3 Huge Economic Misconceptions From Election Season

We're down to nine weeks until the presidential election. That means we're heading into a period of what will no doubt be a breathless display of rhetoric and nonsense winning out over facts and reason. Here are three that always get me.  

1. Lower taxes lead to faster economic growth
It makes a lot of sense: Take money out of the hands of the most productive members of the private sector and give it to some bumbling bureaucrats, and growth will slow, and vice versa. It makes so much sense that few take the effort to look at the historical facts to see how the argument holds up (the most dangerous form of certainty).

Here's the scorecard:

Sources: Tax Policy Center, Federal Reserve.

Do you see the trend? I hope not. Because it doesn't exist.

Since the Sixteenth Amendment was ratified in 1913, America has had every combination of taxes and growth you can think of. High taxes and blistering booms, low taxes and crushing depressions, and everything in between.

Why is this?

First, there's a difference between the top statutory tax rate and the top effective tax rate. Statutory is the rate that's advertised; effective is the rate people actually pay. Because of deductions, write-offs, loopholes, and high marginal barriers, the difference between the two can be huge. Since 1979, the top statutory tax rate has been as high as 70% and as low as 28%, but the average effective income tax rate for the top percentile of households has hovered between and 18% and 24% -- much less variance. A spike in effective tax rates would almost certainly thump the economy, but we simply haven't seen that despite big changes in statutory rates.

More importantly, taxes are just one piece of this enormously complicated thing we call the economy. Other factors like education, population growth, and the ideas of entrepreneurs play a much larger role in economic growth than taxes alone. It's not that taxes don't matter, but that other things matter so much more. Take an economy of 300 million people, 27 million businesses, and 6.7 billion other people on the planet in hot pursuit, and very rarely can you say, "Do X and Y will happen." It's just a lot more complicated than that.

2. We eventually need to pay off the national debt
Let's just get this out there: We will never, ever pay off the national debt. And frankly, that's fine.

A popular way to put U.S. debt in perspective is to compare it to household finances. This makes the numbers more comprehensible, but it turns the comparison into apples and oranges.

Households have a fairly short window of money-making potential (40-50 years), and pass away 10-20 years after that. All debts have to be repaid by that time for creditors to get their money back.

Countries are different. Their lifespans are indefinite, and they can remain indebted indefinitely. The same is true for corporations. General Electric and Ford have likely been indebted for over a century, and they'll never become debt-free. Nor should they, and nor should our country. Rather than being paid off for good, debt that comes due is replaced with new debt, and on and on. What matters for organizations with indefinite lifespans is not the raw amount of debt, but the cost of carrying that debt.

Yes, sometimes the cost of carrying debt becomes excessively expensive. When interest rates rise, our nation's $16 trillion debt surely will. How will we deal with it then? Ideally the same way we did after World War II: We grew out of it.

As a percentage of GDP, debt after the second world war was more than a third higher than it is today. But it was never much of a problem. For the following three decades, debt to GDP fell consistently and like a rock before settling at just 31% in 1981, three-quarters lower than it was at the end of the war.

Interestingly though, from 1945 to 1980, there were only eight years when the government actually ran a surplus, and most were irrelevantly small. Think about that: The debt burden fell dramatically even as we ran deficits almost 80% of the time.

How? Because those deficits were small and the economy grew like a weed.

As long as nominal GDP growth is higher than the annual deficit, a government can run in the red forever while actually lowering its debt load. This isn't intuitive because it doesn't apply to households, but that's the point: Governments aren't households.

3. It matters who wins the presidency
Can we all admit one thing? Evidence that if one party wins, the economy will tank, or if another party wins, it will boom, is mindlessly weak. Just as with taxes, we have had every combination of political party and economic growth you can think of. Democrat and high growth, Democrat and deep recession. Republican and high growth, Republican and deep recession.

There is very little a U.S. president can do to the economy unilaterally. If a single person does have inordinate sway over the economy, it's the president of the Federal Reserve, not the president of the United States.

Almost without exception, politicians get too much credit for the economy when things are good, and are burdened with too much blame when it slows. In their world, a successful economy reflects their decisions, and a poor one reflects the decisions of the person they're running against. In the real world, the economy is built on the decisions of businesses and consumers, most of whom go about their day making personal choices while blissfully unaware of what's happening in Washington.

This is not a declaration that the Oval Office has no impact on the economy -- surely it can have. But its impact is way out of proportion with the amount of blame and credit we often give it. The 1990s boom probably would have happened with a Republican president, the 2000s probably would have been just as miserable with a Democratic president, and the budget deficit would have been massive over the last four years even with a Republican president. For the vast majority of Americans, the most important business stories of the next decade will have nothing to do with who wins the next election. You reject that at your own peril.

Bank lobbyist (of all people) Andrew Lowenthal made a good point a few years ago: "Every election I've ever been involved with has been 'the most important election in history.' At some point, it's not. It's just the path of history."

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy.

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Comments from our Foolish Readers

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  • Report this Comment On September 04, 2012, at 3:38 PM, CajunRon100 wrote:

    As uncomfortable and uneasy as these points make me me feel about the debt and taxes, I think Mr Housel makes some very good common sense observations. The first two points were really new revelations for me ponder. But they do seem to make some sense. I have always been in agreement with the third point.

    Which leads me to a final point. Perhaps the famous quote should be changed to..."There are actually three things certain in life...debt, death and taxes"

  • Report this Comment On September 04, 2012, at 3:46 PM, tdotsports1 wrote:

    Good read.

  • Report this Comment On September 04, 2012, at 3:49 PM, TMFCane wrote:

    Great article Morgan, and superb point about the national debt.

    I feel the debt number is always thrown about to spark fears in the hearts of average Americans, as if spending is some sort of taboo thing for a government. Good to see the refreshing take here.

  • Report this Comment On September 04, 2012, at 4:02 PM, astuber9 wrote:

    Regarding taxes and growth, who cares what the top marginal rate is? We should be concerned about actual taxes received vs. GDP growth. I don't see how taking more money from producers (raising taxes) does not lower growth.

  • Report this Comment On September 04, 2012, at 4:10 PM, mdk0611 wrote:

    1. 1000% in agreement that higher/lower taxes in a vacuum lead to economic growth. However, tax policy CAN influence the economy. And 1979 is a case in point. On the individual side, when your effective rate is maintained close to historical norms due to loopholes (losses from tax shelters that are now called "passive activities"), deductions (credit card interest etc) you can say that the code, in concert with other factors, held the ecconomy back. Throw in bracket creep and an even more screwed up set of rules and rates for corporate taxes than what we have today for good measure.

    2. No, the national debt will never have to be entirely paid off. However, I think you do not give adequate weight to the fact that the debt can reach levels that can damage the overall economy. And this can be accelerated by high interest rates, if and when they occur.

    3. Just like the tax question, who wins the presidency can not, in a vacuum, fix or damage the economy. It's just one of many factors. That being said, the presidency can influence the direction the economy takes. I think energy is one area of policy where this will become very apparant between 2013 and 2017

  • Report this Comment On September 04, 2012, at 4:13 PM, TMFHousel wrote:

    <<However, I think you do not give adequate weight to the fact that the debt can reach levels that can damage the overall economy. And this can be accelerated by high interest rates, if and when they occur.>>

    From the article:

    "Yes, sometimes the cost of carrying debt becomes excessively expensive. When interest rates rise, our nation's $16 trillion debt surely will."

    Thanks for the comments all.

  • Report this Comment On September 04, 2012, at 4:59 PM, RedScourge wrote:

    This also just in: studying how many people die of all causes in a given year doesn't help you discover how fatal esophageal cancer is.

    Of course there is no correlation between the top effective income tax margin and the economy, you'd need to look at something like federal+state+county spending as a percentage of GDP to try to find a useful correlation.

    Also, of course you're not going to find a trend between which party is in office and how the economy performs, because recessions under one administration might be caused by actions of another, such a bubble which took 20 years in the making to finally burst, etc.

    You have to start with more sane metrics in the first place and then correct for other factors, if you're going to try to find some correlation between specific actions and their results on the economy.

  • Report this Comment On September 04, 2012, at 5:11 PM, Foosballking wrote:

    This article is as useless as I've seen. Insipid correlation between taxes and growth. DEFINETLY written by a liberal who probably wouldn't admit to being one....

  • Report this Comment On September 04, 2012, at 5:12 PM, s73v3r wrote:

    astuber9:

    " I don't see how taking more money from producers (raising taxes) does not lower growth."

    The numbers are right there for you to see. It doesn't.

    Part of the reason is that, if you know taxes are going to go up, you're going to invest more in your business. If you're going to have to lose X dollars in taxes, or invest X dollars in your business, you're likely going to want to do the later.

  • Report this Comment On September 04, 2012, at 5:13 PM, s73v3r wrote:

    Foosballking:

    The chart shows that there was NOT a correlation. You can whine about "liberals" all you want, but numbers don't have a political affiliation. They're just numbers. They just kinda sit there and... and numb.

  • Report this Comment On September 04, 2012, at 5:15 PM, dc75036 wrote:

    Help me out on point 2. Why was the U.S. credit down graded by the rating agencies?

  • Report this Comment On September 04, 2012, at 5:19 PM, TMFHousel wrote:

    <<Why was the U.S. credit down graded by the rating agencies?>>

    "The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political

    institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a

    negative outlook to the rating on April 18, 2011."

    http://www.standardandpoors.com/servlet/BlobServer?blobheade...

  • Report this Comment On September 04, 2012, at 5:27 PM, bonefishing wrote:

    Thank you Foosbalking! Let's not be mentally myopic and think that this election is just a mere formality.

  • Report this Comment On September 04, 2012, at 5:28 PM, TMFHousel wrote:

    <<This article is as useless as I've seen. Insipid correlation between taxes and growth.>>

    The point is there's no correlation.

    "I've already made up my mind. Don't confuse me with the facts!"

  • Report this Comment On September 04, 2012, at 5:31 PM, carjjc wrote:

    Its about time. We have spent so much energy on lower taxes. They do matter to our government services, they are too low. Not to be missunderstood, we need roads and bridges and a strong defence... The national debt as well. And for sure the preaident needs so much help from congress that it does not make a lot of defference.

    I am a small company owner and I dont spend any time (very litttle) on the tax rate. I actually want the rates to go up on high earners (including myself) and i think our economy will inprove.

  • Report this Comment On September 04, 2012, at 5:33 PM, iamtheschmitzer wrote:

    I see no logic Point 2 whatsoever. What policy should the government enact because of #2? I ca n tell you, that's exactly how the last two administrations have acted, and its got us $16 big ones, and you DO pay for it, whether in principal or interest. In higher taxes or fewer services.

    My counter point: What is wrong with paying for every program we have? I can't name a single thing wrong with it.

  • Report this Comment On September 04, 2012, at 5:34 PM, stimepy wrote:

    <<This article is as useless as I've seen. Insipid correlation between taxes and growth. DEFINETLY written by a liberal who probably wouldn't admit to being one....>>

    You'd be correct, so long as you ignore the truth and look at only what you what to see, then you will ALWAYS see a correlation.

    Number don't lie. Statistics warp truth, and facts can be hidden/forgotten. However, I see no statistics up there, no facts (for the first part anyway), only numbers. Care to explain how numbers lie?

  • Report this Comment On September 04, 2012, at 5:36 PM, Hankinsense wrote:

    ya fail to mention der wha happens when the interest is so high the USofA can,t pay and NO ONE will lend ya any more! Do not worry be happy. Coming soon to a country near you.

  • Report this Comment On September 04, 2012, at 5:37 PM, TMFHousel wrote:

    <<My counter point: What is wrong with paying for every program we have? I can't name a single thing wrong with it.>>

    Over the long run, yes, I totally agree. As the most basic rule of thumb, tax revenue should roughly match the services voters demand.

    The argument for deficits is basically textbook Keynes, who argued a government should run surpluses when the economy is strong and deficits when it's in recession to balance out the decline of the private sector. Long run though, yes, taxes should match spending.

  • Report this Comment On September 04, 2012, at 5:37 PM, scotttw wrote:

    As I read the article I got the undeniable impression that it was attempting to undo the Republican political party's criticisms of the Democrat policy by cleverly hiding it in macroview. Regarding: 1) If a household received a lower tax rate then household would spend more in the economy and it would grow. 2)a not so clever statement which doesnt address the real problem that as debt grows so does the payment on the debt. Really braindead to think paying substantially more interest to creditors doesnt take money out of our economy. 3) This administration has not passed a budget in 3 years and practiced uncontrolled borrowed spending. Succesful money management and wealth production comes carefully through discipline and prudent investmenting, as we all know. I would call this article "mumbo jumbo".

  • Report this Comment On September 04, 2012, at 5:38 PM, jlynchslu wrote:

    I agree with the comments to this story that point out that if you measure and contrast the wrong things or leave out the context of your measurements you will never be able to make any meaningful conclusions.

    Points 1 & 3 can be combined here (1. Lower taxes and faster growth and 3. It matters who wins the presidency). Yes, all kind of other factors come into play when trying to show trends over decades on these 2 factors. However, in my view most pundits are overlooking a very important proposal by Romney which will revolutionize and revitalize savings and investment in this country. Not taxing dividends and capital gains for individuals earning less than $200,000 per year will quickly make capital market investment an everyday reality for low salary workers when they realize that tax free income is their reward for investing in the market via dividend and capital appreciating stocks, etc. Compare this to Obama’s aversion to rewarding investment risk and Points 1 and 2 ring true to me at least this election year and will have a definite positive change within the first year of Romney’s first term. Regarding Point 2 (We need to pay off the National Debt), clearly the importance of this belief is related to the percentage of debt to overall GDP. Well, in our nation where our debt is sky rocketing and our GDP is flat at best, this has become important especially since these trends do not appear to be changeable under a democratic legislature and executive. We all know you can take parts of any truth and make it appear irrelevant but it is the context of a statement that makes a statement relevant. You may argue with my context presumptions but I think a fair evaluation of the contexts I mention show the exceptions to the author’s conclusions.

  • Report this Comment On September 04, 2012, at 5:43 PM, TMFHousel wrote:

    jlynchslu,

    The current long-term capital gains and dividend tax for those in the 10% and 15% income tax bracket is currently 0%. Most of what you're wishing for is already law.

  • Report this Comment On September 04, 2012, at 5:47 PM, dmiles2 wrote:

    Uh, the top Federal statutory tax rate is not only sort of irrelevant, as you point out, but it is only part of the picture. How about including all the state, county and city taxes that have grown to the point of being almost obscene?

    To do that justice, I think you would have to do it state by state. It would be a fair bit more work, but it would be illuminating to see that some time this month.

    There is a ton of anecdotal evidence from people leaving California. Are we going to claim that California's economy is healthy?

  • Report this Comment On September 04, 2012, at 5:53 PM, dmiles2 wrote:

    Morgan, this surprises me.

    <<This article is as useless as I've seen. Insipid correlation between taxes and growth.>>

    The point is there's no correlation.

