"Tax-Cut Follies"

Uwe Reinhardt says allowing the Bush tax cuts to expire would not devastate the economy:

Tax-Cut Follies, by Uwe E. Reinhardt, Economix: There is a school of economists and pundits in the United States that views tax cuts as the panacea for any conceivable economic woe, and even some social ones. They tenaciously hold on to this doctrine, even though the United States ranks as one of the least-taxed nations... (Table 2 here). ...

The school’s views are trotted out with regularity on the editorial page of The Wall Street Journal. The latest installments ... in commentaries penned by a UCLA economist, Lee Ohanian, and by former Representative Jack Kemp and Peter Ferrara. A few months earlier, a Nobel laureate economist, Robert Mundell, offered in The Journal the apocalyptic vision that allowing the Bush tax cuts to expire in 2010 “would be devastating to the world economy.” Arthur Laffer of Laffer Curve fame and several colleagues have just delivered themselves of a new tome entitled “The End of Prosperity: How Higher Taxes Will Doom the Economy — If We Let It Happen.” ...

From a macroeconomic perspective,... changes in tax rates are but one of many factors that drive the time path of gross domestic product (G.D.P.), savings, investment, employment and other such variables. By itself, changing tax rates steers the economy about as much as would tapping an elephant on the leg with a chopstick. There may be some effect, but typically it is small and dwarfed by other effects.

Empirical support for this brash proposition can be found in the Economic Report of the President 2008. Table B-1 of the report features G.D.P. by year from 1959 to the present. Table B-18 lists “Private Investment” for the same years, broken down into “residential” and “non-residential” investment (that is, business investment). If one expresses the latter as a percentage of G.D.P. and plots the percentage on time, one should see in its time path the footprints of supply-side theory, which always is adduced to justify tax cuts. Supply-side theory suggests that tax cuts made economies more productive through greater investments by business. [graph]

Alas, supply-side theorists will find little support in the president’s Economic Report. Over President Ronald Reagan’s tenure, the fraction of G.D.P. devoted to “non-residential” investment fell more or less steadily from about 13 percent to 11 percent, in spite of the sizable tax cuts he got passed. That fraction fell even further, from about 11 percent to about 10 percent, under President George H.W. Bush. The fraction then rose more or less steadily from about 10 percent to about 12 percent on President Bill Clinton’s watch, in spite of the sizable tax increases he got passed. Finally, on President George W. Bush’s watch, business investment as a percent of G.D.P. fell again, from about 12 percent to about 10 percent by 2004, and this in spite of the sizable 2001 and 2003 tax cuts. The percentage rose only slightly after 2004, but is bound to decline again in the current turmoil.

I defy Professor Mundell and like-minded people to see in these macroeconomic footprints the “devastating” consequences he predicts for the world, were the Bush tax cuts not extended past 2010. ...

To think more carefully about the role of taxes in an economy, one might inquire what all these taxes support. For example, if increased taxation diverts resources from private investments in golf resorts – which is part of business investment – into government investments in infrastructure, schools, college education and biomedical research, who is to say that this retards economic growth? ...

Both President Reagan and President Bush have taught us that the mirror image of tax cuts is not cuts in wasteful government spending, but merely increased federal indebtedness, increasingly to foreigners who then can acquire our nation’s assets at fire-sale prices.

It is happening as we speak.

Right now is not the time to raise taxes, but it is certainly the time to shift the focus of taxation from the long-run and growth to the short-run and stabilization, and the case for that is strengthened by the fact that the tax cuts do not seem to have actually had much of an impact on economic growth. Thus, rather than raising taxes overall by letting the tax cuts expire, a better strategy would be to shift the tax cuts from those who don't need them and are not using them to enhance our long-run growth potential, to those who need the money to help them with the day-to-day struggle to make ends meet in a declining economy or to public sector projects that will enhance our productive capacity.

Comments

[Roger Chittum]

Doesn't the graph show "crowding out" of private investment by government borrowing? (Repbulicans didn't just lower taxes they simultaneously increased deficit spending and borrowing.) Graph of changes in national debt is here.

[KThomas]

Wasn't it Trent Lott that once said, "To the victor goes the spoils."?

Why do people still vote Republican?

[Moot]

Changing the capital gains tax may be a moot point now, as few have any after the market crash. However, I do like Barack's plan to lower taxes on the middle class.

[Anonymous]

Why is right now not the time to raise taxes? Why can't you raise taxes on the wealthy and funnel that money (through outright distribution or through infrastructure spending) to those who spend a larger percent of their income? Sure, there might be less productive investment, but seriously, how well did the market channel investment into productive avenues in the last 10 years (tech bubble, nonproductive housing bubble)? I'm sorry, but we live in a democracy. When will the vast majority of middle and lower class voters finally wake up and force policies that are in their best interest rather than in the interest of the wealthy few? It is not a mirage that almost all the gains of the last twenty years went to the wealthy. Turn it around. Enough already.

[CBBB]

Anonymous,

Mark, in his last paragraph is advocating more or less what you say - specifically not raising taxes overall but shifting the tax burden onto the wealthy while trying to keep middle classes taxes low.

[James Kroeger]

Right now is not the time to raise taxes...Why, Mark,why? Have you ever heard [ :) ] of the Balanced Budget Multiplier? Does not even Mark Thoma agree that an increase in taxes will result in an increase in GDP?

Why would that not be a good idea?

[S Brennan]

Hogwash Mark,

"Right now is not the time to raise taxes..rather than raising taxes overall by letting the tax cuts expire, a better strategy would be to shift the tax cuts"

FDR & Clinton records say just the opposite.

[macquechoux]

I agree with S Brennan. Just how could raising taxes help the economy at this time?

[Richard H. Serlin]

First, now or in the near future would be a fine time to raise taxes (on the wealthy) if you first enact and get started more than offsetting stimuli to demand in spending on extremely high return government projects of the type that the pure free market will grossly underprovide due to well proven in economics market problems like externalities, asymmetric information, inability to patent, and many more in any university intermediate economics textbooks.

Such projects include alternative energy -- how about stimulating demand by spending an additional $100 billion on that over the next year instead of giving $100 billion to people in tax cuts and asking that it's spent on fashions, cars, and big screen TVs. Wouldn't greatly diminishing the monumental risks of global warming and the resources going to terrorists be a better way of increasing spending to stimulate demand?

I've listed reasons before why a small minority of successful economists would support Republicans (at: http://richardhserlin.blogspot.com/2008/09/government-has-to-pay-more-than-fair.html:)

1) There are relatively few successful university economists who support the Republicans, so there is much less competition for plum and high paying jobs in Republican administrations and propaganda tanks. Becoming a Republican crony can mean a lot of money and/or very high level government jobs, like Mankiw's job as Chairman of the Council of Economic Advisors in George W. Bush's administration. He's also currently a fellow at the American Enterprise Institute. Mankiw has a strong incentive to please the Republicans by misleading for them.

2) He may be an extreme Libertarian (more economic than social obviously), and very willing to mislead for that cause, even if he knows it hurts total economic, scientific, and medical growth greatly, and embarrasses him professionally.

3) He may be very Plutocratic, and very willing to mislead for that cause, even if he knows it hurts total economic, scientific, and medical growth greatly, and embarrasses him professionally.

4) He may have Slipperyslopeaphobia -- for details see my blog post.

5) A well intentioned reason -- He may think he can affect change to the historically disgraceful and brain dead Republican party better from the inside than from the outside, and in order to stay inside he can't displease those in control too much.

I'll add another one which may be applicable to Nobel winner Robert Mundel -- Mental instability or illnes -- Anyone who has seen the movie "A Beautiful Mind" knows that a Nobel Prize winning economist can suffer from severe mental illness. What evidence is there that Mundel may suffer from mental illness? Princeton economist Paul Krugman writes in his book, "Peddling Prosperity" (pages 87-88):

His academic reputation rests largely on a series of papers he wrote in the early 1960s, as his native Canada wrestled with the question of whether to peg its currency to the U.S. dollar...The fact is that around 1970 Mundell veered off from conventionality in a number of ways. Some of these were superficial: He began to wear his hair long and speak in a slow mumble. Some were more significant: Mundell dropped out of the usual academic round of conferences and seminars, and began holding his own conferences in a crumbling half habitable villa he owned near Sienna. Most importantly, Mundell completely abandoned his former intellectual style; since 1970 he has written little, and what he has tends to be marked by extravagant rhetoric, accusing his fellow economists of "Sheer quackery" in espousing ideas that he himself held when younger."

[Bruce Wilder]

It's always a good time to raise taxes on someone, somewhere . . .

[brad]

Market has bottomed as predicted last night by financialtraders blog ( http://www.financialtraders.blogspot.com ) . No need for any government support from tax payers. Do not let them use your money to mark up this market, and sell it later.

