Presidential contenders are talking a lot of how they can create jobs out of one side of their mouth (including the incumbent) and talking major cuts in government spending out of the other side of their mouth.
It is fantasy to think you can have both. A recent study that looked at 173 government policy changes between 1978 and 2009 found that overwhelmingly cutting government led to a drop in GDP and a rise in unemployment (as summarized in the Economist July 16, p.79). Beyond the data it is simple common sense. Cutting government means depriving businesses of contracts, and employees of jobs. If you are need to do it you do it in a healthy economy, not an ailing economy.
Major cuts in government spending seem imminent, maybe as part of a Government debt ceiling deal. Obama feels raising the debt ceiling is crucial to our good name as a creditor, Republicans have demanded major cuts in exchange, Republicans seem to have won that battle.
If we are lucky the cuts will be spaced over a long period of time, but given the scale of the proposed cuts, there is probably going to be a pretty big hit within the next year or so.
Here is what is going to happen. The cuts in government spending will mean contracts with private companies will be cancelled. Those companies will lay off the workers they hired to work on that project. Cuts in government spending mean government workers will be laid off, contributing to few consumer dollars to prop up the economy, and perhaps adding a little fuel to the ongoing foreclosure problem. In short any cuts in Government spending right now will give a big boost to the possible relapse into recession and higher unemployment. And next year both Presidential candidates will be pointing the finger of blame at the other for higher unemployment.
I am calendering this blog to revisit it during the heat of primary season next summer - Aug 15, 2012. If I am wrong, if the economy picks up, I will tip my hat to Republicans. If I am right I am hoping my Republican friends will acknowledge that maybe the hard core of the Republican party needs to rethink their economic notions a little bit.
Sunday, July 31, 2011
Thursday, July 28, 2011
Some interesting facts about the history of our Federal budget deficit
Here are some interesting facts about deficits and economic growth in the last 100 years. As Democrats and Republicans point fingers to pin responsibility for the deficit it is important to understand both parties are culpable. Republican influence has sometimes resulted in budget surpluses, but also contributed to the biggest yearly deficits. Democrats don't blow up the deficit in the middle of healthy economies like Republicans sometimes do with tax cuts, but they have run big deficits in times of crisis, and in good times they historically have still, like water building a stalagmite, slowly and steadily added to the national debt.
Top 8 biggest annual deficits - (using deficits over 3% of GDP as the minimum qualifier):
#1 - 1942 to 1945 - WW II saw deficits that averaged about 20% of GDP. Democrats controlled Congress and the Presidency throughout the war (as they had since 1933). The nation went into war with a deficit from the Great Depression (see #6 below).
#2 - 1918 - 1919 - WW I saw deficits shoot up to 12% in 1918, and then 17% in 1919. This was a period with a Republican House and a Democratic Senate.
#3 - 2009 - 2010 - Deficits of about 9% of GDP - This was a result of a major loss in revenues as a result of the financial collapse, the various government credits and bail outs begun by President Bush and continued by President Obama to treat our ailing economy, and the ongoing wars in Iraq and Afghanistan
#4 - 1982 to 1988 - deficits ranged from 3.04 to 5.88 percent of GDP, averaged around 4.5%. This was during the Reagan years - Republicans controlled the Presidency and the Senate, Democrats controlled the House. There was no war at this time (other than the cold war), the economy was healthy and growing, the deficits were driven by tax cuts that reduced revenue coupled with increased spending, primarily in defense.
#5 - 1990 to 1993 - through and after the Gulf War we averaged deficits of about 4.25%. Democrats controlled Congress, Mr Bush Sr was in the White House, Mr Clinton took over in 1993. We experienced a recession during this period but the economy continued to grow.
#6 - 1933 to 1936 - After 12 years of Republican control of Congress and the Presidency Democrats took over Congress and the Presidency three years into the Great Depression. Trying to pull the country out of the Depression we averaged deficits of about 4% for this period. Before the Democrats took over the Republicans deficit in 1932 was 2.78%.
#7 - 1975-76 - at the end of the Vietnam war we averaged deficits of about 3.75% for these two years. Democrats controlled the House and Senate, President Ford was in the White House. The economy was growing but inflation was rampant.
#8 - 2003 and 2004 - Although the economy was growing we averaged deficits of about 3.4% during these years. Republicans controlled Congress and the Presidency, the deficits were a result of tax cuts coupled with wars in Iraq and Afghanistan
Other notable periods in our deficit history:
The longest period of continuous balanced budgets was from 1920 to 1930. Republicans took control of both houses of Congress and the presidency in 1921 and maintained that control until 1933. In 1920 Wilson was President but Republicans controlled both the House and the Senate. Economic growth during this period was spotty however, as a percent of GDP it did not reach 1920 levels until 1925 then collapsed from 1930 through1940. It did not reach 1929 levels again until 1941.
