Posts tagged ‘supply side economics’

Econ 101 for Republicans

Republican economic theory (theology?) relies on two beliefs or tenants. The first is that if you cut taxes there will be new investment by businesses and corporations, and with that, jobs and wage growth. The second is that this increased economic activity will actually grow the treasury’s coffers, paying for themselves. This effect when applied to the impacts of a tax cut is called dynamic scoring. See, the tax cut will cost x, but the result will be y additional income to the treasury or so the theory goes. The first one could be true in certain circumstances and the second one is demonstrably false. But that is what their whole approach to the economy is made up of. Oh sure fewer regulations, but that is really a subset of the first tenant and when you add the secondary costs, like damage to environment, death and dismemberment, and loss of rights for workers, the cost are usually more than the benefits.

Let’s go after the first tenant, cutting taxes creates jobs and stimulates the economy. Well there are times when that actually helps, not as much as actual increases in government spending (a tax cut has the same effect on balance sheet of the Treasury as increased government spending), but it helps and it can be faster than government spending. Economic theory and practice have shown us that after a recession or even during one, with high unemployment, making money available to corporations and businesses in the form of a tax cut does stimulate growth. It is a tool Republicans favor because they don’t believe in direct government spending in things we need like infrastructure and R&D, and want to give it to corporations and businesses (and people) to decide for themselves.

Two things you need to ask yourself here. First are we coming out of a recession, and how high is unemployment? The answer which conservative economist Bruce Bartlett gave us the other day was neither apply as corporations are already awash in record profits, and the unemployment numbers tell us we are almost at full employment. Second, one thing we know for sure is money given to the middle and lower classes is generally spent, while money given to wealthy is much less effective. Where was the emphasis in the current tax bill? Oh, the wealthy. There are great debates about whether direct spending by government is far more effective in these times to create real demand through jobs and wages. But we have some empirical data from Governor Brownback and the Kansas experience where they slashed taxes, little change in jobs or wages, and the state went into massive debt, defunding education to help balance the books.

The bottom line on the first tenant, is that if used judiciously at the appropriate time in the economy (not now) it might help. But considering the infrastructures needs across the country, the money would have a much higher multiplication factor (return on investment; every $1 spent creates say $1.5 of increased activity in the economy), and we would create jobs, higher wages, and invest in our future. The money they are going to spend paying off their wealthy donors, in other words, is going into a big hole.

Okay, tenant number two, that cutting taxes pays for itself (dynamic scoring) is fairly straight forward, it has never worked. Oh sure there might me some increased revenue if the tax cuts were properly targeted to the middle class, but nowhere near the income to make up for the spending. “Assessing the House version of the plan and accounting for the economic growth its tax cuts would induce, the analysts found that growth would offset only about 12 percent of the plan’s cost over the first decade. After an initial economic boost, bigger deficits and rising interest rates would drag on the economy.” Here is another well research source that can find no pay for itself effect in Vanity Fair. But hey, get it from the non-partisan Joint Committee on Taxation and note they still used very optimistic growth rates.

So there you have it. Or as conservative economist Bruce Bartlett said, “…virtually everything Republicans say about taxes today is hogwash.” So we are going to take a big hit. Get ready. And what is next? This from Paul Ryan in the NYT this morning:

Speaker Paul D. Ryan and other Republicans are beginning to express their big dreams publicly, vowing that next year they will move on to changes in Medicare and Social Security. President Trump told a Missouri rally last week, “We’re going to go into welfare reform.”

That’s right. When the numbers don’t add up and the Treasury starts going in the red, they will all of a sudden care about the deficit again and go after the programs that we need most. Maybe that was their game all along. We are in for hard times ahead, but as I told my son who works in the school district in San Diego and is afraid the new tax bill that eliminated his tax deduction for interest on loans and cut the deduction for state and local taxes that school districts depend on could bankrupt him, Conservatism is like cancer. The treatment to cure it if it can be cured almost kills us. That is where we are at. The great Kansas Experiment has moved to the national stage, and we will see the same results. Think you might get out and vote in 2018?

Job Creators, Immigration, Crazy, and real Conservatives

It is reported that Cheeto-Head is meeting with “job creators” this morning.  Oh, how to approach this?  The “Economism” theory is that if you reduce taxes and regulations making it cheaper for firms to operate, they will hire.  It is supply side economics.  If we build it, they will buy it. Now for reality.  They won’t buy it unless they have disposable income.  That is demand economics.  Further even with lower costs, if there is no market, why produce?  You can make more money investing in financial instruments. If Cheeto-Head wants to meet with job creators he would meet with those who support a livable minimum wage, a real infrastructure bill, and institute a single payer system for health care producing more disposable income for the majority of us.

On immigration reform, we have Cheeto-Head’s roundup program.  If you are going to deport the criminals, well great right?  However they “vastly expand the definition of ‘criminal aliens’ and warn that such unauthorized immigrants ‘routinely victimize Americans,’ disregard the ‘rule of law and pose a threat’ to people in communities across the United States.”  Hey, that works right?  Well, Deamers and others will not be targeted unless they commit crimes.  Ah, there’s the rub.

President Obama’s edict was “serious crimes”.  Getting a social security or a driver’s license (in states that don’t issue them to undocumented persons) means assuming a false identity.  Out you go.  So basically if you are an undocumented person and you work requiring a social security number, and you did not get one through one of the exemptions President Obama issued for Dreamers.  You committed a crime.

