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economics

Obama-facepalmOne of the things that mainstream media tends to overlook in the current debate over the roll-out of the Affordable Care Act (aka “Obamacare”) is that it employs the very market solutions that business-centric Republicans love to tout as the panacea for all that ails, but either don’t really seem to understand, or only apply topically when needed — like zinc ointment for a skin rash.
 
One reason the media keep missing it is because the White House Office of Communications (WHOC) repeatedly fails to point it out.
 
We need to remember that Obamacare is not socialized medicine, or anything remotely like it, no matter what those reality-challenged moonblind sub-normals in sloth cloth say on the buzzbox.
 
The foundation of Obamacare is state-based insurance exchanges. The idea is not to socialize medicine, but to socialize risk across a broader population base and thereby to reduce costs for everybody. In fact, that’s all insurance companies of any stripe do — socialize risk by spreading loss across a large subscriber base. The ACA state-based insurance exchanges just make it more efficient.
 
Here’s where market principles apply: as health insurance companies compete for customers within a huge pool of potential customers, over time there will be winners and losers, as there are in any competitive marketplace. Those who survive and prosper will be those who figure out ways to: 1) Provide better services at lower cost; 2) Create more efficiencies in providing those services; 3) Find innovative ways to create those efficiencies; 4) Increase productivity while decreasing overhead.
 
What’s for a free market capitalist and Austrian School Tool not to like? Maybe the regulations?
 
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Too minimal a minimum wage increase

by Dog Gone on May 1, 2013 · 0 comments

The bill to raise the minimum wage came out of committee on Monday, and is expected to reach the floor of the House for an up or down vote on Friday.

 

Minnesota currently is among the states with a minimum wage at $6.15,  below the federal minimum wage of $7.25.  The plan is to raise the minimum wage in stages starting in August 2013, to $9.50 by August 2015. Overtime is now mandated to begin after 40 hours a week for some kinds of jobs previously excluded as well.

 

There had been an effort to make it over $10, but that was shot down.  Too bad, because even $10 is too low.

 

The advantages in raising the minimum wage is that it will benefit the working poor, raising them out of poverty and dependency.  A recent study by Demos calculated that in retail employment, where big box stores like Walmart are particularly bad about paying a living wage, and even encouraging their employees to seek government assistance, $15 an hour would make that assistance unnecessary.  Demos estimated that for a typical, average shopping trip to Walmart, the increase would reflect only an additional $0.15 at the cash register.

 

According to Payscale.com’s data,  it is worth noting that while executives of such businesses make anywhere from 500 times to where, in the case of Walmart, the CEO makes 1,034 times the median worker compensation — which is more than the minimum wage. An yet, every time he gets a raise or a big big big bonus, no one computes how that would figure into the cost to shoppers — because no one cares what it costs consumers when the big guy gets more money. …READ MORE

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Photo from the Honour campaign web site

Investment Banker Scott Honour appears to have set up a web page that indicates he wants to throw his hat into the ring against presumably Mark Dayton making a second run.  Honour has no previous experience holding office, but he has experience raising money for right wing politicians from TPaw to Mitts on R-money, who will presumably reciprocate if he looks like he can be effective against the increasingly popular Dayton.

 

The photo is from the Honour campaign web site

 

Already we see Honour  looking the wrong way and making the wrong but very right wing assumptions.  As already noted over at the MN Post coverage of his website::

“The impact of our state tax and regulatory policies can literally be seen on our borders. For instance, Fargo has outgrown Moorhead seven to one since 1980. They’re not moving there for the pheasants. Look at the difference in tax rates and the business rankings of Minnesota versus North Dakota. 

What the MN Post doesn’t address is that unless Honour has some way to put the oil resources like those driving the economic activity in NoDak under the ground in Minnesota by some wave of a magic wand, the comparison is a bad one, and I would go further – a dishonest one.  Without that oil, North Dakota would be struggling, and struggling badly.  A more apt comparison would be to look to the east, to see what the same right wing economic policies have accomplished — or more precisely NOT accomplished.  This is a bit like the misdirection used by magicians who practice sleight of hand.
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The speech Rep. Michele Bachmann (R-MN) gave to the Republican Jewish Coalition was a gold mine of crazy. Yesterday I noted her remarks linking Iran and the next Pearl Harbor. Today, I’ll explore her remarks on economics. She doesn’t say much which is probably a good idea.  The more she talks about economics, the more ignorant she sounds.

