Economy noun econ·o·my \i-ˈkä-nə-mē, ə-, ē-\ the production, distribution or trade, and consumption of limited goods and services by different agents in a given geographical location.
When we ask the American people what their top considerations are in any congressional or presidential election, without question one of the top issues they raise is the economy. From the definition above, it’s hard to actually imagine that people care about the economy in a literal sense though. The theories and systems related to that which is described by the definition of an economy are best left to classrooms. What people actually mean when they say “the economy” is that they care about aspects of our fiscal and monetary policy that actually impact our lives. Fiscal being budgetary and taxation activities. Monetary being activities conducted by the Federal Reserve that impact interest rates. We choose to use the word “economy” to sum all that up in one average sized word. We like terms that we can put in our back pocket so we can pull them out when required in discussion or debate to prove a point. So the “economy” is what we care about. And so it becomes top issue.
If you think about it just a little bit more though, you can actually give some purposeful voice to the demands of the people’s economy. When you think about it in reasonable terms, and its important to be reasonable here because there’s quite a bit at stake, you can produce a pretty distinct list of exactly what we care about. To be even more precise, you can get to eight portions of the economy that we really care about. Here they are in a somewhat particular order.
What American people want of their “economy”:
1. Income that keeps pace with inflation
2. Job growth equal to employment demand
3. Stable employment rates
4. Historically moderate tax rates
5. Affordable cost of borrowing
6. Participation in growth through investment
7. The ability to retire at a reasonable age
8. A safety net in hard times.
The good news is, we actually have data on all eight of these categories. When you throw economic theory and political principles out the window, you can do some unbiased statistical analysis. So we did that. We analyzed 19 separate economic categories that included government spending, income tax rates, interest rates, trade deficits, financial markets, GDP, budget surplus/defecit and corporate profits. By simple correlation analysis, we can ignore the rhetoric and theory and look at simply what the data tells us. So here it is both in raw form and commentary.
What happens when taxes went up?
People had less money. But you didn’t need data to tell you that. But interestingly, job growth increased and unemployment decreased. The S&P 500 went up. Corporate profits decreased, which makes sense, because they were paying higher taxes. In the statistical world, we are always careful to point out that correlation is not causation. Which means in lay terms, just because two points of data showed a pattern, it doesn’t mean one caused the other. What we do know is that the data alone does not support the history of dire economic consequences from tax increases. That doesn’t mean we have to like them though.
What happens when corporate profits increase?
Surprisingly nothing. Though profits increased with lower taxation, the growth doesn’t appear to materialize into wage increases, job growth or significant financial market gains. From a data perspective, the only thing that appears to benefit from corporate profits, is well, corporate profits. This isn’t a purposeful commentary about the evils of corporate America. It’s simply what the data says.
What happens when corporate profits decrease?
We don’t know because it’s never happened. Even during the great recession that started in 2008, corporate profits continued to grow at record rates. What correlates to the spike in unemployment and the crash in financial markets is a slow down in the rate of growth. Which means companies were more profitable during that time than in the years previous to the crash, they just weren’t more profitable enough. And why did it slow down? As far as the data shows, for no reason at all related to taxes, wages, spending, interest rates etc. Which leads us to believe that free market forces of expansion and contraction dictate rate of growth; not taxation, wages, spending, trade, currency exchange rate etc. Again, this is not principle or rhetoric, just data.
Do we spend more tax payers money when we raise taxes?
Oddly, no. One of the strongest correlations in the entire analysis shows that we spend more when taxes are lower. Clearly no one is arguing that when we lower taxes, we spend more because taxes are lower. What we are saying however, is that the data shows us that we spend independent of how much money we collect from taxes. Which is why our national debt is higher now as a percentage of GDP than at any time in our history. The conclusion is that it has at least as much to do with historically low tax rates than it is out of control spending.
Is our spending out of control?
We do spend more than we used to. The increases in spending exist in social security, medicare and medicaid, and social safety net programs. People live longer then ever before and medical care that simply didn’t exist in the recent past presently does exist. What we choose to spend on safety net programs is a choice. When unemployment spikes, our government spending does as a result. Choosing to do so however appears to have no negative impact on any economic outcomes that we care about, other than supplying us with income and resources when we fall on hard times. It simply means we spend more money. Which matters, especially when you don’t fund it.