Debt exploded during the 1930's through WW II. After the war, from 1947 through 1960 we alternated between small surpluses and small deficits.
For the 26 years between 1955 and 1981 Democrats controlled Congress. 22 out of those 26 years we ran deficits. The 4 non-deficit years, 1955, 1956, 1960 and 1969 were years we had Republican Presidents These years spawned the immortal Republican phrase "tax and spend liberal". On the upside the economy grew every year during this period.
We continued to run budget deficits from 1981 through 1997. The amount of the deficit jumped up to around 5% of GDP from 1983 to 1986. 1981 to 1987 was the period when President Reagan's tax cuts were enacted. Republicans controlled the Senate, Democrats controlled the House. GDP continued to rise each year. After 1987 Democrats controlled Congress until 1995, each year after Democrats recaptured Congress the budget deficit shrank further from the highs of the mid-80's until they jumped back up in response to the Gulf War. The economy grew continuously during this period.
In 1995 Republicans took over Congress and maintained that control until 2007. The budget deficit shrunk further in 1995 and 1996 then we ran surpluses from 1997 to 2001. In 2001 President Bush took office and Republicans continued to control Congress. In 2002 we began running deficits again and we have since run deficits continuously. The economy was consistently strong during this entire period until the housing bubble burst in 2007 leading to the financial collapse in 2008. 2009 was the first year since 1949 GDP shrank in comparison to the prior year.
Top 8 biggest annual deficits - (using deficits over 3% of GDP as the minimum qualifier):
#1 - 1942 to 1945 - WW II saw deficits that averaged about 20% of GDP. Democrats controlled Congress and the Presidency throughout the war (as they had since 1933). The nation went into war with a deficit from the Great Depression (see #6 below).
#2 - 1918 - 1919 - WW I saw deficits shoot up to 12% in 1918, and then 17% in 1919. This was a period with a Republican House and a Democratic Senate.
#3 - 2009 - 2010 - Deficits of about 9% of GDP - This was a result of a major loss in revenues as a result of the financial collapse, the various government credits and bail outs begun by President Bush and continued by President Obama to treat our ailing economy, and the ongoing wars in Iraq and Afghanistan
#4 - 1982 to 1988 - deficits ranged from 3.04 to 5.88 percent of GDP, averaged around 4.5%. This was during the Reagan years - Republicans controlled the Presidency and the Senate, Democrats controlled the House. There was no war at this time (other than the cold war), the economy was healthy and growing, the deficits were driven by tax cuts that reduced revenue coupled with increased spending, primarily in defense.
#5 - 1990 to 1993 - through and after the Gulf War we averaged deficits of about 4.25%. Democrats controlled Congress, Mr Bush Sr was in the White House, Mr Clinton took over in 1993. We experienced a recession during this period but the economy continued to grow.
#6 - 1933 to 1936 - After 12 years of Republican control of Congress and the Presidency Democrats took over Congress and the Presidency three years into the Great Depression. Trying to pull the country out of the Depression we averaged deficits of about 4% for this period. Before the Democrats took over the Republicans deficit in 1932 was 2.78%.
#7 - 1975-76 - at the end of the Vietnam war we averaged deficits of about 3.75% for these two years. Democrats controlled the House and Senate, President Ford was in the White House. The economy was growing but inflation was rampant.
#8 - 2003 and 2004 - Although the economy was growing we averaged deficits of about 3.4% during these years. Republicans controlled Congress and the Presidency, the deficits were a result of tax cuts coupled with wars in Iraq and Afghanistan
Other notable periods in our deficit history:
The longest period of continuous balanced budgets was from 1920 to 1930. Republicans took control of both houses of Congress and the presidency in 1921 and maintained that control until 1933. In 1920 Wilson was President but Republicans controlled both the House and the Senate. Economic growth during this period was spotty however, as a percent of GDP it did not reach 1920 levels until 1925 then collapsed from 1930 through1940. It did not reach 1929 levels again until 1941.
Debt exploded during the 1930's through WW II. After the war, from 1947 through 1960 we alternated between small surpluses and small deficits.
For the 26 years between 1955 and 1981 Democrats controlled Congress. 22 out of those 26 years we ran deficits. The 4 non-deficit years, 1955, 1956, 1960 and 1969 were years we had Republican Presidents These years spawned the immortal Republican phrase "tax and spend liberal". On the upside the economy grew every year during this period.