“The problem is an individual tax code with 3.8 million words that’s too complicated for the average American to understand and a corporate tax code that makes America hopelessly uncompetitive at almost 40 percent when you add the federal and state taxes. And a tax code that contains loopholes that are exploited by companies large enough to hire an army of lawyers. As Investor’s Business Daily wrote, in 1981 the entire developed world had high corporate tax rates, averaging 47 percent. Then capital became mobile and rates plummeted to 25 percent and haven’t stopped falling. The United States remains stuck since 1986 in an out of date high corporate tax rate that sent companies fleeing America for a more competitive tax climate. Just ask any number of companies why they left America and they’ll tell you that between the high tax and unreasonable regulatory burden in America, other nations are now a more profitable place to do business. For your sake and your future, America, and Occupy Wall Street in particular, needs to wake up and stop blaming job creators for the failures created by selfish politicians who wink at their political donors.

My problem is where to begin. There’s so much wrong with what’s in this paragraph.

I’ll start with what is a central theme for Bachmann. She claims that “The United States remains stuck since 1986 in an out of date high corporate tax rate …”  Bachmann refuses to recognize that many Fortune 500 multi-national corporations pay zero in US taxes.  Many others spend more on lobbying than they pay in taxes.

Yet, two sentences prior, she claims that we have too many corporate tax loopholes!?! Which is it?  Are corporations exploiting too many loopholes or are taxes too high?

Next she gets basic economics all wrong. Its the second half of the sentence I cited above. “… high corporate tax rate that sent companies fleeing America for a more competitive tax climate.”

Corporations did not ship jobs overseas because of high taxes. They do it because we allow corporations to import their own products they have made overseas and avoid any tarrifs. They can exploit cheaper overseas workers and lax foreign environmental laws.  This is a direct result of NAFTA and the WTO.

The next gem is “… just ask any number of companies why they left America and they’ll tell you that between the high tax and unreasonable regulatory burden in America.”

Of course corporate lobbyists are going to rationalize our exploitable tax code in this way. If they were honest, they’d be out of a job. Bachmann, as usual, is just carrying water for the multi-national corporations.

Her final sentence is both willfully ignorant of reality and just plain ignorant of simple economics.  “For your sake and your future, America, and Occupy Wall Street in particular, needs to wake up and stop blaming job creators for the failures created by selfish politicians who wink at their political donors.”

When have the magical job creators she keeps talking about ever created any jobs? George W. Bush massively slashed their taxes, yet job creation fell steadily under his watch.

If those “selfish politicians” who “wink at their political donors” are George W. Bush and the Republicans who gave massive amounts of business to Halliburton then her analysis is right on. However, I’m fairly certain she isn’t intending to impugn Bush and her fellow GOPers.

I’ll end with the gem she says immediately after the sentence I’ve analyzed:

“Politicians assure their friends that with government’s financial backing, their businesses will never fail.

“It happens every day, and it has to stop. After all, we’re not a Banana Republic; we’re the United States of America and we need to act like it.

Srsly? Sheesh. She and her fellow Republicans have steadfastly done the bidding for their corporate donors and turned the US into a Banana Republic.

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On The Emergence Of China, Or, Zhou Knew This Was Coming

by fake consultant on December 3, 2011 · 0 comments

After doing a bit of mountain hiking a few days back, I had a chance to get involved in a great afternoon conversation with the Alliance for American Manufacturing’s Mike Wessel, who also serves as a Commissioner with the U.S.-China Economic and Security Review Commission; the conversation was about how we’re doing when it comes to our relationship with China.

As it turns out, the two events went well together, because what I’m hearing from these guys is that we have a great big ol’ mountain to climb if we hope to get back to a level playing field in our interactions with this most important country.

There’s news to report across a variety of issues; that’s why today we’ll be talking about trade, human rights, cybersecurity, poverty and development, and the methods by which you can apply “soft power” to achieve hard results.

The entirely unanticipated result: all of this will reveal the naïveté of Ron Paul when it comes to foreign policy; we’ll discuss that at the end.  

The King of China’s daughter
So beautiful to see
With a face like yellow water
Left her nutmeg tree

–From the song “The King of China’s Daughter”, by Natalie Merchant

So let’s start with the background stuff: the U.S.-China Economic and Security Review Commission exists today because of the legislative wars surrounding China being granted Most Favored Nation status back in the day.

At the time, there were concerns about the way China does business on the international stage, and the Commission provides a follow-on monitoring program to examine questions regarding the Chinese human rights record, issues related to economics, cybersecurity issues, the intentions of the Chinese military, and lots more.

