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Tuesday, March 02, 2004

Way Out on one Data Branch

Bret, I think you've missed the point. In my opinion, the main issue is not whether lower tax rates spur growth -- in the short term, they probably do. (A difference in time horizons for statistical analysis seems to be one reason you and the author to the article I cited come to different conclusions. By the way, I did read the article, although I did not take the time to validate the statistical analysis.) The main issue is the health of the overall economic system. It's certainly nice to get short-term growth, but at what long-term cost?

My basic theory is that problems tend to play out in one of three ways. Either they go away because of changes in the environment (e.g., technological advance, new social trends), they get solved, or they build up until a crisis happens. National financial problems may go away due to technological changes or social trends, but it's hard for me to imagine how. I'm also not optimistic about the problems being solved because of two incompatible conditions: (a) the U.S. economy is complex and trends in it are exhibited over decades (not a few years), and (b) there is no accountability -- in government or elsewhere -- for long-term economic performance. Whoever happens to be president when the debt-exploding policies of this administration come to roost (perhaps in 8-10 years from now) will pay a political price.

In fact, the incentives for politicians are all in favor of short-term fixes. Why? Because those who benefit the most from short-term gains in tax policy (i.e., the wealthy) can accumulate enough wealth in the short-term to mitigate the impact of any future calamity. (This, by the way, is my strategy.) And because those who benefit the most from "social" spending by the government (i.e., the poor, the middle class, and special interests) will fight like hell to keep the spigots open. So, what we get is an administration who cuts taxes and spends like a drunken sailor. "We have met the enemy, and he is us."

Meanwhile, the soundness of our economy is deteriorating, which eventually will lead to an extended period of lousy growth, regardless of tax rates. This article from the Economist explains the situation reasonably well. Here, also, is a quote from another article in the Economist:

"In fact, according to a forthcoming book by Laurence Kotlikoff, an economist, the present value of the American government's future obligations, taking into account promised pensions and health-care benefits, is a staggering $45 trillion."

Anyway, focusing only on tax rates, Bret, reminds me of the old quip: "The treatment was successful, but the patient died." The long-term scenario for the U.S. economy is not, in my opinion, pleasant. Of course, only the future will prove whether I am a Cassandra or you are a Pollyanna. In the meantime, I recommend that all of those folks in their mid-40s stock up on their resources and hedge their risks. If I'm wrong, and there is plenty of growth and prosperity to go around for the next 50 years or so (the relevant timeframe for us), then we'll be just that much more comfortable entering our retirement years.

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