We continued to run budget deficits from 1981 through 1997. The amount of the deficit jumped up to around 5% of GDP from 1983 to 1986. 1981 to 1987 was the period when President Reagan's tax cuts were enacted. Republicans controlled the Senate, Democrats controlled the House. GDP continued to rise each year. After 1987 Democrats controlled Congress until 1995, each year after Democrats recaptured Congress the budget deficit shrank further from the highs of the mid-80's until they jumped back up in response to the Gulf War. The economy grew continuously during this period.
In 1995 Republicans took over Congress and maintained that control until 2007. The budget deficit shrunk further in 1995 and 1996 then we ran surpluses from 1997 to 2001. In 2001 President Bush took office and Republicans continued to control Congress. In 2002 we began running deficits again and we have since run deficits continuously. The economy was consistently strong during this entire period until the housing bubble burst in 2007 leading to the financial collapse in 2008. 2009 was the first year since 1949 GDP shrank in comparison to the prior year.
Wednesday, July 27, 2011
Thoughts on Pension Plans
A couple generations ago Economists who didn't know what they didn't know sold both business and government on the idea they could give employees pension plans that would guarantee the employee's a certain return in retirement. It was called a defined benefit plan. Congress build in preferences for defined benefit plan into the tax code and it became the norm for Government and large businesses.
Recent history has demonstrated that defined benefit pension plans are prone to disaster. They require an element of predicting the future based on scores of assumptions, and unless rigorously controlled the assumptions often tend to err on the side of overestimating the future. They also require a level of discipline those who oversee plans often lack. In the private sector companies don't contribute when they stock market is bullish, on the assumption increasing stock values will cover the cost of the program, then when the market crashes the program is hugely underfunded, or when the business founders the employee's pension get wiped out in bankruptcy. Governments make promises to employee's that become impossible to keep when tax revenues fall.
In the private sector we now have a hundreds of thousands of older folks who are trying to figure out how to make due on far less than they expected in retirement after their companies ran through bankruptcy to reduce their pension obligations.
In the public sector we have the services provided by government disappearing under a crush of overly optomistic pension obligations.
Defined benefit plans are inherently unreliable over the long term. The tax code should require any defined benefit plan to be based on conservative projections and fully funded each year without regard to investment performance.
Recent history has demonstrated that defined benefit pension plans are prone to disaster. They require an element of predicting the future based on scores of assumptions, and unless rigorously controlled the assumptions often tend to err on the side of overestimating the future. They also require a level of discipline those who oversee plans often lack. In the private sector companies don't contribute when they stock market is bullish, on the assumption increasing stock values will cover the cost of the program, then when the market crashes the program is hugely underfunded, or when the business founders the employee's pension get wiped out in bankruptcy. Governments make promises to employee's that become impossible to keep when tax revenues fall.
In the private sector we now have a hundreds of thousands of older folks who are trying to figure out how to make due on far less than they expected in retirement after their companies ran through bankruptcy to reduce their pension obligations.
In the public sector we have the services provided by government disappearing under a crush of overly optomistic pension obligations.
Defined benefit plans are inherently unreliable over the long term. The tax code should require any defined benefit plan to be based on conservative projections and fully funded each year without regard to investment performance.
Monday, July 25, 2011
Thoughts on the learning curve of Conservatives
I was raised a Conservative Republican back when the people that are now Tea Party folks were in the John Birch society. I was crushed when Goldwater was defeated in 1964. I voted for Richard Nixon and for Ronald Reagan for President. I learned the ideology as a child and that was all I needed, I was not going to waste my time thinking about wrong-headed non-Conservative notions. I felt my opinions were right, and I trusted those emotions. I would look around for facts and logic to justify my emotion based beliefs, but when facts and emotions that contradicted my beliefs were presented I simply dismissed them.
Huge emotional upheavals in my life, coupled with moving into a profession where being right is about facts, not belief, were necessary to get me to open up my mind and start questioning the truth of my emotional beliefs.
I don't mean to imply conservative are the only folks who unconsciously rely on their emotional beliefs and block out facts and reality, we all do it to some extent. We are hardwired to make our emotions the chairman of the brain board. But I think what makes one a conservative is the willingness to trust ones emotions in the day to day interactions of life. It works well for individuals - the emotions are pretty good at figuring out what we need as individuals. Conservatives often do pretty well for themselves in life. Where it doesn't work so well is in dealing with a world of people with different backgrounds and outlooks. Basically conservatives are very judgmental and inclined to think any thinking or behavior they aren't emotionally comfortable with is bad and should be prohibited. The evolution of modern society has been a constant battle of conservatives fighting to stifle new ideas or ways of living.