So what’s the “so what”?
What does it all mean? The rhetoric around taxes and spending and how it impacts our lives is not supported by the data. We certainly don’t like to pay higher taxes. Nor should we. But the increased costs associated with modern lifespans and healthcare are taking their toll. And this is not because of the Affordable Care Act. At least not yet. Most of this data comes from well before it was in place.. There is one important consideration though. Whatever our political affiliation, we all agree that at a minimum, a government’s role is to exist and remain solvent so it can continue to govern. Which is a pretty low bar. If you take this data seriously, and I do, you see that there’s nothing that actually supports the “trickle down” effect from lower taxes. Which is actually good in one way. It leaves us with a clear choice; to have the services that our government presently provides or to not have the services that our government presently provides. Right now we’re choosing to have them and not pay for them because we’re hiding behind the rhetoric that choosing to pay for them would be bad for the economy. The data doesn’t support it but our inability to have effective political debates in congress, or anywhere won’t let us get to that choice. My guess, is we’d have some, divest of others and maybe even improve ones that weren’t working. We’d be forced to prioritize. That is, if we could actually talk about this. Which we can’t.
This level of analysis isn’t particularly hard to do and the conclusions that it yields are strikingly conclusive. They’re just not popular ones to advocate for because frankly, we can’t have honest discussions any more without being stuck in the irrelevant loop of “government bad” -v- “government good” paralysis. Which puts us in the impossibly dysfunctional position of having more, paying less and not being able to prioritize anything until we drive off a cliff of insolvency. Painful truths hurt. So we don’t say them. If we don’t want to pay for the social programs, then cut them. But there will be no denying that we are cutting them in order to preserve the lowest tax rate in my life time. Or, maybe we try reviewing and prioritizing, like any organization on the planet that has a budget. But we can’t, because we’ve stopped talking. And so the self deception continues and our deficit grows as does our compliance with our insolvency as a nation. This one actually isn’t that hard. But it’s going to take a discussion. And we can’t do that any more.
5 thoughts on “The Great American Economy: A Study in Data and Self Deception”
Thanks for the comment. And I think there’s more than a little to it. This was an early piece and my thinking has evolved quite a bit on the next level analysis. But I think it still holds up to make us as the questions about why we think the things we think about the economy when so many of our “rules of thumb” aren’t proven out by any data or objective observation.
Great post and very well reasoned analysis.
I just wanted to offer another perspective I found over at Bloomberg (below). The gist of the article is that corporations HAVE been passing on gains to workers. The problem is that all of those gains have been eaten up by the growth in healthcare costs.
“Our deficit grows as does our compliance with our insolvency as a nation”
What if I suggested, as do Modern Monetary Theorists, that the federal government cannot go insolvent financially, with or without taxes? If taxes did not actually fund federal spending (and they do not), shouldn’t it be far easier to make the kinds of choices and decisions needed to attain our collectively desired outcomes, whatever they may be? For example, if FICA were eliminated and everyone realized that Social Security could still be fully funded and even expanded if desired, with a larger (but meaningless) deficit being one result, would that not go a long way toward weighing Social Security on its merits alone? Federal government neither has nor does not have money. It creates money by spending and destroys money by taxing.
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Thanks Chris, It’s actually both. Corp taxes and personal tend to track along the same line. Which is a bit of the problem that we’re trying to highlight when increased corporate profits don’t result in wage or hiring increases. We fund shareholders and as a result C level corps aftershock exclusively instead of the employees or the government. If you asked most Americans, they would rank the group receiving the benefit bi higher than #2 on that list. We want to 1) benefit the employees and the government or shareholders 2nd or 3rd on that list dependent on your political lean. But no one believes it needs to go where it’s going now first.
I enjoy reading your thoughts and analysis, keep up the great work.
Were you looking at corporate or personal taxes for this analysis? Sounds like just corporate because you mention corporate profits.