The Commission issues annual reports to Congress, and this year’s report has just been released.

Now normally I would present a point of view, followed by a counterpoint; today, we’ll do the opposite: there are folks I listen to out there, including Thomas P. M. Barnett, who would tell you that you are not going to be able to keep spending $900 billion a year on the defense budget if you can’t find an opponent worth $900 billion a year, and China looks like that kind of opponent, in a number of ways that Al Qaeda never could…even if, in Barnett’s opinion, China is a great big paper tiger.

Al Qaeda will never build aircraft carriers, or intercontinental ballistic missiles; they’ll never put to sea in submarines or build a stealth fighter, and they darn sure aren’t going to be mounting military operations in space or engaging in cyberwarfare.

And yet, if you’re a defense contractor, a General, or an Admiral, that’s where all the money is; naturally, if the money goes away, some of those Generals and Admirals are not going to have the chance to “graduate” from the military and become defense contractor representatives themselves.

Put it all together, and some would tell you that the biggest battle facing the Military/Industrial Complex today…is making sure we’re always nervously looking under our beds at night, just to be safe.

You should also know that our first Secretary of the Treasury, Alexander Hamilton, convinced his brand-spanking-new country to put in place a series of protective tariffs. The intent was to foster manufacturing in the then-agrarian United States; this was intended to create a climate favorable for non-farm businesses and to allow a far more disparate group of immigrants to come to the new Nation than what would have occurred if the only major business activities around the country were farming-related.

So with all that in mind, let’s talk China.

The U.S.-China Economic and Security Review Commission (the USCC) wants you to know that China is very much on a knifedge: the country is ruled by the Chinese Communist Party (the CCP) and the People’s Liberation Army (the PLA).

The USCC would tell you that the primary goal of the CCP and PLA leadership is to “protect their phony-baloney jobs” and the corruption that goes with ‘em (thanks for the line, Mel Brooks), and that they have to do a few things to keep those jobs safe: they have to find a way to make 900 million near-peasants into a middle class, quickly, because the peasants have seen how the other 300 million live, to secure markets and resources China has to begin to project power around the world, by military or other means, and they have to make extra sure that nobody in China, except the CCP, gets the opportunity to take over the political conversation – in other words, ensure that the “Arab Spring” doesn’t become the “Jasmine Spring”.

There’s more: in a country without something like Social Security, China’s population will age faster than any in history, and many of the 900 million seem to want to move from the country to the city in numbers so large that they literally can’t build cities fast enough.

So how does the Chinese Government deal with all this?

What China has been doing is seeking internal “quietude” by growing the economy through manufacturing, and they have decided to choose certain industries as the linchpin of “valuing up” that growth, so that China’s low-tech manufacturing becomes more high-tech. (Think computers and telecommunications, space, alternative fuel vehicles, aviation, green energy technologies, that sort of thing.)

China has decided that virtually the only way a foreign company can do business in any of the “chosen” areas is to mandate technology transfers that allow Chinese companies to obtain the methods and tools needed to compete with the foreign supplier down the road. (This is officially against WTO rules; China disputes that assertion. The USCC says they now make these demands in subtle ways that are less “enforceable”.) Chinese buyers are told to give preference to “state-innovated” technologies.

China also uses their currency as a way of “preferencing” the local economy. The Renminbi (RMB) is, according to most observers, deliberately undervalued in order to make Chinese goods cheap overseas and imported goods expensive at home. Mike Wessel would tell you it’s about 40% undervalued, and that that “trade tax” (my term, not his) costs the US budget about $500 billion a year, with a similar impact on State budgets. Despite much USA pressure and some recent upward valuation (roughly 6% last year), it looks like China is not going to move much on the RMB anytime soon.

Wessel anticipates China will spend about $1.5 trillion on anti-poverty subsidies to quell unrest over the next 5 years; that would become a lot more difficult if a revaluation were to occur.

During the 1990s China began to move to a free-market model that emphasized the growth of privately-owned businesses; Wessel says today China is going back to promoting the State-Owned Enterprises (SOEs) to the detriment of a free market.

This has been bad for our own industrial strategy, such as it is, which assumed we would be selling China lots of high-tech goods, even as they sold us cheap goods. That has not worked out; in fact, China is now the largest market for cars and cell phones, among other products…and those products are not being manufactured in the USA.

It’s reported that the theft of intellectual property is the normal way business is done in China; as an example Wessel notes that something like 80% of the software on Chinese corporate computers is stolen.