Reasons why it is the bottom are at:

http://financialtraders.blogspot.com/2008/10/stock-market-crash-october-2008-bottom.html

PS: PS: check the live trading that the blogger did today. It is amazing, he nailed the bottom and the top today!

http://financialtraders.blogspot.com/2008/10/stock-market-crash-2008-ended-today.html

[Larry]

We have had enormous changes in tax policy in recent decades. What hasn't changed is that Washington takes a fairly consistent chunk of GDP for its projects, somewhere around 20%. One other thing that hasn't changed much is that the upper half pay almost all of the income taxes. That fraction has slowly and steadily increased since Reagan and is now >97%.

I do think that rather than a tax cut, it makes more sense (I can't believe I'm writing this) at this specific instant to use federal money to replace the money that's gone missing from state and local government budgets. The idea is to sustain existing programs and projects which are about to be slashed, not to drive a wave of new projects. Those programs and projects are up and running, and the money can go to work without the lags and corruption that otherwise accompany "free" money.

@Roger Chittum - "Doesn't the graph show "crowding out" of private investment by government borrowing? (Repbulicans didn't just lower taxes they simultaneously increased deficit spending and borrowing.)"

"Starve the beast" hasn't worked that well, except that government spending might be approaching European levels without it. Also, there are lots of notional causal relationships out there that thrive with little or no explanation. Tax rates and growth; Presidential party and growth. With the rise of the Dems, we'll get to see a quite different policy regime and how that works out. Educational, if nothing else.

@KThomas - "Why do people still vote Republican?"

Because they're the closest thing to a conservative party we have. Not that close...

@Moot - "Changing the capital gains tax may be a moot point now, as few have any after the market crash."

You're right as far as tax revenues go. But the more important purpose for low cap gains rates is to encourage people to invest, which is the best way to create economic growth. Also, note that cap gains taxes, dividend taxes, and high rates on high incomes are all highly volatile, zooming up in good times and disappearing in bad times. I.e., they exacerbate swings in government revenue.

"However, I do like Barack's plan to lower taxes on the middle class."

You mean increase subsidies to the middle class. Most of his changes are refundable tax credits...

@Anonymous - "Why is right now not the time to raise taxes? Why can't you raise taxes on the wealthy and funnel that money (through outright distribution or through infrastructure spending) to those who spend a larger percent of their income?

We've tried having government direct investment in the past, and it usually works out less well than our crazy capitalism.

"Sure, there might be less productive investment, but seriously, how well did the market channel investment into productive avenues in the last 10 years (tech bubble, nonproductive housing bubble)?"

You contradict yourself. Productive investment is a good thing. Bubbles are bad, but the government bubble may be no better.

@James Kroeger - "Why, Mark,why? Have you ever heard [ :) ] of the Balanced Budget Multiplier? Does not even Mark Thoma agree that an increase in taxes will result in an increase in GDP?"

Of course he doesn't. No reputable economist does. An increase in spending will increase GDP. The two are very different. Increasing taxes shrinks the economy (it's just a different way to pay for spending.)

[Patricia Shannon]

I suppose your unsupported statements are as valid as the one you made about half the population not paying any federal taxes. As I pointed out, that might be true if you are counting children and retired people.

I notice you give no source for your statements. Most of can guess.

[Patricia Shannon]

http://econlog.econlib.org/archives/2007/03/the_distributio_1.html

The progressivity of the U.S. federal tax system at the top of the income distribution has declined dramatically since the 1960s.

[Patricia Shannon]

Looking at the total tax burden, federal, state, and local, all income levels pay approximately the same percentage of their income in taxes, because of the use of sales taxes by the states.

[Patricia Shannon]

http://www.washingtonpost.com/wp-dyn/articles/A61178-2004Aug12.html

Tax Burden Shifts to the Middle
Presidential Campaigns Draw Differing Conclusions From Report

By Jonathan Weisman
Washington Post Staff Writer
Friday, August 13, 2004; Page A04

Since 2001, President Bush's tax cuts have shifted federal tax payments from the richest Americans to a wide swath of middle-class families, the Congressional Budget Office has found, a conclusion likely to roil the presidential election campaign.

The CBO study, due to be released today, found that the wealthiest 20 percent, whose incomes averaged $182,700 in 2001, saw their share of federal taxes drop from 64.4 percent of total tax payments in 2001 to 63.5 percent this year. The top 1 percent, earning $1.1 million, saw their share fall to 20.1 percent of the total, from 22.2 percent.

Over that same period, taxpayers with incomes from around $51,500 to around $75,600 saw their share of federal tax payments increase. Households earning around $75,600 saw their tax burden jump the most, from 18.7 percent of all taxes to 19.5 percent.

The analysis, requested in May by congressional Democrats, echoes similar studies by think tanks and Democratic activist groups. But the conclusions have heightened significance because of their source, a nonpartisan government agency headed by a former senior economist from the Bush White House, Douglas Holtz-Eakin. The study will likely stoke an already burning debate about the fairness and efficacy of $1.7 trillion in tax cuts that the president pushed through Congress.

"CBO is nonpartisan, it's independent, and right now it works for a Republican Congress with a former Bush economist at its head," said Jason Furman, economic director of the presidential campaign of Sen. John F. Kerry (D-Mass.). "There's no higher authority on the subject."

[roger]

Patricia, thanks for that.

I myself, inspired by McCain's visit to the Harry Truman library, where he communed with Truman's spirit about dropping atom bombs, am enthusiastic for Truman's progressive tax policies, which went to up to 90 percent of the earnings of the top 1 percent. A nice thing about this is that there is no harm. A man who brings home 100 million dollars will live with no appreciable harm to his lifestyle if he has to make due on 10 million. Plus, it removes the incentives to use the wealth he doesn't use on consumption or saving to preserve his lifestyle in the usual nefarious ways available to the wealthy, namely, to skew the system in order to preserve his advantages. A good libertarian system would make sure that the wealth of the wealthy was largely expropriated by the state in order to preserve the freedom to compete all along the social hierarchy. This will make the wealthy more efficient, prevent them from using their wealth to create bubbles (such as one sees with derivatives), and further prevent them from using their wealth to undermine the Republic. The great thing about it is, of course, that there is no harm involved, like there would be if one forced a man making 20 thousand dollars to exist on, say, five. Creating these disincentives to enormous fortune making would create incentives to the creative use of the talents of the wealthy. I'm sure they have many.

This is, of course, a very ancient suggestion followed by democracies that always guarded against an entrenched, power hungry minority at the top.

[Bill]

I used to work in Washington DC as counsel for a non-financial committee. A number of my friends went on to be lobbyists.

The majority of their efforts are not to obtain earmarks, but rather targeted tax breaks.

Now, I think targeted tax deductions should be treated as earmarks. I think they are more insidious as well, as there is a private, not public, beneficiary, and they are a gift that keeps on giving.

We should require that legislators identify any known recipient of a targeted tax cut.

Follow the money.

[Bruce Wilder]

roger, maybe we could retire the accumulated Bush deficit with a one-time wealth tax -- Ricardian equivalence with teeth?

The tricky part would be taxing the accumulations of the Saudi Princes and the PBC and the
Bank of Japan. How would we handle that? Hmmm. infl ...

[Techie]

@KThomas - "Why do people still vote Republican?"

Because they're the closest thing to a conservative party we have. Not that close...

Why indeed? Yesterday I listened to a political discussion involving a Republican who gave reason after reason that McCain was unacceptable and Palin worse. Through it all he kept insisting that he is a Republican, albeit voting for McCain will be hard.

If you can figure that out please explain it to me.

[Patricia Shannon]

Income and wealth have continued (at least until very recently) to accumulate in the top 1% or 0.1%
If it is true that the tax burden has shifted more to them, then obviously the increased tax burden has benefitted them ;).

[Alan Harvey]

A blue ribbon committee on transportation infrastructure needs issued a report early this year, I believe, identifying something on the order of $225 billion per year in roads, bridges, rail and transit infrastructure needed. They suggested a phase-in of a gas tax for the funding source.

Now as oil plummets back toward $40, it may be a time to institute gas taxes of the magnitude they were suggesting, something I think on the order of 85 cents per gallon at top. It's a plan that is on the shelf and gasoline at low prices is in itself a bad economic thing. (Why not go further and increase gas taxes balanced with a decrease in income taxes? Tax the things we don't want.)

There is certainly an argument for a higher top marginal rate. Say 80% over $1 million. It would make my baseball team competitive with the big market teams. Applied to capital gains, perhaps people would be discouraged from taking their money out of investments and realizing the gain.

But if tax cuts were going to work as a basis for economic strength, they would have done it by now. As we see, quite the opposite is true. Underfunding the public sector is at least as great a cause of the current decline, leaving aside the financial system meltdown.

