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New Mexico’s real economic driver
Paul Gessing takes an enormous leap of faith in his blog post about the effectiveness of tax cuts. There is hardly conclusive evidence that the 2003 income tax cuts created any jobs, much less were responsible for the economic growth prior to the 2007 stock market crash.
Like the Bush tax cuts, New Mexico’s 2003 cuts disproportionately benefitted those in the very highest income brackets. One of the problems with the trickle-down sham upon which this tax-cut-as-economic-stimulus strategy is based is that the wealthy can do whatever they want with their tax cuts. They are free to enjoy a European vacation or to park the extra money in the bank – neither of which will create jobs nor increase incomes for Americans.
A recent guest column by venture capitalist Garrett Gruener, which ran in both the L.A. Times and the Albuquerque Journal, makes this valuable point: “None of my investments has ever been motivated by the rate at which I would have to pay personal income tax,” he writes. What has motivated them is the presence (or potential) of a thriving market. But when the market isn’t thriving because consumer demand is low (that happens when lots of people have lost their jobs or fear that they soon will), investors are more likely to sit on their assets than risk losing them.
Then what did drive the growth?
So that leaves us with the question of what actually did drive the state’s income and job growth in the early years of Richardson’s administration. It helps to look at as objective a data source as possible. When you want to know about job and income growth, that means going to the U.S. Department of Labor (DOL). According to the DOL’s Bureau of Labor Statistics, New Mexico’s construction industry added more than 11,000 jobs between 2001 and 2007. Construction wages grew by 19 percent during that same time frame.
This growth was caused by the housing bubble. We know this because when the housing bubble burst most of those jobs went away. Between 2008 and 2009, almost 10,000 construction jobs were lost, and those who still had jobs found that their wages had flat-lined. Other sectors that are connected to the housing industry, such as financing, experienced the same rise and fall.
The other major factor in New Mexico’s pre-recession job and income growth was the inflation in energy prices, which peaked in the summer of 2008. Mining employment grew from 15,000 jobs in 2003 to more than 20,000 in 2008, and wages had risen by a third. By 2009, after global energy prices had tanked, 2,600 jobs had gone away and wages had fallen. Sectors such as transportation, which are connected to the energy industry, saw a similar pattern.
This points to a big problem with Gessing’s theory: The tax cuts for the rich are still in place, but the jobs and increased income they allegedly created have gone away. If the tax cuts led to higher incomes or created new jobs, shouldn’t that income and those jobs still be here?
In fact, personal income has grown slightly since the onset of the Great Recession. But that was due to an increase in public assistance such as unemployment insurance benefits, food stamps, Medicaid, and others programs. These kinds of payments increase when the economy falters because people need them to replace lost income until they can get back on their feet.
Tax cuts for the wealthy should end
Tax cuts for the wealthy do little, if anything, to create jobs in a bad economy because there are fewer consumers for the products and services those jobs create. Putting money into the hands of those who need it most and are, therefore, more likely to spend it – such as people who have lost their jobs and those working but earning low incomes – helps sustain consumer demand. Putting money into the hands of people who will use it for a European vacation does not.
The Bush-era tax cuts for the very wealthy should be allowed to expire, as they were intended. Unfortunately, the New Mexico tax cuts did not include a sunset provision, so it will take action by the Legislature and new governor to reverse them. There seems too little political will for that, which is unfortunate because this would back some fairness to the state’s tax system, which currently extracts the most from those who earn the least (see ITEP’s Who Pays? report, pages 78 and 79).
It would also help the state in making the necessary investment in programs such as education, health care, and public safety that are the real foundational infrastructure upon which a healthy economy is built.
Bradley is the research director for N.M. Voices for Children, which is is a member of Better Choices New Mexico.
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Mr. Molitor:
You are correct that we are living in a different world that the one Mr. Stockman was living in; our middle class has been ravaged by nineteen years of unworkable supply-side economics. I not only understand the theory behind tax cuts and their correlation to capital investment, but (more importantly) I understand the reality… something that you have completely failed to grasp.
