Responding to some current Republican economic arguments

I start this blog by with a preface - Democrats are far from perfect.   But these days Republicans are the problem.


I used to be Republican.  I wish they could really be an advocate for fiscally responsible government to counter the tendency of politicians to hand out government money to get elected.  But Republicans talk the talk but seldom walk the walk and the current crop of Republicans is living in a fantasy world where the answer to every problem is tax cuts.  Republicans discovered cutting taxes plays really well with voters - just like handing out candy plays well to kids.   The candy strategy has become an obsession.  

Fact: the Federal Governments income right now is the lowest it has been (in real dollars) since the 1950's - even though we have had two wars going on for nearly a decade.  The Republican approach to economics is sort of like quitting your job just as your kids are starting college.

Republicans try to paint Democrats as the reason we have a big deficit, saying Obama hasn't submitted a balanced budget in three years.  Here is my problem with this statement - it is factually correct but way out of context.  Its like accusing a fireman that has been trying to pull you out of a burning building of messing up your hair.  It ignores the fact Obama walked in the door facing the worst economic crisis since the great Depression.  If we had tried to balance our budget immediately we would probably be in a depression right now.  I would be real surprised if you could find even one reputable Republican economist (outside a partisan think tank) who would disagree with that assessment.  Not to mention a Congress full of Republicans many of whom seem to care more about defeating Obama than in making government work.

Some facts - the budget was balanced in 2001 when Mr Bush walked in the door and Republicans took control of both houses of Congress.  Republicans continued to control both houses of Congress and the Presidency until 2007 by which time the economy was already starting to melt-down and the deficit had already exploded.  That events of that six year period, coupled with the bailout to stop the free fall in financial markets, are the source of our current financial morass.  Mr Bush was the only President in history to cut taxes while a war was going on.   Mr Bush never vetoed a single spending bill of any kind, because they were filled with the kinds of handouts and freebies Republicans prefer. 

Republican commentators are fond of saying that the Democrats are paying for current spending with our children's money.  Here is an easily documented fact - lots of charts and graphs on the internet - since WW II the budget deficit has increased twice as much during Republican administrations as it has during Democratic administrations.  The biggest deficit explosions in the last thirty years happened during the Reagan/Bush administrations and the Bush Jr. administration.   The fact is Democrats have spent much of the last 30 years trying to patch up fiscal messes made by Republicans.

The current deadlock in Congress is remarkably similar to what was going on in Congress in 1990 to 1993.  Republicans had set the agenda during the Reagan years when they controlled the Senate and Mr Reagan was President.  They enacted big tax cuts without making cuts in spending and the deficit immediately began to shoot up.  In 1987 Democrats regained control of both the House and the Senate.  Republicans whose policy's had caused the big jump in the deficit suddenly became deficit hawks, lambasting Democrats as the cause of the deficit.  A budget deal was struck in 1990 that brought us to a balanced budget by late in the decade.  But by that time Republicans were already at more tax cuts and the cuts in regulation that triggered the financial collapse in 2008.  By 2001 Republicans had gained control of the House, Senate and Presidency (for the first time since 1921 to 1933).  They cut taxes and started handing out government money left and right, once again exploding the deficit.  Then they get out of power and suddenly they are deficit hawks again.  Only this time there policies are idiotic as well as hypocritical.  In 1990 the economy was basically pretty strong, although we did go into a recession.  Now we are flirting with a replay of the great depression.  Government spending is what has kept us afloat.  And they think now is the time to deflate the life raft.

Republicans credibility with me is gone.

Is there a correlation between income disparity and growth?

The news is full of data these days about how over the last thirty years the gap between the wealthiest Americans and the working folk in America has exploded.   The rich have gotten way richer, while the middle class has seen no growth in real income.

