41.7	4.7	37.0
OECD Average	33.8	49.5	1.7	47.8

Red Up, Blue Down...with a time lag

A few people have asked me what my deficit graph looks like when it is modified to include congressional control. So I have recolored it, with red being Republican control of the Presidency, House, and Senate, blue being full Democratic control of all three, and pink and purple,  representing Republicans or Democrats holding any two of the three, respectively.

This isn't as clear cut as the presidential chart, which simply showed upward trends every time Republicans captured the presidency, and flat or declining deficits under Democratic presidents. So how can we interpret this new chart? If you look carefully, you can break this chart down into six regions

1: A more or less flat region pre-Reagan, under mostly or full Democratic control

2: A huge rise during a period of Republican dominance. Note that this was during an economic boom, which normally will bring down deficits. A deficit increase during a boom is indicitive of highly irresponsible fiscal behavior.

3: Another period of relative deficit calm under full or partial Democratic dominance, with a downward trend at the end

4: Another period of partial Republican control, where deficits indeed fell during a boom but then rose again during a relatively modest slowdown.

5: A period of full Republican control, where defcits were stubbornly high despite an economic strong period. Again, this is highly indicative of fiscal irresponsibility

6: A period of full or partial Democratic control, early in which an absolute economic bomb went off, sending the deficit into the stratosphere, followed by gradual recovery despite a weak economy

There is only one area on this chart that reflects remotely well on Republicans, which is the late Clinton era. Deficits were brought down, though much of this was a natural consequence of the end of the cold war plus an economic boom, and very little due to the painful process of spending cuts and tax increases. Also note that this was largely illusiory, and deficits bounced back to their previous levels after the tech-bubble pop. In contrast, there are two regions that look awful for Republicans - the Reagan budget disaster and the Bush era, both of which saw high deficits despite a strong economy.

As for Democrats, deficits have been stable or declining every time they had partial or full control, with one exception - the epic bust of 2008. A lot comes down to how you assign blame for this. Is it plausible to blame it on the 110th congress, where Democrats seized control of both the House and Senate after four years of Republicans having full control of the government. Not really. The housing bubble was already at its peak, Wall Street had already placed its trillions upon trillions of dollars worth of bets, the wars already launched, the tax cuts already enacted. The bills adopted by the 110th were all run-of-the-mill spending bills until the economic bomb burst half way through their second year.  To the extent you can blame the economy on the government, it is clearly Bush and his two Republican congresses that own the majority of what happened shortly after they were removed from power.

Alternatively, you can look at the chart another way. Every time Republicans gain power, deficits start rising a few years later. For Democrats, it is the reverse. Please vote accordingly.

Why I Was Wrong, 10th Anniversary Edition

Ten years ago, on March 20th, 2003, the US invaded Iraq. I supported that invasion, and I was wrong. Specifically, I can recall when debating with others that I believed Iraq would be a better place in 3/19/2013 than 3/19/2003, and now time has come to pass judgement on my attempts at foresight.

Is Iraq better today than the day before the invasion? Arguably. But only at a far higher price for both the US and Iraqis than I imagined back then. Additionally, while it is impossible to predict alternative histories, I doubt Saddam or his sons would be in power today in Iraq if we had simply ignored him in 2003. Iraq would have been a prime candidate for revolution during the Arab Spring, leading to an end that is likely better than the state they are in now, with far lower costs than the invasion.

Where specifically did I go wrong? First and foremost, I simply under-estimated the incompetence of Bush and Rumsfield. They screwed up just about everything with this matter. Back then, I was in the waning days of my non-non-interventionalist libertopian phase, and still too trusting of the Republican party in general. Second, while it was obvious that the WMD issue was being hyped way out of proportion by the Bush administration, I really did think we would find something. Not a lot, mind you, nor enough to justify a war. Just enough to avoid the extreme embarrassment of being totally wrong. It never occured to  me that coming up with a big fat goose egg was a real possibility. Third, I underestimated the sectarianism that exists in that part of the world, and how it has ripped Iraq apart in so many ways while ringing up far higher human and financial costs than anything that I considered plausible before the war. Fourth, I underestimated how negatively this would be perceived abroad, which combined with Bush's arrogance and obvious incomptence undermined our credibility at every step.

Saddam was an awful, cruel dictator who deserved to be removed from power, which was my primary motive for supporting the war. But the war was far too costly, including over a trillion dollars slapped on the credit card, the lives of thousands of American troops, and the lives of tens of thousands of Iraqs by any measure, perhaps hundreds of thousands. We should have stayed home in this case.

Social Security vs Art Laffer

Do higher taxes slow down economic growth? The answer to this question is far from clear, with data to support just about any opinion on the matter readily found in both the academic literature and the political sphere. However, most of the data I have seen on this matter suffers from at least one of the two major flaws

1: The data fails to separate changes in tax policy with changes in deficit spending. In most cases, tax cuts are not paired with similarly-sized spending cuts, nor tax increases coupled with similar-sized spending increases. What happens in practice is that tax cuts are often paired with spending increases, thus causing a big increase in deficit spending. However, this makes it impossible to determine whether it was the change in tax policy that caused changes to economic growth, or the deficit spending itself, which seems like an obvious candidate for the causal factor. Of course you can goose your short term economy with borrowed money.