Sorry Icarus, yes I was putting words in your mouth based on your liberal views as I perceive them to be. But saving and investing in stocks and bonds on a personal basis does not make that money disappear from the economy, that is totally ridiculous. The money is still circulating and creating jobs and growth. Do you think there is some “lock-box” out there in cyberland where this money sits collecting dust? This money is just as active in the economy as folks buying TVs, iPads, and houses they can’t afford.
Something is wrong with your picture.
Nothing is wrong with my picture, Dr. J; something is, however, wrong with your usual inability to read what is actually written rather than whatever bizarrely irrational belief you want your opposition to believe. No where did I say anything about “evil rich folks”, that over-consumerism was good, or that stocks and bonds were bad. The only person who said any of that was (as usual) you. For starters, I specifically said that over-spending by the middle class is a problem, but as it’s tangential to the current issue, I wasn’t going to address it. The whole point of what I said was actually very clear; that Thomas is espousing supply-side economics, and then demonstrating that he doesn’t actually understand the theory in the first place.
Saving is a good thing; investment is a good thing. However, they are only good for personal wealth, which doesn’t really do anything for the economy if that money is not then circulated back into the economy. This is why supply-side economics doesn’t work. Not because of “rich folks” are “evil” (or whatever other inane belief you wish to ascribe to me without actually asking if I believe it or not), but because the end result is that much of that money leaves our economy.
@IcarusPhoenix
Please read my two previous posts on this subject carefully and perhaps you will understand the correlation between tax cuts and saving and capital investment. As I say in the second post on Stockman’s denounciation of supply-side economics, Stockman’s last word at the table was in 1981. We are living in a different world today.
Icarus said: “However, as has been demonstrated, the working- and middle-classes spend every single dollar they make (in fact, the average American spends $1.65 for every dollar we make, but that’s a separate problem). Therefore, when you lower their taxes, they spend the remainder.”
So, saving $$, or investing in stocks and bonds (so other entities can lend money, expand capacity, invest in their businesses, and thus create jobs) is bad ’cause those evil rich folks do it, but excessive, beyond-your-means consumption ($1.65 or every $ made) and the accompanying debt, and rampant consumerism is good ’cause middle class and poor folks do it. So our economy is only good if we consume more than we make and we make sure “rich” folks can’t save or invest in stocks and bonds? Something is wrong with your picture.
Um, Thomas? You not only missed reality by incalculable amounts , you’ve actually screwed up the theory of supply-side economics by several degrees. The problem with supply-side economics is that those in higher tax brackets (the ones getting larger tax breaks) are saving the money. They are, in fact, sitting on it. The problem is that saving does not equal more economic growth. Supply-side theory is that investing equals more economic growth. The issue here is that reality has shown (after decades of failed experimentation with supply-side economics) that only direct investment (i.e. actually going out and hiring someone) actually creates jobs, whereas indirect investment (savings, stocks, etc.) doesn’t – even if it theoretically should. In other words, when we give more money back to the wealthy, it essentially leaves our economy and does no one any good at all.
However, as has been demonstrated, the working- and middle-classes spend every single dollar they make (in fact, the average American spends $1.65 for every dollar we make, but that’s a separate problem). Therefore, when you lower their taxes, they spend the remainder. This means there is a cumulative effect of several billion dollars being pumped back into the economy by the simple act of giving tax cuts to working- and middle-class American families – as opposed to tax-breaks for the wealthy, which have been shown time and again to have little to no benefit to the economy.
Look guys, it is really simple.
Tax cuts increase saving. More saving = more economic growth = more productivity = more jobs.
China and Singapore are saving at a rate of 30% – and look at both of their robust economies.
Our government isn’t going to spend its way to prosperity.