    "I've already made up my mind. Don't confuse me with the facts!"

    You already said that the important thing is not top statutory rate, but effective rate. Why did you graph top statutory rate? I am disappointed.

    Furthermore, as I already pointed out, Federal taxes are only part of the tax issue. I am sure you already know that. I don't think you are being honest. I'm disappointed.

  • Report this Comment On September 04, 2012, at 5:53 PM, nogrthinker wrote:

    Just like running a household, you either have to make more than you spend, or spend less than you make. You can only ignore reality for a limited time. It is the 'trend' that will ultimately spell acceptable continuation, or a 'start all over' disaster.

  • Report this Comment On September 04, 2012, at 5:54 PM, RWBerey wrote:

    We seem to forget that the ability of America to pay off its post WWII debts was based upon two important factors:

    1. We were the only industrial base left standing, and the only market with money. The world depended upon us to manufacture, and we had the money to buy their goods as their manufacturing bases recovered. We were the only game in town for two plus decades.

    2. Americans bought bonds during that period. Our debt was primarily covered from U.S. based savings. That obviously is no longer the case.

    Bottom line - We will not grow out of our debt nor be able to cover our unfunded liabilities. We can only default, or reduce the value of the U.S. dollar to enable repayment of debts. Present interest rates will eventually go up. Just a few points would be catastrophic. This is why Mr. Bernanke is trying to push all indebtedness out as long as possible. He won't be around for the meltdown.

    It's simple math. Immediate debt plus unfunded liabilities in excess of 70 trillion. Seriously. The pain will come sooner than we all think.

  • Report this Comment On September 04, 2012, at 5:55 PM, TMFHousel wrote:

    <<Why did you graph top statutory rate?>>

    Because politicians don't debate about changing the effective rate. The debate and set policy and make commercials and bumper stickers about the statutory rate. This article is about election season claims.

  • Report this Comment On September 04, 2012, at 5:57 PM, TMFHousel wrote:

    <<There is a ton of anecdotal evidence from people leaving California.>>

    Beyond the anecdotes, the deeper studies show most of those fleeing California were very low-income workers who weren't paying much taxes to begin with. They're fleeing because there are no more construction jobs.

  • Report this Comment On September 04, 2012, at 5:57 PM, KBOKSOFT wrote:

    Well... "It matters who wins the presidency" could probably be reworded to "Which party wins the presidency materially affects the economy".

    Historically, it sometimes DOES matter WHO particularly wins the presidency. What about FDR's New Deal if Hoover had won reelection? Or Reaganomics if Carter had won again? You can't tell me the US economy would have been unchanged by a Ross Perot or Ron Paul win.

    The general political threat that the world will come to an end if the other guy wins is, of course, kaka. That point is well-taken.

  • Report this Comment On September 04, 2012, at 5:58 PM, jlynchslu wrote:

    The Author's comments to my prior post:

    "jlynchslu,

    The current long-term capital gains and dividend tax for those in the 10% and 15% income tax bracket is currently 0%. Most of what you're wishing for is already law."

    There you go again. It is too bad you are trying to simplify and categorize legitimate points. How many people who make near $200,000 per year fall within the 10 or 15% tax brackets? Yes, you can marginalize any truth by taking it out of context and / or misquoting the actual truth with you are debunking. This is the point of my comment to begin with and you just continue the same line of faulty reasoning. By the way, having low income tax rates on investment is not just what I am wishing for, how about all those poor working stiffs who have never really had the incentive to invest in our world's best capital markets? Is is not time to share the wealth of know the success of savings and investment and being rewarded for taking risk in investing in America (or foreign investments if that is their wish)?

  • Report this Comment On September 04, 2012, at 5:59 PM, TMFHousel wrote:

    ^ I said most. Not all. Most. A 15% tax bracket is about $70k a year for a married couple. That's AGI, so it's a salary of probably something close to $100,000 a year. Again, most.

  • Report this Comment On September 04, 2012, at 6:00 PM, jracforr wrote:

    We would be foolish to think these facts are not known to the political parties and their supporters.Each party is interested in the "facts" as long as it promotes their version of the truth . Those who have created this crisis have protected themselves by distracting the gullible with emphasis on taxes and debt and not the greed and fraud that is at the root of the present crisis.. The savings and loan crisis of the 80s and the Panic of 1857 are all rooted in excess speculation. However this should not diminish the importance of reducing the debt or simplifying the tax rate at about 20% ,the real rate after deductions.

  • Report this Comment On September 04, 2012, at 6:07 PM, bearbitten wrote:

    So, why did Obama promise to cut the $10 trillion in half if it doesn't matter?. and since our gdp is rather low, increasing deficit by half with more to come seems to me to be worthy of concern.

  • Report this Comment On September 04, 2012, at 6:08 PM, TMFHousel wrote:

    <<So, why did Obama promise to cut the $10 trillion in half if it doesn't matter?. >>

    He never promised that.

  • Report this Comment On September 04, 2012, at 6:13 PM, TMFHousel wrote:

    To elaborate, if I recall, he pledged to cut the deficit (not the debt) in half, which obviously hasn't been done (though 2012's deficit will be about one-quarter lower than 2009's).

  • Report this Comment On September 04, 2012, at 6:15 PM, terryongarland wrote:

    Grow out of the debt, like just after the Second War ? The world has change much since 1945 , and the biggest factor is we are not the largest manufacturing economy we once were. Just how this US economy will out grow the debt is beyond me

  • Report this Comment On September 04, 2012, at 6:17 PM, TMFHousel wrote:

    <<the biggest factor is we are not the largest manufacturing economy we once were>>

    Real manufacturing output is much higher now than it was after WW2. It's manufacturing employment that has declined as much of the manufacturing industry has become automated.

    http://g.foolcdn.com/img/editorial/ManufacturingJuly11.png

  • Report this Comment On September 04, 2012, at 6:17 PM, jlynchslu wrote:

    Author's 2nd comment to my 2nd post:

    "^ I said most. Not all. Most. A 15% tax bracket is about $70k a year for a married couple. That's AGI, so it's a salary of probably something close to $100,000 a year. Again, most."

    Thanks for making my point (again). Your willingness to make broad generalizations and mention only selective points make you point of view/bias obvious.

  • Report this Comment On September 04, 2012, at 6:18 PM, TMFHousel wrote:

    Also worth noting:

    "The United States is the world's largest manufacturing economy, producing 21 percent of global manufactured products. China is second at 15 percent and Japan is third at 12 percent."

    http://www.nam.org/Statistics-And-Data/Facts-About-Manufactu...

  • Report this Comment On September 04, 2012, at 6:21 PM, TMFHousel wrote:

    jlynchslu,

    You said it would be great if those making less than $200k wouldn't have to pay investment taxes. I implicitly agreed and pointed out that that's already true for most low-income workers. I don't know where the bias or disagreement is.

  • Report this Comment On September 04, 2012, at 6:24 PM, onion44 wrote:

    Sure looked like a "talking points" memo for the DNC...

    Much more of that and I think you will find many that depart...

  • Report this Comment On September 04, 2012, at 6:28 PM, TMFMorgan wrote:

    <<Sure looked like a "talking points" memo for the DNC.>>

    Just wanted to repost this comment from a reader of my last column:

    "Anyone else starting to get the feeling that the Motley Fool is turning into a right-wing propaganda machine?"

  • Report this Comment On September 04, 2012, at 6:28 PM, jbacva wrote:

    Morgan sounds like a liberal democrat.

  • Report this Comment On September 04, 2012, at 6:40 PM, FundamentalsMan wrote:

    While I'm in general agreement on the three points, I would add that who sits in the Oval office can make a difference in unexpected ways. Had a democrat been in office during 2000's it is not likely we would have gone to war with Iraq. The expense of that decision is something our country will continue to feel long into the future as we pay the promised benefits to all our brave soldiers.

  • Report this Comment On September 04, 2012, at 6:43 PM, 42jim wrote:

    Simple economics, as well as common sense, tells us that lowering taxes helps grow GDP (gross domestic product). Placing more money in the hands of consumers leads to more spending, which in turn, leads to growth in GDP. And this is not simply a conservative argument. Increasing government spending also puts more money in the hands of consumers and grows GDP.

    So why doesn’t the chart show a clear relationship between highest marginal tax rate and growth in GDP? First of all, to examine the impact of lowering taxes on the growth of GDP, we should examine the tax rate on all consumers, not just those at the top. But more importantly, policymakers raise and lower taxes for a number of reasons. For example, when the economy is strong and GDP growth is high, policymakers are likely to lesson the tax burden and lower the tax rate. Similarly, when the economy is weak, thoughtful policymakers would lessen the tax rate to stimulate the economy. So a graph would show low tax rates during both boom and bust and hence no correlation between tax rate and GDP growth. Incidentally, the same argument holds true for government spending.

    As Morgan points out, paying the interest on the national debt is expensive now, and can get really expensive when interest rates go up. But this doesn’t mean we should never go into debt. What if we had a sick child? Wouldn’t we go into debt to do everything we could to make sure that child recovered? We now have a sick economy. We need both tax and spending policy that will help put people back to work. The trick for policymakers and the citizens who support them is to have the discipline to NOT fund pet projects and NOT lower taxes once the economy recovers. That’s the time to use the increased revenues to reduce the debt, so we’re not paying huge interest on the debt and we have the ability to rescue the economy the next time it’s needed.

  • Report this Comment On September 04, 2012, at 6:43 PM, eldetorre wrote:

    The only point I would disagree with here is that elections can make a profound difference if an extreme of ideology, regardless of party, prevails.

    Ad hominem attacks are directly proportional to lack of knowledge.

  • Report this Comment On September 04, 2012, at 6:48 PM, akaluna wrote:

    TMF Housel wrote:

    "When interest rates rise, our nation's $16 trillion debt surely will. How will we deal with it then? Ideally the same way we did after World War II: We grew out of it."

    Are you serious? We will "grow out of it" Wow I have not heard that one from many analysts who study economics. Lets hope we do but I think it would be prudent to recognize what happens if we dont grow out of it?

  • Report this Comment On September 04, 2012, at 6:56 PM, xetn wrote:

    I believe Morgan has made a huge error in his debt analysis; the unfunded liabilities related to primarily entitlements. A good analysis is:

    http://lewrockwell.com/north/north1187.html

  • Report this Comment On September 04, 2012, at 6:58 PM, xetn wrote:

    Opps; left this one off of the above:

    http://lewrockwell.com/north/north1189.html

  • Report this Comment On September 04, 2012, at 7:00 PM, hbivins wrote:

    Please address these three concepts using Europe as your example instead of the USA. And yes, the only fair tax is a flat tax with no deductions!!

  • Report this Comment On September 04, 2012, at 7:02 PM, RodCarlson100 wrote:

    I agree with an earlier comment to use effective tax rates, include federal income tax, state and local taxes. The effective rates are much lower, especially for higher income groups, than statutory rates. Wonder how the GDP vs. tax rates graph would look on that basis.

  • Report this Comment On September 04, 2012, at 7:02 PM, jlynchslu wrote:

    Author's response to my 3rd post:

    "You said it would be great if those making less than $200k wouldn't have to pay investment taxes. I implicitly agreed and pointed out that that's already true for most low-income workers. I don't know where the bias or disagreement is."

    I am glad we agree although I do not understand why do you just "implicitly" agree and not expressly agree? My disagreement is with your statement that 1) lowering taxes will not increase growth and 2) it does not matter who wins the presidency. You pointed out that Romney's proposal is already part of the tax law. I in turn point out that (accepting all of your presumptions) it currently does not reach anywhere near half the number of low income earners. You last comment seems to acknowledge we agree on the premise that Romney's proposal is good. Now perhaps we disagree on just how large the impact will be on growth of our economy. I suggest this proposal will have a revolutionary effect not only on growth of the economy and our capital markets but on the culture and psyche of everyday low wage earners. It will give them all a real chance of becoming part of the American Dream. Even for those who will never own their own business, they can own part of many businesses and receive tax free income if they invest wisely. For me, this can not be understated especially in stark contrast with the current administration which places emphasis on government dependency then on individualism, work, and investment motivation ("You did not build that"). Now I readily admit my bias on these issues but I think my views are based upon what is best for America. In times when the media and pundits have made mush of legitimate party positions, I think this particular Romney proposal that I point out will have profound impact on our country and at the same time prove the alleged economic misconceptions 1 & 2 are true. I am sure you understand that not everyone agrees with the presumptions in your article and I have tried to list just one example of why I do not agree. There are many others. Thanks for starting an interesting and important debate.

  • Report this Comment On September 04, 2012, at 7:19 PM, JadedFoolalex wrote:

    OK, enough of the political potshots! I am disturbed by the laissez-faire attitudes on display here! Apparently, none of you have ever gone through a world-wide depression where food was hard to come by, all your assets were confiscated to pay for your debts, and believe me, at 70 trillion in debt, everyone in the U.S. WILL lose theirs!!! That's not hyperbole or fear mongering, that is a fact and a guarantee!!

    Regardless of who is in the white house or whatever party is in the Senate/Congress, the fact remains that debt and especially government debt is a tax on the future! I hope that you, Mr. Housel and you, Mr. Morgan don't have children because pushing government debt down the road is akin to spending your grand-children's wages when they aren't even born yet. Kinda selfish isn't it?? It's also morally reprehensible, so stop acting like Gov't debt is no big deal!! It's a huge deal that will become incredibly costly if nothing is done about it NOW!!!

  • Report this Comment On September 04, 2012, at 7:21 PM, gunnboy wrote:

    You deal way too lightly with the impact of so much debt when interest rates were to return to Carter levels. The artificial pushing down of interest rates through money supply will eventually mean high inflation and the erosion of nest eggs put away over a lifetime. Why should we have to put up with irresponsible politicians who take from those who work hard, invest, and save?

  • Report this Comment On September 04, 2012, at 7:22 PM, TMFBlacknGold wrote:

    O'Doyle (and Morgan) Rules!

  • Report this Comment On September 04, 2012, at 7:29 PM, desertcounselor wrote:

    As an historian, I say that this article is bunk. Look at the record, and you will see that there are patterns; actions do have consequences, and it does matter who does what. Maybe over the long haul things even out, but that ignores the lives of millions of ordinary Americans. A heartless point of view, typical of many economists.

  • Report this Comment On September 04, 2012, at 7:55 PM, willbite wrote:

    "We grew out of it"... from your text about WWII

    What do you see as reasonable national debt? What GDP growth is required to "grow out of it"... to your reasonable debt level over what time span?

    Comparisons to the past may not reflect the nature of our current and future global economy.

    "Growing out of it" takes a large leap of faith.

    I think it matters who will lead going forward!

  • Report this Comment On September 04, 2012, at 8:07 PM, crhans wrote:

    42jim says: "Simple economics, as well as common sense, tells us that lowering taxes helps grow GDP (gross domestic product). Placing more money in the hands of consumers leads to more spending, which in turn, leads to growth in GDP. And this is not simply a conservative argument. Increasing government spending also puts more money in the hands of consumers and grows GDP."

