American Elephants

The Economy Is Not a Pie: It’s a Garden by The Elephant's Child


The most common metaphor for debates about growth and income distribution is a pie chart picturing the economy as a pie. The usual argument is how to divide up the pie and distribute the slices. What is fair? But this is another misleading metaphor.

A pie has a defined size. Economic growth and efficiency are about making the pie bigger. Equality is about the size of the slices. Keith Hennessey, Director of the National Economic Center under President Bush, explains in an essay for the George W. Bush Presidential Center:

The pie metaphor for the economy is misleading and damaging, especially if you place a high priority on economic growth.

A pie has a predefined size. A central authority (probably the baker) cuts up the pie before serving any of it. It’s a single pie to be divided. Indeed the popular economic debate analyzes what “share of economic growth over the past X years has gone to the top (or bottom) Y percent,” as if income or income growth is a single quantity that is centrally allocated among a population, to be later reallocated by policymakers. Because the market allocation is increasingly unequal, some argue we can and should simply re-slice the new, bigger pie to produce more equitable pieces. Those who do usually ignore that their actions would make the economy smaller. The pie metaphor contributes to this view because one cuts the pie only after it has been baked, after its size has been centrally chosen.

A flower garden is a better metaphor for looking at economic growth and income distribution. A flower’s growth depends on the individual characteristics of that type of flower and that particular seed. It also depends on common factors shared with other flowers in the same garden (e.g., the local climate, pests, the skill and diligence of the gardener) as well as its particular advantages relative to other flowers (better sunlight, soil, and water in this part of the garden than that part over there).

The economic challenge is to maximize the growth potential of the whole garden, the gardener helps, but flowers grow naturally, with a little fertilizer, sun and water. Policymakers and elected officials do not “create jobs” nor do they “increase economic growth.” Wise policymakers create the policies under which the whole economy can grow. Think incentives and freedom: maximizing the potential for those struggling to succeed. When you have vigorous economic growth, the whole economy blooms and income distribution ceases to be a problem.

Efforts to control by those who do not understand the workings of business, regulation by those who do not understand the results of over-regulation. Far too many politicians have never worked in the private sector and do not grasp the effects of the regulations they choose to employ.

An example is the current outcry over restaurant menus, and the federal requirement to list every ingredient with its calorie count. Think about the big menu on a lighted sign behind the cashier in a pizza place, a Mexican restaurant or an Asian restaurant. For restaurant chains, the signage problem is immense and costly. Multiple studies have shown that adding calorie counts to a menu have no significant effect on menu choices. But you knew that. You don’t go to McDonalds to reduce. You go to McDonalds because you want a hamburger and french fries. It’s a regulation in search of a purpose.

Is Relying on Lies a Winning Campaign Strategy? by The Elephant's Child

Obama has been out on the campaign trail telling anyone who will listen that”we tried our “economic plan “and it worked.” Whoo-eee. Well, as he said a few days back: “the private sector is doing fine.” Possibly related: Obama hasn’t received his daily economic briefing since April 2011. The last one was at 10:00 a.m. on April 24, last year.  As press secretary Jay Carney says”the President has a lot on his plate.”

Then he veers off into imaginary world. He claims that the country has tried Mitt Romney’s economic policies already, and they were a dismal failure. Romney, he says, wants to do two things: Cut taxes for the rich and massively deregulate the economy.

“The truth is,” Obama says, “we tried (that) for almost a decade, and it didn’t work.” Bush-era tax cuts and deregulation resulted in the most sluggish job growth in decades” he claims, along with “rising inequality, surpluses turned into deficits, culminating in the worst economic crisis in our lifetimes.” Oh, my. Another whopper.

History was never the president’s strong point. You remember the maternal grandfather who liberated Auschwitz, the paternal grandfather who was tortured by British imperialists in Kenya, and the Indonesian step-grandfather who was killed by the Dutch while fighting for independence. That was made-up personal history. He didn’t do well with historical references in his speeches either, though it’s hard to know whether it is the speechwriters, the president, or both, who are unfamiliar with history. It is economics that seems to be his weakest point.

He congratulates himself for “rescuing the automobile industry” and not letting them slide into bankruptcy.  But we have very good bankruptcy laws that would have reined in the auto workers unions whose overblown salaries and benefits were the major reason the car companies were in financial trouble. in the first place.

What Obama did was illegally shaft the bondholders who had first legal claim on company assets, the unions got ownership of a big chunk of the companies— because Obama supports the unions who support him. Many auto dealers were put out of business, though they are separate, private businesses. A big chunk of Chrysler was given to Fiat. The whole thing smells to high heaven. The taxpayer funds invested will never be paid back, and GM still owes us something over $35 billion.

But aside from aggrandizing his own efforts, Obama tells tall tales about the Bush years. He has consistently tried to blame the financial collapse on George W. Bush.” Bush-era tax cuts and deregulation” he claims “resulted in the most sluggish job growth in decades” along with “rising inequality, surpluses turned into deficits, culminating in the worst economic crisis in our lifetimes.”

Big problem. His claims are all false. Bush was no big deregulator, he actually imposed dozens of major new rules. Regulatory staffing climbed 44% during the Bush years, and federal spending on regulations shot up 45% in real terms under Bush. Much of that came as the result of government takeover of airport security in the wake of 9/11.

Romney, Obama says, wants to cut taxes for the rich and deregulate the economy. “The truth is,” Obama says “we tried (that) for almost a decade, and it didn’t work.”

When the Bush tax cuts kicked in, from June 2003 to December 2007, the economy added 8.1 million jobs, according to the Bureau of Labor Statistics. The unemployment rate fell to 5% from 6.3%. Real GDP growth averaged close to 3% in the four-plus years after that, and the budget deficit fell steadily from 2004 to 2007. 5% unemployment is considered full-employment, a far cry from Obama’s 8.2% unemployment, which is the best-sounding. Unemployment for Blacks, Hispanics and kids is far higher, and most unemployed have just quit looking.

A study by University of California economist Emmanuel Saez found that inequality has climbed much faster under Obama. It was unchanged under Bush. The rich ended up paying a larger chunk of the federal income tax burden after the Bush tax cuts went into effect, with the share by the top 1% rising to 40% by 2007, up from 37% the year before Bush took office.The federal income tax was more progressive in 2007 than it was is 1979,  and is the most progressive anywhere.

The one thing Obama actually got right was that the country has tried a combination of deregulation and tax cuts before. That happened in the Reagan administration

President Reagan aggressively deregulated entire industries, and put the brakes on new federal rules. Regulatory compliance costs fell 8% during his time in office, and staffing dropped about 7%. At the same time tax cuts reduced taxes as a share of GDP by 6%. The result was an eight-year economic boom in which real quarterly GDP growth averaged 4.3%.                                                              (click to enlarge)


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