@Hemingway – I agree that the code is far more of an issue than the rate. Statistics show that tax revenue has stayed between 17% and 20% of GDP every year for the past 40 years, with only a couple exceptions, regardless of what the rate is set to. So, are you in favor of completely scrapping the code and adding, say 30% (needs to be studied) to all current rates (I mean on the base, so 10% becomes 13%, etc)?
The current problem with taxes, at least nationally, is how complicated the code is. Every bit of it has been dictated by the most powerful and influential in our country. With the help of elephants and donkeys, they created a system that would favor themselves…not much different from the Federal Reserve. The code was written in a very complicated manner, requiring a full time accountant to navigate it if the full benefit of their code writing labor was to be realized. So those powerful and influential hired said full time accountant, maybe even a team, to ensure they retained every penny that the system they created would allow. Normal folk do not have these resources and therefore have an extra $500 (about the average per H&R Block) taken from them by the IRS than they would should they have such a team. It is even worse for small businesses, who are routinely bamboozled out of an extra $10,000 – $11,000 (my memory is a little shady here).
So, to finish up, scrapping the code would be the best thing our government could do for the forgotten man. Sure there are many more things that could be done to make our system more equitable (whatever that means to you), but scrapping the code would have more impact than any others. It seems even you may agree with me on that point?
Re: Reagan’s former Budget Director David Stockman’s comments last night on “60 Minutes” (http://www.cbsnews.com/stories/2010/10/28/60minutes/main6999906.shtml)
…”Tax cutting is a religion. What do you mean by that?” correspondent Lesley Stahl asked Stockman.
“Well it’s become in a sense an absolute. Something that can’t be questioned, something that’s gospel, something that’s sort of embedded into the catechism and so scratch the average Republican today and he’ll say ‘Tax cuts, tax cuts, tax cuts,’” he explained. “It’s rank demagoguery,” he added. “We should call it for what it is. If these people were all put into a room on penalty of death to come up with how much they could cut, they couldn’t come up with $50 billion, when the problem is $1.3 trillion. So, to stand before the public and rub raw this anti-tax sentiment, the Republican Party, as much as it pains me to say this, should be ashamed of themselves.”
To argue that neither putting money in banks or spending it abroad will increase incomes for Americans, is flawed. In the first place, the more money banks have, the lower the interest rates they can charge on loans. Cheaper loans for starting small businesses could very well increase incomes for Americans. While the money spent abroad may never make it back to America, the money it cost to get there does.
The fairest (most equal) for tax rate is for everyone to pay the same total amount of taxes.
The next fairest is for everyone to pay the same percentage of their taxable income.
The least fair, is for wealthy people to pay a higher percentage rate than taxpayers with lower taxable income.
There is no justification for higher tax rates for the wealthy, other than the belief that the redistribution of wealth is a legitimate function of government. I see no constitutional foundation for that premise.
I believe it was Jefferson who first said; the beginning of the end of Democracy is when people realize that they can vote to take other people’s money and give it to themselves. It is hard to argue with the point.
Where is the line drawn on the amount of money (poorer) people can take from other (richer) people? I would argue that there is no such line except that which is as indefensible as it is arbitrary.
I find the title of this article to be odd. I read it expecting to learn of the author’s opinion of what the real economic drivers of growth in NM are. What Bradley said is that the housing bubble (which was driven by speculation and easy money), energy price inflation (which was driven by speculation), and entitlement welfare programs are the drivers. In other words, highly specualtive and risky, smoke and mirrors betting and government handouts drive our economy. So that’s it? Is that what we can expect to drive our economic growth in the future? Sorry, but I find this whole explanation shallow and misleading. Therefore, any conclusions based on this shaky foundation have to be discounted. The other fallacy in the article is that income tax rates don’t matter to the economy. Now ask yourself, does that make sense? The second question I would ask is that if the author believes in what drives our economy, as stated, then what is the author’s solution to growth today?