Oh, and here is the real linch pin in this mess.  Cheeto-Head will need tens of billions of dollars approved by Congress and then years to hire and train new legions of enforcement agents.  Most of what you are going to gather at first are innocent law biding undocumented workers and their families in an act of what only has to be described as inhumane and approaching the roundup of the jews.  It will legitimize violence toward immigrants, and it will pit state and city against the federal government.  And the impact on our economy to do this is estimated to be around $381.5 billion to $623.2 billion. This translates to a 2.9 percent to 4.7 percent reduction in total annual output from the private sector, not to mention the billions to actually ramp up to do this.  So it is all insanity.

Speaking of insanity,on Lawrence O’Donnell last night were were two psychologists, Dr. John Gartner, a psychotherapist affiliated with the Johns Hopkins University Medical School,  and  Dr. Lance Dodes,  assistant clinical professor of psychiatry at Harvard Medical School, who wrote the letter signed by 34 other psychotherapists to the NYT saying Cheeto-Head was mentally unfit for office. They first demolished the gag rule of their professional organization that says they should not comment on anyone they have not personally interviewed.  Dr. Gartner made the argument that this was crazy, and in fact personal interviews are more misleading than observing actual behavior, and there is plenty of behavior to observe. Further, they have a overrididing responsibility to warn us.  Here is what they had to say:

Dr. Gartner:  “I would argue to my colleagues that those who don’t speak out are being unethical. If we have some knowledge and understanding about the unique danger that Donald Trump presents through our psychiatric training and don’t say something about it, History is not going to judge us kindly…If we could construct a psychiatric Frankenstein monster, we could not create a leader more dangerously mentally ill than Donald Trump. He is a paranoid, psychopathic, narcissist who is divorced from reality nd lashes out impulsively at his imagined enemies. And this is someone as you said who is handling the nuclear codes.”

Dr. Dodes:  “He lies because of his sociopathic tendencies that Dr. Gartner was talking about. He lies in the way anybody who scams people does. He’s tried to sell an idea or a product by telling you something that is untrue. … There is also the kind of lie he has that in a way is more serious; that he has a loose grip on reality. We can say that because he lies about things that aren’t that important… I think what that indicates is that he can’t stand an aspect of reality that he doesn’t want. So he rejects it. His grasp of reality, his attention to reality is loose, an extremely dangerous trait in a president. It actually makes him unqualified.”

Enough said.  You have been warned.

Finally Conservatism. George Will, who drives me crazy, was on Lawrence O’Donnell last night to explain why he left the Republican party last summer as it had become a party that no longer embodied conservative ideals.  George was quite willing to lambast Cheeto-Head way back when, and then watched the whole Republican machine be turned over to him, including the Murdock enterprise from which he was fired.  Now I could argue with George about his conservative beliefs, but it would be a real argument because George is a real intellectual.  I think he is wrong, but he is worth listening to.  Basically he wants small government, free market places, andno deficits, and he sees neither with what George sees as a political sociopath.  Here is the video and it should raise in you mind what the Republican Party has become, a pandering mob to power at any cost:


So just another day where the members of the asylum are now running it.

The Donald’s Economic Plan

Can you say bull shit and supply side economics?  Basically it was nothing new.  Cut taxes for the wealthy and the world will take off. Oh, and no mention of how to pay for it except the growth in the economy will pay for it.  Might I remind you that their own guy at the Government Accountability Office (GAO) said this was a fiction, tax cuts don’t pay for themselves.  Then of course was the lie about tax rates.  We are the number one tax payers in the world! NOT!  While our rates are the highest (35% for corporate federal and 6% state), none of the corporations pay those rates.

The United States actually rates 16th in world in effective tax rates on corporations (what they actually pay).  The reality is that companies generally don’t actually pay those rates due to tax credits, exemptions, and offshore havens.  The GAO found that among profitable companies in the United States, the average tax rate was 12.6% and two-thirds of American corporations have no tax liability.  In other words, to be kind it is a big lie.  Cutting taxes for the wealthy in a demand starved economy will do nothing.

Supply side economics, if you build it, they will come, was effective in the Eisenhower days when there was pent-up demand and savings to support it.  We live in a world where corporations are rolling in the dough and don’t invest it because they don’t see demand to support their investment.  We live in a different economic era and Republicans have not moved on.

It was nonsense, full of misinformation like the tax rates, and outright lies like Obamacare cost jobs which it did not.  Oh and let’s get rid of the Estate Tax so the wealthy which will have no impact on the economy except to increase once again economic inequality.  It is the same old Republican nonsense that has held us back and increases the root problem, economic inequality.  Oh, and none of it adds up because he borrowed Ryan’s magic asterisk, cutting taxes will return enough money to pay for it.  It was done under George Bush and created giant deficits.  In other words, the same old shit:  Supply side economics, flow down, and tax cuts for the wealthy with no way to pay for it.

Oh, and you see all those links above?  It is called critical thinking, believe nothing, ask questions, find out the facts.  Oh, and judge your sources appropriately.

Saturday Morning

And all is good.  The Donald has fallen in line, read his teleprompter, and endorsed McCain, Ryan, and Ayotte.  Really, for how long?  Do we not think they are all seething?  He has caused so much rancor, my guess is that payback will be sweet.  But they are all falling in line for Party unity except, they are running as far away from him as they can.  There might be a moral question in that.  Oh, and what happens if he becomes President and there is no one then to control him?