The drug war was a Conservative war. Richard Nixon first called it the drug war in 1971, although in fact it had been going on since politicians first started using drug use by immigrants and minorities as a tool to fire up peoples emotions and get their vote back in the 1920's. In about 1986 while investigating some old California laws punishing drug use I ran across 1929 newspaper articles, and transcripts of legislative proceedings from 1928 and 1929 where the arguments of police chiefs and politicians were virtually identical in tone and content to the quotes I was hearing and reading in the media and political speeches in 1986. The drug war had been going on 50 years at that point.
Beginning in the 1970's, in response to the ideas of individual freedom that grew out of the 1960's, conservatives pounded on any moderate Republican or Democrat who questioned the wisdom of the drug war. The buzz phrase was people were "soft on drugs". Conservatives were so good at appealing to peoples fears and instincts that by the early 1990's few politicians of either party who wanted to get elected dared be anything but one more drug warrior.
Now, after trillions of dollars spent on enforcement and incarceration over nearly a century, some conservatives are coming to the conclusion maybe it isn't really working. Debra Saunders, SF Chronicle columnist, is representative of this turnabout by many Conservatives. In her column on June 12, 2011 she argued that the drug war encouraged criminality, deprived government of needed revenue, limited individual rights and was the essence of hypocrisy given that huge percentages of the leaders in the country used drugs as young people.
She argues "Prohibition didn't work for alcohol and it doesn't work for drugs". Prohibition ended in 1934 - why did it take conservatives 76 years to figure that one out?
She next implies Democrats are what is keeping the drug war going. She quotes some former Narcotics officer saying "(Obama)...needs to think about where he would be if he had been caught with drugs as a young black man". I find this breathtakingly condescending. Do they really believe Obama hasn't been painfully aware of that fact his whole life?
In the last decade immigration has been one of the clubs conservative politicians use to beat up political opponents. Now that conservatives have basically taken over many of the smaller states, they are passing harsh immigration laws. Georgia passed a really tough immigration law that takes effect on July 1 that is basically causing many of the farmworkers in the State to leave. As a result farmers in Georgia had only about 1/2 to 2/3 the labor available they normally need during the May/June harvest period. The farmers estimate they lost about $300 million because they did not have enough labor. The Governor of Georgia who signed the bill into law suggested that Parolee's would take those newly available jobs (Right - parolees are going to voluntarily do hard physical labor all day in the hot sun). Here is my prediction. There is little that is more important to conservatives than letting people make money, so Georgia's law will be amended to become relatively toothless and then Georgia's conservatives will be keeping mum about immigration, or find a way to say Democrats caused the states economic problems. I just have to wonder why they couldn't take a couple minutes before they passed the law to question the wisdom of their emotional beliefs, to think and do some research about the consequences of their actions. In the last decade every time the topic of immigration came up farmers or other people who actually know what immigrants do would point out migratory labor does the dirty work no one else is hungry enough to do. But conservatives don't seem capable of hearing voices that contradict their ideology.
In 1863 Republican President Abraham Lincoln freed the slaves. Yet in my lifetime Republicans are consistently the last to get on board with civil rights issues. The fought the 1963 Civil Rights Act tooth and nail. They railed against equal rights for women. The last decade they have been firing people up about saving marriage by not letting gays get married, but never stopping to think exactly how a gay couples marriage negatively impacts anyone else. For the longer term that battle is probably over - in the Prop 8 case in California the Conservatives had to actually put on evidence showing gay marriage harmed society in some way - and suddenly discovered they had none. Strongly held emotional belief doesn't cut it as evidence in Federal Court. The proponents of Prop 8 still think they may get the extremely conservative current Supreme Court to reverse the trial courts decision. But I don't think even this Supreme Court will be able to find a way to protect this particular Conservative ideology. They may be Conservative but they are lawyers who have devoted their entire life to the distinction between evidence and belief.
In another couple decades Conservatives will be standing up on the floor of Congress making self righteous speeches in support the right of gays to be treated like everyone else. Much as they now support racial equality, or womens rights. I just wish they could pause from time to time to really critically exam their ideology to see if it makes sense before they start manning the political barriers for decades long fights.
(Sources: SF Chronicle Insight Section for Debra Saunders quotes, June 12, 2011, Economist, June 18, 2011, page 37 for discussion about the Georgia immigration law)
Huge emotional upheavals in my life, coupled with moving into a profession where being right is about facts, not belief, were necessary to get me to open up my mind and start questioning the truth of my emotional beliefs.