[german_reader]

Low tax America? Depends on how you define it.

Defined it as a share of GDP, the U.S. is indeed a low tax country. Defined as tax burden per capita the picture is not that clear. Lets take Germany and the U.S. for example.

According to the OECD tables to which Reinhardt points in his post

http://www.oecd.org/dataoecd/18/23/35471773.pdf

taxes as share of GDP in the U.S. in 2004, the last year available, were 25.4% ( with a historical range from 25.4%-29.9% ) and 34.6% in Germany ( 34.6% - 37.2% ).

Superficially that looks indeed as if the U.S. is a low tax country, at least lower than in Germany, a classical European social state with a taxation close to the OECD average.

The numbers appear different if you calculate them on a per capita base. U.S. GDP in 2007 was $13.8 trillion. 25.4% of GDP would $3.5 trillion or $11606 for every of the 302 million Americans. German GDP adjusted for purchasing power in 2007 was $2.812 trillion ( IMF ). 34.6% would be 973 billion or $11836 for every of the 82.2 million Germans.

Given the fact that productivity per hour worked in Germany and the U.S. is almost the same ( the German numbers are a bit screwed by the lower productivity in East-Germany ), Americans and Germans must work nearly the same hours for their governments or, to be more precise, for their communities. The differences are mainly in the structure of taxation and spending, but not in the total level of taxation.

And the picture changes to the disadvantage of the U.S. if you include private health care expenditures. According to the U.S. GDP statistics private health expenditures in the U.S. in 2007 were 1681 billion or $5566 per capita. Private health care expenditures ( most is public ) in Germany in the same year were around 67 billion euros, $77.7 billion adjusted for purchasing power or $945 per capita. Combined taxes and private health care costs in the U.S. were $17172 per capita and $12781 in Germany.

Certainly, that's only a rough, not really scientific calculation because taxes and health care costs change from year to year, but the general trend remains the same: The U.S. is neither a low tax nor a low cost country.

Especially health care and defense are the black holes in the private and public budgets of the U.S. Compared to Germany for example the U.S. spends $4070 per capita and year more on health care ( with better health care outcomes in Germany ) and $1750 more on defense. And that includes only the official defense expenditures in the U.S.. The total, including hidden spending, is certainly higher.

Any U.S. presidents who wants to free up resources for a modernization of the U.S. infrastructure, better public services or the of rebalancing of government finances, should in the first place address the huge imbalances in the U.S. system. And he should indeed massively increase taxes on the financial sector to pay for the current mess and discourage speculation. That would be probably better for the economic future of the U.S. and a lot better for the nerves of other nations. And the chances that this could improve in the long run economic stability and performance in the U.S. are not bad.

[James Kroeger]

Why is it, Mark, that you and your non-Republican brothers and sisters have been unable, or unwilling, to apply some skeptical doubt to the assumptions of Laffer, Mundell, etc.? Let's try going over this one more time...

The crux of the Supply-Side argument is that increases in after-tax returns to capital will shift some spending from consumption to investment. Increasing the pool of savings will supposedly produce long-run economic growth because those extra savings will be invested by firms in productivity improvements. The reality is quite different from this string of fantasies.

Firm investment levels actually have almost nothing whatsoever to do with savings levels. Empirical fact: 85% of the money that corporations spend on investment comes from retained earnings or other internally generated funds. (Brealey & Myers, Principles of Corporate Finance).

Consider also: between 1998 & 2001 (years that included cyclically high levels of business investment) the combined borrowing of non-financial corporations and all non-corporate businesses varied between 20-34% of total borrowing nationwide. (Flow of Funds Accounts, http://www.federalreserve.gov)

If 76%-80% of all borrowing is for spending that does not improve economic efficiency or create jobs, then how can any rational economist argue that more savings are needed in order for more economic investments to occur? If banks are far more willing to lend money to consumers for consumption purchases at a higher rate of interest, then isn't the actual problem one of improper allocations of loanable funds?

The only time it becomes necessary to reduce spending on consumption in order to increase spending on investment is when there is zero unemployment and hyperinflation is threatening. That is when it actually becomes a good idea to raise taxes on consumption (I recommend Robert Frank's Progressive Consumption Tax) and interest rates on non-commercial loans, but not when there is any slack at all in the economy.

There is really only one kind of tax cut that will lead directly to increased economic investments: targeted investment tax credits. Next best: a cut in corporate excess profits taxes. Capital gains taxes put extraordinarily few dollars into the hands of firm managers/owners. Income tax cuts are equally inefficient.

[IdahoSpud]

Sometimes it is difficult to believe this is the same nation that that built the Golden Gate bridge, the US highway system, put men on the moon, built the Grand Coulee and Hoover dams, and built the locks that allow cargo passage up the mighty midwestern rivers.

Such endeavors by the government (aside from wars and Wall St. bailouts, which can assume are not productive), have not been seen by the US in decades.

It seems a pity. We used to do magnificent and useful works with the US tax base.

Does anyone see the political wherewithal in the US to spend tax money on something we all can benefit from, as was once done in America?

[OhNoNotAgain]

"Does anyone see the political wherewithal in the US to spend tax money on something we all can benefit from, as was once done in America?"

Sure. It's just going to take an actual leader to get us back to that point. Let's hope Obama is elected and can, at least, get the train back on the tracks. I think that he could turn out to be a very good president, or a mediocre president, depending upon how much of what he says now translates into actual policy. He mentions infrastructure spending a lot, so let's hope that it comes to fruition.

[Larry]

@Patricia Shannon - "half the population not paying any federal taxes."

It's about 40%, not paying income taxes, not all federal taxes.

- href="http://econlog.econlib.org/archives/2007/03/the_distributio_1.html">http://econlog.econlib.org/archives/2007/03/the_distributio_1.html

This link fails when I try it. Here's one for you: http://blogs.wsj.com/economics/2007/10/12/tax-cuts-two-edged-impact-on-income-tax-distribution/

Check out the spreadsheet, lines 154-174. Attempted reproduction:

Descending cumulative percentiles
Tax year Total Top Top Top Top Top
1 percent 5 percent 10 percent 25 percent 50 percent
1990 100.00 25.13 43.64 55.36 77.02 94.19
1991 100.00 24.82 43.38 55.82 77.29 94.52
1992 100.00 27.54 45.88 58.01 78.48 94.94
1993 100.00 29.01 47.36 59.24 79.27 95.19
1994 100.00 28.86 47.52 59.45 79.55 95.23
1995 100.00 30.26 48.91 60.75 80.36 95.39
1996 100.00 32.31 50.97 62.51 81.32 95.68
1997 100.00 33.17 51.87 63.20 81.67 95.72
1998 100.00 34.75 53.84 65.04 82.69 95.79
1999 100.00 36.18 55.45 66.45 83.54 96.00
2000 100.00 37.42 56.47 67.33 84.01 96.09
2001 100.00 33.89 53.25 64.89 82.90 96.03
2002 100.00 33.71 53.80 65.73 83.90 96.50
2003 100.00 34.27 54.36 65.84 83.88 96.54
2004 100.00 36.89 57.13 68.19 84.86 96.70
2005 100.00 39.38 59.67 70.30 85.99 96.93

Top 50% number has gone up for years. In 2005, the entire bottom half accounted for 3.07% of income tax revenues.

"Looking at the total tax burden, federal, state, and local, all income levels pay approximately the same percentage of their income in taxes, because of the use of sales taxes by the states."

Sales taxes aren't progressive. They should be, and in fact, they should replace income taxes altogether.

"Income and wealth have continued (at least until very recently) to accumulate in the top 1% or 0.1%
If it is true that the tax burden has shifted more to them, then obviously the increased tax burden has benefitted them ;)."

You could say that the current tax code has benefitted everybody, right? Bush took millions off the income tax rolls entirely, and increased EITC to boot, leaving the higher earners with more of the load.

@roger - "Truman's progressive tax policies, which went to up to 90 percent of the earnings of the top 1 percent."

Even JFK realized those rates were counterproductive. One of the reasons that the visible income distribution has changed is that investors are no longer sheltering their income in the myriad niches of the ever-expanding tax code because the rates don't drive them there.

@Bill - "Now, I think targeted tax deductions should be treated as earmarks."

Earmarks are only one kind of pork. The tax code has to be voted on explicitly, unlike earmark pork. I agree that they are insidious. We need a new approach to taxation. Progressive consumption taxes best fit the bill.

@Bruce Wilder - "one-time wealth tax"

There is a proposed proposition to that effect floating around in California. Think what it means, though. The current holders would be forced to liquidate their investments to pay the tax. Wonder what the resulting market crash would do to everybody else's retirement plans? It would make last week look pleasant. Lots of people have most of their wealth in their houses. They'd have to move...

@Alan Harvey - "They suggested a phase-in of a gas tax for the funding source."