No one outside of the partisans on each side of the political spectrum seem quite sure how to treat this fact.  The partisans on the right talk about class warfare, and that the rich got that way because they earned it.  The partisans on the left say we are all in this together, that this simple fact in itself justifies....something...no one seems quite sure.  Higher taxes on rich people maybe?

I find some data from a couple different fields raising a question I believe should be the focus of consideration of the increased disparity in income across our society.

First, I know that psychological studies have found that generally what makes rich people happy is not how much they have, it is how much they have relative to other people.  It is an ego boost, a way of proving they are special.  It is not, I suspect, that the super rich are competing with the middle class, they are competing with one another, with other people that judge self worth in monetary terms.  I am not being judgmental here - I draw no conclusions about whether building your self image around how much money you make is good or bad.  We all need to have ways to make ourselves feel special.  I am just noting this is what psychology suggests is what motivates people to keep accumulating wealth far beyond what they need to live comfortably and securely.

Second, one of the historical facts frequently cited to prove that we have in fact developed into a much more stratified society economically is that the gap between the middle class and the wealthy has not been this large since the 1930's.

This intrigues me because our current situation tracks so closely to the situation in the 1930's.   In the decade leading up to the 1930's Republican ideology that focuses on turning individual initiative loose from the constraints of government was very popular, Republicans controlled both houses of Congress and the Presidency from 1922 to 1932.  During that period we went through an enormous, largely unregulated boom that caused the gap between the wealthy and the middle class.  In 1929 the stock market crashed and we began sinking into the great depression that, among other things, aggravated the income gap.  The country turned more toward the Democrats view that a society that used government to control individual excesses in 1933.  For the next half a century we went through a prolonged period of growth that spread benefits across the income spectrum.  The gap between the wealthy and the middle class was a fraction of what it is today.  In 1980 Ronald Reagan invigorated the Republican ideological counterattack  and the gap between the rich and the middle class began to grow again during his administration.  Public sentiment seemed to swing toward Republicans and they gradually began regaining control of the nations agenda, culminating with the election of George W. Bush in 2000 along with Republican majorities in both houses of Congress.  For 6 years Republicans controlled both houses of Congress and the Presidency, and pursued policy's reflecting their ideological belief that individuals needed to be released from the constraints imposed by government.  The current economic collapse was beginning as the Republicans lost their total control over government, and the current gap between the incomes of the rich and the middle class seems to be entirely a product of the policies pushed by Republicans to free individuals from the constraints of government.

So here is where all this leads me?  It leads me to wonder if there any research out there correlating economic growth with the degree of income disparity in the countries population.

Do Country's that have relatively small disparities in income between the wealthy and the middle class grow faster or slower than countries that have a large disparity in income between rich and middle class?

Is there an optimum level of disparity where growth is maximized?

Would the wealthy care if it became apparent the country could grow faster and be stronger, if they shared more of the wealth with the middle class?   This is a particularly compelling question now that the wealthiest folks are now global.  The really wealthy in the US didn't seem to have a problem with shipping jobs to other countries and closing down their operations in this country.  Of course one can argue they were compelled by the markets.  But in terms of their personal wealth, will they see trying to help their country remain a dominant economic power as a distraction from their effort to climb the global wealth ladder?

I'm betting, given the fact this income disparity issue has been an issue for awhile, that if there isn't any data out there yet, there will be soon.  If anyone runs into it please share it.

Postscript:  there evidently is some data - as explained in an email from my cousins:

In his book, “The Darwin Economy,” Robert H. Frank of Cornell University cites a study showing that among 65 industrial nations, the more unequal ones experience slower growth on average. Likewise, individual countries grow more rapidly in periods when incomes are more equal, and slow down when incomes are skewed.

Globalization - the long term picture

Historically economy's have usually been local, and locals have fought to keep competition from outside the local area even as they sometimes are seeking to sell their goods and services to others outside their area.  Economists believe that knocking down all those local barriers will make everyone better off.