I don't mean to imply conservative are the only folks who unconsciously rely on their emotional beliefs and block out facts and reality, we all do it to some extent. We are hardwired to make our emotions the chairman of the brain board. But I think what makes one a conservative is the willingness to trust ones emotions in the day to day interactions of life. It works well for individuals - the emotions are pretty good at figuring out what we need as individuals. Conservatives often do pretty well for themselves in life. Where it doesn't work so well is in dealing with a world of people with different backgrounds and outlooks. Basically conservatives are very judgmental and inclined to think any thinking or behavior they aren't emotionally comfortable with is bad and should be prohibited. The evolution of modern society has been a constant battle of conservatives fighting to stifle new ideas or ways of living.
The drug war was a Conservative war. Richard Nixon first called it the drug war in 1971, although in fact it had been going on since politicians first started using drug use by immigrants and minorities as a tool to fire up peoples emotions and get their vote back in the 1920's. In about 1986 while investigating some old California laws punishing drug use I ran across 1929 newspaper articles, and transcripts of legislative proceedings from 1928 and 1929 where the arguments of police chiefs and politicians were virtually identical in tone and content to the quotes I was hearing and reading in the media and political speeches in 1986. The drug war had been going on 50 years at that point.
Beginning in the 1970's, in response to the ideas of individual freedom that grew out of the 1960's, conservatives pounded on any moderate Republican or Democrat who questioned the wisdom of the drug war. The buzz phrase was people were "soft on drugs". Conservatives were so good at appealing to peoples fears and instincts that by the early 1990's few politicians of either party who wanted to get elected dared be anything but one more drug warrior.
Now, after trillions of dollars spent on enforcement and incarceration over nearly a century, some conservatives are coming to the conclusion maybe it isn't really working. Debra Saunders, SF Chronicle columnist, is representative of this turnabout by many Conservatives. In her column on June 12, 2011 she argued that the drug war encouraged criminality, deprived government of needed revenue, limited individual rights and was the essence of hypocrisy given that huge percentages of the leaders in the country used drugs as young people.
She argues "Prohibition didn't work for alcohol and it doesn't work for drugs". Prohibition ended in 1934 - why did it take conservatives 76 years to figure that one out?
She next implies Democrats are what is keeping the drug war going. She quotes some former Narcotics officer saying "(Obama)...needs to think about where he would be if he had been caught with drugs as a young black man". I find this breathtakingly condescending. Do they really believe Obama hasn't been painfully aware of that fact his whole life?
In the last decade immigration has been one of the clubs conservative politicians use to beat up political opponents. Now that conservatives have basically taken over many of the smaller states, they are passing harsh immigration laws. Georgia passed a really tough immigration law that takes effect on July 1 that is basically causing many of the farmworkers in the State to leave. As a result farmers in Georgia had only about 1/2 to 2/3 the labor available they normally need during the May/June harvest period. The farmers estimate they lost about $300 million because they did not have enough labor. The Governor of Georgia who signed the bill into law suggested that Parolee's would take those newly available jobs (Right - parolees are going to voluntarily do hard physical labor all day in the hot sun). Here is my prediction. There is little that is more important to conservatives than letting people make money, so Georgia's law will be amended to become relatively toothless and then Georgia's conservatives will be keeping mum about immigration, or find a way to say Democrats caused the states economic problems. I just have to wonder why they couldn't take a couple minutes before they passed the law to question the wisdom of their emotional beliefs, to think and do some research about the consequences of their actions. In the last decade every time the topic of immigration came up farmers or other people who actually know what immigrants do would point out migratory labor does the dirty work no one else is hungry enough to do. But conservatives don't seem capable of hearing voices that contradict their ideology.
In 1863 Republican President Abraham Lincoln freed the slaves. Yet in my lifetime Republicans are consistently the last to get on board with civil rights issues. The fought the 1963 Civil Rights Act tooth and nail. They railed against equal rights for women. The last decade they have been firing people up about saving marriage by not letting gays get married, but never stopping to think exactly how a gay couples marriage negatively impacts anyone else. For the longer term that battle is probably over - in the Prop 8 case in California the Conservatives had to actually put on evidence showing gay marriage harmed society in some way - and suddenly discovered they had none. Strongly held emotional belief doesn't cut it as evidence in Federal Court. The proponents of Prop 8 still think they may get the extremely conservative current Supreme Court to reverse the trial courts decision. But I don't think even this Supreme Court will be able to find a way to protect this particular Conservative ideology. They may be Conservative but they are lawyers who have devoted their entire life to the distinction between evidence and belief.
In another couple decades Conservatives will be standing up on the floor of Congress making self righteous speeches in support the right of gays to be treated like everyone else. Much as they now support racial equality, or womens rights. I just wish they could pause from time to time to really critically exam their ideology to see if it makes sense before they start manning the political barriers for decades long fights.
