Reagan 1986 Tax Reform

[cdcaveman]

What' startling about the Brownback case is what little understanding he had of supply-side economics despite having served three terms in the U.S. Senate. Apparently he was unaware that the Reagan experiment with supply side economics, according to every legitimate economic study, did not increase revenues as predicted. Instead just as in Kansas, huge deficits resulted. Revenues did increase after supply side initiatives were adopted, but these were due to other factors -- recovery from recession and large increases in spending. The effect of extreme compression of tax brackets which resulted in a windfall for those in the top brackets had the same effect that drastically cutting taxes has had years later in Kansas.

So why was Kansas driven toward bankruptcy by supply-side tactics while the Reagan economy boomed? The answer can be found in the unique finances of the Federal Government compared to that of the States. Both Federal and State government can raise revenue by taxing, but only the Federal government can create fiat money. Consequently the Federal Government can not go Bankrupt, whereas State and local Governments can.

When the Federal Government spends and taxes in equivalent amounts the budget is balanced, and there is no net change in the amount of money in the private sector. When the Government taxes in an amount greater than it spends it runs a surplus and the amount of money in the private sector decreases by the amount of the surplus. The practical result is that net bank reserve balances decrease by the amount of the surplus, but this will be compensated by the Fed buying Treasuries which has the effect of increasing net reserve balances.

On the other hand, when the Government spends more than it taxes, which it did in the extreme during the Reagan supply-side experiment, reserve accounts grow buy the amount of the Federal deficit and the Fed drains the excess reserves by selling Treasuries.

This is how the Fed is able to control the net amount of money in reserves accounts, and in this way it controls the Fed Funds Rate which is its chief tool for controlling interest rates.

What happened in the Reagan experiment is that the huge government revenue shortfalls, created by drastic cuts in the upper tax bracket and collapsing all the upper brackets into one lower bracket, were made up by creating new fiat money. Kansas can't do that!!!

Kansas could not compensate for their deficit by creating new money. Kansas had no other choice other than to drastically and quickly reduce spending. In theory they could have raised additional money by issuing bonds but that would have only made matters worse down the road. Had they continued on this path the State would have gone out of business, and in short order.

What is truly amazing is the financial ignorance of Republican law makers. The ones in Washington are no less ignorant then the ones in Kansas. And that's rather scary. For a country whose currency is a reserve currency, regular deficits are the normal state. It is the size of those deficits that matters, as deficits that are too large during good times can be inflationary. That is what we are facing at present if the Republican tax plan should pass. It is just more failed supply-side economics that is being proposed.

If the Trump tax plan, by some miracle, should pass as proposed, there will be huge deficits, unless there is compensation by equivalent spending cuts. If there are not sufficient spending cuts, the economy could take off like a rocket ship, at least initially. The Fed will have to sell bonds to drain reserves in an effort to control inflation. This will put downward pressure on bond prices and upward pressure on rates. Nevertheless, down the road we could see some significant upticks in inflation.

Managing the economy and controlling inflation while promoting full employment is a difficult balancing act. It is more art than science. It would be made doubly difficult by the Trump tax proposals. We won't really know the full effect of what is likely to be heavy deficit spending into an already fairly strong economy until we are well into the melee.

Recall that the Reagan supply-side initiative was launched into a recessionary economy, where deficit spending makes sense. Now we may get to see what happens when you launch supply-side stimulus into an already fairly robust economy where heavy deficit spending makes no sense. If that happens I hope the Fed will be standing by with a fire extinguisher.

By the way, while deficit spending into a recession makes sense, it is difficult to conjure up a situation where supply-side stimulus makes any sense at all. If you want to stimulate the economy, as for example in a recession, than the right way to do it is on the demand side! What the Trump proposals are going to do, if they get implemented, is worsen the already dangerous wealth disparity in the U.S., possibly fuel inflation, and of course increase deficits. If the Trump administration can pull off greatly decreased Federal spending, and I certainly would not bank on that, than that will keep deficits in check and prevent inflation and an overheated economy. But it won't do anything to ameliorate the dreadful results of cutting important and sorely needed Federal programs. supply-side stimulus certainly won't do much for employment. Its a bankrupt economic theory we ought to confine to the trash can of history.