    I know the republicans are often guilty of making this argument, but there is nothing conservative or common sense about it. It is the same argument that Paul Krugman (NYT) makes: just have people do enough "make work" and the economy will begin moving again. I respectfully disagree.

    The economy is actually dependent on discovering evermore efficient ways to provide things of value to people. The prerequisite for any employment - being more valuable to another than what is paid in compensation. When we buy things we are exchanging value. Because we are free to choose, the product mix we select encourages those means of production seen as having the highest value and greatest efficiency. Obsolete methods of production are phased out.

    Consumption is only a byproduct of a healthy economy! Consumption uses up valuable natural resources lost to eternity, hence the onus is on us to seek ever more efficient paths. Less consumption, more saving and investment, and more value creation is the key to a healthy economy. Given this combination, the world would beat a path to our door.

    We can't spend ourselves rich and the debt we are accumulating in an attempt to do so is very dangerous to our long term survival as a nation.

  • Report this Comment On September 04, 2012, at 8:07 PM, golferman101 wrote:

    While the statements seem valid, the oposite can be stated for most examples. If you had used GM and Chrysler for examples, they don't compute. While I am interested in investments for profit, your liberal views kind of scare me. If you value a business operation according to your government debt values, most companies would have to be "to big to fail" for survival. If big Government or smaller Government policies do not matter, or who wins, neither does the investment profits.

  • Report this Comment On September 04, 2012, at 8:08 PM, 48ozhalfgallons wrote:

    <<There is very little a U.S. president can do to the economy unilaterally. If a single person does have inordinate sway over the economy, it's the president of the Federal Reserve, not the president of the United States.>>

    .... And who appoints the president of the Fed?

    Ironically, Bush 43 appointed Bernanke. Bernanke's first move was to raise interest rates 1/8 % in June 2006. The markets immediately plunged 900 points despite expecting the increase. Moreover, despite a quick recovery, Bernanke apparently promised never to do that again no matter what.

    I expect nothing to change under another four years with Obama. The best chance for change lies with a different administration.

  • Report this Comment On September 04, 2012, at 8:27 PM, golferman101 wrote:

    I love it, we have a lot of opinions and politics as usual. Right or wrong, the only comment missing is "GOD BLESS AMERICA"

  • Report this Comment On September 04, 2012, at 8:28 PM, pillarsoflight wrote:

    All your points are valid and support an equanimity that will serve to reject the popular histrionics and focus on what's really important. Thank you.

  • Report this Comment On September 04, 2012, at 8:30 PM, TMFMorgan wrote:

    <<And who appoints the president of the Fed?>>

    The president *and* by confirmation of Congress. It's not a president-only decision.

  • Report this Comment On September 04, 2012, at 8:33 PM, billr44 wrote:

    Here we go. Now the Motley Fool has to put its two cents of no sense in the political persuasion game. I don't care for mixing money and politics. I don't need to be told what to think. I can go to Yahoo Finance, Yahoo News, or MSNBC for that.

    I do believe that lower taxes spurs the economy. I don't know about the word "faster" which the author throws in.

    Even Obama used to say it was unwise to raise taxes in a downright down economy. You want another recession tomorrow? Raise taxes today.

    If the author wants to raise taxes, then he can send the US Treasury a check. I doubt if he has paid any more than what he owes.

    My guess is that not one dollar of increased revenue will ever go to deficit reduction in this Washington DC. Congress will spend it, and then some, borrowing more from China.

    Show me Congress has cut to the bone, and then used the saw, and then, and only then, ask for more taxes. Don't trot out that Keynesian stuff; I'm not buying it even though I'm paying for it.

    I do believe we have to get the national debt down to a manageable size. I don't know anyone who talks about eliminating the national debt.

    We do want to balance the budget and shrink the deficit. The year by year deficits must start going to zero. The National Debt and the year by years deficits are not the same things. Zero national debt is a straw man argument and not worthy of consideration.

    I somewhat agree that it doesn't matter who is President as far as the economy goes.

    Economies have cycles. Bill Clinton had a good cycle and then, under George Bush, the Clinton chickens came home to roost and it turned out the Clinton economy hadn't been so good; too many companies cooked the books.

    It was under Clinton that Fannie and Freddie gave out mortgages based on fogging a mirror, and that came home, along with mortgage backed securities, in 2008.

    Supreme Court nominations, I used to believe, are another matter.

    But I think that Obama has changed my mind. He didn't create this mess, but he sure messed it up something awful. Don't get me wrong, I blame Bush 43 as well. And back down the line, Clinton, Bush 41, Carter, FDR, to name a few. This is a long-standing problem of too much government.

    The banks got bailed out but they are not making loans. Has Obama cajoled them to do so? I don't see it.

    The Democrat Senate has passed no real budget in three years. Just Senatorial fiction.

    The Senate is sitting on stuff that needs to pass. Obama must be giving Harry Reed tacit if not explicit approval.

    What about his energy policy? It's all stick and no carrot.

    The stick is to make fossil fuels so expensive that we are crushed into cutting back so that alternative energy is more competitive. What will it take for another depression? $6 gas. $10 gas?

    Why not lead for a change and start putting alternative energy on all government buildings and the government car fleets? That would spur development and drive down the cost of alternative energy by carrot, not by stick.

    We face another fiscal cliff. We just faced one in 2008, now this one in 2012. We didn't see the one in 2008 coming. We are letting the one in 2012 happen right in front of us. Nobody says boo.

    How can the president and the Senate leave what taxes will be on Jan 1 2013 unresolved? How about the AMT? How about the deficit reduction? How about the sequester? Why aren't people out in Washington DC with pitchforks and torches?

    I can't speak to the President's motive in all of this, but if he wanted chaos, confusion, and uncertainty, his action and inaction would fit the bill.

    Obama is a smart guy. If you don't think so, just ask him or anybody at MSNBC. I doubt that a smart guy would have created this mess.

    MF: See what you unleash? Did I mention that this article ticks me off?

    I don't know if this is from a freebie I got at MF or if it is because I subscribe and paid money to the MF.

    In either case, please cut it out. As you can see, I have my own.

    If this sort of thing gets out of hand, I will terminate my subscription to MF.

  • Report this Comment On September 04, 2012, at 8:35 PM, hbofbyu wrote:

    Morgan, I didn't know you were such a fatalist.

    1. I know first hand 3 companies of 20+ employees that closed their doors in California and moved them to Alabama, Arkansas and Mississippi for only one reason - taxes. Don't say that tax rates don't have any effect on behavior. In a similar manner I know 2 companies that left the US for Mexico and Brazil. Generally, if you want less of something, tax it.

    2. "...deficits don't matter".

    - Dick Cheney/Morgan Housel.

    I don't think the politicians are saying it has to be payed off but we are playing with fire. A debt trap is very real. The burden of excessively high interest payments (interests rates will go up) will eventually displace public investments including education, which will be needed to restore normal growth and bring down the persistently high levels of unemployment. Technology may soon allow the dollar to be replaced as the reserve currency. We may no longer have that crutch to lean on.

    An error you are making is comparing the America of 1940 to the America of 2012 in size and growth potential. Who is more likely to double their revenues next year, a mature Phillip Morris or my wife's catering business that has 10 clients? I can guarantee you Phillip Morris will not double their revenues next year. America is no longer the young buck exploiting it's resources and doubling its manufacturing base - we are becoming and old behemoth saddled with entitlement programs, pensions, regulations, bureaucracies and wars. We will have a much more difficult time growing our way out of this debt.

    3. Gore would not have invaded Iraq.

    Jimmy Carter would not have said "Tear down this Wall".

    Hubert Humphrey had laid no groundwork for opening the door to China.

    LBJ accomplished every piece of legislation that his predecessor JFK could not get done - including budgets that very much effect economies and the stock market.

    Obamacare has a huge economic impact.

    A Supreme Court appointee who decides that a mandate falls under the commerce clause does indeed effect the economy.

    The Presidency absolutely matters.

    You usually write some great articles but you mailed this one in on your lunch hour.

  • Report this Comment On September 04, 2012, at 8:40 PM, TMFMorgan wrote:

    <<2. "...deficits don't matter".

    - Dick Cheney/Morgan Housel.>>

    Nowhere did I write this. I wrote that as long as deficits are lower than nominal GDP growth, debt-to-GDP declines. Which is true. Deficits above nominal GDP growth add to the equation, which is also true.

    To respond to others pointing out presidential decisions regarding war, I'll note that the article explicitly says "to the economy." The original draft made a point of saying "outside the military," and now I wish I left it in. FWIW.

    Further, the article admits that presidents alone can impact the economy. I'm just pointing out that it's usually less than we give them credit for, both on the upside and downside.

  • Report this Comment On September 04, 2012, at 8:41 PM, TMFMorgan wrote:

    <<America is no longer the young buck exploiting it's resources and doubling its manufacturing base>>

    No, but we are the young buck that has seen an absolute explosion in oil and gas production in the last decade.

  • Report this Comment On September 04, 2012, at 8:43 PM, TMFMorgan wrote:

    <<Don't say that tax rates don't have any effect on behavior.>>

    Where did I say that?

  • Report this Comment On September 04, 2012, at 8:51 PM, jbs330 wrote:

    Lousy article full of the liberal talking points, nothing more.

  • Report this Comment On September 04, 2012, at 8:59 PM, meddguy wrote:

    I agree with all three statements. I haven't read all the comments, but I doubt that I can add a whole lot to the conversation, except to say: If you are interested try to read as much as possible on the subject, but from as unbiased a source as possible.

    I am not going to recommend anything, but do try to avoid anything even remotely related to a political party or a particular ideology. They have something to gain by deceiving you.

  • Report this Comment On September 04, 2012, at 9:04 PM, drt2202 wrote:

    I stopped reading after this obviously republican said that this was a bad or biased article. There's nothing and nobody more biased and fact twisting ppl hater than you guys. Some conservatives can be sincere and care about the country but the ones I've seen in the past 4 yrs were douche bags

  • Report this Comment On September 04, 2012, at 9:05 PM, SN3165 wrote:

    We've only been able to borrow at such low rates because of the Fed's bond buying program and the fact that we are the world's reserve currency. What happens when inflation goes up and interest rates start to rise??? What happens if China decides they don't want to buy our treasuries anymore??

    You also failed to mention what our payments on the interest of our debt currently are per year, and what they would be if interest rates rose.

    Deficits DO matter.

  • Report this Comment On September 04, 2012, at 9:05 PM, drt2202 wrote:

    This is coming from an Egyptian guy who moved here 3 yrs ago. I have no biases.

  • Report this Comment On September 04, 2012, at 9:08 PM, DonSchreiber wrote:

    From my perspective, money is analogous to blood.

    Money only benefits people when it moves around from person to person.

    How much good for people does the gold in Fort Knox provide? About the only people who benefit from the gold in Fort Knox are those who are paid to guard it.

    As we all know, when an individual's blood piles up in one location that is bad.

    So if we want money to benefit people, not be just black marks on someone's balance sheet or net worth statement, then the money must move around.

    The August 31st article entitled "1 Reason the Recovery Is So Slow" is evidence that money is piling up in banks, and people are not benefiting from the money piling up there.

    Paraphrasing the old negro spiritual, let my money go!

  • Report this Comment On September 04, 2012, at 9:10 PM, TMFMorgan wrote:

    <<What happens when inflation goes up and interest rates start to rise???>>

    From the article:

    "Yes, sometimes the cost of carrying debt becomes excessively expensive. When interest rates rise, our nation's $16 trillion debt surely will."

    "Deficits DO matter."

    Yes, they do. Pointing out that a country can remain indebted indefinitely is not the same as saying deficits don't matter.

  • Report this Comment On September 04, 2012, at 9:10 PM, 48ozhalfgallons wrote:

    <<The president *and* by confirmation of Congress. It's not a president-only decision.>>

    Ok... then let us be completely candid about the issue of presidential (party) influence over the direction of the national economy among other matters.

    The appointment of the Fed president is inspired by the president and his party. It is precisely inspiration derived from perspective (of the leadership) which steers national issues and their outcomes. It follows that if we are to expect different results we must seek inspiration derived from a different perspective.

  • Report this Comment On September 04, 2012, at 9:12 PM, whyincreasetaxes wrote:

    It does matter who is elected. For instance: Gas pipelines delayed, obstructing further oil drilling, increasing entitlements which raise tax burdens, ramming the first step towards national healthcare down over half of the nation's collective throat when he should have been concentrating on the economy... Do I have to go on with this incredibly poorly written sentence?

    Yes I am a republican. Your article, Mr Housel, would be seen as less disingenuous if you declared your political affiliation. In spite of what George Stephanopolous (?) claims, we're all biased. What's your bias? You really should preference any article that is obviously political in nature (especially when written just before an election) with that information so the reader knows what to expect from your interpretation of the facts.

    Lastly, I saw that some readers commented previously about numbers not lying when referencing the graph presented. Really? You don't think that numbers and "facts" are subject to the interpretation of the people presenting them?

    Really? Something is "numb," but I don't think it's the numbers.

  • Report this Comment On September 04, 2012, at 9:19 PM, rmfool100 wrote:

    Well, the US Government and economy didn't just GROW its way out of the debt, it also INFLATED its way out. Borrow money that's worth something, pay the debt back with less valuable currency. Guess who's taking the hit from this.

    Why do you have to get such a high return on your investment just to stay even?

  • Report this Comment On September 04, 2012, at 9:55 PM, velcrosalsa wrote:

    Morgan, agree with the comment about household debt not being comparable to institutional debt, but would emphasize the point you did make that the size of gov't debt or a company's debt certainly CAN matter if it gets large enough.

    The tax argument made or implied by most Democrats today that raising rates to [or even above] the rates in place during Clinton's term is not persuasive to me. I do agree that doing so won't automatically usher in a recession but I don;t believe there is any proven cause and effect such that the tax policy in place in the 90s was the cause of the prosperity we had. I suppose the other party would say we had it good despite what Clinton did or perhaps because the Republicans controlled Congress for part of those years. Personally, I think the more accurate, simple explanation is that unbeknownst to most of us at the time the economy was being carried along by the inflating dot.com bubble that was yet to burst.

    It is very easy to succumb to simple arguments or explanations and I agree with your point that there a often much more nuanced explanations than which party had the White House. In today's global economy, such single variable models probably miss the mark more often than not mixing up cause, effect, and coincidence. Even a blind squirrel may stumble across an acorn and a broken watch is exactly right twice a day.

    Even things like inflation in Chile, and unemployment in Italy, and demographic trends in Japan, interest rates in Thailand, climate in Australia, exchanges rates between W & X, trade between Y & Z..... Well, you get the idea -- they all matter a little and the effects vary from month to month as they change.

    In any case those are my 2+ cents worth.

