State Tax Revenues Rebound By 5.2% in QIII
Individual income tax: +4.78%
Property taxes: +7.77%
General sales taxes: +4.01%
Motor fuel taxes: +8.21%
Tobacco taxes: +8.25%
Alcoholic beverage taxes: +1.90%
Corporation income taxes: - 3.26%
The increases in state tax revenues in the third quarter provide more evidence that economic activity (income, retail sales, etc.) continues to improve, and we can probably look forward to even greater improvements in the fourth quarter.
Update: See related report in today's WSJ.
36 Comments:
Once again you are not looking at the big picture. What you are seeing is that things are clearly not as bad for the states as they were a year ago. That is positive. But the average state is in far worse position than it was a year ago because it is far closer to bankruptcy than before and the extra money it received from the federal government has now been spent. Pension obligations are now larger and more difficult to fund as the economy is not growing fast enough to pay for them.
also keep in mind that 2008 left many taxpayers with big loss carryforwards for 2009.
it's quite possible for personal income tax receipts to be going up without personal income going up just because these are running out.
i find that fact that corp taxes are down interesting.
how does that fit in with a "recovery"?
Increasing property taxes in the fourth quarter may be dubious based on the most recent Case-Shiller evidence. Overall, the results are surprising and encouraging -- Q4 corp taxes should follow the trend.
Well in Missouri the tax rates for property, tobacco, alcohol, and sales taxes have gone up over the last year...
So of cource 'revenues' look better...
One mark of a still declining economy here in Missouri is the smaller size of the boat & camper show that will be here in St. Louis in a month or so...
In a state where fishing is one of the very major pastimes this is not a minor detail...
Many boat dealers have gone out of business over the last two years...
The Paradox of Thrift may work the same way as taxes.
In the Paradox of Thrift:
"If everyone tries to save more money during times of recession, then aggregate demand will fall and will in turn lower total savings."
Government (including state and local) raising tax rates, audits, liens, garnishments, fees, fines, fares, etc. will slow economic growth and generate less tax revenues.
Higher taxes force Americans to save even more, and spend less, or default on debt, ceteris paribus.
"The Paradox of Thrift..."...
Ahhh, good point PT, yes that is really good point indeed...
The Paradox of Thrift may work the same way as taxes.
In the Paradox of Thrift:
"If everyone tries to save more money during times of recession, then aggregate demand will fall and will in turn lower total savings."
Not the Foster and Catchings nonsense again. How many times will someone have to point out the error in the Paradox of Thrift before you guys finally figure it out and see reality as it is. Wealth comes from savings, not spending. Before you can spend you have to have the means to produce goods and services in the first place. As Hayek pointed out in the late 1920s, when we save and invest there is more production, more consumption consumption and more profit. The economy does not stay where it was and redistribute the same amount of resources. It actually grows larger and distributes more resources to a population that has been made wealthier by that investment.
People who buy into the paradox of thrift myth simply show their ignorance of the role of capital and interest rates in a complex economy. When a company that makes computers invests in new equipment it can drive costs lower than prices and make more profit from greater sales on more units. Because consumers see a major decrease in prices real wages increase and they are also better off. Savings that increase productive capital create no net loss. That cannot be said about consumption of capital.
VangelV, another paradox is the U.S. (the world's only superpower) is a capital abundant and labor intensive economy, while an economy like China is labor abundant and capital intensive.
Saving does not necessarily create wealth. The U.S. created enormous (real) wealth through dissaving.
Labor and capital are needed for production. Do you believe labor without capital or capital without labor can create production or wealth? Money in itself is just paper or metal. Economies are made out of people.
And when people decide to save instead of spend, firms will lay off workers, and aggregate income will fall, which will cause a further decline in spending and saving will also fall.
"And when people decide to save instead of spend, firms will lay off workers, and aggregate income will fall, which will cause a further decline in spending and saving will also fall."
Peak,
So, saving is never good? we should always spend as much as we can including borrowing as much as we can to buy even more than we can pay for, otherwise economic activity will enter a death spiral of declining employment, income, spending, and savings until everything grinds to a halt?
Moreover, I may add, successful firms strive towards profit-maximization whether or not there's a recession. The capital created is just a measure of success, e.g. producing at $1 and selling at $10 is a 9 :)
Increasing capital investment or expanding production in a recession could be like standing in front of a freight train yelling you're going the wrong way.