Better yet, and working people are you paying attention, he appointed his economic team advisors:

The 13-member team — all men — includes several billionaire bankers and investment managers, and even a part-time professional poker player. Many have been in business with Mr. Trump before.

Note, not one economist.  All white guys, all cronies, and all experts on the game of microeconomics (how to make themselves rich at the expense of others) and clueless on macroeconomics (how to make the nation profitable for everyone, and no they are not the same unless you believe in flow down).  It should scare the snot out of you.  This is who the Republican Party has benefited for years and now they are going to make the world safe for the middle class?  Are you on drugs?

My take on all this, we are waiting for the Donald to go rogue again and it is only a matter of time. Speaking of the economy and our slow growth, Neil Irwin, economist wrote about this phenomenon and I will cut and paste to give you the short version:

This slow growth is not some new phenomenon, but rather the way it has been for 15 years and counting. In the United States, per-person gross domestic product rose by an average of 2.2 percent a year from 1947 through 2000 — but starting in 2001 has averaged only 0.9 percent. The economies of Western Europe and Japan have done worse than that.

It increasingly looks as if something fundamental is broken in the global growth machine — and that the usual menu of policies, like interest rate cuts and modest fiscal stimulus, aren’t up to the task of fixing it (though some well-devised policies could help).

…Larry Summers, the Harvard economist and a former top official in the Obama and Clinton administrations, watched as growth stayed low and inflation invisible after the 2008 crisis, despite extraordinary stimulus from central banks. Even before the crisis, economic growth had been relatively tepid despite a housing bubble, war spending and low interest rates.

In November 2013, he combined those observations into a much-discussed speech at an I.M.F. conference arguing that the global economy had, just maybe, settled into a state of “secular stagnation” in which there was insufficient demand, and resulting slow growth, low inflation and low interest rates.

…But it may not be as simple as supply versus demand. Perhaps people have dropped out of the labor force because their skills and connections have atrophied. Perhaps the productivity slump is caused in part by businesses not making capital investments because they don’t think there will be demand for their products.

Mr. Summers, in an interview, frames it as an inversion of “Say’s Law,” the notion that supply creates its own demand: that economywide, people doing the work to create goods and services results in their having the income to then buy those goods and services.

In this case, rather, as he has often put it: “Lack of demand creates lack of supply.”

His proposed solution is that the government sharply expand investment in infrastructure, which might provide a jolt of higher demand, which in turn could help the picture on supply — helping workers who build roads and bridges become reattached to the work force, for example. 

Or said very simply, which economists have a hard time doing, economic inequality, you know that thing Bernie was raving about in the primaries, is putting all the money at the top where it sits because all the people at the bottom don’t have enough to create demand so they will invest it.  It really is that simple.  You can’t continue to create incentives for investment if their is no demand for what they build.  You think pathological liar and narcissist Donald Trump and his gang of business cronies get this?  Just another day in the asylum.

UPDATE:  Remember Thomas Piety (Capital), the French Economist whose data shows that that is where the world always heads, slow growth and depressed middle class, pheasants, and finally revolution?  That is what is going on here.  As money migrates to the few, growth tanks because fewer and fewer are spending.  Demand crumbles as investment dollars have no where to go.  And here is the really connect the dots moment, that is where our conservative ideas about wealth accumulation and “job creators” is taking us.  Certainly economic inequality has many causes, including global markets, robots in the workplace, and others, but we are not really looking at solving that problem.  While Republicans say the words economic inequality, they have never faced up to the reality that their whole economic theology is based upon making it worse as the rich get richer.  They still believe is supply side economics in a world where demand (buying power of the masses) is shrinking.

Voting and Republicans

Well Americans voted or didn’t vote in the current crop of misfits and we got the letter to Iran and an almost shutdown of Homeland Security.  Now we are about to get their vision of our future. as the NYT reports,  with a Republican budget proposal “that partly privatizes Medicare, turns Medicaid into block grants to the states, repeals the Affordable Care Act and reaches balance in 10 years, challenging Republicans in Congress to make good on their promises to deeply cut federal spending.”  

First thing you want to consider is why returning healthcare to full control of the market place will help anyone?  Second is why the rest of the world doesn’t do that?  Third is how turning Medicare into private hands will drive your costs down and make our system much more efficient?  It won’t and never has.  Oh and block grants of Medicaid is just a way to shift the burden to the states and dry up funds.  Finally, why again does the rest of the world use mostly a single payer system and get better results than our system?  Ideology run amok.

And what is their plan for investing in R&D?  What is their plan for building, repairing, and preplacing our failing infrastructure?  They don’t have one.  And if we have learned one thing, austerity and balanced budgets will depress the economy and make further budget cuts necessary.  Name me one corporation that does not invest in its future through borrowing?  

But wait!  Republicans still genuflect to the supply side model, that tax cuts produce revenue and then even have their own boys developing fantasy reports to support it.  According to Josh Barro of the UpShot:

The Tax Foundation released a report last week arguing the Rubio-Lee plan would generate so much business investment that, within a decade, federal tax receipts would be higher than if taxes hadn’t been cut at all. According to William McBride, the chief economist at the right-of-center think tank, the senators’ plan would add 15 percent to gross domestic product and 13 percent to wages.

If that sounds aggressive to you, you’re not alone: I discussed the Tax Foundation report with 10 public finance economists ranging across the ideological spectrum, all of whom said its estimates of the economic effects of tax cuts were too aggressive. “This would not pass muster as an undergraduate’s model at a top university,” said Laurence Kotlikoff, a Boston University professor whom the Tax Foundation specifically encouraged me to call.

