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February 2009 Archive for Economic Sense

RSS By: Matt Bogard, AgWeb.com

Matt's primary interest is in the biotech industry and ag policy.

Evidence on Tax Cuts

Feb 22, 2009
It is unfortunate that certain policies often get categorized as being either 'liberal' or 'right wing'. As a result, good policies are often neglected, or are never considered based on their actual merits. There are many cases where this is true, but one in particular has to do with marginal tax cuts that include tax cuts for the wealthy.

The basic argument for cuts in marginal taxes is that lower tax rates provide an incentive for increased economic activity. In addition, lower taxes reduce the incentive for the wealthiest Americans to engage in activities to avoid paying taxes . Why pay high management fees, and risk lower returns if a reduction in taxes will lead to higher after tax returns than what you will get in a tax shelter?

Is there any evidence for these supply side effects? Do we actually see increases in economic activity and increases in revenue in the face of cuts in marginal tax rates?

In his book 'Vision of the Annointed,' Thomas Sowell provides data from the US Budget Historical tables ( I checked these ) indicating that with the Regan tax cuts, we saw revenue increases.

This is corroborated by Lawrence Lindsey ( 1987) who found that for those earning > $200K per year, we saw the following increases in collections:

1982 – 3%
1983 – 9%
1984 – 23%

( see Lindsey, Lawrence B. 1987. “Individual Taxpayer Response to Taxcuts, 1982-1984.” J. of Public Economics 33 (July) 173-206 , also noted in: Robert Barrow. Macroeconomics- 5th Edition MIT Press 1997 )

And for the recent Bush tax cuts: ( see this from the  Wall Street Journal

"Taxes paid by millionaire households more than doubled to $274 billion in 2006 from $136 billion in 2003. No President has ever plied more money from the rich than George W. Bush did with his 2003 tax cuts. These tax payments from the rich explain the very rapid reduction in the budget deficit to 1.9% of GDP in 2006 from 3.5% in 2003." ( see historical tables link above )

Also, straight from the historical tables provided by the office of management and budget you will see that from 2004-2007 there was a 25% surge in tax revenues, ( in face of tax cuts) which was the largest 3 yr surge since 1966. ( again I checked the math)

Further evidence is given by President Obama's chief of the council of economic advisers, Christina Romer. She finds that a dollar of tax cuts raises the G.D.P. by about $3. According to this research the benefit from tax cuts is more than twice what other researchers say we get from spending increases.

The evidence indicates that ‘marginal’ tax cuts may lead to increased economic activity and therefore increased tax revenues. It is certainly something to consider for the next stimulus package.

Regulating Commerce: Agricultural History

Feb 07, 2009

In the case Wickard v. Filburn (1942) the Agricultural Adjustment Act (AAA) was found to be constitutional. This was on the basis that congress had a right to ‘regulate commerce.’

The power to ‘regulate commerce’ can be found  article 1 Section 8 of the constitution. It is listed as one of the enumerated powers of the constitution:

‘To regulate Commerce with the foreign Nations, and among the several States, and with the Indian Tribes;’

In this case a farmer’s crop was being taxed because he produced more than was allowed under the AAA. His defense was that the federal government had no power or business telling him what he could grow on his private property in his state.

The court concluded that even though his crop was grown on his land in his state, it was possible that after he sold it, it could be marketed with grain harvested by other producers across the country. As a result this was considered ‘interstate commerce’ and could be regulated or taxed. The court did not give any more specific definition of ‘interstate commerce’ and set a precedent that if an activity could be considered ‘interstate commerce’ in theory, then it was subject to federal jurisdiction.  
Was the court’s decision consistent with what was written in the constitution and our founder’s intentions? How broad did they interpret the power to regulate commerce?

What was meant by regulating congress among the several states?

In Federalist # 45 we read the following:

‘The powers delegated by the proposed constitution to the federal government are few and defined. Those which are to remain in the state governments are numerous and indefinite.’

‘The powers reserved to the several states will extend to all the objects which, in the ordinary course of affairs, concern the lives, liberties, and properties of the people and the internal order, improvement, and prosperity of the state.’

It appears here that our founders never intended for the federal government to be very involved with business and agriculture in the states. The Wickard interpretation is very broad. It does not seem consistent with the idea that the powers of the federal government are few or defined. It is obvious that this decision is contrary to our founder’s idea of limited government.