Ron, saving increases with higher income, not higher unemployment, and if borrowing is cheap, then why not borrow?
Higher incomes lead to more spending and more saving.
Saving does not necessarily create wealth. The U.S. created enormous (real) wealth through dissaving.
You have no idea what you are talking about. Real wealth is not created by consuming capital. The US created its wealth while it was the world's greatest creditor and accumulated huge amounts of capital.
Labor and capital are needed for production. Do you believe labor without capital or capital without labor can create production or wealth? Money in itself is just paper or metal. Economies are made out of people.
Africa has lots of people but little capital. That is why it is poor. Singapore does not have may people but a great deal of capital. That is why it is so rich. For an economy to be productive it needs capital. The more capital the fewer
low skilled workers that are needed.
<b"Higher incomes lead to more spending and more saving. 'éb"
Only if higher incomes come because of increased productivity. But to increase productivity a company needs capital investment. That comes from saving, not consumption. As I wrote above, your understanding of economics is weak.
And when people decide to save instead of spend, firms will lay off workers, and aggregate income will fall, which will cause a further decline in spending and saving will also fall.
There is a difference between saving and hording. When I 'save' by not consuming what I make some of the money winds up as an investment in productive capital that increases productivity and lowers production costs. That increases real wages for workers and profits for businesses.
VangelV, paper or metal economies really don't explain much. The real economy is important.
Obviously, the U.S. created much more wealth as a debtor nation, after 1980, than before.
You can send Africa lots of capital, and it may end up in Swiss bank accounts, rather than invested in people to create more capital.
Higher (real) income comes from higher productivity and international trade. So, both spending and saving can increase.
A country can save too much and create idle resources (labor, capital, etc.), as the Paradox of Thrift shows.
The U.S. is a capital abundant country (e.g. stock market capitalization, capital account surpluses, real net wealth, etc.), thanks to the best workforce in the world. So, why create idle resources?
Obviously, the U.S. created much more wealth as a debtor nation, after 1980, than before.
Actually, it didn't. If you look at growth rates, the US was doing much better when it was a nation of savers and investors. You also need to look to the real economy and stay away from accounting fictions in the financial sector. Most of the 'wealth' created in the past few years was an illusion created by make believe market valuations and improper accounting rules. The US managed to go from $980 billion in 1980 to $13,560 billion in 2010Q3. Add to that around $100 trillion of unfunded liabilities and the massive increase in state, municipal, and public debt and the US has had a terrible performance when compared to previous periods.
Although you not want to acknowledge it, the ability of the US government to finance its spending with money printing has been very harmful to the average worker, saver, and investor. By spending money it was no willing to finance by direct taxation it allowed the size of its operations to keep growing to the point where they now dominate the economy. Public 'servants' have been transformed into the highly paid masters of the private sector, which is struggling as money is extracted to pay for activities that do far more harm than good.
The move away from specie backed money has led the US to the precipice with no apparent landing zone in sight. The USD has become just another fiat currency and there is a great fear that its days as the primary reserve currency are about to end. As with the currency that they are denominated in USTs are looking very vulnerable. Given that bonds are clearly not a store of value the sentiment against them can easily be justified by sound economic theory. While the treasury auctions are showing that there are serious issues on the horizon, the first real test will come in the muni market some time in the next six months. If things go badly for the states and they are forced to go hat in hand to the federal government the UST market will follow munis down and the illusion that you have mistaken for wealth will become apparent.
You can send Africa lots of capital, and it may end up in Swiss bank accounts, rather than invested in people to create more capital.
Actually, Africa has seen a huge improvement in its fortunes because capital has accumulated where it was required. The large miners and foreign funds with lots of power and money behind them have built ports, roads, railways and mines to bring African minerals and agricultural products to a world that wants them. As more of these products are eventually produced many Africans will see their standard of living increase substantially even though the region will experience a great deal of volatility as Western economies go through volatile cycles of their own.
The trouble for the US comes from a corrupt system that makes it very difficult for capital formation. This is why many companies have chosen to protect their investors by moving many of their operations abroad. Unfortunately, that means that employment will be weak and that tax revenues will be support promises made by governments to individuals who expected those promises to be kept.
Higher (real) income comes from higher productivity and international trade. So, both spending and saving can increase.