Its their attempt at “dynamic scoring”, the new Republican push to show that tax policy will effect revenue (we all know that).  But as Josh pointed out:

In principle, dynamic scoring is fine. Tax policy really does affect the economy, and the right tax policies can produce economic growth that increases the amount of taxable income. But as the Tax Foundation report shows, dynamic scoring can be misused: You can get essentially any answer you want out of a dynamic tax model by changing the assumptions about economic behavior that you plug into it. If you turn the dials far enough, you’ll get a report that shows a tax cut will pay for itself, even if it won’t.

So we have elected the boys and girls from La La Land and they are creating fantasy facts to believe all of this stuff will help when Econ 101 tells us it is nonsense.  And they are going to try to implement this stuff which really will crash the economy.  

Oh and as just another sign of ideological dysfunction, we have a bill in the Senate that will “create a victims’ fund from fines collected from perpetrators of sex trafficking. A similar measure has passed the House and was expected to pass easily in the Senate.”  However the Republicans in the Senate inserted a clause that says none of the funds can be used for abortions.  I guess having a love child from multiple rapes is a blessing in their eyes.  Of course they want to cut funds to programs that would help the mother care or raise the child, just that in the tyanny of their ideology, she must be made to carry it.  Who is victimizing who again?

Here is what I wonder:  Will the Democrats fight this stuff, and sort of win so that the economy and our country sputters on as it has been and both sides get blamed, or will they just let them finally crash the economy and they take over after the wreakage?  I think the answer lies somewhere inbetween, but the real question is will people get off their asses and vote?  There was not a mandate for these guys, just a mandate for apathy that allowed the organized fringe to control the elections.  If this thing is going to work, you have to vote.

Do Tax Cuts Pay for Themselves

This is the basis of conservative economic theory, supply side economics. Cut taxes and create a favorable business climate (low taxes and less regulation), then businesses will expand, and the tax income from new new businesses and jobs will pay for themselves. That is the theory anyway but its a lie. But don’t believe me, look at Kansas. They did all that and they are crumbling. Oh, I know, I am a liberal communist war monger so I would say such things. Well here is from Forbes Magazine, that bastion of liberal bias:

One can argue whether cutting taxes is a good thing. One can argue about whether government is too big. One can even argue about whether low taxes increase business activity. But one cannot credibly argue that tax cuts increase revenue or even pay for themselves. They didn’t for Ronald Reagan. They don’t for Sam Brownback. They won’t for the next politician who tries—whether he (or she) is in Washington, D.C. or in some state capital.

According to Forbes:

The tax cuts in Kansas have been breathtaking. In 2012, at Brownback’s urging, the legislature cut individual tax rates by 25 percent and repealed the tax on sole proprietorships and other “pass-through” businesses. It also increased the standard deduction (though it eliminated some individual credits as well).

In 2013, the legislature cut taxes again. It passed a measure to gradually lower rates even more over five years. By 2018, the top rate, which was 6.45 percent in 2012, will fall to 3.9 percent. It also partially restored some of the credits it eliminated in 2012. This time, it did raise some offsetting revenue for the first few years but far less than the statutory tax cuts. The Center on Budget & Policy Priorities wrote up a nice summary of all the tax changes.

So what happened after all those tax cuts? Revenues collapsed.

So why? Well it is fairly intuitive. Studies have shown that cutting taxes on individuals does increase spending, but cutting taxes on businesses does very little to create jobs. The big takeaway is that no matter what, cutting taxes does not create enough revenue to replace the lost tax income. But why did Kansas lag on job creation if cutting taxes on individuals should increase spending? The answer is two part, the first fact, the second, my guess.

First, tax cuts have been studied and their impact on the economy is much less effective than direct stimulus because much of it doesn’t get spent. Now comes my opinion. In a depressed economy and people losing equity in their homes, they are saving it or paying down debt (also a form of savings) and it is not getting spent. That seems to be born out by the fact that nationally companies are sitting on tons of cash and they are buying back stock, not investing in growth. So even with the lower taxes and less regulations, they are not investing in expansion. Why is that?

Now comes the real failure in Supply Side Economics. If you build it they will come is the basic belief. If the economic climate is right (low taxes less costly regulations), business will establish themselves, create jobs, and people will spend, justifying those jobs. The problem is that unless there is pent up demand and disposable income, nobody is going to come. In Kansas the assumption was create a favorable business climate and businesses will establish themselves and people will buy. But what if they don’t have the money to buy and the money they do have they are saving?

It is the classic chicken and egg argument about which came first. But in economics we know the answer. If people have pent up demand and disposable income they will spend. If they don’t have that income, all the bight shiny bobbles in the world won’t make them spend what they can’t afford. Now we get into what Republicans hate, Keynesian economics.

The only way to stimulate an economy in this depressed economic state is by government spending. It provides an income which is then mostly spent creating demand and stimulating business. Once the cycle is restarted (spending, jobs, spending, more jobs) the government can pull back and in a good economy actually raise taxes to pay down their borrowing without contracting the economy. In a roaring economy, supply side economics actually works. If you build it, they will probably buy it.

Kansas simply has the wrong economic plan for the wrong economic environment and they are in a cycle of less spending, fewer jobs, even more less spending, and even fewer jobs, etc., and the collapse of tax revenue.  In other words, there are situations where conservative economic dogma might work, but this isn’t one of them and they continue digging deeper and deeper because they can’t accept that one size does not in fact fit all. It is the problem with all ideology. When circumstances change, ideology is the last to go.