    Good article

  • Report this Comment On September 04, 2012, at 9:58 PM, rclaussen wrote:

    There were some comments earlier that the deficit would be approximately the same even if John McCain had been elected president in 2008. And this is largely true – the root cause of our current debt situation originated in the previous administration – passage of massive spending without consideration of how to pay for it (the 2001 Tax Cuts were to be paid for through growth, however the President’s own advisor told him spending cuts would be required to avoid deficits – that advise was ignored). Remember, the previous administration started with a budget in surplus projected to resolve the then existing debt of $5.56 trillion in a decade. We also had the housing bubble working its way through the system which was exacerbated with Credit Default Swaps and resulted in a world wide collapse of the financial system. So deficits were baked into the system regardless of who was elected president in 2008. For an extensive analysis of how we got here and where we are headed, you may wish to read a post created in October 2011 - http://boards.fool.com/how-we-got-here-where-are-we-headed-2... It is worth noting the article and report upon which the post is based were written in 2003 and 2004. They accurately describe what we are facing today.

    Next, we have one party, whose vice presidential nominee was a contributor to the run up in debt in the previous administration (check his voting record – he voted “Yea” on each and every spending bill while ignoring how to pay for it) putting forth a budget which he claims will resolve the deficit and debt problems – in 2060 all will be well and we will enjoy surpluses. This is after draconian cuts to the federal budget (including shifting the responsibility and cost for senior health care to the individual) and providing another unpaid for tax cut to the “job creators”. Based on Congressional Budget Office estimates, the debt will continue to grow, requiring multiple Debt Ceiling increases (recall Summer 2011 and the man-made crisis which resulted in lowering the credit rating?) for the next decade and bankruptcy of Medicare before the end of the next presidential term (at least under current proposals, that date is at least eight years away, allowing the opportunity to address issues and extend the life of a program that impacts a significant and growing segment of our population).

    The real question for us as citizens and investors is how does our country regain the necessary growth in GDP to resolve our current issues – Debt and Unemployment. We have seen the potential results of one path that is advocated – how do the measures adopted by several European countries and their resulting return to recession correlate with what we may expect if similar measures are pursued in the United States?

    While I agree with Morgan that major changes in investing are not warranted, I do have a limited amount of cash that I will hold in reserve to invest as opportunities present themselves.

  • Report this Comment On September 04, 2012, at 10:07 PM, wtatm wrote:

    Morgan... another well-written, thought-provoking article, as usual.

    That said, I don't quite agree with the comparison of America's debt in 1945 compared to today. Obviously, hindsight is always 20-20... but it was not unreasonable to expect America to grow out of a 120% debt-to-GDP ratio in 1945. At the end of the war, there was so much pent-up American demand due to rationing. Americans had not been able to buy cars... or much of anything else... for 4 years. In addition, most of Europe and all of Japan needed to be rebuilt. It was not unreasonable to expect GDP growth to substantially exceed deficit growth for a long time.

    Today is different... the American consumer is exhausted... and the economies in Europe are in far worse shape. Where is the growth going to come from?

    Another way of looking at it. We will run about a $1.1 Trillion deficit in 2012. Based on a national debt of about $15 Trillion at the end of fiscal 2011, that's a 7.3% growth in the debt. GDP is limping along at under 2% and no one is forecasting the GDP to grow much faster that 3% anytime soon. It's not the economy that's growing like a weed... it's the deficit.

    2012 Is the opposite of the scenario that faced the US in 1945. We have to reverse the scenario... and soon.

    Jim

  • Report this Comment On September 04, 2012, at 10:18 PM, JadedFoolalex wrote:

    Mr. Don Schreiber,

    There is no gold in Fort Knox. Nixon sold all of it when he took America off of the Gold Standard!

    Alas, America is now on a paper standard! Pretty precarious if you ask me.

  • Report this Comment On September 04, 2012, at 10:44 PM, rclaussen wrote:

    Hi wtatm,

    “Today is different... the American consumer is exhausted... and the economies in Europe are in far worse shape. Where is the growth going to come from?”

    The consumer is Not exhausted. I suggest you read Bob Johnson, a Morningstar economist who I have been following for years. His articles are insightful and fact based. An easy way to verify his accuracy is to read past articles and compare what was said with actually occurred. I think you will find he is down to earth and well respected with his reports. Plug in the URL below to get a listing of videos.

    http://search.morningstar.com/sitesearch/search.aspx?q=bob+j... Report

    To get to his articles, you need to be a member. However, registering is free and gives you access to good information. He usually publishes on Saturday mornings (“Reading Indicators”) and has several commentators who regularly contribute.

    Bob

  • Report this Comment On September 04, 2012, at 11:12 PM, whereaminow wrote:

    Morgan Housel,

    Why are you using GDP to measure economic growth?

    If government is reducing its revenue (supposedly), then GDP has a built in decline.

    Does that really make sense to you to measure whether or not economic performance improved, using an indicator that is guaranteed to decline?

    I know you're just another mainstream journalist that can't think outside the box. You've proven this countless times. But you really can do better.

    David in Liberty

  • Report this Comment On September 04, 2012, at 11:17 PM, whereaminow wrote:

    I'm sorry to be rude, but does that seem dumb to anyone else? Am I the only person who sees that?

    Jesus.

    You could use something like private output. You could actually use data sets that encompass more than one country. You could actually investigate whether those Top Marginal Tax Rates really determined the amount of tax revenue (something many economists have already shown to be fallacious.)

    I mean, you could actually do some research.

    It's just sad.

    David in Liberty

  • Report this Comment On September 04, 2012, at 11:18 PM, rando101 wrote:

    3 Huge Economic Misconceptions From Election Season

    1) Lower taxes lead to faster economic growth.

    If there is no correlation then why not just raise the tax rates to 100% on everybody. After all tax rates dont affect GDP growth, it just doesn't matter and we all know the Goverment can spend your money more wisley than you or I.

    2. We dont eventually need to pay off the national debt

    your right lets increase the debt from 16 trillion to 100 trillion (think of all the growth the goverment will create with that amount of money) and we can tell all the treasury bond holders were not going to pay them all back. unless they keep loaning the Goverment more money.

    3. It doesn't matters who wins the presidency

    On election Day we all will go to the polls and stand there in the polling place and make a decision. I think when you make that decision, it might be well if you would ask yourself, are you better off than you were four years ago? Is it easier for you to go and buy things in the stores than it was four years ago? Is there more or less unemployment in the country than there was four years ago? Is America as respected throughout the world as it was? Do you feel that our security is as safe, that we're as strong as we were four years ago? And if you answer all of those questions yes, why then, I think your choice is very obvious as to whom you will vote for. If you don't agree, if you don't think that this course that we've been on for the last four years is what you would like to see us follow for the next four, then I could suggest another choice that you have.

  • Report this Comment On September 04, 2012, at 11:46 PM, LAVol wrote:

    It is absolutely absurd to insinuate that the level of debt incurred by the U.S. over the last 5 years will not materially impact the future of the U.S. economy.

  • Report this Comment On September 05, 2012, at 12:32 AM, PositiveMojo wrote:

    I totally agree with rando101.

    Your first question is weak because it ignores the elephant in the room, which is, the current tax system is broken and everyone knows it. Here are some questions that really address the problem:

    - Is the current tax code easy to understand?

    - Does the current tax code create a level playing field for everyone?

    - How much revenue from the public sector does government need to run efficiently?

    - Is the Fair Tax a better solution?

    The second question is odd. I don't know of anyone who is saying that the U.S. needs to pay off all debt. However, many are proposing a balanced budget amendment.

    The third question is without a doubt, preposterous. Of course it matters. Does it matter who is the CEO of a company? Should they know how to manage it effectively? Should they be able to make sound decisions, especially for the safety and welfare of our families?

  • Report this Comment On September 05, 2012, at 12:36 AM, 48ozhalfgallons wrote:

    Nicely countered, rando.

  • Report this Comment On September 05, 2012, at 12:54 AM, fullmoonchaser wrote:

    Morgan,

    <<^ I said most. Not all. Most. A 15% tax bracket is about $70k a year for a married couple. That's AGI, so it's a salary of probably something close to $100,000 a year. Again, most. >>

    How in the world do you drop a salary of close to $100,000 a year to an AGI of $70,000? The only way I can think of is if the person socks away 30% of his/her salary in a 401(k). And then the salary would only be reported at $70,000...

    Methinks you mistyped and meant taxable income instead of AGI. It is pretty easy to reduce a salary of $100,000 to $70,000 or even less, depending on what itemizable expenses are incurred.

    Just saying...

  • Report this Comment On September 05, 2012, at 2:08 AM, TheMacbone wrote:

    Wow

    Tax rates don't matter - raises taxes on everyone - check

    The national debt will never be paid back - give more money to our supporters - check

    The performance of the man hired to be the most powerful man in the world doesn't matter - so keep the affirmative action hack who despises businessmen and all will be well - check

    I am sure the Obama is grateful for your endorsement, but I wouldn't let people like you manage the quarter I found in the gutter the other night forget about my familys life savings.

    I now understand the title of your blog. Kudos for truth in advertising.

  • Report this Comment On September 05, 2012, at 2:22 AM, Trapper97 wrote:

    Morgan,

    Let correct a historical bias. Post WW2 the US had the only industrial power not severely damaged or destroyed. Without any real competetion the US had hugh GDP growth that may not be possible now. Otherwise you made great points.

  • Report this Comment On September 05, 2012, at 6:04 AM, TheOthermfa wrote:

    As to point 1, did anyone actually DO the correlation analysis on the data charted, or did everyone just look at the scatter-chart and say "no correlation"? I've seen studies that showed GDP growth is correlated with higher tax rates. Google "The Pirates of Capitol Hill" for one, or see "http://thecivildiscourse.wordpress.com/2011/04/22/the-relati... for an excellent comprehensive discussion of the issue.

    As to point 3, one respected financial adviser has shown that of the 4 possible election outcomes (Initial election of R or D, re-election of R or D), the historical S&P 500 returns are highest for the 2 possible outcomes of the 2012 election (Initial R or re-elect D), so this should be a good year no matter who is elected.

  • Report this Comment On September 05, 2012, at 6:44 AM, TMFMorgan wrote:

    TheOthermfa,

    The R-squared is 0.0409 if you're curious.

  • Report this Comment On September 05, 2012, at 7:40 AM, devoish wrote:

    Nice article, especially about the deficit.

    Clear something up for me, if you will.

    If Citibank lends you $100 over 15 years at 5% and the sum of your repayment with interest is $161, I understand that the $100 principle was put into the economy as spending on whatever you spent it on and can circulate back to you as income over the course of 15 years so you can pay back the principle.

    Where does the cash to pay back the $61. interest come from?

    My answer is you need to take $1 from 61 other people over the course of 15 years (ultimately making them cash poor and your lender cash rich through your successful loan repayment), or $1 from 30 people plus some combination of federal deficit and personal bankruptcies or increasing lending.

    Therefore, in order for Citbank not to use your borrowing to steal my quality of life the Federal deficit needs to equal the sum of all outstanding interest due. Or, I need to borrow more, faster and before you do and be the better thief.

    I think the worst thing for the personal situations of most (95%) Americans would be for the Federal and State Governments to cut services and repay its debt with no guarantee that its creditors would put that money into the US economy. Without enough cash in circulation for the rest of us to pay off our mortgages, auto, college or business loans we'll all default and our kids will never be able to pay back their college loans.

    I agree with the point that Presidential elections, and tax rates have not mattered much to the 'economy' as measured by GDP.

    We are now being faced with the threat of removing even more cash from circulation and decreasing our ability to repay loans.

    Outside of another such extreme capitulation as the bank bailout, I do not think that the 'economy' as measured by GDP matters to me.

    Steven

    PS. Concerning this;

    "Anyone else starting to get the feeling that the Motley Fool is turning into a right-wing

    propaganda machine?"

    The first time I read that comment I thought the reply was referring to the comments not to your post.

    http://en.wikipedia.org/wiki/Digg_Patriots

  • Report this Comment On September 05, 2012, at 9:05 AM, Mathman6577 wrote:

    You have been listening to Paul Krugman too much.

    Reducing marginal tax rates across the board (not just the top) DOES result in increased GDP growth. Look at the 1980's and 1990's. When taxes went up (1970's and 2000's) growth went down. It typically takes one or two years for the changes to fully take effect. The government does not spend tax dollars in an effective way. The private economy will spend the extra money in the most efficient way.

    Budget deficits do matter, especially when interest rates start to go back up. Right now we are in a zero rate policy period and the amount spent to service the debt is relatively low. Once the rates go up we will be in trouble. Look at Greece and Spain .. countries with huge debt and high interest rates. They can not grow with a situation like that.

  • Report this Comment On September 05, 2012, at 9:15 AM, kumbehr wrote:

    Morgan,

    I think you rattle the nerves of people (including myself) when discussing your 3 points.

    However, I don't see your largest assumption coming to pass anytime soon: that the GDP of this great country will grow fast enough to keep up with our spending. Here is the GDP growth of the last 6 decades (GDP figures compiled by the Department of Commerce's Bureau of Economic Analysis):

    1950s (1950-1959): 4.17 %

    1960s (1960-1969): 4.44 %

    1970s (1970-1979): 3.26 %

    1980s (1980-1989): 3.05 %

    1990s (1990-1999): 3.2 %

    2000s (2000-2009): 1.82 %

    After WW2, the USA was the only 1st World country left standing. We took our great manufacturing system, our hard work (that we learned from the war), and intense entrepreneurial spirit and build or influenced *most of the world*!

    And you think over the next 30 years the GDP growth rate will be able to match the 30 years after WW2? The numbers show me a steady decline. What do they show you?

  • Report this Comment On September 05, 2012, at 9:27 AM, TMFMorgan wrote:

    <<Look at the 1980's and 1990's. When taxes went up (1970's and 2000's) growth went down. >>

    Taxes went up in the 90s (Clinton, '93) and growth went up. Taxes went down in the 2000s (Bush, 01 and 03) and growth went down. Thought that's probably not causation (again, there's basically no correlation between the two).

  • Report this Comment On September 05, 2012, at 9:29 AM, TMFMorgan wrote:

    <<And you think over the next 30 years the GDP growth rate will be able to match the 30 years after WW2?>>

    Probably not. Though I think most are far too pessimistic about our future prospects.

  • Report this Comment On September 05, 2012, at 9:38 AM, jlynchslu wrote:

    Morgan,

    Regarding our prior discussion (above) on whether it will make a difference which candidate is elected in November and whether lower taxes can lead to faster growth, you cited current tax law to argue that some of Romney's proposal of 0 tax for dividends & capital gains for those earning less then $200 K per year is already in effect. What you left out was the following pending changes to the tax laws:

    "Unless Congress acts before year-end, dividends received from Jan. 1 onward will be taxed as ordinary income, instead of the current maximum 15% tax. And ordinary-income tax rates are scheduled to return to pre-2003 levels, with a maximum of 39.6% — plus a new 3.8% tax to help cover the Affordable Care Act, for a total of 43.4%. So dividend taxes would nearly triple for some taxpayers. But consider this: The tax cuts that took effect in 2003 brought dividend taxes down to the level of capital-gains taxes for the first time since a brief period from 1988 to 1990. Aside from that stretch, payouts were long taxed at ordinary-income rates — as much as 91% in the late 1950s and early 1960s, 70% in the 1970s and 50% by the early 1980s. Capital-gains tax rates typically have been half those levels or less — a relationship that would be restored next year without congressional action, with long-term capital gains taxed at a maximum of 20%, rather than the current 15%."

