Monday, January 18, 2016

Recommended reading: Taxes and a Two-Santa Theory

The late Jude Wanniski was the most prolific writer and economic thinker that I have ever had the pleasure to know, and he played an important role in my economic education over the course of two decades. He was the one who coined the term "supply-side economics," and he was instrumental, along with Art Laffer, Jack Kemp, and Robert Mundell, in shaping Reagan's economic thinking and  the policies which led to The Seven Fat Years (the title of Robert Bartley's excellent book) in the 1980s. 

I heartily recommend you read Jude's 1976 essay, "Taxes and a Two-Santa Theory." It's a quick and easy way to understand the tax and spending roles played by our two political parties over the last century. It's easy to forget how each party has evolved over the years. Republicans were not always the party that favored tax cuts, and they have made their share of mistakes, as have the Democrats.

Excerpt:


Simply stated, the Two Santa Claus Theory is this: For the U.S. economy to be healthy and growing, there must be a division of labor between Democrats and Republicans; each must be a different kind of Santa Claus.
The Democrats, the party of income redistribution, are best suited for the role of Spending Santa Claus. The Republicans, traditionally the party of income growth, should be the Santa Claus of Tax Reduction. It has been the failure of the GOP to stick to this traditional role that has caused much of the nation’s economic misery. Only the shrewdness of the Democrats, who have kindly agreed to play both Santa Clauses during critical periods, has saved the nation from even greater misery.

On the eve of this year's presidential election, the Democrats are promoting more income redistribution and more spending, while the Republicans are trying to convince the country that tax cuts are what's needed to boost the economy. This time around I think the Republicans are right, but they still have to execute, and their record on that score is spotty.

Plus ça change, plus c'est la même chose.

HT: Russell Redenbaugh

11 comments:

Lawyer in NJ said...

I will never understand why it has to be "either or." We can reduce taxes, specifically corporate taxes, and spend on our crumbling infrastructure, as well as build productive assets for the future, because we can borrow at such historically low rates. In tandem, we will be setting ourselves up for present as well as future growth.

M Miller said...

https://research.stlouisfed.org/fred2/series/T5YIFR

Inflation expectations breaking to the downside. This is what Dudley [in his last speech] said is the key data sign for the future. 10 year bond yield going lower despite petro wealth funds selling US bonds and despite everything else anyone has been saying about higher yields.

Scott Grannis said...

Miller: that measure of inflation expectations has been much lower several times in the past: late 2008 (hitting a low of 0.5%), 1999 (between 1 and 1.5%), and 1998 (0.8%). In any event, I don't see how inflation expectations of 1.6% are anything to worry about. In that regard, I note that the very low inflation exceptions of 1998 and 1999 occurred at a time when the Fed was demonstrably tight: the yield curve was flat, real yields were 3-4%, the dollar was soaring (and much stronger than it is today), and commodity prices were extremely depressed (today they are at least 50% higher than they were in the late 1990s). Deflation was a concern, and Alan Greenspan made that clear.

Scott Grannis said...

Lawyer: if we are to engage in another round of "infrastructure investment" I would hope that the federal government keeps its distance. Much better to let the states and local governments handle this, using revenues from a stronger economy which would follow a reduction in today's onerous tax rates. The last time the government dumped billions of dollars into "shovel ready" projects the results were disastrous.

Benjamin Cole said...

Scott Grannis: speaking purely as a classic economist, the results of federal spending on infrastructure cannot be any less wasteful than spending on national security.

The $1 trillion in national security spending (DOD, DHS, VA, black budget, pro-rated debt) is annual and unstoppable however...

Benjamin Cole said...

OT:


"The oil market faces the prospect of a third successive year when supply will exceed demand by 1 million barrels per day and there will be enormous strain on the ability of the oil system to absorb it efficiently," the EIA said, according to the Wall Street Journal.
"Unless something changes, the oil market could drown in oversupply," the EIA continued. The market could be dealing with a surplus of 1.5 million barrels per day in the first half of the new year."

---30---

"Drown in oversupply"?

Egads. Does this sound like a time to raise interest rates?

Is this not great news?

Should not the world major central banks be blowing their front doors open with outpourings of money?

William McKibbin said...

Regarding taxes, I recommend that the Congress pass a three-year moratorium on personal income taxes for all taxpayers earning less than $300,000 annually. This three-year period would give the Congress the time it needs to pass a VAT and repeal personal incomes taxes, while creating consumer demand across Main Street USA. I see no other recommendations on the table that come close to working. Sadly, I think the days of the USA are numbered because simple advice such as the above will never happen due to establishment politics.

William McKibbin said...

PS: Watch for the Gulf coast to secede and for the West coast to secede from the USA. The west coast will quickly align with Asian technology and aerospace interests, the Gulf coast would align with Latin America and South America in an effort toward energy hegemony, and the remaining Northern tier country would align with European banking interests. The incentives for the new Gulf coast and West coast countries would be to abandon the national debt to the Northern tier banking country. Read the gray press and learn...

William McKibbin said...

Question: Is it true that the Fed is positioning Wall Street lenders to employ "bail-ins" to resolve debt defaults? Tell me this isn't so...

Thinking Hard said...

This isn't so. Ask yourself: If the Fed has the ability to expand its balance sheet 450% in a 7 year period, why is there a need for bail-ins? That type of fear mongering is not necessary to pitch gold.

Here you go....Can the market go down and stay down? Why? Why not? What is the Fed's role in the boom/bust cycle?

How does the Fed help ensure the market continues on a long term upward trajectory? Is there a maximum amount of individual, corporate, and governmental debt expansion before continued debt expansion does not materially alter GDP to the upside?

What is the advantage of gold in a deflationary spiral? What is the advantage in a high inflationary environment? Disadvantages?

Your pitch needs some refining to arrive at a logical maxim. Just my two cents.

William McKibbin said...

Hi Thinking Hard, you are right -- precious metals are not the way to go during deflation. For the record, I do not own much gold and silver overall -- I own dividend and rent earning equities. My consideration of gold and silver is more about the potential for anarchy that could ensue in the coming years, but who knows if that's really going to happen either.

So, what do you think about my tax moratorium idea?