Globalization is the buzz word we use for the process of knocking down local barriers to commerce.  Globalization is one of those things that is great in economic theory but presents horrendously thorny problems when we try to find ways to get there.

The basic conundrum is as long as big parts of the worlds workers are climbing out of abject poverty, they are happy with a life style workers in developed economies find unacceptable.  But the process pursued in the last 150 years that has brought workers in less mature economies up out of poverty  has involved developed world companies moving jobs to less developed countries.  Sometimes this is driven only by the desire to make more profits, but often it is forced by realities of the market place.  If a company doesn't do it some one else will and the companies products will then be overpriced.

The result has been progress toward globalization has waxed and waned.   There is lots of enthusiasm for awhile, but eventually the process causes job losses and economic slowdowns which kill enthusiasm, particularly in democratic states, for globalization.

There is lots of irony involved in the Globalization process.   American consumers have made Wal-Mart one of the worlds most successful retailers because of its low prices, but Wal-Mart - and other similar companies - have dropped prices by producing their goods outside the United States and gradually undermined the economic viability of many of the industries that employed those same consumers.

So the fundamental problem can be posed - how can you deal with the job losses in developed countries that are inherent in the process without condeming the undeveloped world to decades of further poverty.   How do you replace the jobs in western countries that are migrating to less developed economy's?

Supporters of globalization (mainly either rich folks not threatened with job loss or idealistic economists) often argue that the free market can replace those lost jobs with the proper incentives.  I'm dubious - I think the free market can dream up some new products or services that can provide jobs for workers in developed countries, but I suspect that won't happen nearly as fast as job losses will occur.  Our world is already full of products and services many of us wouldn't buy, finding really new products that appeal to masses of people is really hard.

One possible way to alleviate the gap between job losses and creation of new private sector jobs is to use Government jobs.  Hire people, particularly young people and older folks, to do the things that contribute to a richer life but that the private sector can't do effectively (or profitably).  All my life I have marveled at the beautiful and functional infrastructure built by the WPA during the great depression.  It seems to me that offers a path to offset the negatives of globalization.

However the Civil Service laws that have built up over the last century create a problem with using Government.  If the primary purpose of the government program is to create jobs, direct government hiring is handicapped by the protections the law gives to Government workers.  Government jobs seeking to stimulate the economy should be focused on giving people a lifeline and experience.  They should pay less than the private sector, and provide fewer long term benefits, so people will be motivated to move out of the government job and into the private sector as soon as possible.

What to make of Occupy Wall Street

It certainly is not going to have much short term effect beyond a lot of media frenzy.   Wall Street regards it as a nuisance, nothing more.  Washington is locked in mortal combat over the next election, both sides afraid to do anything that might hurt their election chances.  In the longer term OWS may provide an emotional counterweight to the tea party on the right, a mixed blessing, since that will tend to pull Democrats out of the sensible center, even as it takes some steam out of the media fascination with the Tea Party.

The irony is OWS has the tools to make Wall Street sit up and take notice right now.  I would imagine a huge percentage of the OWS protestors, and the people who support them have bank accounts with Bank of America, Chase and the other big retail banks.

This country is full of little regional banks, who survived the 2008 crash because they are run by sensible management, they didn't get sucked into doing whatever stupid mortgage trick increased their bottom line a little bit.  If all those OWS protestors and supporters pulled their money out of the to-big-to-fail banks and moved to a regional bank, Wall Street would be scrambling all over to please OWS.

Of course the to-big-to-fail banks would then start trying to buy up the local regional banks to get their customers back, so  OWS should be working to turn the big bank brands into a liability, wherever the brand goes, OWS supporters go elsewhere.  If a big bank buys out a regional bank, dump that regional bank and move to a still independent bank.

We have two tools with which we can influence Wall Street.  Our votes are one, indirectly through the people we elect.  But the far stronger tool, in the short term, is our money.  We can all vote against Wall Street and the to-big-to-fail banks with your dollars by switching to bank with regional banks.