We are told that the PLA is looking to create an “area of influence” that extends from the South China Sea to space; to this end the first Chinese aircraft carrier is being readied for service, a stealth fighter is in development, antiship missile systems are being upgraded, and a “counterspace” capability has been demonstrated. (The idea is that Chinese satellites explode near other satellites, thus disabling them. The USA and Russia seem to have similar capabilities.)

Chinese military doctrine, Wessel tells us, advocates shutting down the “network-centric” model of US military operations; it is believed that a significant campaign of computer-based intrusions and attacks on the USA have already taken place, including two events that took place at Department of Defense-operated satellite-control facilities that seem to have been external attacks.

Wessel anticipates that a war with China would begin with China attempting to disable various USA computer networks and infrastructure; the resulting confusion would be used to China’s advantage.

Beyond that, Wessel worries that we’re buying so much of our telecommunications and computing infrastructure from China that we may be vulnerable to being spied upon by our own laptops; he cited two examples of this problem: a computer sale to the State Department that involved Lenovo laptops and classified data, and a sale of network equipment by Huawei to Sprint that might have allowed classified computer traffic to be compromised.

Chinese spying, Wessel would tell you, is widespread and not limited to government: trade secrets are up for grabs in a big way, and even the US Patent and Trademark Office had to upgrade its security after it discovered patent applications were being snatched out of the system and appearing as Chinese products, with Chinese patents, before the applications could even be acted upon in the USA.

Wessel also wants you to understand that China uses “soft power” to advance its interests: there are lots of “hosted” opportunities to study in China, former military officers of various nations, including the USA, are recruited as “representatives”, and there are lots of “get to know us” opportunities that have been created around the world; all of this is intended to “sell” China in ways we do not.

And with all that said, let’s talk about Ron Paul.

Paul’s attitude toward China seems to be that we should allow free, unimpeded trade, and that the currency manipulations about which many complain would not exist if we went back to a gold standard. Paul stated in 2001 that:

Concern about our negative trade balance with the Chinese is irrelevant. Balance of payments are always in balance. For every dollar we spend in China those dollars must come back to America. Maybe not buying American goods, as some would like, but they do come back and they serve to finance our current account deficit.

Free trade, it should be argued, is beneficial even when done unilaterally, providing a benefit to our consumers.

If I’ve been paying attention during the recent Republican debates, this is still what Paul believes about China, and here are a couple of thoughts about how he’s got it entirely wrong:

Paul may not like it, but Hamilton succeeded when he used tariffs to jump-start a manufacturing economy in this country, and not having free trade is working pretty well for China as well. Unfortunately, it’s working very badly for us.

On the one hand, Wal-Mart and all the others who import less-expensive products from China have done a great job of masking the fact that incomes have been either stagnant or declining for about 99% of us, but Wessel would say that’s been at the cost of sending millions upon millions of jobs to a country that is working hard on every level to ensure we can never again compete as a manufacturing nation – and while we thought we would make up that difference with our high-tech advantages, theft and spying and a devalued currency and “partnerships with benefits” and protectionist “state-innovation” rules have made sure we don’t.

A gold standard won’t fix this, and simply advocating that we allow China unfettered access to USA markets while they rob us blind seems a bit like suggesting everyone leave their houses unlocked so that the market can more efficiently decide which ones are the best for burglars.  

So we’ve covered a lot of ground today, and let’s wrap this thing up with a summary of where Commissioner Wessel says we’ve been:

We have a competitor in China who will do more or less anything to keep its current political leadership in power, even as that leadership is forever worried that 900 million of its citizens will discover that you can overthrow a government.

The PLA is busy as well, with the South China Sea and everything above being the “area of influence”; computer warfare seems to be the next phase.

“Soft power” is also being applied; we have former military officers and Chinese language students and lots of other folks either hearing or telling China’s story all over the world and we don’t do a good job of answering back.

All the while, the CCP is working hard to create a higher-tech Chinese economy, by hook or by crook, and that’s putting the future of our own economy at risk, not to mention the operations of our government.

We, as a people, seem to be unaware of all of this, and that plays out in the form of ignorance in our politicians, with Ron Paul being a recent prominent example.

So now it’s up to you to figure out what all this means: is this really a substantial threat that we have to defend against (and there’s lots of evidence to suggest it is), or is this an effort to find a way to keep spending that $900 billion every year?