    This should bring the issue I raise into even more focus as Romney will do everything he can to prevent these end of year tax changes and to pass his proposals for those earning $200K or less per year, which I maintain will revolutionize investment by ordinary workers in this country, spur capital investment, and bring the American Dream to everyday low salaried workers. This is in stark contrast with the professed policies of Obama on the refusal to reward individual investment risk. I'm just saying.

  • Report this Comment On September 05, 2012, at 10:43 AM, Darwood11 wrote:

    I've skimmed a few of the comments. Here's my 2 cents;

    1. "Lower taxes lead to faster economic growth." If there is no correlation between top marginal rate and GDP growth, then it would seem that taxing the rich would have no impact on growth, either. The only way to ever end this debate is a flat tax. Is it possible the politicians resist this for the simple reason that it provides such rich fodder for their election campaigns? Is it also possible it provides such a wonderful diversion?

    2. We eventually need to pay off the national debt." As noted, debt is not an issue "As long as nominal GDP growth is higher than the annual deficit" nor is it a problem unless borrowing costs increase. When considering deficits, it's useful to note where and how they occur. My current concern is government programs have increased spending at a rate far higher than nominal GDP growth. Recently enacted programs appear to have a capacity to accelerate this. Current deficits do not appear to be temporary. However, if this country can change its energy policy it is very possible that growth and trade deficits will make a surprising change in direction. With that will come growth and improved government tax receipts. I would like to see a coherent energy policy.

    3. "It matters who wins the presidency." That's a difficult one because that is something I would like to believe, but I do know better. I've decided that assuming one candidate or the other will get a specific result is like taking the position that it matters which news service predicts the weather. Frankly, after nearly 50 years as an "adult" who has voted and tracked political promises, positions and results, I am pretty clear that as far as the economy is concerned, its dangerous to assume one candidate will be better than the other. Circumstances intervene (9/11, and the "Panic of 2008" as examples) and politicians can respond. But I think this world is so complex, with so many interactions and ditto for our government, that it is really difficult to make any assumptions about future economic outcomes attributable to a specific politician.

    Now, that's not to say that I don't favor one candidate over the other. At this particular date, the 'spin' has overwhelmed many of the facts.

    Finally, to close on my position about the politicians, and to put it another way, if it was so predictable, with 56% of the people in the country possessing at least some college education, I'd expect far fewer personal financial problems in this country. My point? Knowing what has to be done and then actually accomplishing it are two widely separated things. It's like saying "work hard, save and invest prudently and my retirement will be assured." Not so; there is always another Mack truck bearing down on us, and circumstances have a way of intervening.

    I'll be voting for the best candidate, in my opinion. But I'll have few illusions about where this country will be in 4 years, and I'll base my financial plans on what I do actually know, and upon measurable trends. At present, I've got more cash than many think is necessary for someone 66 and still working. That provides some insights into my planning. What I do in the next 4 years will be a consequence of the economy, inflation, and so on.

  • Report this Comment On September 05, 2012, at 10:46 AM, MrMinnesnowtan wrote:

    This article certainly reduces my confidence in the Motley Fool. Not a single observation is deeper than a kiddie pool.For example, the nominal tax rate does apply to many taxpayers who are unable or unwilling to take advantage of the "loopholes." And all the effort to take advantage of these results in distorted investments (ECON 101).

    No you do not "need" to pay off the national debt, just like you do not "need" to payoff your credit card debts. In fact, there are fatcats who enjoy raking in the interest payments each year. But what value do you derive from this expenditure? Eliminate debt and you could free up tremendous funding for valuable investments.

    Third, it does matter greatly who wins the Presidency. The President has more influence than anyone else on the economy, as we found out with dimwits like LBJ, Jimmy Carter and George Bush II.

    Shame on the fools and their foolish readers!

  • Report this Comment On September 05, 2012, at 10:51 AM, TheOthermfa wrote:

    Morgan: Yup, I got 0507, but we're close enough for government work. Nevertheless, there is a positive correlation which, while not statistically significant, might be politically significant. I thought it might be fun to do an autocorrelation to see if there's stronger correlation if you offset the change in GDP to account for delay in changes in behavior when the marginal rate changes, but the marginal rate is, in fact mostly meaningless anyway, and I've already had way too much fun today.

  • Report this Comment On September 05, 2012, at 11:40 AM, astuber9 wrote:

    Morgan,

    Since we are all asking for total taxes vs. GDP growth instead of looking at top tax rates, can you please show a link to that graph? I did a quick search and could not find anything, but I know you have a large database of graphs and can probably pull it up very quickly.

  • Report this Comment On September 05, 2012, at 11:42 AM, TMFMorgan wrote:
  • Report this Comment On September 05, 2012, at 11:51 AM, TMFMorgan wrote:

    astuber9,

    I think this is probably what you're looking for. It's federal taxes as a % of GDP plotted against real GDP growth since 1952 (earliest I have data for).

    http://twitpic.com/arefb9

  • Report this Comment On September 05, 2012, at 12:21 PM, kumbehr wrote:

    "The argument for deficits is basically textbook Keynes, who argued a government should run surpluses when the economy is strong and deficits when it's in recession to balance out the decline of the private sector."

    The problem with promoters of Keynes is that they forget the portion about "a government should run surpluses when the economy is strong". If I am to be so bold, I would say that most democrats are supporters of Keynes. However, most democrats also have the urge to have large gov't-run social programs. And there lies the conflict.

    I agree with Morgan that GDP growth may be higher than most would predict. But I still think it will be lower than the post-WW2 era. Therefore, the only way to make a dent in the national debt is to cut spending. But to be clear, I doubt I would ever see a large budget surplus in my lifetime.

  • Report this Comment On September 05, 2012, at 12:41 PM, Darwood11 wrote:

    @kumbehr, I agree with you 100%. The problem for politicians is they tend to see taxes collected as money to be spent on their pet programs, whatever they are. They fail to take responsibility for their actions and to save (run surpluses) and plan for the future (there will be another recession, and it will require deficits and stimulus spending.)

    In that respect, we do get the leadership we deserve. Or is "walk the talk" something others are to do?

  • Report this Comment On September 05, 2012, at 12:58 PM, kumbehr wrote:

    @Darwood11,

    You're right to focus on all politicians. I shouldn't have singled out democrats, as all politicians have their own programs or policies that they would want to implement if there were to be a budget surplus (social programs for the democrats; military spending and tax breaks for the republicans).

    Either way, Keynesian economics won't work because of the absence of surplus's. I wish people would accept this.

  • Report this Comment On September 05, 2012, at 1:07 PM, stlmikey wrote:

    While the tax rate probably doesn't impact GDP growth significantly, it would be nice to have a simpler tax system and a modicum of certainty in the rates. It's a little frustrating to plan even a year ahead when it's unlikey we will know what the 2013 tax rates will be until sometime in 2013

  • Report this Comment On September 05, 2012, at 1:08 PM, Truth2Power wrote:

    I say we sell Mississippi to help pay off the debt. Maybe to a private equity firm.

  • Report this Comment On September 05, 2012, at 1:14 PM, HaMb0 wrote:

    Thanks for the graph you put on twitpic, Morgan. That's exactly the type of graph I was hoping for, at least. How long is each point? taxes/gdp per year and growth in that year?

    I don't know if there are sustained periods of constant taxes (relative to gdp) for the US, but a graph that flattened out fluctuations over time by looking at prolonged periods may help. That way lingering effects from taxes paid in years past wouldn't be included (ie if I save money this year thanks to low taxes, but spend it next year of the following because I was saving to buy a car). Any chance you might have data like that?

    Hamb0

  • Report this Comment On September 05, 2012, at 1:16 PM, TMFMorgan wrote:

    HaMb0,

    It's per year, yes. Email me at mhousel@fool.com and I'll send you the data.

  • Report this Comment On September 05, 2012, at 1:17 PM, oneperspective wrote:

    The article is proof that you can use statistics to "prove" even the most absurd claims. It shines a light on the Democrat perspective. If you don't believe that who leads the nation matters, then your beliefs are in stark contrast to Mr. Obama's. Can anyone (other than a nihilist) sincerely profess that the level of our national debt does not matter? Ask the Greeks, the Spaniards, the Portuguese, the Italians, etc. For the last several years we've been in a low interest bubble; without historically low interest rates on our national debt, we would be choking on the debt service. Leaders try to take the nation with them; if onto a good track, wonderful; if onto a track that leads to national bankruptcy or, more likely, runaway inflation, then our children and grandchildren will pay heavily with a drastically lowered standard of living. This article has as its unstated premise that economics means nothing; the corollary would be that human behavior is entirely random and not susceptible to incentives or motivation. If your life experience has convinced you of that, your life has been highly unusual.

    We so often hear from politicians and the media that the higher tax rates of the '90's produced wonderful economic effects, but they almost never raise the point that the Internet was bursting onto the economic scene throughout Clinton's tenure. Almost nothing, including higher tax rates, could have stopped the growth of the Internet and the resurgence of the economy fueled by that growth. Clinton was at the right place and the right time to not have the economy damaged by his tax increases. Even Obama acknowledged in 2009 that a recession is an inappropriate time to raise taxes. Back to the '90's, did Greenspan let things go too far? Yes, he did. Just like the regulators let the housing bubble expand way too far. Tax rates are a potent factor to the economy, but they are not by any means the sole driver. What has greatly hampered the US economy over the last 5 years has been the uncertainty over the future's tax rates, level of regulation, and additional, burdensome governmental programs. At some point, the entrepreneurs and business executives simply choose to sit and wait, hoarding cash and ideas, until a new window of opportunity for enterprise opens up. Under Obama there won't be any such windows except for his bundlers and other cronies of his like Immelt and Buffet.

    Don't be naive: leaders do matter, so do tax rates, so does the level of the national debt (unless you simply plan to party yourself into oblivion and care nothing about the next generation or those following). If you really don't care about the increase in the national debt, then you shouldn't bother about climate change either. The debt's urgency is far greater than that of the climate.

  • Report this Comment On September 05, 2012, at 1:19 PM, TMFMorgan wrote:

    <<Can anyone (other than a nihilist) sincerely profess that the level of our national debt does not matter?>>

    More importantly, has anyone professed this? Anyone?

  • Report this Comment On September 05, 2012, at 1:22 PM, TMFMorgan wrote:

    <<Don't be naive: leaders do matter, so do tax rates, so does the level of the national debt>>

    The article made it clear that tax rates matter, just that changes in statutory rates alone don't because of our wacky tax code, and that other things matter more. Nowhere does it state that the level of national debt doesn't matter. It states that as long as GDP growth is larger than an annual deficit, debt-to-GDP declines.

  • Report this Comment On September 05, 2012, at 1:38 PM, Darwood11 wrote:

    Tax rates matter to the extent that they determine overall tax collections.

    The problem we have is political rhetoric tends to ignore the fact that overall collections is the "prize" as far as government is concerned.

    It seems that many people in the US are unawares where the federal tax revenues will come from in 2012. Here are the current projections:

    Income taxes $1.4 trillion

    Social Insurance Taxes $0.8 trillion

    Ad-valorem Taxes $0.1 trillion

    Business and Other Revenue $0.1 trillion

    Recent data (2010) indicates that in that year the federal government collected $2.2 trillion, an amount equal to 14.9 percent of GDP.

    According to recent statistics, federal revenue has ranged from 14.4 of GDP in 1950 to 20.6 percent in 2000 over the past five decades, averaging 17.9 percent.

  • Report this Comment On September 05, 2012, at 1:50 PM, pmc59 wrote:

    While I agree with your observations about presidential control over the economy and I also agree that becoming debt free is an unrealistic goal. However, I think there is a percentage of debt to GDP that we should try to remain below when we are in "normal" times. I think that the comparison about the debt now and at the end of WWII is specious. WWII was not a normal time. The entire country was on a wartime footing and the consumer economy did not exist. Lots of rationing and few consumer goods. I think that we were also financing most of our debt in house, remember War Bonds.

    When the debt is as high as it is now the debt service would become unmanageable if there was a small uptick in the interest rate. We would be forced to refinance our debt at a rate we could not afford.

  • Report this Comment On September 05, 2012, at 3:08 PM, MrFinance223 wrote:

    1) You are comparing the wrong data. Try comparing the total taxes collected as a % of GDP with growth in GDP.

    2) I tend to agree. Debt may extend over the lifetime of the person or entity - as long as you can service that debt. But beware: money used to pay interest is money that cannot be used for other public good (e.g. education, infrastructure, etc.)

    3) I disagree. It does matter who we elect! Do you honestly think we would have Obamacare today in its present form if we had elected the Republican in 2008? Not likely.

  • Report this Comment On September 05, 2012, at 3:12 PM, TMFMorgan wrote:

    <<Try comparing the total taxes collected as a % of GDP with growth in GDP.>>

    http://twitpic.com/arefb9

    Still no correlation (R-squared of 0.00007)

  • Report this Comment On September 05, 2012, at 3:42 PM, Darwood11 wrote:

    Morgan, we've really got you working today!

    Thanks for the data.

  • Report this Comment On September 05, 2012, at 5:51 PM, whereaminow wrote:

    Morgan,

    Are you going to address why you think GDP should show growth when government spending is declining?

    Can you also address why so many economists have shown that Top Marginal Tax Rates do not actually correlate with the amount of total tax revenue?

    I know you like your chart, but if you can't explain these things, I'd say it's correlation to worthlessness is R-squared of 1.

    David in Liberty

  • Report this Comment On September 05, 2012, at 6:18 PM, s73v3r wrote:

    I like how everyone commenting on here sees the bare numbers supporting the author's points, and basically sticks their heads in the sand and go "NUH UH!"

    You can argue over different reasons behind the WHY of the numbers, but you cannot possibly argue that the numbers are not true. You also cannot possibly argue that the opposite of what the numbers show is true. The numbers show that tax rates really do not have much impact on how well the economy is going. This is not debatable, and anyone telling you that the only way to get the economy going again is to lower taxes is an idiot. Further, most people who argue for cutting taxes, especially for the rich (to which is is NOT going to make any difference to them if their taxes go back to where they were under Clinton), are also the ones who tend to say that the Stimulus failed. Yet, a large chunk of the Stimulus was tax cuts. So wouldn't saying that the Stimulus failed mean that tax cuts failed to spur on the economy? So why would you keep arguing for something that has already shown itself to be a failure?

  • Report this Comment On September 05, 2012, at 6:22 PM, s73v3r wrote:

    Also, I am 1000% in agreement with dividends and capital gains being taxed at the same rate as ordinary income. I see absolutely no reason whatsoever why these sources of income should be taxed at a higher rate than the wages of someone doing actual work, like construction or engineering. Why should someone be rewarded with lower tax rates simply because they have money already? Should the people doing real work have lower tax rates than those simply trying to be rewarded for already having money?