Corporations aren't people

100+ years ago the US Supreme Court said that Corporations are people entitled to the protections of the Constitution.  Recently the Supreme Court relied on that old case to say that means government can't regulate campaign contributions by Corporations.

Here are some basic facts about Corporations.  They do not exist in nature.  They are artificial entities that are created by government (in the United States each individual state has its own Corporations law) to allow investors to pool their money to engage in investing.  Their purpose is to encourage risk taking and the way that they do that is provide special rules for Corporations.  If you or I invest money in something on our own, and something goes really wrong and it really hurts some other people, those people can sue us for everything we have.  Corporations were created to allow people to pool their money and if the worst happens, and everything goes really wrong, only the money they put in the Corporation is at risk.

This limited liability protection is a huge benefit that will sometimes result in unfairness to people that are injured.  That is how lots of the guys who made millions by selling the borderline fraudulant mortgages that blew up the economy a couple years ago are still sitting on their millions while millions of homeowners suffer.  They are protected because they pulled lots of money out while times were good and the Corporations are now insolvent.

That is why the Supreme Court decisions are so non-sensical.  Government created these organizations.  They could abolish them tomorrow if they wanted.  The first Supreme Court decision over 100 years ago was grounded in the right of free association guaranteed in the Constitution.  The Supreme Court was evidently unable to figure out that regulating corporations has nothing to do with the right of the people who own corporations to associate, it only regulates the economic terms upon which they are granted limited liability status.

The result is our political process is drowning in so much money it  has become almost completely disfunctional.   People who want to be in politics spend their lives raising money, they can't make any decision without thinking how it is going to impact their reelection war chest.

We need to start moving toward reversing those Supreme Court decisions.  It is unlikely the Supreme Court will do it any time soon.  We could move toward an amendment to the US Constitution to clarify that the bill of rights does not apply to Corporations or other entities authorized by the State for economic purposes.  But that is a slow process.

It might be quicker to do State by State.  Each state has the right to dictate the terms of by which Corporations operate within the State.  An initiative measure in California that specified that a Corporation doing business in California is not a person or protected form of association would be a good start toward bringing some sanity to our political system.

Factoids from the media regarding the economy

The Economist of August 20, 2011, p. 67 figures out which of the big rich countries have been hardest hit by the recession.  Britain is worst.  The US and Italy are next on the misery list, then Canada is slightly better, Japan better still, France even better and Germany has fared the best.  All the countries have seen negative growth in GDP per person since 2004 excerpt Germany where GDP per person has grown slightly.

Factoids from a Robert Reich article in the Sep 4 San Francisco Chronicle Insight section, p.E5:  
1.  The last decade has been the worst in a century for American workers.  Wage gains in the last 10 years have even lagged behind wage gains during the great depression.
2.  Big American corporations make more money, and create more jobs, outside the US than in.
3.  CEO pay has soared.  The median value of CEO compensation at the 350 biggest Corporations was $9.3 million a year, not including stock options.

Educating ourselves on the real tax issues

Preface - Few things the government does affects the average citizen more than taxes.  When we are wage earners we are often a little oblivious to taxes since they are taken out of our paycheck before we ever see the money.  When you are in business you have a little bit different experience - you are confronted with the amount of taxes you pay, and have to actually write a check, on at least a quarterly basis.

Politicians have little incentive to figure out what taxes actually make sense - that takes time, and is hard to explain to people - not to mention it takes a lot of time and thought to figure out what makes sense.  So generally whatever lobbying group has a good theory will get their way eventually.

Putting aside the contentious issue of how much taxes to pay, it is in our interest as taxpayers to understand taxes and figure out what taxes make sense, and what taxes don't make sense. All taxes are first and foremost intended to raise revenue for government operations, but different types of taxes have different characteristics, justifications and impacts on our economic well being as a nation.