If we read Federalist # 41, six powers of the federal government are identified and explained.  Two of these described the federal government’s relationship with regard to interstate commerce.

‘Maintenance and Harmony and proper intercourse among the states.’

‘Restraint of the states from certain injurious acts.’

 To put this in context, after the American Revolution, some of the states were imposing tariffs on each other. The purpose of the interstate commerce clause was to prevent these kinds of ‘injurious acts’ so that trade and ‘proper intercourse’ could take place between the states. The founders never intended that the federal government should  have the power to control every aspect of trade that occurred in or even between the states.

Given this history and the state of fear that our founders had of a powerful government, they would have never ratified the constitution if they thought ‘to regulate commerce’ meant congress would have the power to intervene in private business based on nothing more than a theoretical connection to interstate commerce. Wickard v Filburn lead to a huge expansion of power unanticipated by our founders, and a transfer of power away from the people and states without their consent.The purpose of the constitution was to ensure that the government did very little without the consent of the governed. Court cases like these leave us defensless.

As quoted from Ayn Rand’s book  Atlas Shrugged  ‘ …the government’s plans cannot be held up by the matter of your consent.’

Matt Bogard, Economic Sense

Agriculture and Free Markets

Feb 01, 2009
How does a free market oriented blogger like myself approach the issue of government funding and farm programs?

There are two things that I would like to point out regarding this issue.

1) Total spending on agriculture comprises 1% of the federal budget. Of that amount, less than half is allocated to the producer. The bulk of the rest is spent on aid to the poor and school lunch programs.

2) Despite that the funding is a small proportion of total federal spending, I admit there are some market distortions that result from these programs.

One Iowa State University economist has pointed out that up to 1/3 of the price of farmland can be attributed to government payments. In fact many producers have expressed that government programs have increased the price of land and impeded their ability to expand their operation and remain competitive. It seems that while many producers favor maintaining a safety net, they are also utilizing technology, crop insurance, and marketing tools to manage much of the risk characteristic to their market.

We no longer see the commodity surpluses from farm programs like we did in my grandfather's day. Nor do we see the chronic shortages of food that characterized Soviet agriculture. However, if we look at government interventions outside the ag sector, we are plagued with these problems.

Take for instance the auto industry. One thing that plagues the auto industry is the surplus of low quality high fuel economy cars that noone wants to drive. Corporate average fuel economy (CAFE) standards forced automakers to overproduce these cars instead of the trucks and SUV's that Americans have revealed a preference for even in an environment of high fuel prices. ( see this article from Forbes and my other posts here ) Instead, if left to the market, the auto industry could have focused resources on the long term problem of building more fuel efficeint trucks and SUV's vs the immediate problem of meeting CAFE requirements.

And look at the current housing/financial market collapse. Could this have happened without major government interventions? Every time the federal reserve meets to 'set' the federal funds rate, they are engaging in the social planning of interest rates. i.e. depending on their policy stance, they are effectively setting a floor or cieling on interest rates. When investers react, resources get channeled into assets at an abnormal rate, often leading to a 'bubble'. This time we got a 'surplus' of housing on the market, as well as a 'surplus' of risky financial instruments related to housing. Eventually this 'malinvestment' must be corrected, leading to a bust. Many economists believe that this effect had much to do with the current financial problems we are experiencing today. ( see Walter E. Williams post on Town Hall for a good discussion)

Agricultural programs are not the drag on our economy that they are made out to be when compared to government interventions in other industries. That is why my posts are often more concerned with interventions in the ag industry that could be detrimental to our ability to provide safe, healthy, environmentally friendly, and abundant food. We don't want government interventions to cripple our industry like they have others, as I mentioned here. With the amount of lobbying, rent seeking, and government intervention that goes on across the board in all industries, Agriculture does not stand out any more than government programs related to the financial auto, oil, defense, construction, retail, education, medical, cosmetic... industries.

Because agricultural production is very much an export-oriented enterprise, free trade is essential to opening up markets for food and fiber. Further, given the free market solutions to pollution ( via the use of biotechnology, GPS & potential for selling carbon credits) that the ag industry provides, it is not accurate to characterize the agricultural industry as having a prominent interventionist overtone in relation to other sectors of the economy.It turns out that modern agriculture is very much a free market driven industry. As a result our farmers are competitive, independent, resilient, and the best in the world.
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