  • Report this Comment On September 05, 2012, at 8:57 PM, carolsmithhsa wrote:

    One comment to ponder here. The timeframe during which we carried deficits and it 'did not matter' to the growth of the economy was at the honeymoon period following WW2 in which we essentially purchased our own debt. Today much of our federal debt is owned by other nations and non-US investors. We do not have the luxury to think today is the same as yesterday continuing to run up huge federal deficits.

  • Report this Comment On September 05, 2012, at 9:07 PM, mweems44 wrote:

    I am a big fan and always read your efforts. More often than not I agree with you, but this time you got it wrong. I can tell you from experience that these things do matter.

    I can remember the Carter administration. He was as much of a presidental disaster as President Obama has been. The economy was a shambles and the country was definitely on the wrong path. It was not going to get any better in a second term.

    I’m sure that almost everyone would agree with the American people made the correct decision to send Jimmy Carter home and elect Ronald Regan. It took a few years but Regan was able to turn the economy around and restore confidence. His presidency led to a era of prosperity and progress that both political parties are still talking about today.

    I guess that some people are cut out for the job and some people are not. We made the required change once, and we can and should do it again, because it does matter.

  • Report this Comment On September 06, 2012, at 12:05 AM, MidwestMike1 wrote:

    The author should say that neither political party is currently providing any real answers about how to get the 3-4 percent GDP growth needed to "grow out" of these problems. His statistics are less valid when considering that the global economy has only existed for a couple of decades.

    I find it ironic that politicians are now talking about "putting America back to work" when both parties presided over the outsourcing of U.S. capital and jobs overseas....in the name of free trade.

  • Report this Comment On September 06, 2012, at 7:44 AM, MrFinance223 wrote:

    Regarding the taxation of dividends: Dividends are profits that a corporation pays to its owners (shareholders) after those corporate profits have been taxed at the corporate tax rate. Why should I (the the owner of this corporation, albeit a fractional owner) pay tax a second time when I receive my share of the company's income? I could never see the fairness in letting the IRS take a second bite out of my apple by making me pay taxes twice on my business income!!

  • Report this Comment On September 06, 2012, at 7:50 AM, TMFMorgan wrote:

    MrFinance223,

    I understand and agree with the insanity of the double taxation on dividends, but it's not unique to the tax code. Someone buys something, and pays sales tax. That money is used to pay an employee, where payroll tax is deducted. By the time it hits the employees's bank account, income tax is deducted. The employee uses the money to buy something, where sales tax is deducted ... and on and on. Everything in the economy is in a closed chain of taxation.

  • Report this Comment On September 06, 2012, at 12:01 PM, richinhisgrace wrote:

    Any other fools ever notice: There is a very close parallel between our national debt, the world money supply, and the US dollar as the world's reserve currency since the Bretton Woods conference at the end of WWII? So would the Gardner brothers and friends please examine and give us some foolish wisdom on the meaning of this parallel? I realize that I'm just an average fool, but I suspect that we absolutely nothing to fear from the so-called national debt.

  • Report this Comment On September 06, 2012, at 12:12 PM, josemagus wrote:

    Your graph of GDP growth versus tax rate is an egregious violation of ceteris paribus (changing more than one variable at a time). The time variable is convoluted in this graph and is reduced to the trivial observation that GDP growth reflects population growth. The unemployemt rate is is correlated after time delay with marginal tax rates, notwithstanding the numerous incorrect analysis out there that says it is not. The data illustrates a classic exponential follower, When the tax rate is persistantly high, the unemployment rate gradually move up in response and vice versa. When the marginal rate dropped from 70% to 28% under Reagan, tax revenues moved from 300 billion to 900 billion - a three-fold increase. The the GDP jumped to over 7%. But the response is transient, and GDP will revert to it natural rate determined by population growth. However, GDP growth rate is independend of the actual GDP, which will be suboptimal if tax rates are to high ( unemployemt too high) and optimal if tax rates a set to effect full employment.

  • Report this Comment On September 06, 2012, at 1:03 PM, zgriner wrote:

    More arbitrary statistics, non-sequitars, etc.

    But, there is one thing we agree on: "Let's just get this out there: We will never, ever pay off the national debt. And frankly, that's fine."

    Oh wait, that's not fine. The US debt just keeps increasing. The amount of interest paid as a percentage of the budget keeps increasing. In other words, our descendants will keep paying more and more for all the welfare NOW, forever.

    The US is not a private company. If it goes bankrupt, there will be no "society" to absorb the cost. The GDP does not belong to the US government, it belongs to the taxpayer. Real GDP is a made-up number because the CPI is a made-up number that changes.

  • Report this Comment On September 06, 2012, at 6:15 PM, barstevens wrote:

    This is the biggest piece of clap-trap I've read in a long time. I know I'm supposed to follow this up with a bunch of evidence to refute this, but why bother. The third is obvious to anyone with rudimentary economic knowledge. The first and second are simple politics wrapped in economic naivety, just like the man-made global warming hoax. Either the author is stupid or duplicitous, my suspicion is the latter. It's not just the debt-to-GDP correlation that's a concern, it's the out-of-control public spending to keep stupid people employed (Dept of Education, Justice, Homeland Secuity, EPA, etc.) with no productive value, or keep others unemployed (welfare, disability abuse, etc.) One could just as easily make the argument that if tax rates don't matter, than why don't we fix them and let that money go somewhere else, of the tax-payer's choosing, instead of taking it by force (IRS). Seriously?

    And the argument about the national debt is so absurd it hurts me to read these lemmings in Comments applaud it and say they learned something today. If you don't think that debt matters, I'd like to submit to you Greece and Spain. I suspect their were folks over there saying the same thing during the last ten years.

    This article should be written as a legitimate thesis or paper, not a pithy online editorial for the left. To write something like this is simply Democratic convention inspiration hangover, and frankly insulting to people who actually understand economics.

  • Report this Comment On September 06, 2012, at 9:27 PM, CrankyTexan wrote:

    "Morgan sounds like a liberal democrat."

    Make that a liberal democrat who insults his readers when they dare to disagree with his articles.

  • Report this Comment On September 07, 2012, at 12:23 AM, jlynchslu wrote:

    In response to Mr. Finance223 Morgan stated:

    "I understand and agree with the insanity of the double taxation on dividends, but it's not unique to the tax code. Someone buys something, and pays sales tax. That money is used to pay an employee, where payroll tax is deducted. By the time it hits the employees's bank account, income tax is deducted. The employee uses the money to buy something, where sales tax is deducted ... and on and on. Everything in the economy is in a closed chain of taxation."

    If you agree with the insanity of double taxation on dividends, why not stop there and just support Romney's proposal as discussed in my prior comments? By the way, I disagree with your examples as being equivalent to the tax on dividends. The equivalent would be to tax the worker's salary when they take it home and give it to their spouse and children to spend. Think about it.

  • Report this Comment On September 07, 2012, at 11:57 AM, FJFred wrote:

    If real GDP were accurate I would agree. But Real GDP is calculated by subtracting inflation from nominal GDP. The problem is inflation no longer includes food or energy. Plus, they weight different segments of the economy in the inflation calculation. This came about under Clinton and is known as hedonic adjustments. Under true GDP adjusted for normalized inflation. Our GDP is actually negative. A simple point I would like to make as an example. Supposedly GDP is based on the sum of all value added transactions. The government has loosely interpeted this in different ways that inflate GDP growth. For example. They include the assumed rent you would pay even if you own your home without any debt. Presumably a $250000 home would add $25,000/yr to GDP This is a substantial percent when no dollars or transaction has taken place. the actual Debt to GDP ratio is significantly higher than reported. This is only one of the many adjustments to arrive at the governments manipulated GDP.

  • Report this Comment On September 07, 2012, at 12:03 PM, TMFMorgan wrote:

    <<The problem is inflation no longer includes food or energy.>>

    Yes, it does.

    http://www.bls.gov/news.release/cpi.t01.htm

  • Report this Comment On September 07, 2012, at 12:09 PM, whyaduck1128 wrote:

    The article just happened to come out during the Democratic version of the circle-jerk known as a national convention, the usual collection of lies, misstatements, untruths, self-congratulations, and above all dire predictions of what will happen if the other guy wins and our political hacks are thrown out.

    Just happened.

  • Report this Comment On September 07, 2012, at 12:16 PM, TMFMorgan wrote:

    whyaduck1128,

    The article was written almost exactly in the middle of the end of the Republican convention and the beginning of the Democratic convention.

  • Report this Comment On September 07, 2012, at 1:09 PM, slpmn wrote:

    Housel's assertion that the relationship between cutting taxes and economic growth is more complicated than "cut taxes, watch growth take off" is simply true. There is nothing political about it. It's an observation based on a review of data, as well as an acknowledgement that we live in an extremely complicated world. I would add that it appears the Republicans fundamentally think the world is simple, which is why they advance simplistic policies.

    His second assertion that a national debt does not need to be paid off should be about as controversial economically as the relationship between supply and demand. Every CFO in the nation understands there is nothing wrong with running a perpetual debt balance. In fact, it's taught in finance that an optimal balance sheet includes a mix of debt and equity financing. Yeah, you don't want too much debt, but you sure do want some. And please don't anyone compare national economics with household finances and balancing the checkbook at the dinner table. That's just pathetic.

    I disagree with the third assertion because I think policy matters and influences the economy over the long term. I think you need to vote for the guy you think will advance the best policy. Presidents do matter, and you only have to look at the last one to see why.

  • Report this Comment On September 07, 2012, at 2:22 PM, infopackrat wrote:

    One thing the "OK to have debt" argument fails to consider is that America is all grown up: we have no more "frontier," we haven't added a new state in over 60 years, yet we still try to run business as if the world is still an empty land to fill. Much of America's development stemmed from having more work to do than workers to do it, and we act like that's still the case, when in fact, we're now running out of work for all the workers. We can't "grow out of our debt" if we have no more room to grow. We need a new paradigm.

  • Report this Comment On September 07, 2012, at 2:28 PM, mbaker824 wrote:

    I absolutely agree that there is no correlation between top marginal tax rates and economic growth, but is anyone really surprised by that? There are other, much more relevant questions; e.g., is there a correlation between effective tax rates and economic growth, or between corporate tax rates and economic growth? I don't have the answers at my fingertips, but I would bet both of those correlations are much stronger.

    It's true that the country will never pay off its debt entirely, and that comparison with household debt is weak. On the other hand, the comparison between government and corporate debt is much more relevant. Just as investors don't like companies overburdened with debt, we should be concerned about our government's debt level. Counting on continuing growth to pay for ever-increasing debt is a recipe for disaster for government just as it is for a corporation.

    Finally, the party that wins the election certainly does not correlate with economic growth - but the individual elected can make all the difference. There are many policies aside from taxation that mean a great deal to the economy.

    In a nutshell, everything said in the article is true - as far as it goes - but there is, as Paul Harvey used to say, the rest of the story.

  • Report this Comment On September 07, 2012, at 2:35 PM, TMFMorgan wrote:

    <<I don't have the answers at my fingertips, but I would bet both of those correlations are much stronger.>>

    The correlation between total federal taxes as a percentage of GDP and real GDP growth is actually lower than the correlation of the chart in this article.

    http://twitpic.com/arefb9

  • Report this Comment On September 07, 2012, at 2:40 PM, TMFMorgan wrote:

    Here's the history of corporate tax rates for those who are interested:

    http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Doc...

  • Report this Comment On September 07, 2012, at 3:42 PM, katinga wrote:

    It is well-demonstrated that having debt > 100% GDP reduces GDP growth by a percent. See John Mauldin's website, where there is a recent article on this. Deficits are OK so long as the economy is growing enough to cover them. But once you've run out of other people's money, not so much.

  • Report this Comment On September 07, 2012, at 3:54 PM, sqdeallou wrote:

    what a load of crap. making me rethink my subscription.

  • Report this Comment On September 07, 2012, at 3:55 PM, IndependentDon wrote:

    If keeping taxes low for the "job creators" is such good idea, and they've had 10 years of the Bush tax cuts, where exactly are all those jobs that they created ???

  • Report this Comment On September 07, 2012, at 4:02 PM, whereaminow wrote:

    -------> The correlation between total federal taxes as a percentage of GDP and real GDP growth is actually lower than the correlation of the chart in this article. <-------

    And I repeat, Morgan, if GDP includes Government Spending as a function of the growth, why would you EVER expect to see GDP rise when taxes revenue is falling?

    GDP is a horrible method of measuring growth for that very reason.

    Let go off your mainstream econ bias. It's a folly and a waste of your talents.

    David in Liberty

  • Report this Comment On September 07, 2012, at 4:08 PM, katinga wrote:

    @whereamInow

    GDP = Consumption + Investment + Government + Exports - Imports.

    It's an accounting formula. If G goes up, then either C or I goes down, unless you can change the balance of trade.

    What do you propose as a substitute? Unless you have an answer, it's like you're denying gravity.

  • Report this Comment On September 07, 2012, at 4:20 PM, HeckCreek wrote:

    I'm ok with your second point -- to a point -- and certainly ok with your third. But I would like to see a "statistical do over" of your first. From what I can tell, the data set you present is time sequence aligned. In other words - 1950 tax rate and 1950 GDP growth. I would contend that those have to be lagged in order to validly assess the causal relationship. You might have to try a couple of different time intervals to find the right one, but you should definitely try lagging the GDP result by at least one, two and three years to determine whether or not taxes and GDP growth are correlated. If you would like to send me your data set, I will have one of my analysts run the numbers for you.

  • Report this Comment On September 07, 2012, at 4:26 PM, HeckCreek wrote:

    @whereaminow makes a very valid point katinga. I don't see the statistical argument that G going up is causal to C or I going down. Higher G can simply drive a higher GDP. Help a math dummy out, will ya?

  • Report this Comment On September 07, 2012, at 4:26 PM, whereaminow wrote:

    katinga,

    There are many other ways to measure economic growth. I'm not denying gravity. Not anything close to it. I know the formula and I'm pointing out an obvious fact. If you follow things out logically, you will see that GDP just measures the final price of all goods (roughly) and that is determined by Federal Reserve money printing.

    In other words, it's worthless. That's why the 1970s show higher GDP growth than the Gilded Age. Anyone who believes yoy growth was higher in the 1970s than the Gilded Age needs their head examined.

    Your first step to recovery from mainstream econ theory (which has been able to predict EXACTLY NOTHING correctly over the last 80 years), is to drop the Aggregates and start doing some real economic research.

    David in Liberty

  • Report this Comment On September 07, 2012, at 4:50 PM, slpmn wrote:

    whereaminow - I don't spend a lot of time thinking about the components of GDP, so I may be off base, but wouldn't the logic of "lower taxes = greater GDP" hold under the theory that the private sector does more with a buck than the government?