(Sources: SF Chronicle Insight Section for Debra Saunders quotes, June 12, 2011, Economist, June 18, 2011, page 37 for discussion about the Georgia immigration law)
Thursday, July 21, 2011
What taxes encourage job creation?
I try to stay pretty up to date on economic issues but I don't recall that I ever have seen this question posed - or indeed any suggestion that anything other than tax cuts of any kind can stimulate job growth.
This seems fundamentally wrong to me. It assumes people are always willing to invest in building businesses that create jobs anytime they get a little lower taxes despite the state of the economy. I think the opposite is probably true in the present economy. Lower taxes make it easier for people who have money to take no risks, to park their money in a safe place to make sure they don't lose it. (Anybody out there know of any studies looking at this subject?)
Right now politicians are beating each other up about "job creation" but I am hearing no solutions that will hurdle the basic problem the US economy is more unstable than it has been in generations.
Where would you park your money if you had a bunch of it you wanted to protect? Right now when taxes on corporate dividends are low dividends from safe secure established companies provide a safe haven for capital that might otherwise be expanding businesses, or starting new businesses. That seems the likely explanation for the fact the stock market seems disconnected from the economy. Despite a continuing stream of gloomy reports on the housing market and the job market the stock market is up 30% over the last year.
Part of the reason is also probably the relatively low levels of taxation on short term Capital Gain. It allows people to play in the security or commodity markets rather than tie money up in a long term business venture. Seems like the haven for minimizing taxes ought to be long term Capital Gain, where building a business is rewarded.
It seems to me we ought to be increasing the tax rate on dividends and short term capital gain, and coupling that stick with a carrot - generous job creation credits to be applied against income taxes.
This seems fundamentally wrong to me. It assumes people are always willing to invest in building businesses that create jobs anytime they get a little lower taxes despite the state of the economy. I think the opposite is probably true in the present economy. Lower taxes make it easier for people who have money to take no risks, to park their money in a safe place to make sure they don't lose it. (Anybody out there know of any studies looking at this subject?)
Right now politicians are beating each other up about "job creation" but I am hearing no solutions that will hurdle the basic problem the US economy is more unstable than it has been in generations.
Where would you park your money if you had a bunch of it you wanted to protect? Right now when taxes on corporate dividends are low dividends from safe secure established companies provide a safe haven for capital that might otherwise be expanding businesses, or starting new businesses. That seems the likely explanation for the fact the stock market seems disconnected from the economy. Despite a continuing stream of gloomy reports on the housing market and the job market the stock market is up 30% over the last year.
Part of the reason is also probably the relatively low levels of taxation on short term Capital Gain. It allows people to play in the security or commodity markets rather than tie money up in a long term business venture. Seems like the haven for minimizing taxes ought to be long term Capital Gain, where building a business is rewarded.
It seems to me we ought to be increasing the tax rate on dividends and short term capital gain, and coupling that stick with a carrot - generous job creation credits to be applied against income taxes.
Tuesday, July 19, 2011
Republicans want small government
I wish they could be more specific. It seems to be almost the only goal they are able to articulate these days. It is the reason they provide for their singleminded effort to hack away at government programs.
I never hear them talk about more efficient government. I certainly wouldn't argue with the notion that government isn't always very efficient at accomplishing their objectives - just like almost every other human institution with complex goals. I am aware of lots of government programs that in my estimation are a waste of money or aren't accomplishing much. But Republicans don't seem concerned with toning up government, trimming the fat to make programs more efficient and cost effective. They have expressed no particular interest in digging into the details of, for example, defense spending, which sucks up 1/2 of Federal discretionary spending. They just want a smaller - and I presume - a simpler government.
There is a movie out right now about people who always think life was better a generation or two ago. That romantic emotion based notion seems to be the source of all Republican ideology at the moment. They long to go back to the 1950's because in their memory or mythology it was a much better time.
If they were building a new house they wouldn't build a 1950's design. Modern houses are vastly more comfortable and livable, because they are vastly more complex. Most the Republicans I know buy SUV's, Minivans or Sedans that are light years more complex, comfortable and safe than cars from the 1950's. I doubt that many Republicans are ready to give up their cell phones for a 1950's phone system. Do they want to go to a Doctor who practices 1950's medicine? Go back to the pharmaceuticals of the 1950's? Dump their big screen TV for a tiny black and white screen?
They don't seem to have grasped the direct connection between progress and complexity. I long to just once hear a Republican say "lets look at how this program can be made more cost efficient".