Makes sense to me, as long as it's done right. Increase the tax by 25 cents/gallon each year until we reach European prices. That gives everybody time to adjust.

"Applied to capital gains, perhaps people would be discouraged from taking their money out of investments and realizing the gain."

It certainly did in the old days. Investors have lots of ways to play the tax code. They abandoned most of them when the rates came down. It also discouraged them from putting money in. Do we want that?

@german_reader - Always enjoy your posts. Yes, health care and defense eat big holes in our incomes. Good thing the U.S.' income is higher, which makes our tax burden appear lower.

"And he should indeed massively increase taxes on the financial sector to pay for the current mess and discourage speculation."

That would only worsen the recession. Taxing the heck out of the already-crippled financial sector would complete its destruction.

@James Kroeger - "Firm investment levels actually have almost nothing whatsoever to do with savings levels." Empirical fact: 85% of the money that corporations spend on investment comes from retained earnings or other internally generated funds. (Brealey & Myers, Principles of Corporate Finance)."

But if we heavily tax retained earnings, where do the funds come from? And when firms do seek external capital, as many are doing in these dark days, the price of their shares is a critical part of the puzzle. Higher investment taxes keep those prices low. I'm not claiming that every tax cut produces higher revenue, just that taxes do have an impact on investment and resulting investment.

"If 76%-80% of all borrowing is for spending that does not improve economic efficiency or create jobs,"

But that's not what your data shows. Consumption also supports/is necessary to get firms to invest. And of course, if investment taxes were lower, then the fraction of savings that go to investment would likely have increased.

"I recommend Robert Frank's Progressive Consumption Tax"

Ignoring details, I like this tax regime, too.

@IdahoSpud - "Golden Gate bridge, the US highway system, put men on the moon, built the Grand Coulee and Hoover dams, and built the locks that allow cargo passage up the mighty midwestern rivers."

We decided to spend our money on entitlements and maintaining all the stuff we'd already built instead. Remember the gargantuan highway bill?

@OhNoNotAgain - "Let's hope Obama is elected"

The Pres doesn't control spending, and Obama has few chits to call on in Congress. Pelosi/Reid will do the legislating. Obama will end the Iraq war and invade Pakistan, but the rest happens on Capitol Hill. Gulp.

[D Wreck]

I took a look at non-residential investment as a percentage of total investment and compared it to individual tax receipts as a percentage of GDP (total tax receipts minus corporate tax on income). There was a strong correlation between the two.

It seems to suggest that the individuals making business investment decisions will prefer to put money in the hands of owners when individual tax rates are lower and will make business investments when individual tax rates are higher.

This seems to indicate a bias toward individual gain when individual tax rates are low and business expansion when individual tax rates are higher. This seems to completely contradict the trickle down theory.

[german_reader]

"Good thing the U.S.' income is higher, which makes our tax burden appear lower."

Larry,

incomes in the U.S. are higher because Americans work around 400 hours per year more than Germans. Per hour worked they are nearly identical. And if you look where the U.S. GDP/spending is higher than in Germany or other wealthy nations, it's mainly defense, health care, housing and energy or food, exactly those sectors where the U.S. has serious efficiency, inflation and cost problems. The "higher" incomes or per capita wealth in the U.S. are a statistical illusion driven by highly inefficient organization in some sectors and asset price inflation ( = speculation ). Americans often work more and get less.

And health care is indeed one of the major problems. It consumes most of the resources other nations use for other purposes. Total per capita social spending, private and public combined, for example in the U.S. and Germany, the European country with the highest per capita public social spending in Europe, is very similar. The difference is that health care in Germany is "only" 35% of all social spending, while it's around 70% in the U.S. ( the difference, 35%, equals $1.1 trillion in the U.S. ). And Germany spends much more through the public sector, while the U.S. spends more, mainly in health care, through private channels.

With a better and more cost-effective health care system ( the WHO ranks Germany's health care system significantly better than the U.S. system ) the U.S. could free up the resources to finance other social issues without paying - as a nation - a single dollar more. A better and more balanced socio-economic organization is by the way the reason why Europe's social systems are not unsustainable as often said, at least not more than the U.S. system.

And in regard to taxes:

I didn't say that the U.S. government should raise taxes on the financial sector in the next weeks or months. That would be a long-term project. But I think it would help economic stability, fairness and growth, if the governments in the U.S. and elsewhere would try to reduce the importance of the financial sector and concentrate more on the "real" economy. It's an illusion that the financial sector can grow for ever faster than the underlying real economy. That leads inevitably to financial bubbles and economic instability. You cannot create wealth out of nothing, just by asset price inflation

[Larry]

The financial sector would have grown fast even with proper regulation. It serves a critical purpose: managing one of the few commodities whose supply is fundamentally unlimited and is itself growing explosively, namely capital. FS jobs pay well, and constitute a significant area of American comparative advantage vs our economic competitors.

We crashed the family car. That doesn't mean cars are bad, just that we need to learn better how to drive them.

We spend very little on food, and including taxes, probably less on energy. We import less of it than European countries, except maybe the UK. You're right about health care and defense, but as I said, the rest of the world is freeloading in both areas.

[german_reader]

@Larry

you may pay less for a single energy unit, but if you consume twice as much due to energy waste, you might pay in the end more. And the high taxes on energy here in Europe are not necessarily lost. They are used to build up a better infrastructure or finance investment in other areas. You shouldn't make the mistake to compare only the consumer price for energy and not consider what's all financed by the visible costs for the consumers. If I compare the infrastructure here in ( densely populated ) Germany, France or ( sparsely populated ) Scandinavia with that of the United States then we definitely get more out of our energy bills than the average American consumer.

And you're right, some of the wealth of the United States is the result of rich natural resources. The U.S. has long been the largest oil producer in the world and is still the third largest ( tendency falling ). It can cover around 50% of its oil needs with domestic resources. Germany has very few natural resources and imports 97% of its oil demand. That coins energy policies and has nothing to do with the advantages of American style capitalism. And U.S. oil resources are currently declining even faster than world oil resources. The U.S. will be forced to import more and more oil from a highly volatile world market with declining supply. That will make the inefficiencies in the U.S. system more visible.

Health care seems to be your favorite hobby horse. As I said in a prior comment, you shouldn't confound the undeniable contribution of the U.S. to medical progress, which is similar to Europe's contribution, with high administration costs of U.S. health insurers, unnecessary over-treatment or high drug prices as a consequence of protectionist patent laws. And the U.S. takes in regard to health care as much a free ride on the back of Europe or Canada, Australia and Japan as Europe and the rest of the world does on the back of the U.S.. You shouldn't forget that these countries combined spend more on health care then the U.S. and have done also more ground breaking research.

Defense is a sensible area because it targets the heart of the American self-understanding. Americans have a very special ( some would say paranoid ) way to see world. The recent crisis in Georgia was symptomatic. While the reaction here in Europe was relatively relaxed and most people are convinced that we can find a way to peacefully cooperate with Russia for the advantage of both sides, the Bush administration tried to change the conflict into a remake of the cold war. That has definitely not contributed to the security here in Europe. The same is true for the war on Iraq or the stationing of anti-missile systems in Eastern Europe.

And you shouldn't forget that the voluntarily unchallenged military dominance of the U.S. also means a kind of control and makes life easier for the U.S.. Germany, Japan and especially the EU as a whole could easily organize their defense in an independent way. A few hundred intercontinental nuclear rockets on mobile bases, submarines or stealth ships/bombers would do the job. We have the necessary technologies and the economic capacities. Russia and China organize their defense independently. Is that really a more comfortable situation for the U.S.?

Food is a special story. According to the GDP statistics Americans spend per capita 67% more on food than Germans. And we really have no problem with undernutrition here in Europe. The difference may be the result of different consumption habits or different statistical definitions, but my personal impression during occasional visits in the U.S. was that food prices in the U.S. are somewhat higher than in Germany, despite the lower sales taxes. And you shouldn't forget what counts to estimate the efficiency of a system is the whole package: producer prices, consumer prices, taxes and public investment out of taxes etc..

Some people seem to believe that taxes always disappear always in a deep dark hole and never come back. That's nonsense. What's important is how they are used. And there are lots of examples that public institutions can be as efficient and often more efficient than private ones. It's a question of intelligent organization, transparency and democratic control. In a democracy people have ( at least theoretically ) the option to demand a better management from their politicians/bureaucrats. If they use it is another question.

[Larry]

@German_reader - ""if you consume twice as much due to energy waste"

We do consume more energy, although if I recall, we're better per unit of GDP than the global average. But that doesn't mean it's wasted.

"And the high taxes on energy here in Europe are not necessarily lost."

I wasn't criticizing your energy taxes. I think we should gradually raise ours.

"Germany has very few natural resources and imports 97% of its oil demand."