    Let's say the government gets a buck of revenue to spend and we get a buck's worth of GDP, but let the private sector keep its buck and via the magic of capitalism and the free market, we'll get more than a buck back in GDP? It's essentially return on investment, and the private sector demands and gets a better return than the government.

  • Report this Comment On September 07, 2012, at 5:05 PM, whereaminow wrote:

    slpmn,

    There's a lot of reasons why that's not correct, but here are two.

    1. When the free market takes a buck, it tends to invest it in lengthening the structure of production, which counts negatively in final GDP.

    2. When the free market takes a buck and the government doesn't, prices will tend to fall (which is a good thing), but keep in mind that GDP is really just a total price of goods sold. So that also negatively impacts GDP.

    In summary, GDP is worthless. Mainstream econ should go the way of lysenkoism. It does more harm than good.

    David in Liberty

  • Report this Comment On September 07, 2012, at 5:27 PM, slpmn wrote:

    David, I have no idea what the heck you just said, but it sounds pretty good, especially the lysenkoism part.

    Anyway, excluding the debate about the validity of GDP as a measure of economic growth for a second, where are you at on the relationship between taxes and growth? I believe you're generally against the "theft of peoples' money by the government" on principle alone, but do you also have an opinion on the economic argument for less (or zero) taxation?

  • Report this Comment On September 07, 2012, at 5:31 PM, 1022ThirdAvenue wrote:

    scottw:

    You stated that: "This administration has not passed a budget in 3 years and practiced uncontrolled borrowed spending" Leaving your poor grammar and spelling to the side, the statement indicates a severe deficit of knowledge of the functioning of our government. The administration does not "pass[] a budget"; that is the duty of Congress. U.S. Constitution, Article I, Section 8. The administration neither "borrows" money nor "spends" money. That is the duty of Congress. U.S. Constitution, Article I, Section 8. Neither the Congress nor the Administration have the power to invest. U.S. Constitution, Article I, Section 8; U.S. Constitution, Article II.

    To the rest of the people that posted comments in response to this article: Morgan is spot on in this article. The point of the article it to give some rational argument, based upon raw data, that the importunate rhapsody emanating from the right is flat wrong and the blubbering mumbles from the left are meaningless. A number of very solid studies have been done demonstrating that the amount of the debt carried by a nation is not relevant to the future course of the economy of that nation; rather only the affordability of that debt determines the course of the economy of the country. There are a vast number of people that spout nonsense about inflation, even hyperinflation, because of the magnitude of the debt and deficits and an even larger number that believe that line of drivel. Those on the right lay blame at the feet of the current administration for both the debt, the deficits, and the potential for inflation. Yet none of these people bother to consider the pure fact that the average annual inflation rate under George W. Bush was almost twice that under the Obama administration as computed based upon the Bureau of Labor Statistics Consumer Price Index. Also, the last budget that was passed required the collective action of a republican held House of Representatives and a Democrat, by a slim majority, held Senate. Of course, that budget included a substantial deficit. Further, George W. Busch ran up a multi trillion dollar debt to conduct two wars and not a single republican said so much as "boo" while he did so. The markets lay the lie to rest regarding this fear mongering about deficits and the debt: the market is strongly undervalued because of the tremendous amount of money that has been put into the bond and fixed income markets over the past several years. These latter markets are paying a pitiful yield. The rhetorical question is: if the fear of inflation, or hyper inflation, has any merit, why would any sane person put their money into a vehicle that yields a percentage point or less when vehicles, according to the prevailing nonsensical theory, will soon be available yielding ten or more times as much?

    Here is an anecdote that comes to mind whenever I hear about the debt and deficit problems: about four years ago after Obama was nominated, a friend of mine said that he was buying 4000 acres of land, which was going for about $6,800.00 per acre at the time, and that he was leveraging the equity in his existing 3,000 acres as collateral on the mortgage. Why would he be dumb enough to do this? He stated that it would be trivial to pay off in 4-6 years because Obama would cause hyperinflation exceeding 100% so the payments would be relatively trivial. He is now in bankruptcy and I laugh every time I think about him.

  • Report this Comment On September 07, 2012, at 5:31 PM, whereaminow wrote:

    --> do you also have an opinion on the economic argument for less (or zero) taxation? <---

    Sure, but how far down the rabbit hole do you really want to go? Do you want to about externalities, incentives, how the initiation of violence distorts the price system?

    If you want it summed up in simple principle, mine is this: prices are the result of exchanges between individuals based on subjective value scales. Mess with that at your own peril, because it's all we have outside of the whims of megalomaniacs to tell us how scarce resources should be allocated. Anytime you ask for violence (government intervention of any kind) you are replacing the subjective values of market actors with the arbitrary decisions of the least informed.

    That in a nutshell explains why government intervention never works, including taxes.

    David in Liberty

  • Report this Comment On September 07, 2012, at 6:37 PM, CrankyTexan wrote:

    "A number of very solid studies have been done demonstrating that the amount of the debt carried by a nation is not relevant to the future course of the economy of that nation"

    - in that case, let's have the government give every citizen a check for a million bucks. After all, debt does not matter, right? In fact, make it a check for a billion for every citizen.

  • Report this Comment On September 07, 2012, at 7:12 PM, NOTvuffett wrote:

    @CrankyTexan maybe some people should google images for 1 trillion and 100 trillion dollar notes from Zimbabwe... problem solved!!!, lol.

  • Report this Comment On September 07, 2012, at 8:25 PM, Annbury wrote:

    Surely you are joking in your third point. Have you looked at the record of Republican presidents and Democratic presidents in terms of the economy, the market, the dollar? In every instance the Democrats win, hands down. Most people know this data: why don't you? One of the commentators whom I respect, Barry Ritholtz, of the Big Picture, knows this data also but says one cannot prove cause and effect. That is a different argument than the silly one that you make.

  • Report this Comment On September 07, 2012, at 8:47 PM, TMFMorgan wrote:

    <<but says one cannot prove cause and effect.>>

    Key statement.

  • Report this Comment On September 07, 2012, at 8:59 PM, TMFMorgan wrote:

    The elaborate Annbury: I'm well aware of the numbers Barry refers to. They're clear. But again ... cause and effect.

    For example, it would be inane to give Clinton credit for the dot-com boom, and then blame Bush for the ensuing recession, to say nothing of the economic impact of 9/11. That's one example of many.

    And when looking over a period of 50+ years, "republican" and "democrat" loses a lot of meaning. Not apples to apples anymore. Policies and priorities of each party change over time.

    For what it's worth,

    Morgan

  • Report this Comment On September 08, 2012, at 1:20 AM, jlclayton wrote:

    Very thought provoking and well written article--thank you, Morgan!

  • Report this Comment On September 08, 2012, at 11:05 AM, rgsltg50 wrote:

    Economic misconception #4: Greece, Spain and Italy are in seriously bad financial condition. Everyone knows debt doesn't matter!!??

    Morgan is one of those die hard leftists who still can't accept the fact that collectivism (all government, all the time) was tried in 75 countries for 75 years and failed. He sets up a bunch of straw men and lights a match.

    At some point government becomes so big and so pervasive that the economy is destroyed by politicians pandering to the grievance/entitlement crowd.

  • Report this Comment On September 08, 2012, at 1:05 PM, TMFMorgan wrote:

    <<Economic misconception #4: Greece, Spain and Italy are in seriously bad financial condition. Everyone knows debt doesn't matter!!??>>

    Doesn't say debt doesn't matter. Says what's important is the carrying cost. Greece, Spain, Italy can't afford their carrying costs.

  • Report this Comment On September 08, 2012, at 1:08 PM, TMFMorgan wrote:

    <<Morgan is one of those die hard leftists ...>>

    Not that it matters, but I've voted for an almost identical number of republicans and democrats in the last decade. I can't recall ever voting for a democratic senator.

  • Report this Comment On September 08, 2012, at 2:32 PM, RockyTopBob wrote:

    <<Not that it matters, but I've voted for an almost identical number of republicans and democrats in the last decade. I can't recall ever voting for a democratic senator.>>

    Yes, it matters Morgan. This is TMF. You post what stocks you own when you discuss stocks. It's all about disclosure.

    <<That means we're heading into a period of what will no doubt be a breathless display of rhetoric and nonsense winning out over facts and reason.>>

    Do you attribute these three items primarily to one political party? If yes, then calling them nonsense would seem to imply bias. Why do you think the Fool should host an article obviously related to one political party without disclosing the party they belong to or endorse?

    Politics, no matter what method you use to introduce them, do not belong on the TMF site. I can see no real purpose of publishing such an article before an election and framing it in terms of "the election season".

    Bob

  • Report this Comment On September 08, 2012, at 4:31 PM, CrankyTexan wrote:

    Morgan, since you seem to think that you know everything, how large does the national debt have to grow in order for it to finally be a problem in your opinion?

  • Report this Comment On September 08, 2012, at 5:44 PM, TMFMorgan wrote:

    <<Do you attribute these three items primarily to one political party?>>

    No.

  • Report this Comment On September 08, 2012, at 8:03 PM, becdon wrote:

    best believe that conservative leadership,coupled with personal incentive rewards for extra production, and respect rewards for savings and investments is what caused the fantastic growth of the wealth of the united states of america and the wolderfull advance of freedom around the entire world to so many millions of people who otherwise would be standing in government assistance lines like those that happen is russia so oftern. disrespect for "what brung us", is being advanced in our schools, and is being revealed in the apparent lack of the truth which is required for higher educated young folks. time to take an inward look for the truth which "brung us to this great dance".

    thanks for the opportunity.

  • Report this Comment On September 09, 2012, at 8:55 AM, Whelmo wrote:

    So why not have a chart with effective tax rates and GDP, or change in GDP to increase in deficit? US companies are reincorporating overseas for a reason. We have one of the highest corporate tax rates in the world. The deficit and debt relative to GDP does matter. So the cost to borrow does not matter? What happens when the service on the debt is greater than revenue? What happens when we can not service the debt? Easy, just look at Europe.

  • Report this Comment On September 09, 2012, at 8:57 AM, Whelmo wrote:

    If you are not aware that Obama’s obscene $787 BILLION stimulus program now stands at $1.2 TRILLION and growing, please read that story here, but not before taking a look at the foreign companies receiving your tax money from the ever growing Obama Stimulus. Let your friends know the BILLIONS intended to stimulate the American economy, stimulated the rest of the world, and in the tsunami that resulted, thousands of Americans lost their jobs: A record of a President’s stimulus failure goes round the world:

    AUSTRALIA: $162,000 for Melanoma Tumor Samples to be sent to the National Cancer Institute

    CHINA: Outsourced jobs to China.

    ● $30 MILLION to an American LED manufacturer to open plants. It did, and half of the company’s employees are now located in China.

    ● $337 MILLION for an Arizona solar plant – the panels will be supplied by a Chinese solar panel manufacturer.

    ● GE cancelled a contract with an American manufacturer of parts for Wind Turbines, and then ordered from China. The company, ATI, offered to match the price from China. GE refused the order and the American company laid off 302 workers.

    ● GE has used Chinese-made Wind Towers over American Towers at Stimulus funded Shepherds Flat Wind Farm in Oregon.

    ● A solar power company received $5.4 MILLION in grant monies, then laid off America workers based on an increased reliance on imports from China.

    DENMARK:

    ● $51.6 MILLION in Obama Stimulus Grants to build factories in the US. Layoff of 180 US workers have been announce,

    ● and possibly another 1,600 by the end of 2012. $218 MILLION Stimulus grant for wind turbines for the US assembled in Denmark.

    ● $25 MILLION for the construction of a “Demonstration Scale Biorefinery.”

    DOMINICAN REPUBLIC: Obama Stimulus funds for Renewable Energy Call Center (could have been a US project).

    EL SALVADOR: Stimulus funds used to hire hundreds of workers in El Salvador and the Dominican Republic to administer Renewable Energy Appliance Rebate Program (could have been a US project).

    FRANCE: Obama Stimulus funds for foreign-made Wind Turbines. $69 MILLION in cash grants

    FINLAND: $100,000 to build luxury electric sports cars

    GERMANY:

    ● $440 MILLION for Wind Farms before Stimulus was passed. Turbines for US used were manufactured in Germany.

    ● Another $100 MILLION to Spain in grant monies for Wind Farms. In September 2011, the company announced the would lay-off 10% of their American workforce.

    GREAT BRITAIN/UK: UK:

    ● $39 MILLION in Obama Stimulus funds to build electric delivery trucks.

    ● Another British private equity firm received $40+ MILLION in Obama Stimulus Funds by buying an American company days before the Stimulus funds were designated.

    INDIA: Stimulus funds for Wind Turbines manufactured in India for the US use. $69 MILLION in cash grants.

    INDONESIA: $1.5 MILLION to reduce pollution in Jakarta, one of Obama’s home cities

    ITALY:

    ● Obama Stimulus funds for foreign-made Wind Turbines. Italian company, Brevini Wind was given a $12.75 MILLION Tax Credit to manufacture gearboxes in Indiana. The company promised to hire 450 Americans. So far, only 70 jobs have evolved and the facility will not be in operation until late 2013.

    ● Other Italian Wind Turbine manufacturers received of $84 Million in CASH GRANTS throug Obama’s Stimulus

    JAPAN: Before the Obama Stimulus was passed, we sent money to Japan to build a Wind Farm. $91.4 MILLION in grants – 180 Turbines manufactured in Japan by Mitsubishi.

    LUXEMBOURG: $31.5 MILLION in Obama Stimulus funds for a Waste Heat Recovery Unit

    MEXICO:

    ● Obama Stimulus funds for Mexico. Mexico’s SunPower says some of the solar panels for the $1.3 BILLION stimulus-backed California Solar Valley Ranch will be manufactured in Mexico – not California.

    ● Another $16 MILLION to create green manufacturing jobs in Mexico, while the US company laid off workers here and sent work to Mexico.

    NEW ZEALAND: Stimulus funds go to NZ contractor – work that could have been done by a US contractor. $817,000 awarded to Connexionz to install bus monitors for the city of Santa Clarita.

    RUSSIA: We funded a company in Russia. It went bankrupt. Russian investors bought it. $118 MILLION from Obama’s stimulus to produce vehicle batteries. The Russian investor’s company may do work for the US Military!

    SPAIN: Obama Stimulus funds for foreign-made Wind Turbines. $1.5 BILLION in loans and grants. The company claimed it had created over 15,000 American jobs but the company has only 850 US-based employees.

    SWITZERLAND: A Swiss-based company received $50+ MILLION in Stimulus contracts for Smart Grid Meters. Cathy Zoi, a former Obama Energy Department Official held over $250,000 in stock in the company. Zoi has previously served as an Executive Director with the company before joining the Obama administration.

    THAILAND: $200 BILLION for General Motors plant in Thailand – after GM took a taxpayer-funded bailout they build the Thailand lant to build diesel engines for the Chevy Colorado Pickup truck.

    VIETNAM: GE builds Wind Turbine plant. GM’s Jeffery Immelt chairs the President’s Job Council and GM received over $1.2 BILLION in Obama Stimulus funds.