I never hear them talk about more efficient government. I certainly wouldn't argue with the notion that government isn't always very efficient at accomplishing their objectives - just like almost every other human institution with complex goals. I am aware of lots of government programs that in my estimation are a waste of money or aren't accomplishing much. But Republicans don't seem concerned with toning up government, trimming the fat to make programs more efficient and cost effective. They have expressed no particular interest in digging into the details of, for example, defense spending, which sucks up 1/2 of Federal discretionary spending. They just want a smaller - and I presume - a simpler government.
There is a movie out right now about people who always think life was better a generation or two ago. That romantic emotion based notion seems to be the source of all Republican ideology at the moment. They long to go back to the 1950's because in their memory or mythology it was a much better time.
If they were building a new house they wouldn't build a 1950's design. Modern houses are vastly more comfortable and livable, because they are vastly more complex. Most the Republicans I know buy SUV's, Minivans or Sedans that are light years more complex, comfortable and safe than cars from the 1950's. I doubt that many Republicans are ready to give up their cell phones for a 1950's phone system. Do they want to go to a Doctor who practices 1950's medicine? Go back to the pharmaceuticals of the 1950's? Dump their big screen TV for a tiny black and white screen?
They don't seem to have grasped the direct connection between progress and complexity. I long to just once hear a Republican say "lets look at how this program can be made more cost efficient".
Friday, July 15, 2011
Republicans - the Hammer Mechanics of Politics
When I was young my Dad would often speak disdainfully about "hammer mechanics". A hammer mechanic was someone who had a whole toolbox full of tools, but instead of using the right tool would just pick up a hammer and start beating on whatever was the problem.
Historically Republican have prescribed the same remedy for every economic problem. Economy doing well? Cut taxes, government and regulations. Economy stalled? Cut taxes, government and regulations. Republicans seem to me to be the political equivalent of the hammer mechanic. With a tool-box full of tools for fine tuning an economy Republicans always reach for the same tool. In the last decade as Republicans were leading the charge into the two wars half a world away that are a major cause of our exploding debt, they were cutting taxes. Now Republican Presidential candidates are arguing against increasing the debt ceiling while the Congressional negotiators refuse to consider tax increases to pay for the debt.
It makes me wonder if any of them ever used a history book for anything other than a paperweight.
Republicans have been in complete charge of government and been able to indulge their ideology on only two occasions in the last 100 years, from 1921 to 1933 and from 2001 to 2007. (There was one other brief period where Ike was President and Republicans controlled the House and Senate from 1953 to 1955 which I overlooked when this was first written. Given the short period I don't believe that impacts the thesis of this argument. Particularly since Republicans in 1953 to 1955 were not cutting taxes, they enacted the 1954 Tax Code with some of the highest income tax rates our nation has ever seen). Lets review what happened during those two periods.
Republicans controlled both houses of Congress and the Presidency from 1921 to 1933. They cut taxes, cut government and eliminated regulations. In 1929, after 8 years of Republican control, the stock market crashed and we began a decade long Depression. WW II and the government spending that went with the war effort finally pulled us out the Great Depression a decade and a half later.
For the next couple decades the generation that lived through the crash and depression remembered what had happened, and were largely immune to Republican economic ideology. The top income tax bracket went up to around 90% for a period in the early 1950’s. But as that generation passed from the scene we changed course. In the mid 1980's we bought into Ronald Reagan's fantasy justification for cutting taxes on the wealthy that "a rising tide lifts all boats". Taxes went down and the National debt went up. In the 1990's Republican took control of the agenda and pushed Capital Gains tax cuts, re-structured the nature of the Capital gains tax, and repealed the laws controlling bank speculation. Despite that fact a stock bubble developed and burst almost immediately after the 1996 Capital Gains tax cuts, in 2000 we still handed both houses of Congress and the Presidency to Republicans promising more tax cuts and less regulation. For the first time since 1933 Republicans controlled both Houses of Congress and the presidency from 2001 to 2007. We basically turned back the clock to relive the 1920's. Republicans cut taxes and regulations, eveyone thought they were getting rich. We went through a boom, bubbles in housing, commodities and almost anything else that someone could invest in, then a housing collapse followed by a full on worldwide financial crises.
There is one big difference between the great depression and the current great recession. For the first three years after the 1929 crash, from 1930 to 1933, Republicans continued to control both houses of Congress and the Presidency, they continued to follow their ideology believing the private sector was the path out of the depression. The philosophy was to encourage wealthy people to put their money to work and pull us out of the depression. It didn't work. By the time Democrats took over in 1933 somewhere around 5000 banks had failed, unemployment was at 25%, property values had plummeted and millions of homes were in foreclosure. The country survived on Government borrowing and spending for the next 20 years, running up a huge debt through WW II and the Korean War.