This makes me wonder why Germany hasn't done more with nuclear power, which has a lot less geopolitical baggage, especially now that Russia has gone rogue.

"And U.S. oil resources are currently declining even faster than world oil resources. The U.S. will be forced to import more and more oil from a highly volatile world market with declining supply. That will make the inefficiencies in the U.S. system more visible."

Higher oil prices make the enormous US resource of oil shale economic to recover. And we've just cracked the code (and the rock) on how to markedly increase our access to domestic natural gas (that's why that price started falling well before oil.) We'll undoubtedly figure out solar, algae, and fusion before we run out of oil. And when oil prices rose, our consumption started to decline, well before the crisis.

"Health care seems to be your favorite hobby horse."

I have an entire stable.

"similar to Europe's contribution"

With what measure do you defend that?

"high administration costs of U.S. health insurers, unnecessary over-treatment"

All true, but true in the government side of the system as much as the private side. Our health care system is not diseased by capitalism per se. As with our oil consumption, I think it comes from a sense of the lack of limits.

"high drug prices as a consequence of protectionist patent laws."

Europe has similar patent laws. The cause is that we don't dictate prices under threat of abandoning the patent system. The rest of the world does.

"You shouldn't forget that these countries combined spend more on health care then the U.S. and have done also more ground breaking research."

Again, by what measure?

"Americans have a very special ( some would say paranoid ) way to see world."

Very special indeed.

"The recent crisis in Georgia was symptomatic. While the reaction here in Europe was relatively relaxed and most people are convinced that we can find a way to peacefully cooperate with Russia for the advantage of both sides, the Bush administration tried to change the conflict into a remake of the cold war."

Now there's a tendentious description. I realize that Europe stays relaxed when Russia behaves outrageously. Europe was relaxed when Milosevic behaved outrageously. Will Europe remain relaxed when Russia takes its next steps towards reacquiring the empire whose loss Putin describes as one of the great disasters of the 20th century?

"And you shouldn't forget that the voluntarily unchallenged military dominance of the U.S. also means a kind of control and makes life easier for the U.S."

It makes life easier for everyone who doesn't set themselves against us, and arguably for those who do, simply because we enforce stability just about everywhere except Africa.

"Germany, Japan and especially the EU as a whole could easily organize their defense in an independent way. A few hundred intercontinental nuclear rockets on mobile bases, submarines or stealth ships/bombers would do the job."

Given the bumbling efforts to establish the independent EU military organization, that's hard to take seriously.

We have the necessary technologies and the economic capacities. Russia and China organize their defense independently. Is that really a more comfortable situation for the U.S.?

Can you envision a world in which they didn't? BTW, I have little concern about China militarily. In 6,000 years, they've never invaded anyone successfully. It doesn't appear to be in the Han DNA.

"According to the GDP statistics Americans spend per capita 67% more on food than Germans."

Lately we seem to weigh 67% more too. I have no explanation for that. Also, food/farm policy in both the US and the EU are bollixed up by idiotic subsidy policies that raise prices for consumers (e.g., sugar, which goes here at 3x world prices). These policies not only hurt our consumers, they ravage third world countries. It's a huge, and shared, scandal. That said, food prices are quite low, and appear set to decline basically forever, given ongoing productivity improvements.

"What's important is how they are used."

At least in the US, the bigger the project, the bigger the disaster. Our last really large single infrastructure was to rebuild downtown Boston. It was a huge fiasco, with corruption, and construction defects still ricocheting through the city.

"public institutions can be as efficient and often more efficient than private ones."

There's lots of ways to look at that issue. The American bias is to have the government do it iff there's no workable private solution, reasoning that a multiplicity of solutions allows each consumer to choose optimally. Europe's twentieth century tradition was the opposite bias. That bias has seemed to dissipate with Europe's ongoing slow privatization wave. My preference remains for private solutions. If we compare FedEx and UPS to the US postal system in terms of innovation, there's no contest. I'd be happy to abolish/privatize the latter, because I think the result would benefit consumers - in ways I can only begin to imagine. (That's the innovation part.)

[german_reader]

@Larry

As I can see we're not that far from another. Perhaps a few remarks:

"We do consume more energy, although if I recall, we're better per unit of GDP than the global average. But that doesn't mean it's wasted."

Isn't the U.S. one of the countries with the largest share of the service sector in the economy? That lowers emissions a lot. Especially compared to nations with ( relatively ) stronger manufacturing sector such as Germany or Japan. And what's with the emissions caused by American consumers in China, Mexico and elsewhere?

"This makes me wonder why Germany hasn't done more with nuclear power, which has a lot less geopolitical baggage, especially now that Russia has gone rogue."

Nuclear isn't a cheap energy if you include all costs from the initial public subsidies for development, building nuclear reactors, production costs, realistic costs to insure the risks ( de facto companies which run reactors have a gratis unlimited government guarantee - the Wallstreet-principle ), final disposal ( still unresolved ) etc..

Germany was one of the countries directly affected by the catastrophe in Tchernobyl and a nuclear accident of a similar size here in Germany would devastate half of the country ( Germany is eight times denser populated than the U.S. ). Germans have due to their historical experiences a very good idea what it means if the whole country is destroyed. And this time it wouldn't be a damage which could be cleared within a few years.

Besides, nuclear power wouldn't make us independent from foreign suppliers. Renewables or coal are the only options to build up an independent energy supply. And coal ( with all it's problems ) is only an option for a limited period. On top of this renewables are a good opportunity to intensify the European inegration. The European countries around the North Sea for example are going to connect their wind power nets. That will make the energy supply more stable and more efficient. We are starting to think in European categories instead of German ones. Good thing.

"With what measure do you defend that?" ( health care )

The number of nobel prize winners in medicine over the hundred years for example? But you're right it's difficult to prove, as difficult as your assertion. Lets say we have a remis here.

"I realize that Europe stays relaxed when Russia behaves outrageously. Europe was relaxed when Milosevic behaved outrageously. Will Europe remain relaxed when Russia takes its next steps towards reacquiring the empire whose loss Putin describes as one of the great disasters of the 20th century?

It makes life easier for everyone who doesn't set themselves against us, and arguably for those who do, simply because we enforce stability just about everywhere except Africa."

Oh truly? I have the impression that the war on Iraq has more destabilized the situation in the Middle East than stabilized it. And the reaction on Georgia was also not really helpful. In Latin America or Asia ( Vietnam for example ) the American engagment over the last decades was also not always stabilizing and where it was it has often stabilized the wrong kind of regimes. The situation here in Europe is a bit more complex than you paint it. Ex-Yugoslavia was indeed a failure. But I didn't say that Europe is yet ready to act as international police officer nor am I sure if it's a desirable goal. Has the war on Iraq really helped the Iraqi people or improved the situation in the Middle East? Many would say no.

And it's indeed a difference if you sit at home and see your wars in the TV-screen or if you're directly affected by it. A war with Russia for example could lead to the destruction of major parts of Europe. That makes the decisions a bit more difficult. But I'am sure that Europe, similar to the current financial crisis, would find ways to organize its defense without the intervention of the U.S.. It has more than enough potential.

Germany's GDP for example is larger than that of all former member states of the Warsaw Pact combined. And we reach that with one of the lowest annual worktimes in the world. Increasing our per capita defense expenditures to U.S. levels would result in 4-5% longer working hours and a defense budget of around $200-250 billion ( currently $42.5 billion ), much larger than that of Russia or China. And we still would work 25% less than Americans. If Russia can build all these fancy intercontinental missiles, aircraft carriers or fighter planes Germany also could and we probably would do it in a better quality. And the available number of soldiers is in the era of weapons of mass destruction definitely not the most important factor.

For the EU as a whole increasing total defense expenditures to U.S. dimensions would mean working 2-3% more. You shouldn't forget that the military-industrial complex in the U.S. is also a giant labor program. It employs 5-6 million people. And the EU has a lot of unused economic potential. Building up an independent defense structure is not a question of technological or economic capacities, it's a question of political will. And that could grow rapidly in a situation of crisis, for example with a Russia, Iran or U.S. acting over a longer period aggressively against the European interests.

"Lately we seem to weigh 67% more too."

Unfortunately enough Germany is now the country with the most overweighted people in Europe. The differences to the U.S. are shrinking rapidly. Consumption habits are probably not the explanation ( unless you drink every day a bottle of champagne to your hamburgers ). May be statistical differences are. No idea. On the other hand farmers in the United States are among the richest households in the country. In Europe they are much closer to the average. Possible that U.S. farmers have managed to find a pretty comfortable place in the system. Just a guess.

And food prices in the U.S. seem to be according to my own - limited - experience not only somewhat higher than in Germany, they are also one of the products with the highest inflation rates. Moreover you shouldn't forget that the U.S. has much better natural conditions to produce food cheaply than many other nations. To believe that that is only a result of your magic "free market" system is a bit naive. And even if food in the U.S. were cheaper than in other nations, is it as cheap as the natural conditions allow ?