Bankruptcy is a consequence of bad behavior. After which liquidation of overvalued assets clears that bad behavior.. that's if you actually believe in free markets.. but obviously the Government doesn't operate like a free market entity, as you have said the fed printing supports Government debt spending by their policy of low interest rates.. your attack on Trump to me is more a clear illumation of what the fed does to enable debt creation without the people's say.. you can say their are checks and balances but they have never stopped Government overuns . I am not a fan of trump and his style of intervetionism but "taxing the rich" is very naive... It's a fight over who should pay for the bad behavior of the Government .... Instead of getting a hold of the bad behavior.. is there any end to the need in Federal programs? Are you aware of how many their are.. do you know if they are effective or efficent? How does one know if a Federal program is being efficient with the money given to them? There is no price discovery with Federal programs...many just seem underfunded when their not working to most people....

 

[piezoe]

Bankruptcy is a consequence of bad behavior. After which liquidation of overvalued assets clears that bad behavior.. that's if you actually believe in free markets.. but obviously the Government doesn't operate like a free market entity, as you have said the fed printing supports Government debt spending by their policy of low interest rates.. your attack on Trump to me is more a clear illumation of what the fed does to enable debt creation without the people's say.. you can say their are checks and balances but they have never stopped Government overuns . I am not a fan of trump and his style of intervetionism but "taxing the rich" is very naive... It's a fight over who should pay for the bad behavior of the Government .... Instead of getting a hold of the bad behavior.. is there any end to the need in Federal programs? Are you aware of how many their are.. do you know if they are effective or efficent? How does one know if a Federal program is being efficient with the money given to them? There is no price discovery with Federal programs...many just seem underfunded when their not working to most people....

?

 

[cdcaveman]

What is your question

 

[piezoe]

Bankruptcy is a consequence of bad behavior. After which liquidation of overvalued assets clears that bad behavior.. that's if you actually believe in free markets.. but obviously the Government doesn't operate like a free market entity, as you have said the fed printing supports Government debt spending by their policy of low interest rates.. your attack on Trump to me is more a clear illumation of what the fed does to enable debt creation without the people's say.. you can say their are checks and balances but they have never stopped Government overuns . I am not a fan of trump and his style of intervetionism but "taxing the rich" is very naive... It's a fight over who should pay for the bad behavior of the Government .... Instead of getting a hold of the bad behavior.. is there any end to the need in Federal programs? Are you aware of how many their are.. do you know if they are effective or efficent? How does one know if a Federal program is being efficient with the money given to them? There is no price discovery with Federal programs...many just seem underfunded when their not working to most people....

Your post made very little sense to me. Couldn't follow your reasoning; thus the "?".

Here is a handful of comments which may help to explain why I could not follow your reasoning.
In Order:
1) Bankruptcy of a State or City is quite different from bankruptcy in the private sector, which your comment refers to. Firms in the private sector do not have the power of taxation.

2) The text book term "free market" would not in general apply to governments, but might apply to some aspect of government operations. In general, and in the private sector, there are very few markets of size that meet the monetarist's description of "free markets" -- I suppose the U.S. equities and Bond markets are markets that come somewhat close. It is closer to the truth to say that in modern economies, "free markets do not exist," than it is to say they do exist. A few markets may approximate a "Free Market", but damn few.

And there is a serious problem with the expression "Free Market." It means one thing to the public and another entirely to the private business man. It is the same problem with the expression "Free Enterprise". So two people can be carrying on a conversation about "Free Markets" with neither having a clue what's in the mind of the other. If you are going to use this expression, you must always start by defining what you mean by it.*

3) When the lay public speaks of the Fed enabling debt creation, or "money printing", they often mean to suggest that these are things the Fed should not do. This reveals an unfortunate ignorance of how Central Banks function to stabilize the money supply and interest rates, control inflation, and protect the public from bank failures, and why these functions are necessary. Fed operations are always in coordination with the Treasury; it is the same in every modern country. Central Banking is a complex specialty that most citizens have no interest in studying in sufficient detail to understand it. Consequently many people are prone to misunderstandings and are easy targets for conspiracy theorists.

4) "Taxing the Rich" as opposed to what? Taxing the Middle Class, or taxing no one? In all modern countries the citizens are taxed to provide the means for their governments to function. I know of no country where only the rich are taxed, do you?