In 2007 as the crash was happening George Bush was getting ready to leave the White House. Luckily his advisors knew enough about the great depression to immediately start developing huge government stimulus packages which the incoming Obama administration carried forward. It slowed the downward spiral enough that now, instead of a great Depression, we are “only” in a great Recession. But now Republicans treat increasing taxes to pay our huge debt as the ultimate sin. They continue arguing we need to cut government, cut regulations, no new taxes. Clearly they are oblivious to history, but they also seem clueless about basic human nature, common sense and the findings of science about investing.
Studies established decades ago that successful investors are conservative, tending toward risk averse. In short most people with wealth want to protect it. They are managers, they don't need more wealth (although they often are perfectly happy to have more if there is a safe way to do it) so they don't take risks that might put their wealth at risk. Sure this is a generalization, people are different, but psychological studies have also shown people value what they already have more than what they might acquire, even if in actuallity what they have is not as valuable. This confirms the common sense observation that most people are cautious with what they own. In general people with wealth go to great lengths not to risk losing it.
Most risk takers are risk takers because they have little to lose and a lot to gain.
History has demonstrated how these two simple truths interact. When the economy is stable with few risks on the horizon, wealthy people become more willing to invest with risk takers. As the economy starts to boom the wealthy become more and more willing to invest with the risk takers and the risk takers become more and more bold. Next thing you know you have some kind of bubble.
When the bubble bursts, wealthy people pull their money back like a snail retreating into its shell. They lost some of their wealth and will be a little more cautious before they take risks again, so probably won't loosen their purse strings until they see a long enough period of stability to make them overcome their fear of risk.
This simple observation explains why in the 1930’s the Republican efforts to use the private sector to pull us out of the great Depression didn’t work. Nobody in their right mind sitting on a pile of money during the Depression was going to take a risk in that economic environment.
Lets look at the current situation. Corporations are sitting on huge piles of cash. Put yourself in their shoes to ask why aren't they expanding their business or starting new ventures. Of course Corporate CEO's say that the reason they aren't investing is because of Obama. If I was in their shoes I would want to point the finger elsewhere so all the employees I have laid off to protect my Corporate (and personal) wealth, and all the folks who have been unemployed don't think badly of my Corporate brand. Selfish protectionism is understandable, we would probably all do the same in their situation, but it is a PR nightmare. So blame someone else.
The real reason Corporations are sitting on cash is they don't want to risk losing it. Sitting on cash right now is a perfectly rational decision.
We still have millions of homeowners underwater on their mortgages, and millions more already in foreclosure. House prices continue to fall. We can pander to the wealthy people in every possible way and they are still not going to cure these huge problems in our housing market. There is no money to be made curing the housing mess. Corporations are making the perfectly rational decision to sit on their wealth and wait for someone else to do it.
Unemployment is stuck around 9% and huge swathes of consumers are tightening their belts. If I'm an investor in small business, or a Corporate CEO, I have to ask, if I spend a lot of my cash stash to expand, to whom am I going to sell products ? Why should I take a risk on entering any market already saturated with products when I can keep my money (or keep shareholders happy) by sitting comfortably on our big pile of money, deflecting criticism by pointing the finger elsewhere and wait until someone else solves the problem.
Simple rule of wise investing - when you have wealth and a risky investment environment, you sit on your wealth and be patient. You may dabble in stocks or other liquid investments, since you can bail out quickly, but you are not going to commit to the long term investment of building or expanding a business.
Cutting regulations and decimating government are not the way out of this recession. They will not make the investing environment less risky, they will take us further down the path of economic instability - the worst scenario for risk taking investment.
The National Debt is hardly a stabilizing factor. But cutting government programs is just an impersonal way of saying we are throwing more people on unemployment, reducing the pool of potential consumers, aggravating the slowdown. The time to trim government is when the economy is buoyant, not when it is stagnant.
The huge debt problem incurred after the Great Depression and WW II was dealt with by really high taxes on wealth. In the early 1950’s the wealthiest earners were paying up to 90% of some of their income. No longer could the wealthy just sit on their wealth. They had to invest and use their wealth or gradually lose it to taxes. The highest tax rate continued at not less than 70% for a couple decades, during which we experienced strong growth and became the worlds dominant economy.
I have no problem with people having wealth. There are lots of people out there who have made making money a higher priority than I have, have worked harder and sacrificed more to make money. I do not begrudge them their wealth. But at the same time, we are all in this economy together, and I have a big problem with short sighted policies that history has demonstrated undermine the health of the economy that directly impacts us all. Our economy has the same counterintuitive dynamics as a peloton in a bicycle race - we all go faster when we all go together.
Private wealth is the way out this recession, and tax policies followed in the aftermath of WW II showed the pathway.
Subscribe to:
Comments (Atom)