"Europe's twentieth century tradition was the opposite bias. That bias has seemed to dissipate with Europe's ongoing slow privatization wave."

Mark Thoma has made a good recent post on the complexity of market economies and the problems of privatization:

http://economistsview.typepad.com/economistsview/2008/10/competitive-mar.html

Markets need to be managed to work and privatizations have often not the expected results. And even if the prices fall after privatizations, it's often not clear if the net gains for a society are really positive and what's behind the falling prices. According to a recent study the privatizations in Germany have cost the country until now 700,000-800,000 jobs ( equals 2.5-3 million in the U.S. ). And prices in the private sector are often only lower because companies practice wage dumping and lower the social standards. The low wage sector in Germany has been growing rapidly over the last ten years.

In some sectors such as energy the results of the privatizations are definitely negative. Prices have been rising faster than before, employment and wages have fallen, profits are exploding and necessary investments have been canceled or happen not fast enough.

Even where the results for the consumer ( but not for the employees ) are more convincing, telecommunication for example, it's difficult to say how much of these effects are the result of privatization and how much is simple technological progress.

And in your example, mail services, prices have remained more or less the same, service quality is slightly better, employment has fallen and we have now 6 or 7 mail companies instead of one driving on the roads. From an ecological point of view that's not very effective.

[Larry]

"Isn't the U.S. one of the countries with the largest share of the service sector in the economy? That lowers emissions a lot. Especially compared to nations with ( relatively ) stronger manufacturing sector such as Germany or Japan. And what's with the emissions caused by American consumers in China, Mexico and elsewhere?"

The way I read this: ftp://ftp.bls.gov/pub/suppl/empsit.ceseeb1.txt

US services employment is 115M, with 22M producing non-farm goods. I don't know how that compares. Manufacturing is certainly following labor costs to developing countries. But that affects Europe, too.

"Nuclear isn't a cheap energy"

The costs and delays from litigation and coping with government are a significant part of those costs. But I was speaking about the geopolitics. The US is continually looking for ways to shift to more secure energy sources. Europe is increasingly dependent on Russia, which is not only irresponsible, but has an agenda to weaken and divide the European project.

"Germany was one of the countries directly affected by the catastrophe in Tchernobyl and a nuclear accident of a similar size here in Germany would devastate half of the country"

It certainly would, but the Chernobyl reactor design was far more dangerous than anything in use elsewhere. 30 years of safe and ever more efficient operation have got to put safety fears to rest.

"Besides, nuclear power wouldn't make us independent from foreign suppliers."

No, but it would get the Russian needle out of your arm. And unlike renewables, it is scalable right now. See France.

"The number of nobel prize winners in medicine over the hundred years for example?"

Being lazy, I only went back to 1999, but I see 9 honorees working in Europe, vs 13 in the US. The US has 300 million souls. Europe? More importantly, remember that the US subsidizes European drug makers as well as our own, by paying retail for their products. You're welcome.

"I have the impression that the war on Iraq has more destabilized the situation in the Middle East than stabilized it."

Us losing was certainly destabilizing. Now that the blast walls are coming down and a new round of elections with full participation is imminent, Iraq is poised to realize its promise.

"Georgia"

What was the correct reaction when Russia invaded? Slumber? We didn't cut off relations with them, or deploy troops. We scolded them, and moved to show support for a real democracy.

"In Latin America or Asia ( Vietnam for example ) the American engagment over the last decades was also not always stabilizing and where it was it has often stabilized the wrong kind of regimes."

Vietnam was an attempt to protect an ally against the invasion of a neighbor. See also Korea. There are too many examples of US engagement to argue each one. To cite three other recent examples, we're chasing pirates in the Indian Ocean, and were the key elements of the rescue missions that followed the Pakistan earthquake and the tsunami. I don't argue that we lack flaws, but that on balance, as Albright and others have said, we're "indispensable". No other country has been since...

"A war with Russia for example could lead to the destruction of major parts of Europe."

Completely agree. War is not the answer when dealing with a nuclear state. And the risk of war is 0. Neither side would go that far.

"But I'am sure that Europe, similar to the current financial crisis, would find ways to organize its defense without the intervention of the U.S.. It has more than enough potential."

I don't question Europe's material resources, only its will.

"Possible that U.S. farmers have managed to find a pretty comfortable place in the system. Just a guess."

We have bigger farms than Europe, and our subsidies are monumentally stupid.

"they are also one of the products with the highest inflation rates."

Food prices are up 40% globally. Our energy policy has smashed our food policy.

"To believe that that is only a result of your magic "free market" system is a bit naive. And even if food in the U.S. were cheaper than in other nations, is it as cheap as the natural conditions allow "

Agriculture is anything but free. But our approach doesn't squelch innovation. Our productivity is not only higher; it's rapidly increasing. Productivity is now much less a function of geography and more a function of technology than before. See GM crops, Europe's unfathomable rejection of rationality.

"Markets need to be managed"

There's a lot of room in "managed". My bias is to manage as little as necessary in order to get the market to function, not to replace market judgments with "planning".

"And even if the prices fall after privatizations, it's often not clear if the net gains for a society are really positive and what's behind the falling prices."

My thought is that jobs are about suppliers and prices are about consumers. The price reductions that trade and privations have produced generate everyone. And if labor markets are flexible, workers move on and prosperity increases. That has certainly been the pattern here. Change doesn't benefit everyone, but you have to look at the big picture.

"The low wage sector in Germany has been growing rapidly over the last ten years."

What about education levels? In the US, education gains stopped 30 years ago. I credit lack of progress on that front with the reemergence of low-paying domestic jobs in our globalizing economy, in which wages are forced to match productivity. High skill jobs pay very well.

"In some sectors such as energy the results of the privatizations are definitely negative. Prices have been rising faster than before, employment and wages have fallen, profits are exploding and necessary investments have been canceled or happen not fast enough."

In the US, private companies wishing to expand energy supplies face huge legal obstacles. E.g., a court recently sanctioned the use of civil disobediance against a company wanting to build a new coal plant. Here energy sector employment is a function of the regulatory climate and pricing. If we allow drilling and plant construction, employment thrives, unless prices crash.

"Even where the results for the consumer ( but not for the employees ) are more convincing, telecommunication for example, it's difficult to say how much of these effects are the result of privatization and how much is simple technological progress."

Yes, but where does the technological progress come from? And at what rate does it get deployed? "More, faster" happens in privatized environments in a smart regulatory environment.

"prices have remained more or less the same, service quality is slightly better, employment has fallen and we have now 6 or 7 mail companies instead of one driving on the roads."

Sounds pretty good overall. Better service with lower employment sounds like productivity to me. The next question is about innovation. As those companies compete, I'd expect them to come up with new ways to get things done. Here, I love the UPS "no left turn" rule, which saves time and reduces congestion. As we shift to greener vehicles, we might expect that different companies will take different approaches, giving us privately-funded experimentation to see which works better. I'm jealous.

[german_reader]

@larry

"US services employment is 115M, with 22M producing non-farm goods. I don't know how that compares."

According to my information manufacturing in the U.S. employs less than 14 million. The 22 million might include construction.

http://www.bls.gov/news.release/ocwage.t02.htm

In Germany there are 6 million people employed in the manufacturing sector, that equals population adjusted ( x 3.7 ) 22.2 million in the U.S.. On top of this comes handcraft with another 2 million and construction with 2.2 million.

The German manufacturing output at market exchange rate ( the relevant measure, because most goods are traded in the international market and compete with goods from foreign producers ) is population adjusted 50% higher than in the U.S.. And Germany runs currently a trade surplus higher than the Chinese, more than three times the level of Japan . $158 billion in the first eight month of 2008 ( $174 billion goods only ) compared to $152 billion in China.

"Europe is increasingly dependent on Russia, which is not only irresponsible, but has an agenda to weaken and divide the European project."

It's a dependence on both sides. Russia needs as much European markets to sell its natural resources as Europe needs Russia's gas and oil. And the Russians try to attract European capital and know how to develop their country. Nations which trade with each other normally don't attack each other. Russia seems to search tighter cooperation with Europe ( as counterweight to the Chinese? ) and appreciation as a nation of equal status. The Russians have a latent inferiority complex, just like another great nation in the opposite direction of the globe ( seen from Europe ).

"No, but it would get the Russian needle out of your arm. And unlike renewables, it is scalable right now."

And the follow costs might be completely unscalable. Renewables become rapidly cheaper and more efficient. They are not only ( in most cases ) the healthier option, but create also more jobs and allow decentralized production, more competition between suppliers or energy independence of private households. And they don't cause the problems of nuclear proliferation if you export them. For Germany it would be the only way to create, if necessary, a really independent unlimited energy supply.

