Weekend Snips.

The poor have sometimes objected to being governed badly; the rich have always objected to being governed at all.
– G.K. Chesterton

Every 10 years or so, the US needs to pick up some small, crappy little country and throw it against the wall, just to show the world we mean business.
– Michael Ledeen

[h/t Information Clearing House]

*****
I was looking at this graph of average income in the US from Visualizing Economics and noticed how the light green band, representing income from capital gains, tends to grow wider before a recession.

I'm not sure how to interpret this. Does it mean that relative growth in capital gains predicts or contributes to recession? Or does it simply mean that investors see a recession coming and take gains before the drop?

It will be interesting to see the last two years added to the chart.

One thing seems reasonably certain. John McCain's call for a cut in the capital gains tax is not going to have much effect on the economy in the short term because who'll have capital gains?

UPDATE:

In support of McCain's tax cut proposal, Craig Westover's comment suggests the conventional wisdom that capital gains tax cuts induce investment by those "who might otherwise not do so."

Golly, how would we know what goes on in the minds of real investors without Econ 101 to tell us? Sounds to me a bit like the argument that the death penalty deters murder by those who might otherwise do so. Reasonable, perhaps, but hard to prove otherwise.

I looked up the history of capital gains tax changes and roughly plotted them over the original income chart I had posted. (Note: It reflects change from one period to the next, not rates.) It's difficult to see a clear relationship between tax changes and changes in capital gains income, though Craig might argue there's a thickening of the capital gains band after cuts.

What is clear? The rising "average" income came largely from gains at the top.

Comments

[jdege]

"Or does it simply mean that investors see a recession coming and take gains before the drop?"

Maybe it means that envy and greed on the part of the majority of the electorate who don't see themselves as getting a fair share of those gains votes in a bunch of politicians who enact policies that create the recession?

(It's a lot easier for a government to screw up an economy than it is for it to fix one.)

[Jim]

Causation or just correlation? Well, by definition, the time when we're not in recession is a time of growth. It doesn't seem surprising that capital gains would increase during economic growth. If gains seem to grow quickest right before the crash (and it isn't 100% obvious that this is the case), this seems to be normal, too, as it's the hottest economies that tend to require the most severe corrections.

[Craig Westover]

Charlie --

Econ 101: If you lower or eliminate the capital gains tax, at the margin it encourages people to invest who otherwise might not do so.

[charlieq]

Craig,
Good luck finding those people who'll be "otherwise" motivated by a tax cut in this climate.

But your comment sent me to look at when the capital gains rates changed, and I updated this post.