Election Economics

CSGnet Archive CSG2000
1

[From Rick Marken (2000.11.01.0900)]

I will be in Europe for a couple weeks, with only intermittent
internet access. But before I leave I would like to quickly
make some comments on one of the subject's that has been
forbidden to me: politics.

I don't know if anyone has noticed but there is an election
going on here in the US and some of the issues are directly
relevant to models of the macro economy. The two major candidates
have very different proposals regarding the economy. Bush
wants an across the board tax cut and a reduction in Federal
spending to make up for it; Gore wants more moderate, targeted
tax cuts and an increase in Federal spending, including paying
down the debt.

I think it's possible to make some general predictions about the
effects of the Bush and Gore economic policies based on the
control (leakage) and traditional cause-effect (incentive)
models of the economy.

Control (leakage) Model

I think the control model of the macro economy predicts that
the Bush policies will increase inflation and reduce growth.
This is because the tax cut will increase leakage enormously by
transferring a huge proportion of GNP to rich consumers who can't
use all that money for consumption. Also, the reduced government
spending that would make up for the tax cut would reduce government
redistribution (Reagan prevented inflation and increased growth
by offsetting his tax cut with increased government spending)
keeping growth slow or even negative. Inflation would increase as
the result of increased alpha leakage.

I think the control model would predict that the Gore policies
will have little effect on inflation (that's pretty much in the
Fed's hands with alpha leakage constant) and would maintain or
increase growth. Growth would increase to the extent that Gore
can even out the after tax income distribution and redistribute
that income (via government spending) to the people who would
use it most effectively for consumption.

Traditional (Cause-Effect) Models

I think that most traditional models of the macro economy would
predict that the Bush policies will risk inflation but increase
growth. Growth would be a result of the incentive value of all
the extra money people get (which is a work incentive and available
for capital investment) from the tax reduction; but inflation
could take off if the economy grows too quickly because
inflation is thought to be the result of an "over heated"
economy.

I also think that most traditional models of the economy would
predict that the Gore policies will keep inflation low and reduce
growth. Growth is reduced because high taxes reduce business
incentives and capital investment; and inflation is reduced
because the economy is in the doldrums.

So those are the predictions. If traditional models are right
then Bush is your choice if you want solid economic growth with
only a mild risk of inflation; if the control model is right,
then Gore is your choice for the same reason.

Since what actually happens depends on the congress, I will make
the following predictions based on the control model. If Bush
wins with a Republican congress, we will have the mother of all
recessions by the end of 2001. If Gore wins with a Democratic
congress we get substantially increased growth and (depending
on the Fed) relatively low inflation. If Bush wins with a
Democratic congress things might remain OK but deficits will
probably increase (since the Dems will probably give in to a
tax cut but won't cut spending). If Gore wins with a Republican
congress things will remain about the same (no tax cut and modest
spending producing modest growth and low inflation).

Whaddaya think?

Best

Rick

···

---
Richard S. Marken Phone or Fax: 310 474-0313
MindReadings.com mailto: marken@mindreadings.com
www.mindreadings.com

2

[From Bruce Gregory (2000.1101.1235)]

Rick Marken (2000.11.01.0900)

I don't know if anyone has noticed but there is an election
going on here in the US and some of the issues are directly
relevant to models of the macro economy. The two major candidates
have very different proposals regarding the economy. Bush
wants an across the board tax cut and a reduction in Federal
spending to make up for it;

I have seen no indication that Bush has talked about a reduction in Federal
spending. Quite the contrary, he is talking about an increase in Federal
spending, particularly for education and the military, but both increases
are modest.

Gore wants more moderate, targeted
tax cuts and an increase in Federal spending, including paying
down the debt.

Paying down the debt is not an increase in Federal spending by most
accounts, quite the contrary. Both Gore and Bush are talking about spending
part of the the projected surpluses.

I think it's possible to make some general predictions about the
effects of the Bush and Gore economic policies based on the
control (leakage) and traditional cause-effect (incentive)
models of the economy.

Control (leakage) Model

I think the control model of the macro economy predicts that
the Bush policies will increase inflation and reduce growth.
This is because the tax cut will increase leakage enormously by
transferring a huge proportion of GNP to rich consumers who can't
use all that money for consumption.

A tax cut simply transfers money from the government surplus (debt
reduction) to the people. Anything that actually gets spent is a bonus.
(And an incentive for the Fed to raise interest rates.)

Also, the reduced government
spending that would make up for the tax cut would reduce government
redistribution (Reagan prevented inflation and increased growth
by offsetting his tax cut with increased government spending)
keeping growth slow or even negative. Inflation would increase as
the result of increased alpha leakage.