Besides, if we talk about renewables you shouldn't make the mistake, as many do, and consider only the natural potential here in Germany, which is sufficient but not optimal. We are going to think in European dimensions. I had mentioned wind power in the North Sea, solar power from Spain or Southern Italy or hydro power from Scandinavia could be other examples. You shouldn't forget that the distances and logistic problems in the U.S., with more than twice the land area of the EU, might be even larger.

"Being lazy, I only went back to 1999, but I see 9 honorees working in Europe, vs 13 in the US."

That's your formulation. Going back only to 1999 is indeed lazy. Most important therapies are much older. Besides many "U.S." Nobel Prize winners are born and educated in Europe. I do not doubt that Harvard, Standard or Princeton with 10-15 times the capital per student/teacher of a average public university here in Germany, can provide better conditions for top scientists than most European universities. But is that necessarily a consequence of your health care costs?

And why in god's name ( I am atheist by the way ) can the U.S. with more than twice the health care costs of other rich nations ( $7600 per head compared to $3500 in Germany for example ) not provide health insurance to every of its citizens. The U.S. is probably the only rich nation were full health care coverage for all citizens is not seen as a natural right.

"Food prices are up 40% globally. Our energy policy has smashed our food policy."

May be. Expenditures for food and beverages in the U.S. have been growing with annual rates of 6-7% over the last years compared to 1-2% in Germany. Even if you consider the different population dynamics ( +0.9% per year in the U.S., -0.1% in Germany ) that looks a lot like higher inflation.

"What about education levels?"

Education may play a role, but it's in my view not the most important one, at least not here in Germany. 80% of low wage workers ( below 9.81 euros per hour , $11.38 purchasing power, two thirds of the median ( 50% limit ), 2006 ) in Germany are skilled, 10% highly skilled. The effect is that skilled job seekers replace the unskilled in the low wage sector, because they can't find adequate jobs. And that has different reasons.

First of all we've created a giant "export bubble" here in Germany. The volume of exports has now reached nearly 50% of GDP. Even during the best times of the German "Wirtschaftswunder", from the 50s to 80s, exports never exceeded 30-35% of GDP. Our trade surplus has now reached 7-8% of GDP. In the past it was never higher than 4-5%. We've killed our domestic market to become even more "competitive". This strategy has destroyed more qualified jobs, than it has created.The domestic market is responsible for 80% of all employment in Germany, the export sector for 20%.

Furthermore Germany runs a possibly record-breaking stupid expenditure policy in the public sector. We're the European country with the highest per capita social spending and at the same time the nation in Western Europe with the lowest per capita spending on public employment and public service. Even compared to the situation in the very market oriented U.S. there are around 1 million ( relatively ) less jobs in the public sector. Where other nations make useful investments in education, child care, health care or infrastructure, Germany finances unemployment. Brilliant!

And not at least the privatizations, liberalizations have destroyed a lot of good paying jobs. I think you see only one side of the medal. You ignore the costs the average citizens experiences in the form of job or wage losses, or higher taxes for income support or unemployment benefits. And the increased competition pressure undermines the negotiation position of paid employees.

The current economic recovery was the first one in Germany's post war history without real wage gains ( until now ). The income losses for the paid workforce, 90% of the population, are in the range of 120-130 billion euros. That's far more than any realized liberalization or privatization gains. Even most small business owners have suffered from the lack of demand in the domestic market. Only a small group at the top, larger company owners or high managers have benefited. And it's - see above - not a lack international competitiveness.

We're hyper competitive. That's the problem.

[Larry]

"According to my information manufacturing in the U.S. employs less than 14 million. The 22 million might include construction."

It does.

"Russia needs as much European markets to sell its natural resources as Europe needs Russia's gas and oil."

So that's why Russia treats Europe so well!

"And the follow costs [of nuclear] might be completely unscalable."

As they are in France and Japan?

"Renewables become rapidly cheaper and more efficient. They are not only ( in most cases ) the healthier option, but create also more jobs and allow decentralized production, more competition between suppliers or energy independence of private households. And they don't cause the problems of nuclear proliferation if you export them. For Germany it would be the only way to create, if necessary, a really independent unlimited energy supply."

I see no material health differences. Once installed the costs don't change. And (happily) yes they are becoming more efficient, but not rapidly. I've been waiting for cost-efficient solar my whole life. It's not here yet. (Even so, I just installed some. How cool am I!) And nuclear is also becoming more cost-efficient. Creating jobs is great, unless there are more productive ways for those people to earn a living. The economics is key, and it doesn't yet favor renewables. Next-gen nuclear can be done on a very small scale (the plants are the size of a shipping container) so the centralization and competition points are obsolete. (And if the government runs the utilities, does decentralization apply?) We're talking here about Europe, where proliferation is not a concern. The bottom line is that Germany could much more quickly eliminate its use of carbon for electricity with nuclear in the mix than otherwise.

"Going back only to 1999 is indeed lazy."

You brought it up. What's your tally?

"many "U.S." Nobel Prize winners are born and educated in Europe."

But that's my point. They choose America to live and work in, because our research community just works better. Part of that is the commercial side. Our amazing private universities are another reference point in the public/private centralized/decentralized debate. Thus our bias.

"And why in god's name ( I am atheist by the way ) can the U.S. with more than twice the health care costs of other rich nations ( $7600 per head compared to $3500 in Germany for example ) not provide health insurance to every of its citizens. The U.S. is probably the only rich nation were full health care coverage for all citizens is not seen as a natural right."

Because we don't see full health care for all citizens as a natural right, and because we don't trust government as much as Europeans seem to. I speak generally. Many Americans see things as you do.

"Expenditures for food and beverages in the U.S. have been growing with annual rates of 6-7% over the last years compared to 1-2% in Germany."

As should be evident from my other comments about our brain-dead food/energy policies, these numbers don't surprise me. But I'm curious about your source.

"80% of low wage workers ( below 9.81 euros per hour , $11.38 purchasing power, two thirds of the median ( 50% limit ), 2006 ) in Germany are skilled, 10% highly skilled. The effect is that skilled job seekers replace the unskilled in the low wage sector, because they can't find adequate jobs. And that has different reasons."

What do "skilled" and "highly skilled" mean? And how are those percentages changing? Low individual incomes result from lack of marketable skills. (Even the most highly-skilled maker of internal combusion engines will have troubles when we shift to electric motors.) The key is to get in front of and stay in front of the ever-changing market.

"First of all we've created a giant "export bubble" here in Germany. The volume of exports has now reached nearly 50% of GDP. Even during the best times of the German "Wirtschaftswunder", from the 50s to 80s, exports never exceeded 30-35% of GDP. Our trade surplus has now reached 7-8% of GDP. In the past it was never higher than 4-5%. We've killed our domestic market to become even more "competitive". This strategy has destroyed more qualified jobs, than it has created.The domestic market is responsible for 80% of all employment in Germany, the export sector for 20%."

20% of your workers produce 50% of your GDP? Pretty good workers! More seriously, Germany and the US should both do fine even if you exported 100% of your GDP and we imported it, as long as you also import and we also export an equal amount. In the US, trade-related jobs pay much better than "protected" jobs, on average. I.e., we do better the more we export. I suspect that's true for you, too. If exports decline, will your internal market strengthen? Doubt it.

As a citizen of a country with a ginormous trade deficit, I'd like to thank you personally for sending us so much great stuff at such competitive prices! However, I'm pretty sure our deficit is not sustainable so your surplus may also be at risk. I'd like to apologize in advance for buying less of your stuff than before.

Wasn't a big part of the Wirtschaftswunder the post-war reconstruction process ?

"Where other nations make useful investments in education, child care, health care or infrastructure, Germany finances unemployment. Brilliant!"

I agree that German, and more generally, European labor markets need drastic reform. High skill or not, everybody is employable at some level.

"the privatizations, liberalizations have destroyed a lot of good paying jobs. I think you see only one side of the medal. You ignore the costs the average citizens experiences in the form of job or wage losses, or higher taxes for income support or unemployment benefits. And the increased competition pressure undermines the negotiation position of paid employees."

You forget globalization. In today's world, everybody needs to be ready to adapt to change. That's today's fundamental skill. It will only increase in importance tomorrow. The future is about lowering costs by bringing forward the huge portion of the world that has been living a miserable subsistence lifestyle. That helps everybody by lowering the cost of modern life. Living costs especially matter for low-skilled and retired workers, who have little ability to raise their incomes.

"The current economic recovery was the first one in Germany's post war history without real wage gains ( until now ). The income losses for the paid workforce, 90% of the population, are in the range of 120-130 billion euros. That's far more than any realized liberalization or privatization gains. Even most small business owners have suffered from the lack of demand in the domestic market. Only a small group at the top, larger company owners or high managers have benefited. And it's - see above - not a lack international competitiveness."