    SOUTH KOREA:

    ● Obama Stimulus funded America jobs used to hire foreign nationals. $300 MILLION to manufacturer electric vehicle batteries after building plants in Michigan. Unions are balking and saying foreign nationals are being brought in to fill jobs for Americans.

    ● The Department of Energy admits that 11 of 18 contractors are Asian firms. $179 MILLION for parts from South Korea

    Nope, doesn't matter who is in charge of the Oval office or Congress.

  • Report this Comment On September 09, 2012, at 11:44 AM, STOCKS2076 wrote:

    Morgan - pretty good article, but you do forget a couple of key points. I agree whole heartedly the Nation never needs to repay it's debt, but the concept of growing out of it like post WWII is virtually impossible.

    The war created huge pent up demand in this nation as rationing ended. Europe and Asia both needed rebuilding -both creating huge demand. the US had LITERRALY just ended it's farm based economy (dust bowl of '30s to WWII) and transition to a manufacturing and Banking based economy.

    So with ALL the world needing products, and infrastructure building, and ALL the world needing loans and money, and finally - the USA having it's manufacturing facilities intact after the war, and a stable currency (largest gold reserves) we were naturally going to come out on top.

    I don't see that set of circumstances setting itself up again - nor would I want to.

  • Report this Comment On September 09, 2012, at 1:24 PM, TMFMorgan wrote:

    <<The war created huge pent up demand in this nation as rationing ended. >>

    Very true. But so has the recession (the key factor in our growing debt). Household formation is currently around 1.2 million per year, but new household construction is less than half that amount. Auto sales have been below the scrapage rate of vehicles since 2008. Both returning to levels consistent with long-term demand will be a large and, I think, underappreciated boon to the economy.

    I don't think anyone is calling for economic growth on the scale seen in the 1950s and 60s. But a more-or-less balanced budget, or even a small deficit, run for 15 or 20 years would effectively solve today's debt problem. You don't need a net paydown to the nominal amount to relieve the burden.

  • Report this Comment On September 09, 2012, at 10:02 PM, whereaminow wrote:

    <<The war created huge pent up demand in this nation as rationing ended. >>

    That's actually complete untrue and has been proven fallacious.

    The pent up demand argument was made by Keynesians AFTER their predictions of post war economic armeggedon ended up being false (just like every other prediction they ever made.) It was only the causal-realist economists (the forerunners of today's Austrian School of Econ) that correctly predicted the post war boom.

    David in Liberty

  • Report this Comment On September 09, 2012, at 10:06 PM, whereaminow wrote:

    "Within a year of the war's end, it was clear that the pessimistic predictions were spectacularly wrong. The postwar prosperity was attributed to "pent-up demand", for goods that couldn't be obtained during the war. However, consumption increased only modestly. From the peak of military activity in the second quarter of 1945 to the trough of the mild downturn in the first quarter of 1946, government purchases of goods and services fell an extraordinary 67.5 percent, or $65.7 billion. Over the same period, consumption spending rose but $14 billion, barely 20 percent of the fall in government spending. Investment spending rose a more robust $21.6 billion, and net exports by $9.8 billion, but collectively the increases in demand fell about $20 billion short of decline in government spending, leading money GNP to fall a rather sharp 10 percent.

    Instead, labor supply and real wages have been adjusted downward. For example, millions of women voluntarily decided to withdraw from the labor force and working hours have been commonly reduced. Rising profits, and the anticipation of future increases, stimulated investment spending (the only truly robust major component of aggregate demand). Relative price adjustments brought about what Keyensians perceived to be an increase in aggregate demand, rather than the other way around."

    http://wiki.mises.org/wiki/Great_Depression

    Morgan, give up your Keynesianism and you might actually be right once.

    Just sayin...

    David in Liberty

  • Report this Comment On September 09, 2012, at 10:49 PM, NOTvuffett wrote:

    I am getting the sensation that the market may be overvalued. Almost all the indicators are negative.

  • Report this Comment On September 10, 2012, at 12:53 PM, NoOracleHere wrote:

    Morgan experiments intelligently with some very dangerous ideas. I respect that. However, there is some pretty vast oversight embedded in the glib statement, "How will we deal with it then? Ideally the same way we did after World War II: We grew out of it." We also benefitted from being the only intact economy supplying the world after WWII. Let's all pray we don't enjoy that benefit again. Also, we raised taxes to a peak 92% top statutory rate to pay down that war debt, and we had a constituency that was willing to make sacrifices. Also, arguably a greater percentage of the dollar-based economic activity in the world was taxable at the federal level back then. The emergence of off-shore banks and off-shore dollar based corporate profits is a fairly recent phenomenon, at least at the levels we see today. These things don't even show up in the effective tax rates. We also had a good deal of inflation (another form of tax) that helped pay down the war debt. There is no free lunch. Morgan is right that when the interest rates rise, then we will really feel the federal debt. The enlightening part of Morgan's article is the lack of correlation between the top tax rate and economic growth. I think he misses another important point - that economic growth is not necessarily stimulated by a low top tax rate, but it's more the overall economic treatment of the large masses of middle class that are the best stimulous of growth. In today's situation, it's not the top tax rate that matters. Jobs will not return when Warren Buffett has a few more billions in his bank account. Jobs will only return when there are customers in the stores with money in their pockets. That has everything to do with the general divide that has widened between the top 1% and everyone else. It's not jealousy as so many have claimed - it's the health of the economic system that is threatened when the wealthiest 1% remove most of their earnings to off-shore accounts, CEO's pay lower effective tax rates than their secretaries, and the stimulous money goes to the banks. I'll say it again - jobs will not return until customers return to the stores with money in their pockets.

  • Report this Comment On September 10, 2012, at 1:17 PM, NoOracleHere wrote:

    Another point to ponder - capital gains are the fruit of speculative activity. Cutting taxes on capital gains stimulates the speculative economy. Speculative activity is what produces bubbles. It was the housing bubble that got us in trouble in the last decade, and it was the stock market bubble that got us in trouble in the 1920's. When the bubble bursts, a huge amount of money changes hands, creating winners and losers, destroying confidence, and collapsing economic activity. Don't stimulate speculation. Raise taxes on capital gains.

  • Report this Comment On September 10, 2012, at 3:37 PM, NHWeston wrote:

    I grew up in a very large, very active, and very politically diverse political family. Except for Uncle Hiram who was militantly a political. In 1960, he commented to a very young and impressionable me, "It makes no difference if Dick Kennedy or Jack Nixon is President - neither's gonna make your life any better." I grew up to become a historian and, as a historian, I do NOT do what folks call "Counter-Factual History." I do not how different our lives would be if John McCain was President, for example, or if Ross Perot has won.

    I do know this, gang. Presidents make decisions about war and peace. Those decisions have titanic economic consequences. No, Presidents can affect the economy. Profoundly. Regards.

  • Report this Comment On September 10, 2012, at 4:22 PM, sherms09 wrote:

    I have a strong feeling that the author of the articles is quite biased politically. I pay for fool.com services for their advice and discussions of companies' financials. I find it extremely inappropriate that this space is devoted to political biases.

    I also find the article is not very coherent. The author states that it may be the effective tax rate that is more correlated with the GDP, not the top bracket rate. If this is so, then why not show a plot of GDP vs. effective tax rate. Who cares about the top bracket ?

  • Report this Comment On September 10, 2012, at 4:46 PM, TMFMorgan wrote:

    ^ Writing that it doesn't matter if a democrat or a republican wins seems to me to be the definitional opposite of bias.

    To your second point: "Who cares about the top bracket?" The guys running for president. That's all they debate about.

    I ran a similar chart of total federal taxes as a % of GDP against GDP growth here: http://twitpic.com/arefb9

    Thanks for reading,

    Morgan

  • Report this Comment On September 10, 2012, at 4:59 PM, mdk0611 wrote:

    With respect to NoOracle's comment on capital gains rates:

    1. As opposed to a lower capital gain rate, a special provision (passed in the 90's)related to primary residences provided for a 250k(single)/500k(married) reduction on the sale if you had lived there for a few years. House flippers were not acting on the lower rate, there were acting on essentially a ZERO rate. All you have to do is go back to the 1 time election and deferral provisions of prior tax law to prevent that.

    2. The lower cap gains rates only apply to long term gains. You may argue that a 1 year holding period is too short, but truely long term holdings have appreciation related to inflation that justify a lower rate.

  • Report this Comment On September 10, 2012, at 5:00 PM, mdk0611 wrote:

    Addendum: Reduction of the taxable gain on the sale

  • Report this Comment On September 10, 2012, at 5:45 PM, sherms09 wrote:

    Morgan, I appreciate your reply. However, I think it's still too easy to poke holes in your arguments.

    >Writing that it doesn't matter if a democrat or a >republican wins seems to me to be the definitional >opposite of bias.

    If I were to write a very biased essay and then finish it by saying it does not matter who wins does it make the essay any less biased ?

    >To your second point: "Who cares about the top >bracket?" The guys running for president. That's >all they debate about.

    That is not true. Romney is arguing for lowered brackets and cutting loopholes. The former would lower the effective rate, and the latter would raise it.

    I think you have to admit that neither of your charts is a strong scientific argument for your thesis statement. A strong scientific argument would say that with all parameters being equal other than the effective tax rate would there be some correlation (on average) between a change in effective tax rate and GDP growth 2, 3, 5 years after the change. It may be that the honest answer is "we don't have enough data to determine this " OR it's "too hard to isolate enough important factors to answer the question", but you certainly cannot show that there is no correlation with one simplified chart. I am just saying this to you as a researcher, that a paper lacking strong arguments to support conclusions typically does not get good reviews from my experience.

    thanks for your reply

    -Alex

  • Report this Comment On September 10, 2012, at 6:04 PM, TMFMorgan wrote:

    Alex,

    I don't think we disagree on much. Misconception #1 is a response to those who run with the simplistic argument of, "Do X to the tax rate and Y will happen to growth." To state that there's more going on than my chart shows is exactly the point I attempted to make. As I wrote: "It's just a lot more complicated than that."

  • Report this Comment On September 10, 2012, at 11:34 PM, Marius1871 wrote:

    While this article makes some interesting points, I would say that all three points are more untrue than true, especially about national debt. Around 13% of the Federal Budget went to servicing the debt in 2011, choking off funds available to kick start the economy. As debt rises and is rolled over, more funds get diverted to servicing the debt, forcing the government to raise taxes and cut expenditures to avoid the short term fiscal horror of a default. We see this in Greece right now.

    While the campaign promise of paying of ALL debt is overkill, the US does need to make strong progress in working down its current debt levels.

  • Report this Comment On September 11, 2012, at 11:27 AM, agsimon wrote:

    excuse me if I am repeating something already said.

    If the President cuts federal revenues by slashing taxes, gives everyone some of their money back, and starts two un-funded wars (on of which still hasn't ended), then I say the Office has a distinct effect on the overall economy.

  • Report this Comment On September 11, 2012, at 11:41 AM, TMFMorgan wrote:

    ^ But the president alone doesn't do that. It's the work of the president and Congress.

  • Report this Comment On September 11, 2012, at 12:26 PM, CrankyTexan wrote:

    "If the President cuts federal revenues by slashing taxes, gives everyone some of their money back, and starts two un-funded wars (on of which still hasn't ended), then I say the Office has a distinct effect on the overall economy."

    Why worry? Didn't you get the memo that $16 trillion in debt is affordable?

  • Report this Comment On September 11, 2012, at 1:16 PM, slpmn wrote:

    To those who found this column political - that's only possible if you're viewing it through a political lens. It represents one economic columnist's observations, nothing more, nothing less. The guy has looked at taxes and economic growth and can't find any direct correlation - because there isn't any!

    You can dispute his methods and his data all you want, but what you can't do is prove it wrong with your own data. As it happens, one of the two political parties currently advocates tax cuts as their primary tool of solving the nation's ills (and the corallary position of absolutely no tax increases because it will kill the economy).

    I have yet to see ANY evening moderately convincing analysis that supports their position. If it was out there, we would have seen it trotted out many, many times. It is a THEORY, nothing more. One might say it has to be accepted with faith, because there is no proof. And I'm saying that as an independent investor. All I care about from the two parties is policy that will result in a stronger, more stable economy. I could care less if there is a D or R before any politician's name.

    Saying tax cuts will make the economy grow sounds really nice, and heck, who doesn't like tax cuts. The problem, as Housel correctly asserts- Is. Not. That. Simple. If the average effective tax rate was 90%, yeah, some cuts would help. Duh. If it was zero, um, we would probably need to raise taxes. Somewhere in the middle is the theoretical optimal tax rate. It is an unknowable figure, and it probably fluctuates.

    My own outlook is colored (you might say tainted) by the experience of the 90's. After W. Bush's dad signed a tax increase (thus dooming his reelection), the shrinking deficits set the stage for an economic boom. W. Bush cut taxes massively at the start of his term, and we all know how his eight years ended. The morale of the story is not - tax hikes good, tax cuts bad, it is tax hikes are not necessarily bad, will not kill the economy, and might actually be necessary sometimes. They should be considered one of many tools to be simultaneously deployed to get the deficit under control.

  • Report this Comment On September 11, 2012, at 1:39 PM, CrankyTexan wrote:

    "To those who found this column political - that's only possible if you're viewing it through a political lens. .......... one of the two political parties currently advocates tax cuts as their primary tool of solving the nation's ills.......... I have yet to see ANY evening moderately convincing analysis that supports their position ...... Saying tax cuts will make the economy grow sounds really nice ........ we would probably need to raise taxes....... W. Bush cut taxes massively at the start of his term, and we all know how his eight years ended."

    Uhhh, nice job proving that this article has absolutely nothing to do with politics.

  • Report this Comment On September 11, 2012, at 2:27 PM, mdk0611 wrote:

    sipmn - If you truly believe that boom (AND bubble, which you conveniently overlook) of the 90's has the '93 tax increase as it's proximate cause I feel sorry for you.

  • Report this Comment On September 11, 2012, at 4:25 PM, slpmn wrote:

    Cranky - How can I say this....You're viewing things through a political lens.

    mdk0611 - I appreciate your concern, but no need to feel sorry for me. Things are just fine. Oh, and I didn't say one caused the other. I probably did a bad job of making myself clear. My point is, it's tough to convince me raising taxes will be bad for the economy because I have seen it happen, and it wasn't bad for the economy. Similarly, it's tough to convince me cutting taxes is the Answer because I've seen it done, and the economy went nowhere. If that still doesn't make sense, well, rest assured you're not alone, which I guess is the problem, isn't it?

  • Report this Comment On September 11, 2012, at 5:03 PM, CrankyTexan wrote:

    The name of this article is "3 Huge Economic Misconceptions From ELECTION Season"

    slpmn wrote: "Cranky - How can I say this....You're viewing things through a political lens."

    Well duh!!!!!

  • Report this Comment On September 12, 2012, at 7:22 PM, thidmark wrote:

    "2. We eventually need to pay off the national debt"

    I have never heard this anywhere. We do need to pay DOWN the national debt. Huge difference.

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