Q&A: WHY MEDICARE CUTBACKS ARE IMPORTANT: Threat of Mutiny in Both Parties Helped Scuttle Talks - WSJ.com
Question:
Being an amateur student of economics, I am unfamiliar with a theory of economics that would indicate that cuts in Medicare and Social Security would increase employment. Would you please explain how this would work?
Answer:
You need to think of things with a bigger, macro view.
In other words, there is a reason that there is so much talk about the % of GDP taken from taxpayers (or borrowed) and spent by government.
Right now of course Obama has dug an even deeper who by projecting a share of GDP of 25-30% and having borrowed almost half of what he is currently spending to do it!
For business and investors to have faith in the economy, they need to know they'll be able to keep a fair and reasonable share of their profits and income and have a reasonable return on investment risk.
Right now, too much money is going into Medicare. The program is grossly inefficient and ineptly designed and managed. Although it does give the power to government, which government loves.
So, if money isn't being invested (read: faith in the future management of the economy), then jobs are not being created and they are being lost.
This is the problem Obamanomics faces. His supporters don't make any correlation between high taxes, huge amounts of government regulation and interference in the economy, etc. and job creation.
(As an example, think of a simple farmer. He knows that he needs to save 10% of his crop every year as seed for the next year's crop.
If he wants to provide for a bigger family and produce more, he may want to scrimp and save 11-12%, etc.
Now, if he knows that bandits will come and take all but 5% (or perhaps all of his crop), he may move (i.e. offshoring), he may try to labor and do something else, etc.
Without protection, he won't see any reason to expand his harvest (read: jobs).
So the bandits are the government. Those receiving entitlement benefits are getting them from someone else. What is the percent of all income taxes paid by the top 1 or 2% of the population? As I recall a couple of years ago it had gone from 42% to 51% under the Bush tax cuts.
So, sometimes you get more by charging less or taking less.
This is something Democrats don't understand. Their policies are directly responsible for the unemployment numbers.
Government spending has to be cut. Medicare and Medicaid are out of control. Obamacare was designed to spread the entitlement to healthcare with just some new taxes on the rich.
Again, were are jobs not being created right now where they should be? It's small and medium sized businesses. Exactly those people whom Obama and the Democrats want to tax and burden with additional employment costs and regulatory burdens.
You get the idea.
Saturday, July 23, 2011
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Bruce,
ReplyDeleteThank you for moving the conversation here so that we can continue it in more detail.
It seems from your comments that you are not actually implying that cutting Medicare and Social Security would reduce employment, but rather that reducing taxes will increase employment. Reducing spending on Medicare and Social Security would allow us to reduce taxes just as much as reducing spending on Defense and NASA, for example. So whether or not we cut entitlements specifically is beside the point. I will therefore concentrate on the discussion of whether or not tax cuts increase employment.
First, a counter example. It is quite easy to imagine a society with no private ownership of property and full employment guaranteed by the government. This is in fact pure Communism, as practiced on Kibbutzim in the early Zionist settlements in Israel. In this hypothetical, we have an effective 100% tax rate, but also a 100% employment rate. Granted, this would be a miserable country to live in for a number of reasons, but the fact still stands that in this case high tax rates do not lead to high unemployment. There is therefore more to the story of taxes and employment than a simple indirectly proportional relationship.
Second, let’s review the last thirty years of American experience. By collecting tax receipt data from the OMB (http://www.whitehouse.gov/omb/budget/Historicals) and unemployment data from the BLS (http://data.bls.gov/pdq/SurveyOutputServlet) I constructed the following graph of unemployment vs. tax receipts as % of GDP over the last 30 years (http://www.freeimagehosting.net/93cf1). As you can clearly see, there is not the correlation between high tax receipts and high unemployment as we expect.
In fact we can see a very clear opposite relationship starting in 1992 where increases in taxes correlate to increases in employment. During the 90’s when there was a tremendous drop in unemployment taxes actually increased. Shortly after the Bush tax cuts went into effect, you can see that unemployment actually increased. As the housing bubble built up in around 2004, we can see unemployment drop again as taxes increase. And then as the economy fell apart and unemployment sky-rocketed, tax receipts as % of GDP fell to a historical low for this period. This is where we are today.
Given a lack of any clear historical correlation between low taxes and increased employment, I find it hard to accept the assertion that cutting taxes as a percent of GDP increases employment. I encourage you to review the data I referenced yourself and let me know if you see a better interpretation.
Thanks,
Zev