2: The data fails to account for reverse-causality. As often as not, we change tax policy in response to economic changes, not vice versa. So even if you find a weak correlation between lower tax rates in growth, it might be because we tend to cut taxes vigorously in response to economic slowdowns, allowing them to correlate to the rebound without causing it. Likewise, we seem to pass the most tax increases at the height of bubbles, when the populace is more flush with cash than usual and more tolerant of paying additional taxes.

However, there is one tax that suffers neither of these problems - Social Security (OASDI).  First, Social Security spending and revenues have been pretty close together as the program was phased in over over 50 years starting in 1937, thus giving us a rare example of more or less simultaneous tax increases and corresponding spending increase.

 

 

The exceptions to this can be found in the 50's, 80's, and 90's, where there were slightly faster increases in revenues than spending. However, these changes were slight, and given the fact that these were all economic boom years, are hardly evidence that an increase in tax rates harm the economy.

 

 The other great thing about Social Security is that the tax increases were planned years ahead of time and phased in slowly. Hence, we can be certain that these tax increases were not a response to economic conditions. If there is a correlation, the causality must run the other way. Additionally, there has been little political fiddling (until recently) with the OASDI system. Other than the gradually phased-in tax increases, its structure is the same now as in 1937.

 

So what does the data look like? Well, we can first look at a simple chart of OASDI revenue vs the statuatory tax rate. If the famous "Laffer Curve" is correct, revenues should not keep up with the tax rate - a 10% tax should not bring in twice the revenue of a 5% tax.

 

 

 

Is that what we see? Nope. Not at all. In fact, revenues correlate perfectly with the tax rate. No evidence of a "Laffer Curve" appear at all. It appears people aren't trying very hard to dodge the OASDI tax, despite it amounting to nearly 6% of the economy and constituting our single largest tax.

 

 

 

But wait! What if Social Security is harming the economy? We wouldn't see that in the above chart, so we have to look elsewhere. So I have prepared the two charts below. Both consist of one data point for each year, with the horizontal axis being the change in OASDI tax rate relative to the prior year. The vertical axis are the change in GDP growth, with the upper chart being the difference in growth in the subsequent year less the growth in the prior year, and the bottom chart being the growth in the three subsequent years minus the growth in the three prior years. Positive values on the vertical axis indicate accelerating growth. Most values fall at zero on the horizontal axis because most years saw no change in tax rate.

 

 

 

 

 

So there you have it. Our experience with Social Security shows no evidence at all of even a hint of a "Laffer Curve", or having an effect on economic growth, despite it being our largest individual tax. This is all the more compelling because the Social Security system is a rare example of a tax increase coupled with a corresponding spending increase AND not being a response to the current state of the economy. In appears unlikely that at anything approximating our current tax rates, further tax increase or tax cuts would have a substantial effect on the economy if those tax changes were coupled with a corresponding change in spending.

 





 



 

 

Red Up, Blue Down...

Updated on 10/14/2013 to include Q3 2013 data.

I've produced four different graphs below, all showing the same data but with slightly different adjustments.

1: Quarterly deficits vs GDP
2: Quarterly deficits, inflation adjusted, per citizen
3: Quarterly deficits, inflation adjusted
4: Quarterly deficits, nominal

It's a lot of data, but the trend is rather obvious - vote Republican if you love exploding deficits. This general trend holds true not only for the years on the graph, but all the way back to the post-war era. The last Republican president to oversee a reduction in the deficit was Eisenhower. The last Democratic president to oversee an indisputable rise in the deficit was FDR, and I think he deserves a pass due to WWII. Carter is the odd man out here. The deficit was largely unchanged during his term in office and whether it was a slight increase or a slight decrease depends on your measure. Also note that our projected deficit going forward is consistent with it approximately halving from its current level by the time Obama leaves office.

So when members of one particular party gripe about "fiscal responsibility", just show them these graphs, and remind them of how they have less than zero credibility on the matter.

Similar data can be found at AngryBearBlog here.

 

Why I was wrong...

I used to be a conservative. What changed my mind?

Just this short list of market failures...

Externalities, prisoners' dilemmas, the principal-agent problem, public goods, monopolies, oligopolies, monopsonies, market power, tragedy of the commons, rent-seeking, game theory, moral hazard, incomplete information, information asymmetry, bounded rationality, adverse selection, nepotism, cronyism, racism, sexism, homophobia, regulatory capture, human irrationality, third-party payer, deceptive marketing, non-rival goods, free-riding, non-excludable goods, transaction costs, missing markets, strategic price complexity, guilds, occupational licensure, patents, trademarks, de-merit goods, predatory lending, subsidies, regulatory arbitrage, tax arbitrage, labor arbitrage, capital controls, trade wars, currency manipulation, zero-bounded interest rates, tariffs, and last but certainly not least, a complete blindness to the needs or rights of future generations.

"Free markets" are hopelessly flawed, inevitably riddled with at least several of the market failures I noted above. While government is also flawed in its own ways, there are simply many cases where the government's flaws are smaller than the market's, or alternatively, the best option is government regulation of the market such that the major market failures can be mitigated or accounted for. Which model works best in any given circumstance is something that can only be determined empirically with carefully-collected and reviewed data, not by hand-wavy allusions to abstract theory. If your argument boils down to "Econ 101 says...", you are probably no more than half right, just like I was when I was young and stupid and overly confident in my understanding of the world.