Real income increases can come from increases in productivity that allow them to buy a lot more even if they do not make or spend more. But that productivity either comes from trade that allows someone with a natural advantage to sell products cheaper or from capital investment that makes it possible for per labour unit production to increase. As long as trade is voluntary it cannot be said not to be 'fair' and as long as government stays out of the way investors will allocate capital in a more efficient manner.
A country can save too much and create idle resources (labor, capital, etc.), as the Paradox of Thrift shows.
As I wrote above, resources are not 'idle.' Money does not just sit around in mattresses. It gets used by people who want to invest in capital equipment or for some other need. In a free society the appropriate interest rate would be determined by the voluntary transactions in the market.
There is no 'Paradox of Thrift' in the real world. That was a myth that first got a lot of attention in the 1920s when William Trufant Foster and Waddill Catchings began to promote it. It wasn't long until critics pointed out that those who believed in the myth did not understand the role of investment, capital, and interest.
If I do not spend my money and it gets lent out to someone who is building a mine or a factory the money is not idle. It gets spent by the borrower on salaries and materials that are required to complete the project. The money paid to other people or companies gets spend for general personal consumption, salaries, or other inputs that are required to make the products that are used by the investor as part of the project construction. The money simply acts as a medium of exchange for the acquisition of goods and services that are necessary for capital formation. And when the operations begin and increased productivity allows the production of goods and services at lower prices consumers will find that their purchasing power has gone up as have their real wages, even if there is no change in their level of pay.
The U.S. is a capital abundant country (e.g. stock market capitalization, capital account surpluses, real net wealth, etc.), thanks to the best workforce in the world. So, why create idle resources?
Go to an American railway station or airport and then compare its state to what you see in most of the world. Your infrastructure is decaying and pales in comparison to what we see even in many developing world nations. Your education system is certainly failing to produce well educated students. Many of your bridges are roads are falling apart. Your power grid is substandard and your power generation capacity is in danger of being unable to supply what is required in many areas. Your sewer and water treatment facilities are getting old and many are incapable of doing the jobs that they are supposed to do. Etc. Etc. Etc.
Given the federal, local, and state governments' debt loads it is doubtful that they can attract enough buyers in the capital markets that would allow the rebuilding of much of that aging infrastructure.
VangelV, when the unemployment rate is 10%, then other inputs, e.g. capital, land, raw materials, energy, etc. are also idle.
Definition of Idle Resources in Economics
"During an economic recession, output drops and unemployment rises, creating idle resources--unemployed workers and unused capital...Idle resources are factors of production--land, labor and capital--not being utilized. Unemployed workers and inactive factories are examples of idle resources...During an economic recession, when production slows and output declines, more resources become idle as unemployment rises, and firms close or curtail production."
If labor can become idle, then other inputs, including capital, can become idle.
Steeper improvements in U.S. living standards have not been an illusion, because GDP doesn't fully capture the gains on both the production and consumption sides of the economy.
There's a difference between the rise in living standards in the private sector, e.g. in the U.S., and the rise in living standards through the public (or state) sector, e.g. in China. There is a different mix of goods.
It seems, many underestimate the market power of many U.S. goods in the global economy, and how desperate some U.S. trading partners are in maintaining their employment levels, which both benefit the U.S. enormously.
Anyway, you haven't disproven the Paradox of Thrift, either mathematically or empirically.
Firms will not ramp-up investment and lower prices to induce demand (there's also the concept of "sticky prices") when people decide to save instead of spend:
U.S. GDP falls 1 percent in second quarter as recession eases
08/27/09
"Domestic investment fell 24 percent -- a large amount, but one that also further confirms an recession bottom, because domestic investment plunged 50 percent in the first quarter.
In addition, the 'frugal consumer' trend continued: the U.S. savings rate increased to five percent."
VangelV, when the unemployment rate is 10%, then other inputs, e.g. capital, land, raw materials, energy, etc. are also idle.
You are now changing the argument. You began by trying to argue that savings were bad for the economy and have switched the argument to unemployment is bad for the economy.
But history teaches us that unemployment is easy to deal with. Government needs to stop subsidizing it and allow people get back to work by removing regulations that create the barriers to business and labour.
If labor can become idle, then other inputs, including capital, can become idle.