My take: Wessel’s not a defense lobbyist, even as he is trying to promote manufacturing in the USA, and there is a lot of evidence to support his thinking; with all that in mind I’m more inclined to believe he’s sending a warning we better pay attention to than he is seeing Commies under the bed.

Nonetheless, there are lots of folks who would like to keep stackin’ that big cheddar, at your expense, and even as we think very hard about China, we better also keep in mind that Northup Grumman could be just as dangerous.

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Was OWS Inevitable?

by Tony Sterle on October 25, 2011 · 0 comments


A recent report in the Economist attempts to unearth the causes of social unrest:

In a separate study of fiscal consolidation in Latin America between 1937 and 1995, Mr. Voth pinpoints a tight link between fiscal consolidation and instability, across democracies and autocracies alike.

Protests induced by austerity also attract far more participants than demonstrations sparked by other causes…Tax increases do not have a significant effect on the likelihood of unrest, however which suggests that distributional issues play a role in inciting public ire…

Anger at austerity is likely to be just one component of public dissatisfaction.  High debt levels across the rich world owe much to the impact of weak growth on tax revenues…Weak growth and high unemployment rates are an obvious recipe for discontent…

Inequality is also an engine of protest.  A classic 1994 paper by Alberto Alesina of Harvard University studied 71 countries between 1960 and 1985 and found that higher levels of income inequality were associated with increased social instability.


So to sum up, low growth, inequality, and austerity measures all lead to societal unrest (tax increases on the rich, however, do not).  Assuming the Economist got its facts right, our country has been primed for a movement like ‘Occupy Wall Street’ for quite some time.   Obviously, economic growth these past 4 years has been dismal (we’re just now getting back to the level of GDP we had in 2007):

What’s more, we’ve seen a rather stunning increase in inequality over the past 30 years:

To top matters off, the fading out of the stimulus, mandatory spending caps imposed by the August debt ceiling bill, and decreases in aid to state and local government have led to rapid fiscal consolidation:

It should come as no surprise, then, that the folks who are hurt the most by inequality and austerity measures (the poor and middle class) have taken to the streets in an effort to change the way we do business in this country.  The fact of the matter is that our system has failed the vast majority of Americans.   Frankly, the only thing about ‘Occupy Wall Street’ that actually is puzzling is why it didn’t come about sooner.  For a long time, America has had higher levels of inequality, less progressivity in its tax code, and less social spending compared to the rest of the developed Western world:

People are angry, and they have a right to be.  OWS isn’t about communism; it isn’t about dividing the nation.  It’s about restoring some semblance of justice and fairness to a broken game.

March on.

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You’ve heard the story before.  The economy is in a downturn, unemployment is through the roof, and our policymakers are left searching for a solution.  Democrats call for an increase in spending along with a cut in interest rates.  Republicans, on the other hand, demand that we lower taxes on our nation’s business people.  The rich, they say, are job creators.  If these wealthy folks didn’t have to pay their taxes, than no doubt, they would quickly push through a round of hiring ending the recession.  It’s a nice story.  But, of course, it isn’t true, and I’ll do my best to demonstrate why.

In the pursuit of being as comprehensive as possible, I’m going to explain why tax cuts are rotten at stimulating the economy, using economic theory, empirical data, and a down-to-earth explanation.  
Theory

(Warning: If you find economics dry and boring, I highly recommend you skip this section)

When attempting to stimulate the economy, Fiscal policymakers work primarily with two tools: spending increases and tax cuts.

Importantly, for every dollar the government spends, the economy actually grows by more than a dollar.  Why might this be?  One easy way to explain this “multiplier effect” is through the following example: the government hires a group of construction workers to build a road.  After they finish with their day’s labor, these workers put some of their salary in the bank and then head over to a local restaurant to buy a sandwich.  The restaurant owner deposits some of the proceeds from that sandwich in the bank and uses the rest to purchase a pack of gum from a local drug store.  The druggist then uses the proceeds from that gum to…you get the idea.

The initial money the government spent to hire the construction worker cycles it way through the economy multiple times via market interactions like those described above.  Of course, some of that money is lost along the way (it is saved) but some continues on, stimulating the economy as it goes.  The exact multiplier effect on a dollar of a government purchase is given by the equation 1/(1-MPC) where MPC stands for the “marginal propensity to consume.”  MPC is the percent of each additional dollar of income that gets spent rather than saved (basically, you get penalized when somebody puts money in a bank).  So, for example, if MPC is .5 (50% is saved; 50% is spent) than for each dollar the government spends, the economy grows larger by $2 or [1/(1-.5)].