Said another way for my twitter trained 146 character audience:  When something works, hot damn. When it doesn’t work, we have to change gears. Republicans have not had a gear shift in about 50 years.

The Most Important Thing You Need to Know Today and No, It’s Not About Ebola

What really drives Americans?  Does, “It’s the economy stupid,” ring a bell?  Psychologists tell us that people are less fearful and react with less panic when things are going well financially.  Well things are not going well financially and have not been for many years.  I used to be questioned all the time on where I got the idea that the middle class was losing ground. Now it is common knowledge and most people get it.  What most people don’t get is how our economy works and why things aren’t getting better. Well, reality is giving us a big wakeup call and it is hard to ignore.  Could this be a turning point?

First let’s explore what most people (policy makers, finance ministers in Europe, policy advisors, Angela Merkel, Chicago School of Economics, most business leaders, and our financial markets) believe.  Markets are perfect systems that self correct and must be allowed to self correct.  Our economy acts much like our home budgets and if we spend too much we are headed for disaster.  Borrowing too much puts pressure on available funds and raises interest rates.  It also affects lender’s confidence in the borrower’s (read government’s) ability to pay it back which is reflected in higher risk and drives higher interest rates.

Then there is the conventional wisdom on inflation.  If the economy is sagging, pumping money into the economy either through fiscal policy (making government money more available and increasing the money supply) or stimulus spending will cause runaway inflation.  They also believe that government spending supplants private spending and does no good in creating jobs.  And underpinning all this is the belief that what motivates businesses are low taxes and a favorable business climate.  Business will invest and grow where the burden of government is removed.

The trouble is, it is all wrong and it is demonstrably wrong in our current circumstances.  Now there is a grain of truth in all of it, but it depends on where the economy is when you apply it. If the economy is booming, employment is very low, some or all might be operative.  But when the economy has reached the zero lower bound on interest rates (when the economy is depressed and you can no longer lower interest rates any lower (they are already at effective zero) to encourage borrowing and investment), none of this applies.  Then all of the things we need to be doing are counter intuitive to everything we think we know.

Now let’s look around us.  We have had a jobless recovery in the stock market.  Government has reacted by increasing easy money, and ruaway interest rates and inflation did not happen.  The government has cut its spending and is reducing the deficit quicker than any time since WWII and there is little investment.  Reality intrudes.  This has gone on for six years while all of the above referenced experts scream out of control inflation and rising interest rates, and nothing happened,  They have it wrong.  Companies are sitting on record amounts of cash and are not investing and creating jobs.  But wait, what about the confidence fairy (businesses lack confidence in the economy because of the government debt) and the high tax, bad business environment argument?

Well Europe bought into the confidence fairy hook, line, and sinker (See Germany and misguided Angela Merkel).  Austerity rules and debtors need to be punished. We bought into it just hook and some line (sequester, government cuts, no more stimulus), but our Fed pursued expansionary monetary policies to offset some of the pain, hence the screams of the inflation/interest Chicken Littles.  So what happened?  Europe is crashing and burning.  They are facing their third (triple dip) recession and their recovery (when it was positive) was less than after the great depression.  Could it be that contracting government contracts the economy by decreasing demand (money available to buy things) and confidence has nothing to do with it?  So far that is the lesson in both Europe and here in the United States.  With all the austerity and fiscal discipline, businesses are not investing because there aren’t customers with cash to buy their stuff.  The confidence fairy does not exist.

Okay, but what about restrictive government in terms of taxes and regulations.  Enter Kansas where Governor Brownback brought them the “conservative miracle”.  He cut taxes across the board and reduced government regulation, promising the economic miracle of supply side economics and flow down (as business make money, a high tide lifts all boats).  It didn’t happen and the economy is one of the worst in the region with major state deficit problems when he slashed taxes and cut funding for schools to pay for the cuts. We could also remind people of the Clinton years (he raised taxes and the economy boomed), but that is ancient history.  Supply side economics is a lie.  Demand drives the economy. 

Now the real wakeup call is happening in the markets where the markets are starting to fall because Europe is heading down again and America is also faltering.  They are terrified of deflation. So here is the question for you, should we still be listening to those people who have promised us out of control inflation and rising interest rates for years and it did not happen.  Could their ideas be counter productive to what the economy really needs?  Another no duh moment. Could only government and government spending solve this crisis since the markets being allowed to “self-correct” made things worse as we pursuits constrictive policies?

Could they be waking up to the fact that we need to be stimulating our economy?  That government must act by increasing spending?  That deflation is the real fear and they are starting to see it instead of their chicken little imitation of “inflation is coming, inflation is coming”?  

This is what you need to know.  We have had the wrong idea about how to fix economy and it has not healed us.  The rich are getting richer and the pie is getting smaller for the rest of us, and with it, demand is shrinking.  And now it is becoming alarmingly clear to the markets that things are bad.  It is time to change what we have been doing.

This could start with raising the minimum wage.  It immediately puts more money in the economy and those screaming it will decrease jobs are the same ones who have been screaming inflation and interest rates are out of control.  We could restore much investment in government including R&D.  We could start a real building program to restore our infrastructure by borrowing at record low interest rates.  And we could implement fiscal monetary policies that allow some inflation (it reduces our debt load).  