Americans blamed Bush when that happened here. I'll let them know their diagnosis was wrong.

"We're hyper competitive. That's the problem."

It's your only hope.

[german_reader]

@Larry

"And (happily) yes they are becoming more efficient, but not rapidly."

Depends. Solar is only one option. Solar heating is already competitive. Solar electricity may become in the next decades. Studies here in Germany predict that energy production from renewables could grow over the next decades twice as fast as expected. And you forget the largest short-term alternative energy source of all: energy saving.

I've seen a while ago an energy discussion on a U.S. Republican blog where the participants discussed alternative energy concepts. Nearly 200 comments, lots of arguments pro-nuclear, lots pro-wind, pro-solar ( very surprising on a Republican site ), not a single commenter mentioned energy saving/efficiency as strategy. That using less could be more is obviously a completely Un-American idea. In Germany the middle-term potential for energy saving ( most important better isolated houses, better cars ) is estimated at around 50%. In the United States with it's inefficient energy system the potential might be even larger.

I prefer renewables, because they don't need such huge single financial investments. You can put solar panels on your roof, install geothermic systems in your garden or build wind-turbines in your neighborhood/city without hundred of millions of dollars investments. It makes you more independent from the monopolists. And they don't blow up whole regions if they fail ( we've on top of our own reactors, enough nuclear risks from our neighbor countries ).

"You brought it up. What's your tally?" ( nobel prize winners )

Only one possible indicator. Another could be export of pharmaceuticals. According to the WTO the EU exported in 2006 pharmaceuticals worth $85.3 billion ( only extra EU exports, total is $214.5 billion ) compared to $29.1 billion in the U.S.. And most is developed in Europe. Tiny Switzerland ( not part of the EU ) exported $31.2 billion. Only a small share goes to the U.S ( in Germany 7% ). One could say that the U.S. take a free ride on Europe in providing the world with state of art pharmaceuticals.

By the way, if your health care system is such a great thing, why have others no interest ( tendency rapidly falling ) in copying it? Ever asked yourself that question?

"But that's my point. They choose America to live and work in, because our research community just works better"

Lets say a part of your research/education community. The top universities are only a small share of the U.S. education system. The rest is average or below. And the top institutions have much more capital than universities elsewhere. Compared to their financial resources the results are not that impressive.

Nevertheless the U.S. spends per capita significantly more on education than Germany. In Germany public investments for education have fallen (!) over the last decade. That's stupid. So I must agree: advantage U.S.A in this sector.

"Because we don't see full health care for all citizens as a natural right, and because we don't trust government as much as Europeans seem to."

You trust government to bailout the banksters, but not to provide full health care coverage to children or poor people. Shame on you! That's one of the reasons why we don't see the U.S. as a model.

"What do "skilled" and "highly skilled" mean?"

Most of them have finished apprenticeship or above, some Fachhochschule ( +/- college ) or university. The higher instances of the vocational system here in Germany have at least the same quality as a community college in the U.S..

"20% of your workers produce 50% of your GDP? Pretty good workers!"

They are pretty good, but they don't produce 50% of GDP. For GDP only the trade balance, the difference between exports and imports, is counted. 7-8% in Germany. 50% is only the volume of exports, without considering imports. Manufacturing is around 25% of GDP. Much is for the domestic market.

"In the US, trade-related jobs pay much better than "protected" jobs, on average. I.e., we do better the more we export. I suspect that's true for you, too. If exports decline, will your internal market strengthen?"

In Germany they also pay very good. But we had 1-2 million more good paying full-time jobs when we had a less extreme balance of payments a few years ago. The net effect seems to be clearly negative. The now ending economic recovery in Germany was mainly driven by foreign consumers who are now up to their noses in debt. We've imported our upswing, now we import the downswing.

"I agree that German, and more generally, European labor markets need drastic reform."

In August 2008 there were 145.9 million employed in the U.S. ( seasonally unadjusted, only civilian ) in a population of more than 305 million, 47.8% ( compared to 48.4% a year ago ).

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

During the same month Germany had 40 million employed ( seasonally unadjusted, only civilian, the official number includes 0.25 million soldiers ) in a population of 82.2 million, 48.7% ( compared to 48% in August 2007 ).

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Content/Statistiken/Zeitreihen/WirtschaftAktuell/Arbeitsmarkt/Content100/arb410a,templateId=renderPrint.psml

In West-Germany, with a population of 65.7 million larger than France or the U.K., the share is even higher ( 49.5% ). Many European countries have similar or higher employment levels. And we have a high trade surplus, a balanced budget and less than half as much per capita debt ( private and public ) as the U.S. and all that with 400 hours less work per year ( 1424 compared to 1824 in the U.S. ) and half the resource consumption.

Who needs reforms?

"As should be evident from my other comments about our brain-dead food/energy policies, these numbers don't surprise me. But I'm curious about your source."

GDP statistics. Here is one actual for the U.S.

http://www.bea.gov/newsreleases/national/gdp/2008/xls/gdp208f.xls

You can find statistics which reach further back on their website. The trend remains the same. From Q2 2007 - Q2 2008 not inflation adjusted expenditures for food have grown by 7.1% ( annualized 1416.3 billion compared to 1321.2 billion a year ago or from $4374 per capita to $4643.6, +6.1% ).

In Germany not inflation adjusted expenditures for food and beverages have grown (the latest available data ) from 185.18 billion euros in 2006 ( $2588 PPP per capita ) to 187.71 billion euros in 2007 ( $2626 PPP per capita ). +1.3% or +1.5% per capita. The trend is stable over a longer period.

"You forget globalization. In today's world, everybody needs to be ready to adapt to change."

Germany's problems are not ( at least not yet ) in sectors exposed to the international markets. Germany's problem is a lack of domestic demand and insufficient public investment. And that's the result of supply-side politics which have eroded the tax base and caused a massive upwards distribution of income ( no trickle down ).

[Larry]

"Solar electricity may become in the next decades."

Exactly. Decades.

"energy saving."

We're steadily improving our efficiency numbers here. The driver is cost. Even Walmart has switched to CFLs. Efficiency is an area that is improving rapidly, but I know of no country where overall energy use is declining. Can you correct me?

"I prefer renewables, because they don't need such huge single financial investments."

If you're talking about improving a city, renewables need bigger investments than nuclear.

"According to the WTO the EU exported in 2006 pharmaceuticals worth $85.3 billion ( only extra EU exports, total is $214.5 billion ) compared to $29.1 billion in the U.S....One could say that the U.S. take a free ride on Europe in providing the world with state of art pharmaceuticals."

Only if you charge us less than you charge yourselves. I don't think so. Remember, our exports are priced for the world market ("wholesale".) Our imports are priced for the domestic market (retail.) The difference is not small.

"By the way, if your health care system is such a great thing, why have others no interest ( tendency rapidly falling ) in copying it? Ever asked yourself that question?"

Our system is a mess. Conservatives are no more happier with it than liberals. They just see a completely different solution.

"Compared to their financial resources the results are not that impressive."

If so, then financial resources would flow elsewhere.

"Nevertheless the U.S. spends per capita significantly more on education than Germany."

If only our results matched our spending, we'd be in great shape.

"You trust government to bailout the banksters,"

But we hate the idea. If we could think of some other way to operate, we would, and normally do. We do have better ways to do health care.

"vocational system here in Germany"

Hats off to Germany. Only in the last couple of years have we finally begun to reconsider the idea of vocational training instead of "college for all". A lot of our best vocational training happens in the military.

Repeating my question, if exports decline, will that strengthen your internal market? It's also true that when you have a trade surplus, you're exporting capital as well as goods (we import both on a net basis.) That exported capital could be staying home. It's not clear whether one phenomenon drives the other, but the fact that capital wants to leave suggests you're not treating it very well.

"In August 2008 there were 145.9 million employed in the U.S. ( seasonally unadjusted, only civilian ) in a population of more than 305 million, 47.8% ( compared to 48.4% a year ago )."

Measuring employment rates is valid, but so is measuring unemployment rates. Germany's has averaged far higher than ours, often over 10%, for many years. And when you measure rates for young workers, things look even better for the US.

On food, while US food costs aren't a big burden, government policy keeps them much higher than they could be. Same is true in Europe. And our mutually stupid policies impoverish third world farmers as well.

"Germany's problems are not ( at least not yet ) in sectors exposed to the international markets. Germany's problem is a lack of domestic demand and insufficient public investment."

How do you measure this? Also, Germany's relative openness to immigration (like ours) may be exacerbating the rise in inequality. Immigration of unskilled workers pushes wages for such jobs downward, while in effect subsidizing the wages of higher-skilled workers by reducing the "other" costs of supporting such jobs.