The tax cut multiplier works in a similar fashion-only this time the government doesn’t buy anything; it leaves that to businesses.  So, the government cuts taxes on Joe, who takes that money and buys a sandwich from Ed, who buys gum from Tim, and on down the line.

The tax multiplier is summed by the equation MPC/(1-MPC), which is very similar to the equation for the spending multiplier.  However, what’s essential to note is that because MPC is always less than 1, (again it’s a percentage) the numerator of the tax multiplier is always less than that of the spending multiplier.  This means that, in theory, cutting taxes by a dollar will always have a smaller effect than increasing spending by a dollar.  For example, if MPC is .5 (as in our previous example), for every dollar the government cuts in taxes, the economy will grow by $1 [.5/(1-.5)].

So here’s the takeaway: economic theory shows that when compared to increasing spending, tax cuts are rotten at stimulating the economy.  Of course, this is mere theory; we need to know if it actually holds in the real world.  Let’s look at some empirical evidence and see if it does.

Empirics

This table from Moody’s Analytic demonstrates the ineffectiveness of tax cuts.  It estimates the one year $ change in real GDP for a given $ reduction in federal tax revenue or increase in spending (which is the multiplier effect we discussed in our theory section).

Even the best tax cut, the payroll tax holiday, has a smaller multiplier effect than the worst spending increase, general aid to state governments.

What’s more, not all tax cuts are created equal.  Some are absolutely atrocious at stimulating the economy, namely the extension of the Bush tax cuts, capital gains tax, and corporate tax.

A Simple Explanation

So in the simplest terms possible, why are tax cuts, especially the Bush tax cuts, so bad at stimulating the economy?  Well, it’s because they tend to benefit the rich, a group that saves far more than those with low-income.  Even a middle-class cut, the payroll tax holiday, goes to a group that won’t spend as much as the poor.

I’m sure you’ve heard Fox News complain about how 50% of Americans (the lucky-duckies) earn too little money to pay income taxes.  That’s actually true; and despite how you might feel about that fact, from a practical standpoint, tax cuts aren’t exactly padding the wallets of the nation’s poor.

Poor individuals spend the vast share of their income because they need to.  They immediately use additional money to buy food, clothing, and other essentials.  This benefits their personal lives and the economy at the same time.

The rich, by contrast, save a large portion of their income.  They buy shares in stocks and bonds, they put money away in a child’s college fund, or perhaps they save up to buy a cabin at the lake.   There’s nothing necessarily wrong with those things, but when we’re in a short-term rut, they do nothing to reboot the economy.

Thus, a dollar the government spends on food stamps is going to have a larger impact than a dollar put back into the hands of a rich family through a tax cut…

So there you have it, why tax cuts stink at stimulating the economy from a theoretical, empirical, and simple standpoint.  

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Even the Rich Don’t Mind Taxing the Rich

by Tony Sterle on August 16, 2011 · 0 comments


Warren Buffett, one of our nation’s most successful investors, has just dropped a bomb shell on our public discussion about tax reform:  

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. Some of us are investment managers who earn billions from our daily labors but are allowed to classify our income as ‘carried interest,’ thereby getting a bargain 15 percent tax rate…

If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine – most likely by a lot…

The mega-rich pay income taxes at a rate of 15 percent on most of their earnings but pay practically nothing in payroll taxes. It’s a different story for the middle class: typically, they fall into the 15 percent and 25 percent income tax brackets, and then are hit with heavy payroll taxes to boot…

I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.

Before I start a squabble with our Conservative readers, I will admit that Buffett may not be telling the whole story (namely that if Tim Worstall of Forbes is right, Buffett isn’t including the effects of the corporate income tax).  Nevertheless, the crux of his argument still stands.  As a nation, we have goals we want to accomplish (providing for the elderly, educating our children, paying down the debt), and to achieve these goals, our government needs revenue.  That seems pretty straightforward.  It also doesn’t seem particularly unreasonable to ask those with the highest ability to pay to pay more.  
Now, that’s not to say that the rich are bad people or that they don’t work hard; they do-here I think Buffett also gets it exactly right.  Gone are the days of the lazy rentier soaking up dollars from daddy’s trust fund; by and large, today’s rich are good, industrious people…but so are today’s firemen, teachers, and policemen.  These folks work just as hard as rich people do (some of them even risk their lives on the job every day).  They just happen to make less money because of the supply and demand for their specific skill set.  So, if everybody is working hard and creating value for the economy, I don’t see why those who make millions or billions shouldn’t be asked to chip in a little extra…especially when, as Buffett says, they are currently getting a huge break when it comes to payroll taxes.  