When the government and banks distort the price signals and create bubbles that lead to malinvestments you want those wasted resources to be liquidated so that the economy can get healthy again. The simple fact is that the real economy did not need as many auto workers, construction workers, insurance and real estate brokers, and government workers as were created during the last few bubbles. A true improvement requires that these workers be employed elsewhere and be compensated at a different level as fits their skill sets.
Steeper improvements in U.S. living standards have not been an illusion, because GDP doesn't fully capture the gains on both the production and consumption sides of the economy.
But they have. The American standard of living has been financed by consuming American capital and acquiring debt. Both are unsustainable.
There's a difference between the rise in living standards in the private sector, e.g. in the U.S., and the rise in living standards through the public (or state) sector, e.g. in China. There is a different mix of goods.
You have no idea what you are talking about. Most workers in China work for private companies and their gains came because the importance of government planning diminished. While China's public sector has reduced its influence in the general economy, the US has gone the other way. There are now more government workers than ever before and they consume much more of GDP than ever before. That is why the USD is in such trouble and why the economy is heading for disaster.
It seems, many underestimate the market power of many U.S. goods in the global economy, and how desperate some U.S. trading partners are in maintaining their employment levels, which both benefit the U.S. enormously.
American manufacturers are still very strong. But they operate in the international sphere and see no reason why they should build factories and invest at home. It makes more sense for them to keep their earnings abroad and invest there rather than pay the taxes that they would be liable for if they repatriate foreign earnings. Bush made a deal and allowed companies to bring cash home by paying a very low rate. I doubt that Obama would do the same.
Anyway, you haven't disproven the Paradox of Thrift, either mathematically or empirically.
I gave the Hayek argument against the Paradox of Thrift, which has never been proven empirically. As Hayek pointed out, it is believed by people who do not understand the role of capital and interest in the real economy.
Firms will not ramp-up investment and lower prices to induce demand (there's also the concept of "sticky prices") when people decide to save instead of spend:..
The electronics companies have been doing just that for the past thirty years. Each year they invested more and more in new plant and equipment so that they could lower their costs and still make nice profits even though the sale price of their products kept falling.
Here's a great discussion of Hayek on the paradox of thrift.
Ron, thanks for the article. It seems, someone at the American Enterprise Institute also wrote a related article:
Japan Battles the Paradox of Thrift
July 2000
"The key to understanding the fundamental problem facing the Japanese economy can be found in the Keynesian notion of the paradox of thrift.
For nations, as opposed to individuals, the parallel to the paradox of thrift is the mercantilist doctrine. If a nation restricts consumption in order to run a balance-of-payments surplus and accumulate gold, the shortage of demand depresses output, prices, and employment and leaves the nation worse off.
By the late eighteenth century it was recognized by David Hume and others that the accumulation of gold should be allowed to increase the money supply and thereby propel spending on domestic and foreign goods so that prices and output rise and the economy is revived.
The idea that thrift is at all times a virtue either for individuals or for nations has never really died, although it was intellectually vanquished for nations by the free-trade doctrines that grew up in England in the later eighteenth and early nineteenth centuries and, one would have thought, for individuals by Keynes in The General Theory of Employment, Interest, and Money.
The Fable of the Bees sets forth the problem encountered by a prosperous community in which all the citizens suddenly decide to abandon luxurious living...in the interest of more saving. Mandeville concludes his allegorical poem the Fable of the Bees as follows:
Bare virtue can’t make Nations live
In Splendor. They that would revive
A Golden Age, must be free,
For acorns as for honesty.
The tragedy of the economic picture unfolding in Japan is more profound than that suggested by Mandeville in the Fable of the Bees. Japanese households are not arbitrarily deciding to be more thrifty in order to increase future wealth. Rather, they are driven by absolute liquidity preference and risk aversion either to hold cash or to hold short-term government securities."
Peak,
Perhaps you didn't read the whole article. As you must be aware, Hayek pointed out the errors in the work of Foster and Catchings.
From the Robert Blumen article:
"Hayek criticized Foster and Catchings: "What they entirely lack is any understanding of the function of capital and interest."[8] By analyzing the effect of savings on the structure of capital in the economy, Hayek showed that the new investment would enable firms to reduce their production costs by more than the amount that prices would fall, enabling firms to make profits at the lower prices. And real wages would rise, providing the "missing" purchasing power.