History - After the great depression and World War II we as a nation had a huge national debt.  After nearly a decade of wrangling Congress in 1954 made huge revisions to the United States Tax Code.  They built a tax code that balanced the needs of government against the needs of the public well enough that our economy took off and grew for 50 years.  Over that 50 years life has been really good here in the United States, so we as voters haven't really paid a lot of attention to taxes, so Congress has gradually let the expediencies of the day (satisfying lobbyists)  undermine the carefully negotiated balance that made the 1954 tax Code work.

We are now at a point in our history where we need to make major changes in the way we do government, including a major revision of our tax law, but we are stuck with a Congress still clinging to the self indulgent politics of self satisfied people.  We need to go back to basics and remind ourselves that, while all taxes raise revenue, some taxes exacerbate problems in society while others lubricate the smooth functioning of society.  Here are some things we need to keep in mind on the three most prominent types of taxes.

The Capital Gains tax - probably more than any other tax the nature of Capital Gains tax insures that it directly impacts economic development.   A good Capital Gains tax should encourage people to make the investments in time and energy to build or expand enterprises.  This type of investment contributes to building a stronger and more prosperous world for all of us.   On the other hand it should not encourage market speculation that is essentially a zero sum game - where for every winner there is a loser and no long term benefit is provided to anyone other than the winner.

One of the big ongoing problems of the Capital Gains tax is we have never indexed the Capital Gains tax for inflation.  So Joe, who bought a farm for $50,000 thirty years ago and now wants to retire, sells his farm for $250,000.  In the view of the tax code Joe has a $200,000 in Capital Gain.  In fact the $50,000 Joe paid 30 years ago may be the equivalent of $250,000 in current dollars, so in fact Joe has no real gain and is essentially being asked to pay tax on his initial investment.  We should demand from Congress that any Capital Gain tax should be indexed for inflation.

Another problem of the Capital Gains tax has been many speculator's engaging in zero sum financial market speculation, who provide no real gain to society pay far less tax on their income than folks working 40 hours a week doing productive, necessary work.  Speculative gains should be treated no differently than the income wage-earners take home as their way to make a living.  This particular issue has become prominent thanks some very wealthy people stepping forward and pointing out the unfairness of this tax.

Income taxes -  We want to structure the income tax law to encourage hard work - we don't want to discourage people from taking the time and making the effort to commit themselves to being as productive as possible.  On the other had we don't want to income tax to be used in a manner that allows some to benefit more from while paying less tax.

One of the factors that has allowed Congress to undermine the 1954 tax code is folks have sold us on the notion that to be fair we all should pay the same amount on each dollar of tax we paid.  That notion is predicated on the assumption we all benefit equally from each tax dollar.  Yet many programs are of great value to some and no value to others.  The income tax should, to the extent possible, match tax to benefit.

The lack of indexing for inflation has also been a big problem in the income tax, probably the single biggest reason for the taxpayer anger that has resulted from the current mess that is our tax code.  Over the years people who's real incomes aren't really increasing get bumped into high tax brackets by inflation.  It has been an effective hidden tax for decades.  We should demand that Congress index tax brackets for inflation.

Property taxes on land and buildings - The primary reality of property taxes is that they represent the ultimate finite asset.  There is only so much property.  The free market generally does a good job of relative pricing on land, a house on the Beach at Malibu is always going to be more desirable and vastly more expensive than a house in suburban Riverside.  If you want to live in Malibu it is going to cost you.

Inflation also impacts property taxes and has created many of the problems with property taxes in the public mind.  People who buy an house and expect to pay a certain level of taxation find their taxes rising through inflation as their home values rise.  If they are people on fixed incomes, or find themselves in some area that becomes popular so prices rise rapidly they may be forced out of their house.  Not a situation that will create happy voters.

One way to deal with the problem of inflation on property taxes would be to allow people the option of not paying additional tax attributable to inflation and give the taxing authority a lien on the amount of the accumulated additional taxes at the time the house is sold.