What’s particularly ironic is that Buffett’s article comes on the heels of a Republican debate in which every candidate proudly proclaimed that they would reject a 10-to-1 spending cut to tax-hike deal to reduce the deficit.  As I’ve written before, this anti-tax ideology flies in the face of practicality.  Cutting our way to “victory” would be needlessly painful–and the burden of those cuts would fall on those who most rely on government services (the poor and middle class).  Most polls show that the majority of Americans, even Conservatives, favor including tax increases as part of a responsible long-term debt solution.  Even the rich can see that.  Why can’t our Republican politicians?

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A little while back, I wrote a piece on the debt ceiling dilemma.  In it, I reported how I felt that the Republican position on the matter is akin to playing a dangerous game with the economy.  Since then, a lot more has been said and done (or not done considering that a deal has yet to be reached), and the two sides have become much more specific in their talking points.  Considering that raising the debt ceiling is perhaps the most pressing issue facing the nation right now, I figured it was worth a second look.

In case you haven’t been following the situation particularly closely, the trouble all started when Republicans refused to raise the debt limit above its current level without getting major deficit reduction concessions from the President and the Congress.  As has time has gone on, the Republicans have demanded ever more extreme spending cuts but have been unwilling to even consider raising taxes.  By contrast, the Democrats have already agreed to multiple cuts, but they also ask that revenue increases be a part of the budget solution.  If no compromise is reached, some rather devastating economic consequences will be brought to fruition.  The price of inaction includes a partial default on the national debt, skyrocketing interest rates, a devaluation of the dollar, and as CNN recently reported, a downgrade of the sterling bond rating on U.S. Treasury bonds (currently considered one of the safest assets available with a rating of AAA).

We absolutely have to find common ground, but the trouble is that there just doesn’t seem to be that much common ground to find.  Last Tuesday, David Brooks wrote a rather stunning article about the mess we’ve put ourselves in.  Brooks’s reports:

If the Republican Party were a normal party, it would take advantage of this amazing moment. It is being offered the deal of the century: trillions of dollars in spending cuts in exchange for a few hundred billion dollars of revenue increases…The party is not being asked to raise marginal tax rates in a way that might pervert incentives. On the contrary, Republicans are merely being asked to close loopholes and eliminate tax expenditures that are themselves distortionary.

But, of course, the Republican Party doesn’t even want to do that.  Congresswoman Michele Bachmann has recently said that she hasn’t forgotten “where [she] came from” and that she will strictly oppose raising the debt ceiling if it means any form of revenue increase.  She’s not alone.  All but a handful of Republican Congressmen have signed loyalty pledges that disallow them from raising marginal tax rates even in the case of war, famine, or plague.  
One has to wonder if the Right is making any real effort to compromise at all.  I’m on a bunch of Republican email lists (don’t ask me why), and I keep getting bombarded with messages urging me to say “no” to raising the debt ceiling.  Moreover, the other day, Rick Santelli went a little crazy on CNBC demanding that Congress cut spending and that refusing to raise the debt ceiling was the best way to get them to do that.  

The fact is that this political theater and posturing has officially switched from being annoying to being insane.  I say that it’s insane for two reasons (well…it’s insane for many reasons, but two particular ones).  The first is that if you are unwilling to allow any form of tax increase at all to fix a deficit problem that you brought to light, than you are essentially like an individual who wants to balance their personal budget without getting a job.  It’s like saying, “gee, I don’t have enough money for stuff, I should probably just stop buying absolutely everything altogether….sure I could get a job-but really, who needs food, and clothes, and a place to live?”  The truth is that any responsible solution to a budget problem, whether on an individual level or that of the government, needs to include both a reduction in outflows and an increase in inflows.

The second reason the Republican position is crazy, and this is the most important one, is that their argument essentially boils down to this: “we’re worried about the country defaulting on its debt.  We need to reduce our debt.  Therefore, our best bet is to put ourselves in a situation where we will immediately default on the debt in order to stop ourselves from potentially defaulting at some unspecified time far off in the future.”  It just doesn’t make any sense.  If I had a recurring fear that I was going to fall off a cliff sometime next year, I wouldn’t go jump off one today just to prove a point.  Seriously, it’s a mind-bogglingly crazy argument.