Yes, our deficits will increase, but so will our income and spending.  If the GDP grows, the growths in deficit spending are reduced by our increased income.  When the economy is able to sustain this growth, government spending gets cut back and all that stuff we have wrong then comes back into play.  It’s a different economy.  We have a whole history in the 30’s we forgot. Those screaming inflation/interest rate morons told us it didn’t matter and those lessons don’t apply. But now with the realization that deflation, not inflation is the real threat they are rethinking it (I hope). All we have to do is do what we already learned how to do and then forgot because the greedy took over and those lessons weren’t convenient anymore.

So the most important thing you need to know today if you are a fiscal conservative is that you have had it all wrong, and reality is flashing red telling you to change directions.  Maybe that is what it takes for change these days.  Of course Republicans who control our government, won’t allow any of this to happen.  Maybe you ought to get out and vote.

Oh, and Paul Krugman, bless his heart, has been hammering away at this for years and nobody has been listening,  Does Cassandra come to mind? But now that the world economy may be heading south, they just might start listening, unless of course it inconveniences the wealthy. Then we are screwed.

 

The End of Flow Down and What It Means

We like to blame flow down and the bad policy outcomes on the Republicans, but in reality we all have been complicit. We all did and in some form or other, still believe that if the market place is roaring, so are we. But that is belied by the facts. Wall Street reached record highs, corporations are making record profits and sitting on record amounts of cash, and there are no jobs. When you really look at the jobs numbers and consider who isn’t counted and how many dropped out, we are close to the numbers of unemployed in 2009. And as Dean Baker pointed out, if you look at average income gains, President Obama was about right when he said the wealthy have increased their income by large amounts and the middle class is running in place since 1970. Between 2009 and 2013 the top 1% took 93% of all income growth. In the 1970s CEOs made 50 times the average worker, today, 300 times. Flow down is not flowing down.

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Moderate Republicans and Some Democrats, What they Believe (Ignoring the Fruit Loops) that is Just Flat Wrong

Sorry this is a long one, but gives you something to really digest on a cold wet weekend about what we really need to be doing in a second Obama Administration. If Obama over focuses on the deficit, we may have a real problem.

One of the things you hear is that Mitt would have won if he would have just stayed away from social issues. The argument goes that with the economy in the doldrums and Barack unable to get things really going again, Mitt, had he focused on economic issues, could have won this thing. Sadly that may be true, but it ignores the reality that Mitt offered nothing but Bush economic policies on steroids, did not address the real concerns of many Americans, or the obstructionism of the Republicans to allow the Democrats to put in place programs like the Jobs Bill that might have really helped, or even, oh dare I say it, Stimulus II.

Just as an aside for a moment, when you really look at it, the Republicans ran as the anti-Obama. They took the wrong lesson from the 2010 election when the Tea Party swept in. In my humble opinion, the voters did not buy into the Tea Party austerity and hate of government, they were just frustrated with the lack of improvement in the economy and they blamed the incumbents. What they got was worse and real gridlock. So in 2012 Mitt and company just assumed they could run on not being Obama, and they would be swept in. But this time the voters were really looking at policies, and besides the dismal social policies of the 19th century, the Republicans had no new policies to sell to bring about real change.

Okay, back to topic, That got me to thinking about what these “moderate Republicans”, if they exist, and they certainly don’t in our Congress (gerrymandered primaries going right of Attila the Hun) really want or believe. Think about the David Brooks of the world, or the Peggy Noonans. I think I know the answer to that. These moderate Republicans are socially liberal, but fiscally conservative. So let’s examine that fiscally conservative thing and see what it means, and more important, does it itself have to be revisited in modern thinking.

Well I think in a nutshell, what moderate Republicans believe in basically is a small, but not eviscerated government, fewer regulations, let the market place solve most problems (i.e. health care), and economic conservatism based upon the home budget analogy (to be explained later). My first thought here is welcome to the moderate to conservative wing of the Democratic Party, but that is a discussion for another day. Let’s take them one at a time with the real focus on their economic beliefs.

Small government – Well Sandy just demonstrated why their bubble belief in small government doesn’t apply anymore. But even more salient than that, across the board, the problems that we face require a national response, not a local one. Environmental policy, immigration, energy policy, food and drug administration, monetary policy, security, transportation, global warming, education, voter rights, oh, it just goes on and on, cannot be effectively and fairly implemented at the local level. Today’s reality is that government and business have to work together for our future. Small Government is really not an option, smart government is, and that is something the Democrats embrace fully. This is not a deal breaker and there is room for discussion/debate about how to get there.

Fewer Regulations – This one is coupled with small government and again, while there is an element of truth in it, it really doesn’t hold water. Sure regulations hold back business, like when they said they had to incur expensive costs instead of dumping contaminated material into our lakes and streams, but we also need safe drinking water. We are seeing what unregulated businesses like compound drug companies bring to us. BP and the oil catastrophe is a prime example of how short term profits can cloud our judgement and push us into ever more risky behavior without regulation. Meltdown of Wall Street anyone? So once again, we are looking at smart regulations, not no regulations. Welcome to the Democratic Party. Again what we have is not a deal breaker and there is room for discussion/debate about how to get there.

Market Place solves all Problems – There is no doubt that the market place can solve many problems better than government. But the profit motive does not apply to many activities that government just does better. The big example is health care and again is a demonstration of the bubble Republicans have built for themselves (See Building a Better Health Care System). The rest of world, no really, all the rest of the world gets it. Health Insurance as a for profit business (as separate from Health care providers) is a bad model for providing health care. That data is overwhelming. Yet we slog on.