No, for the above reasons. To increase leakage we have to transfer money
from the middle class to the rich. At least as I understand leakage.

Since what actually happens depends on the congress, I will make
the following predictions based on the control model. If Bush
wins with a Republican congress, we will have the mother of all
recessions by the end of 2001.

Seems unlikely for the reasons given above.

If Gore wins with a Democratic
congress we get substantially increased growth and (depending
on the Fed) relatively low inflation.

I doubt that Gore's targeted tax cuts are sufficiently large to have any
effect. Since the present rate of growth is being financed by negative
savings, it is unclear that it would be effected by anything that either
Bush or Gore might do.

If Bush wins with a
Democratic congress things might remain OK but deficits will
probably increase (since the Dems will probably give in to a
tax cut but won't cut spending).

A major tax cut would make a return to deficits almost certain and probably
induce the Fed to increase interest rates.

If Gore wins with a Republican
congress things will remain about the same (no tax cut and modest
spending producing modest growth and low inflation).

Sounds right.

···

Whaddaya think?

Best

Rick
---
Richard S. Marken Phone or Fax: 310 474-0313
MindReadings.com mailto: marken@mindreadings.com
www.mindreadings.com

3

[From Rick Marken (2000.11.01.1240)]

Bruce Gregory (2000.1101.1235)--

It looks like you agree with the leakage model but dispute
some of my factual assumptions. That's nice to hear. I'm not
sure I understand some of your comments. For example, you say:

A tax cut simply transfers money from the government surplus
(debt reduction) to the people. Anything that actually gets
spent is a bonus. (And an incentive for the Fed to raise
interest rates.)

I think a tax cut just means the government takes less of GNP.
The government has a surplus when what it takes in (as taxes and
loans) is more than what it spends (on programs and debt service).
So a tax cut doesn't necessarily take money from the surplus
(if there is one), right? If a tax cut is accompanied by a large
spending cut there could actually be an increase in the surplus.

You also say:

To increase leakage we have to transfer money from the middle
class to the rich. At least as I understand leakage.

I don't think this is the case. Alpha leakage is unspent income;
no transfer of money is needed for alpha leakage to occur. All
you need is a small portion of the population (the rich) to be
holding far more money than it can spend, which takes this money
out of the circular flow. The government reduces leakage by taking
part of the unspent money (from everyone in taxes but disproportionately
from the rich when there is progressive taxation) and putting it
back into the circular flow through government spending (which
generally puts the money in the hands of people who can spend it).

Best

Rick

···

---
Richard S. Marken Phone or Fax: 310 474-0313
MindReadings.com mailto: marken@mindreadings.com
www.mindreadings.com

4

[From Bruce Gregory (2000.1101.1610)]

Rick Marken (2000.11.01.1240)

Bruce Gregory (2000.1101.1235)--

It looks like you agree with the leakage model but dispute
some of my factual assumptions. That's nice to hear. I'm not
sure I understand some of your comments. For example, you say:

> A tax cut simply transfers money from the government surplus
> (debt reduction) to the people. Anything that actually gets
> spent is a bonus. (And an incentive for the Fed to raise
> interest rates.)

I think a tax cut just means the government takes less of GNP.
The government has a surplus when what it takes in (as taxes and
loans) is more than what it spends (on programs and debt service).

So a tax cut doesn't necessarily take money from the surplus
(if there is one), right?

True. But in this case Bush and Gore are talking about returning part of
the surplus to the tax payers. Presumably some of this money will be spent.
I agree that more of it would be spent if the tax cut were returned to the
poor and the middle classes.

If a tax cut is accompanied by a large
spending cut there could actually be an increase in the surplus.

Definitely. But no one is suggesting any spending cuts. At least I haven't
heard any such suggestions. Instead both candidates are talking about
spending a surplus.

You also say:

> To increase leakage we have to transfer money from the middle
> class to the rich. At least as I understand leakage.

I don't think this is the case. Alpha leakage is unspent income;
no transfer of money is needed for alpha leakage to occur. All
you need is a small portion of the population (the rich) to be
holding far more money than it can spend, which takes this money
out of the circular flow.

True. But I said "To _increase_ leakage..." To increase leakage you must
take money away from people who are spending it and transfer it to people
who are not spending it. Or so it seems to me.

The government reduces leakage by taking
part of the unspent money (from everyone in taxes but disproportionately
from the rich when there is progressive taxation) and putting it
back into the circular flow through government spending (which
generally puts the money in the hands of people who can spend it).

Yes.

BG