We’ve got to do something…but I don’t’ know what it is.  Democrats have agreed to spending cuts, they’ve agreed to deficit reduction, there’s just not that much more they can do.  Republicans have to come to the middle, at least a little bit, or our country is headed for disaster.  I hope for all our sakes that they can get it together.    

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The Federal Reserve-Deviously Evil or Boring?

by Tony Sterle on July 7, 2011 · 0 comments

During my time interning at the U.S. Senate, one of my many duties (which also included opening and sorting mail, and delivering mail, and reading mail, and well…just a lot of stuff with mail) was to take the phone calls of constituents and help them with their questions or concerns.   I always loved doing this because it gave me the opportunity to find out the issues that my fellow Minnesotans cared most about.   However, I had a few particularly strange constituent conversations while I was there.  One of them was centered on the economic role of the Federal Reserve.  The caller, who ended up going on an anti-Semitic/anti-Democratic tirade at one point, also brought up how, in his opinion, the Federal Reserve is an evil shadow agency destroying the country.  At first, I just sort of laughed this off.  “The Federal Reserve,” I thought, “well, their primary focus is to help manage the economy…why would anybody be concerned about that?”  However, as time passed, I started receiving more and more calls from people–rational people–who thought that the Federal Reserve needed to be regulated by the government.  

And it isn’t just individuals that want more government control over the Fed, but politicians too, like Libertarian Congressman Ron Paul.  In fact, Congressman Paul wants to abolish the institution altogether.  Here’s a quote:

Since the creation of the Federal Reserve, middle and working-class Americans have been victimized by a boom-and-bust monetary policy… I urge my colleagues to stand up for working Americans by putting an end to the manipulation of the money supply which erodes Americans’ standard of living, enlarges big government, and enriches well-connected elites, by cosponsoring my legislation to abolish the Federal Reserve.

Now, maybe it’s just because I’ve been trained in classical economics, but I couldn’t disagree with these sentiments any more.  I think, and I intend to show, how the Federal Reserve effectively and efficiently manages the economy and how regulating or abolishing it would be a detriment to the state of the nation.  

More below the fold…
What does the Federal Reserve do?  Well, amongst a variety of other responsibilities, it clears checks, lends to banks, and removes damaged currency.  However, by far the most important activity it engages in is what is known as “open market operations.”  When the economy is doing poorly, the Fed can buy Treasury bonds on the open market, which ends up increasing the economy’s money supply and decreasing its interest rates.  With rates lowered, people can take out loans for cheap, banks want to hold less money in reserve, and so, the economy speeds back up.  However, sometimes the money gets flowing around a little too freely and so inflationary pressure forces the Federal to sell bonds, thereby raising interest rates, thereby taking money out of the economy and curbing inflation.  That’s what the Fed does.  It’s super duper boring, but it’s effective.  The Fed is not the illuminati; it’s not the death star of the galactic empire; it’s not even that crazy, sorta-racist great aunt that you don’t really want to spend time with, but your mom says you have to spend time with, because she loves you, and so you do, but you don’t really want to, but you do it for your mom.  No, it’s just an agency full of smart guys who do their best to control a complex economy (I know they’re smart because my super-awesome high school economics teacher, Mr. Wolla, works there).  

Since the Fed has taken on the role of economic caretaker, the booms and busts that Congressman Paul worries so much about have actually become a lot less severe-indeed, far from endangering it, the Fed actually plays a major role in stabilizing the financial system.  Save for the recent financial disaster, the economy has been chugging relatively steadily along with few major pitfalls, and the Federal Reserve has played a large part in that.  Moreover, through time and experience, the Fed has improved its own methods, to the point where it can now control interest rates extremely effectively.

Now, if we were to remove the Fed’s independence and place it under the jurisdiction of our politicians, it would become subject to the political business cycle.  Because it has some control over the performance of the economy, during election years, politicians in power would likely use the Fed to create inflation in order to stimulate output, thus garnering them extra votes.  I’m all for stimulating the economy when it’s in need, but you don’t do it to win an election.  If our national politicians are having this much trouble with a no-brainer like the debt ceiling, I’m a little leery to hand them the keys to Monetary Policy.  Don’t get me wrong, there are a lot of things I think our government does really well, but I don’t think that this would be one of them.   I’d rather leave it to the professional economists, but that’s just me.  

If we regulate or abolish the Fed, we risk losing the relative stability we’ve come to take for granted.  I for one think we need to leave it alone.  It isn’t perfect, it makes mistakes, but the alternative is a whole lot worse.  

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