@Hemingway
Thanks for the link to 60 the Minutes brief interview with David Stockman. Supply-side economics is a tricky subject to analyze without taking into account the current health of the US and global economy in the year 2010. Stockman left the Reagan cabinet in 1981 when he criticized supply-side economics. Today, we have a much different world. Western central bank economies have reached the end of their cyclical effectiveness. It is impossible for groups of people (central bankers) to fix the price of money. In their attempts, over time, they have literally drained/ruined Western economies which all-but-collapsed in 2008.
Even now, it is impossible to resuscitate these Western economies because the distortions remain thanks to the bailouts – and nobody is sure who to lend to, and nobody wishes to borrow anyway, given all the uncertainty. Unemployment in fact is at catastrophic levels. Governments set unemployment at 10 percent but in fact the real rate of joblessness may be 20 percent or even 30 percent. So my argument that the wealthier class have a higher propensity to save could remain true – but their saving in the bank is not finding the banks lending and therefore the additional money supply ( via tax cuts) is not reaching the people and businesses in need. Stockman says today he is for raising taxes on all income classes, because our national debt and large deficits have exposed our country possibly “to be rendered insolvent.” He may be right. But cutting government spending (think bailouts and Wars) may be a much better way to raise government income than raising taxes.
Watch this insightful interview with David Stockman – Reagan’s former Budget Director
http://www.cbsnews.com/8301-504803_162-20021193-10391709.html?tag=component.0
Economic theories abound! However the reality of the situation is the abuse of the tax codes by the wealthy and corporations. Read this Bloomberg on corporations and taxes.
http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html
What we need in New Mexico is similar to a proposal in Washington – “The proposal calls for a 5% tax on income over $200,000 for individuals and over $400,000 for couples. That would rise to a 9% tax on income over $500,000 for individuals and over $1 million for couples.” And don’t give the boogieman statement that jobs will be driven out of the state. That has no reality.
Mr. Bradley states that one of the problems with the “trickle-down sham” (which he calls the Richardson tax cuts in 2003), is that it puts more money in the pockets of wealthier Americans – “which doesn’t create jobs nor increase incomes for all Americans.”
First off, only critics of supply-side economics such as Mr. Bradley use the term “trickle-down economics” today. Economist Thomas Sowell has written that the actual path of money in a private enterprise economy is quite the opposite of that claimed by people who refer to the trickle-down theory. Sowell noted that money invested in new business ventures is first paid out to employees, suppliers, and contractors. Only some time later, if the business is profitable, does money return to the business owners—but in the absence of a profit motive, which is reduced in the aggregate by a raise in marginal tax rates in the upper tiers, this activity does not occur.
Mr. Bradley says that “when the market isn’t thriving because consumer demand is low” (like today, due to high unemployment), “investors are more likely to sit on their assets than risk losing them.”
Mr. Bradley is ignoring the saving part of tax cuts – called the marginal propensity to save. Many studies have found that the marginal propensity to save is considerably higher among wealthier people. Policies, including tax cuts, that seek to increase saving are often aimed at the wealthy for this reason. Saving, of course, also ultimately means some form of investment, as even money placed in savings accounts is ultimately invested by the banks.
To reverse the Richardson tax cuts (and let the Bush cuts expire, for the matter), as Mr. Bradley advises, is the absolute wrong policy to pursue if we want to encourage saving and private investment and claw our way back from the nine million jobs we have lost in the past two years – lost jobs that had nothing to do with tax cuts.
I’m all for tax-cuts for everybody (which is what I assume he’s getting at with the line, “Putting money into the hands of those who need it most and are, therefore, more likely to spend it – such as people who have lost their jobs and those working but earning low incomes – helps sustain consumer demand”). He quotes Gruener as saying “None of my investments has ever been motivated by the rate at which I would have to pay personal income tax” and that “What has motivated them is the presence (or potential) of a thriving market.” But I believe high taxes (for everyone) congest the market and do not let it thrive. So I’m for letting the tax cuts on the rich remain but I’m also for cutting taxes for everyone else as well.
But for that to happen the government will have to rein in their spending. Which is not likely to happen no matter how good it will be for the country.