Remember when Mitt told us that stuff government does should be pushed down to the state or the market place? Should we have contracted out our response to Sandy. It is a mixed bag and we can’t just say government is bad and the market place will solve all problems, We have too many instances that they have made things worse. Again what we have is not a deal breaker and there is room for discussion/debate about what should be market place solutions and what should the government be doing, but we do have to quit ignoring the evidence when it is inconvenient to a belief in the market place solves all problems.

Economic Conservatism – This is really the big one. This is the one where they really have it wrong as do many Democrats. The others above, while they are fairly consistent beliefs in the Republican mainstream, the moderates recognize that there are limits and there can be an honest debate about the limits of these beliefs. But on this one, we even have Democrats, and as Paul Krugman calls them, Very Smart People (VSP), who are marginally in this camp. That is why fear of the deficit worked and is working so well. Now in this discussion I am not going to go into the psychological underpinnings of why this is so attractive to many people, I am just going to focus on the economic ideas and why they are false. Note that I provide the backup for most of this in my blog, Why Republicans have Almost Everything Wrong.

Conservative economic belief based on the home budget analogy – This is our experience, that if your income is reduced, you have to reduce your expenditures. It is what we all live and breath. The trouble is that it does not apply to the macro economy, our government, and its actions. I am going to try to keep this simple. Say your family is supported by the father being employed as a construction worker, and his hours get cut. Unless you want to go further and further in debt, you either have to find other sources of income (very hard in a depressed economy) or cut back your spending. The home budget analogy is that as the economy shrinks in our mini-depression, the government’s tax revenue decreases, its spending must be cut.

Okay, but where the analogy fails us is equating a fixed source of income like that of the construction worker dad with how a government funds itself. Think of it this way. when you spend money, you get things generally, but that spending is not directly related to your income. Government spending creates jobs and income, and by extension, tax revenues. Right now in our very depressed economy, government spending, according to most economists, is multiplied by about a factor of 1.5. That means for every $1 spent by government, $1.5 dollars is actually spent throughout the economy as those who earn that money also spend some creating additional jobs and income. The result is tax revenue multiplied by 1.5. Certainly oversimplified but you get the idea, and remember critical to this discussion is a depressed economy.

Now turn it around. For every $1 cut from spending, the result is $1.5 dollars taken out of the economy, and a 1.5 times reduction in tax revenue. In other words, cuting spending actually reduces the governments income and makes the deficit worse in these tough times. See all the noise over the fiscal cliff, which is really an austerity bomb. They get it about not wanting to cut spending, but just don’t want to admit it, and think we can just make smaller cuts (like Medicare) and still reduce the deficit. We can, but growth will be lack luster and there will be no real improvement on the deficit.

Once you get that, and there is tons of data including the current Europian experience, not to mention our own lessons from the Depression, that substantiates all of the above, you understand some of the fallacies in their other economic beliefs which follow:

  • The Deficit – Oh be afraid. Their belief is that the deficit is the reason our economy is in the doldrums. It is simply not true. Interest on the deficit as a percent of GDP is the lowest it has been in 60 years. What is it about the deficit that is actually restricting our economy? Interest rates are at a record low. The big fallacy here is believing that the deficit is the problem, instead of jobs which the lack of is the root cause of the lack of tax revenues (well that and the Bush Tax cuts which is the largest driver to the deficit). The way to reduce the deficit is not by cutting spending which contracts the economy and just makes the problem worse, but by expanding the economy through spending to grow the economy till it will sustain itself.
  • Supply Side Economics – Associated with the above is the belief that business won’t invest because they lack confidence, referred to and debunked by Paul Krugman as the confidence fairy. What this is really a reflection of is the belief in supply side economics which is also totally wrong. Business won’t invest, according to this belief, because they do not have confidence in the business climate in the future. Oh, and add to that the excessive regulations argument saying that also inhibits investment. It is all bull shit. The data clearly shows that businesses are not investing because demand is not there. I would bore you with my pizza parlor owner logic but it takes up too much space and you can read it at this link (Uncertainty of the Lack of Demand).
  • Flow down and a high tide raises all boats – This one is debunked by our present circumstances: First interest rates on the rich are the lowest in 60 years and where are the jobs and they were anemic in the Bush years. Also see a recent study by the Congressional Research Service (CRS) which was withdrawn after pressure from Republican Senators, which showed that there is no economic benefit to low tax rates for the wealthy. Flow down simply doesn’t exist and it is the foundation of conservative economic belief. Meanwhile the rich have gotten richer and the middle class is losing ground. Something isn’t working here.
  • If Wall Street is doing well, the economy will thrive – This one is easily debunked. There was tremendous wealth created on Wall Street during the giant housing bubble, but there was little or no job creation. Wall Street has become a giant casino with profit focused on financial instruments that invest nothing in industries that create jobs or grow our economy. That does not mean that when Wall Street is doing poorly we will be doing well, it just means that Wall Streets health is just one of many factors in growing our economy.

So where does that leave us? Well we can legitimately argue about the role and size of government around the edges. We can legitimately argue about whether regulations serve a long term benefit, again around the edges. But when it comes to financial conservatism, they not only have wrong, they have it destructively wrong. The way we thrive is to expand the middle class, not the wealthy. We should not be having these arguments anymore and until we pull moderate Republicans and “moderate” Democrats, including our President, into the 21st century, the recovery is going to be one long slow process.