The two authors showed only that more workers can produce more goods with the same amount of capital per worker. But as Hayek explained, the real question (and one they could not answer) is, how can the same workers produce more goods? The answer is that the amount of capital per worker must increase. Increased capital in proportion to labor is the only means of producing more without the number of workers increasing."
"Hayek demonstrated that the Foster and Catchings' underconsumption doomsday does not arise. The "missing" purchasing power comes from the increase in the supply of goods that workers are able to produce. As they supply more they are able to demand more. Rather than a collapse into depression, the entire system reaches a new equilibrium at a higher level of savings by means of adjustments everywhere else: in labor and in capital; in prices and in quantities; in production and in consumption."
Ron, I've never disputed investment can lower production costs, increase the quantity and quality of goods (to raise living standards) and increase profits. That's normally the case. The Paradox of Thrift, like the Liquidity Trap (and expansions taking place more often than contractions) are rare cases.
Ron, I've never disputed investment can lower production costs, increase the quantity and quality of goods (to raise living standards) and increase profits. That's normally the case. The Paradox of Thrift, like the Liquidity Trap (and expansions taking place more often than contractions) are rare cases.
You missed Ron's point. The Paradox of Thrift is a myth that was created because its promoters did not understand the role of capital and interest in a free economy. You might want to look at question 4 in the quiz below.
http://mises.org/quiz.aspx
Or the way Rothbard deals with the issue in Chapter 2 of his great book, America’s Great Depression.
VanglV,
Thanks for the link to the great quiz. It appears I'm a 90% Austrian who has been reading too much Milton Friedman.
Thanks for the link to the great quiz. It appears I'm a 90% Austrian who has been reading too much Milton Friedman.
Any time. I found it very useful to get me to think over my positions.
Have you had a look at these?
http://mises.org/books/chose_liberty_block.pdf
http://mises.org/books/case_discrimination_block.pdf
"Have you had a look at these?"
Yikes! They're big. I'll get started. :-)
VangelV, the quiz is based on economic value judgements instead of (unbiased) economics. That's why you believe the Paradox of Thrift is a myth.
VangelV, the quiz is based on economic value judgements instead of (unbiased) economics. That's why you believe the Paradox of Thrift is a myth.
What is unbiased economics? We live in a world where value is subjective and depends on the judgment of individuals making choices based on personal preferences. The "Paradox of Thrift" is a myth because it is not supported by either empirical evidence or sound theory. The Hayek article cited makes the case far better than I could.
VangelV, the truth, which is unbiased, can be found in an equation, or equations, and data can further support the truth.
There's plenty of empirical evidence and sound theory supporting the Paradox of Thrift. The article I posted above cites some of them.
VangelV, the truth, which is unbiased, can be found in an equation, or equations, and data can further support the truth.
There's plenty of empirical evidence and sound theory supporting the Paradox of Thrift. The article I posted above cites some of them.
The economy is dynamic and non-linear. It is being described by linear equations assuming equilibrium. That approach does not work. And no, there is no empirical evidence or sound theory supporting the Paradox of Thrift. As the Hayek reference showed you, belief in the Paradox of Thrift requires ignorance of the nature of capital and interest in a free market.
VangelV, mathematics has often proven conventional wisdom wrong. It seems, you want to cling to old beliefs. Here's what your Mises blog says:
The Uses and Abuses of Math
"While we understand that better mathematics skills are important and that we would like to handle numbers more deftly, most of us are unwilling to put in the time and effort to do so. And in many cases we simply do not want to “do it right,” because that would force us to trade in some of the self-delusions we want to keep for the reality we are often desperate to deny."
VangelV, mathematics has often proven conventional wisdom wrong. It seems, you want to cling to old beliefs. Here's what your Mises blog says:
The Uses and Abuses of Math
"While we understand that better mathematics skills are important and that we would like to handle numbers more deftly, most of us are unwilling to put in the time and effort to do so. And in many cases we simply do not want to “do it right,” because that would force us to trade in some of the self-delusions we want to keep for the reality we are often desperate to deny."
How do you use math to model a dynamic, non-linear system using linear algebra and assumptions that are not real? It seems to me that you are arguing for the use of a Procrusten approach without understanding where that would lead you. To see where it does lead look to the models that made the 2008 collapse possible imagined catastrophic global warming where there was none or projected that Japan would rule the world.
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