5)"How does one know if a Federal program is being efficient with the money given to them?" This is a good question. It seems the answer is clear however. Most of us can't know if a Federal program is being efficient unless we are closely involved with that particular Federal Program. We are dependent on the managers of these programs to make wise decisions, and on our Agency Heads and Congress to exercise their oversight function. Have you got a better idea?
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*You won't find the entry "Free Market" in the index of some economics texts. This is a tacit acknowledgement of the clouded definition of this term. During the Friedman era, when Volcker was Fed Chair, the monetarists got hold of Fed policy for a period. (They failed to control the money supply with their direct tactics, and the Fed eventually returned to indirect control via interest rates.) The monetarists' definition of "Free Market" is synonymous with laissez faire. To quote Samuelson: "Monetarists have generally favored markets free of government intervention... Governments are often viewed as inefficient, venal, and destructive of personal liberty." (Samuelson, 12th Ed. Pg.329) The vernacular meaning of "Free Market" is, however, more closely associated with opportunity. Thus a free market becomes one which has a low barrier to entry and in which one in free to compete. This latter kind of free market could be one that is regulated to prevent monopolies and cartels from forming and offers protection from regulatory capture.

 

[cdcaveman]

I don't doubt i make little sense to you... Are you inferring i'm a conspiracy theorist and or a person misunderstood about the workings of the federal reserve? Just because you believe central banks are complex doesn't mean they are.. How exactly does a central bank control inflation? when their only tool is printing money? printing less money? and allowing interest rates to float more towards a market driven value is controlling inflation? I firmly believe in the credit cycle as described by Ludwig Von Mises. He described what central banks do clearly, and my beliefs are derived from his teachings. I do not agree that we should allow a central monopoly on money to bail out large corporations for their poor risk taking, socializing their losses..

 

[cdcaveman]

i know you won't pay much attention to this .. but for people who want to learn a little more about the fed ..
https://mises.org/library/money-banking-and-federal-reserve-complete-transcript

 

[piezoe]

Are you inferring i'm a conspiracy theorist and or a person misunderstood about the workings of the federal reserve?

The latter.

 

[piezoe]

I can't recommend the link you gave. It is a contrived, cobbled together piece which includes some comments supposedly from from Pace University economist Joe Solerno*, I suppose in an attempt to give it some legitimacy . Unfortunately it contains many statements, that while they may have been true, or at least partially true, at some point in the history of the Fed, are certainly not true today. It is best described as a piece of dog shit. It calls into question the legitimacy of that thing called the " Mises Institute." This 'Institute' has the ear marks of something originating in Russian Hack shops or an Alabam swamp. I'd check it out thoroughly if I were you. Especially the source of the funding (which mark my words, no donors names will be forth coming)for this "magnolia Ave." Alabama outfit. The great micro economist Ludwig von Mises would turn over in his grave if he knew his name was associated with this pile of steaming horse dung!!!

The Wapschot book is readable by the non-economist if you have an interest in moving forward in time into the mid twentieth Century and well beyond the Austrian School, which became mired in microeconomics. It's "Keynes Hayek: The Clash that Defined Modern Economics." That could be a good jumping off place to start late twentieth century and early twenty-first century critiques, such as Quiggin's "Zombie Economics." Quiggin's book remains a seminal critique of Supply Side Economics and crops up often on Graduate level Economics Reading Lists.
_________________
*Joseph Solerno is a legitimate, Rutgers trained, Austrian School, radical, anarcho-capitalist Economist. He might be able to offer a clue, in fact he could be one of those responsible for, the misappropriation of the tern 'libertarian' in the U.S.

Rutgers of 50 years ago was well known, highly regarded, hot bed of radical economics. Left and Right. It is not unusual to find some extremely bright and capable Rutgers trained economists relegated to back waters like Pace University. Their thinking is too far from mainstream to find wide acceptance.

 

[murray t turtle]

I think this 10 years bull market (from 2008 to 2018) would end on Oct 2018 when people realize Trump is a poor leader. He has a midus touch for bankruptcies, and he isn't a "good communicator" like Reagan was. it'd be harder for him to motivate anyone to do anything.

it seems big moneys are unloading the FANG stocks:

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Thanks for charts. MODERN TRADER MAGAZINE had a 2017 article, many could count it UP-trending bull market =only couple years young. Of all the reasons for the 1987 crash ;tax reform seems the least likely, with the one year time lag LOL. On the other hand ,i never 100% believed the simple prediction ''never short a Republican-M Schwartz''

 

[murray t turtle]

But I thought Americans liked paying taxes...it's the price we pay to live in a civilized society right.

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NO; USa like$ paying user fees, which is not a tax.Feds,+ TN taxes ammo, for example; if you dont like to shoot ammo you pay no user fees .See the big difference??LOL