Postscript: If you are interested in the psychology that drives a person to ignore all the data that shows everything that conservatives believe about the economy is wrong, reference my blog: Pitchforks and Torches – The Big Lie.

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Class Warfare and Other Miscellaneous Thoughts

The Republicans or maybe I should say conservatives, have claimed that by asking for a fair tax policy, Democrats are waging class warfare.  They ought to know, they have been doing it under the radar for years.  The basic gist of this line of thought goes like this:  After the disaster of the Goldwater candidacy, the conservatives started forming their “think tanks” to develop a conservative game plan and to develop the underlying strategy for wiping liberals off the face of the earth.  It went something like this:

  • First they recognized that liberals were ruling the day in the court system.  If liberals thought conservatives went to far, they took it to the third branch of government, the judiciary, and usually won.  So the conservatives decided to pack the courts with conservatives.  Now in the world of politics this is not a new idea and liberals have employed similar (or tried to employ)  tactics.  But look where we are some 50 years later.  We have a Supreme Court that by all accounts is activist (conservatives say they hate activist judges, but only when they lose) rewriting the meaning of many laws draped in conservative philosophy.  Corporations have the same rights as people?  They have prevented the confirmation of most judges today on purely ideological grounds, not conservative enouth.
  • Second, they recognized that unions were power to the people.  So they set out to destroy them.  They did this through lax enforcement of labor laws protecting union rights under Republican Administrations.  While strictly enforcing employer’s rights, they defanged unions by delaying enforcement actions for years after the fact (through reduced budgets causing long backlog of complaints) making them moot.  They have been successful on private enterprise unions, and in the last two years we have seen the attack of government employee unions as the last bastion of organized money against the conservatives.
  • Third, in two different actions, they are trying to marginalize liberal voters.  One action is of course the voter ID law.  I have no problem with that as long as they provide an easy way for elderly and poor people to get an ID (people who don’t drive, don’t have money, and are isolated).  But what we have seen in states like Florida, they have also reduced the operating hours of DMV to further make this process hard.  No I am not making this up.  It is class warfare against the poor and elderly who would vote liberal.  Then they looked a voting trends and where states let delegates vote for President based upon how the voting in their district went (1 Electoral vote for a liberal) they are changing the rules to winner of the state takes all the delegates.  In states where winner takes all delegates, but there are red districts, they are changing it to allow each electoral vote to be according to the district.  No I am not making this up.  See Nebraska and Pennsylvania controlled by Republican state governments.
  • Fourth, the Fed is set up to disenfranchise the worker.  This may or may not be a conservative plot, but they certainly are not going to make the Fed more democratic to reflect interests other than the banks.  Said simply, the Fed has two mandates, to control inflation and ensure full employment.  But the two may be at odds.  If inflation rises,large holdings of dollars becomes problematic as its value (buying power decreases). More importantly the return on investment of lending money is decreased by the interest rate.  On the other hand, a weaker dollar makes our goods and services more competitive and usually stimulates the economy as we can sell more products and services.  It also reduces the total debt held because the value of the debt is reduced by inflation.  So guess which side the banks and the conservatives are on.  Unemployment is okay as long as our investments are protected.
  • Fifth, it is no revelation that corporations and monied interests own our Congress.  And it is also no surprise that trade laws favor our corporations at the expense of our workers.  Remember corporations don’t give a damn about employment in the United States, they care about maximizing profits for their stockholders.  So their focus is on policies that allow them to broaden their markets and earn larger profit margins.  With the declining wealth of our middle class, the buying power is overseas along with lower wages for cheaper products.  So they have worked in conjunction with Congress to craft tax and trade policies that facilitate the movement of manufacture and trade offshore further hurting the working class in our country.  This isn’t class warfare?  Further, in a bad economy, they claim that regulations hurt their business (there is a cost for sure).  So they want to reduce workplace rules like safety or environmental requirements, and do away with the minimum wage, further reducing the standard and quality of life in the United States for the working class to maximize profits for stockholders.
  • Sixth, and I will stop here but there are more, they have worked with Congress to craft tax policies that transfer the nations wealth to the rich.  The effect of this transfer is an empty treasury that cannot invest in our infrastructure or people, and a declining middle class that no longer has the buying power to sustain our economy.  They did this by selling to the nation a couple of pieces of nonsense, on the snake oil order of things, but we bought into it looking for a painless free ride.  The first was flow down.  As the wealthy get wealthier because they are smart and entrepreneurial, they will reinvest in America creating the jobs that drive our economy and everyone will benefit.  Except it hasn’t happened.  The wealthy either hang on to their cash or invest in corporations to maximize profits that are moving offshore.  We have the lowest tax rates (allowing the wealthy to keep their bounty) with no job creation.  The last two recoveries from recessions have been jobless reflecting this new reality.  Secondly was supply side economics which said as the economy booms because these “job creators” (conservative misdirection) would produce income for the treasury.  Once again, show me the money.  It hasn’t happened and what we have is the largest transfer of wealth to a few in this country (bring on the French Revolution) and an infrastructure and working class that is slowing sinking.

So do we have class warfare?  You bet we do and it has been waged on us  as guerrilla warfare for almost 50 years.  Conservatives do not believe in democracy and their action ensure that the will of the people will only be their will.  Now it is time to bring it out into the open and fight back.  There are many challenges before us and this transfer of wealth is just one of the them, but if we don’t win this one first, all the rest are moot.