Tag Archives: austerity

Heller: 0.01% trumps Nevada’s 15%

Heller 2As of 2012 there were some 161,317 workers in the state of Nevada who would be directly affected by an increase in the minimum wage, out of a total workforce of approximately 1.068,842.  Of the 161,317 directly affected 139,064 were aged 20 or above.  [EPI pdf] A bit of punching on the plastic brains (read calculator) shows that 15.1% of Nevada’s workforce would be directly affected, and that 86.2% of these workers were NOT teenagers.

So, why would Senator Dean Heller (R-NV) vote to sustain the Republican filibuster of the minimum wage increase bill in the U.S. Senate? [Senate]

Senator Heller offered two explanations: (1) “Heller’s vote was rooted in his belief the minimum wage should be determined by individual states and not the federal government, “and this particular legislation is no exception,” according to his spokeswoman Chandler Smith.” [LVRJ] (2) “Smith added Heller was persuaded by a Congressional Budget Office estimate that the legislation “could cost our economy 500,000 jobs.” [LVRJ]

Let’s take the second part first — Senator Heller seems to have read one half of the report, or one half of the CBO’s conclusions.  The conclusions created a “mixed message:”  A popular Democratic proposal to raise the minimum wage to $10.10 an hour, championed by President Obama, could reduce total employment by 500,000 workers by the second half of 2016. But it would also lift 900,000 families out of poverty and increase the incomes of 16.5 million low-wage workers in an average week.” [NYT]

Evidently, it doesn’t take too much precision to convince Senator Heller to embrace half a report.  He missed the part wherein there were two options ($9.00 and $10.10) and he obviously missed this portion of the text:

In CBO’s assessment, there is a two-thirds chance that the effect of the $9.00 option would be in the range between a very slight increase in the number of jobs and a loss of 200,000 jobs. If employment increased under either option, in CBO’s judgment, it would probably be because increased demand for goods and services (resulting from the shift of income from higher-income to lower-income people) had boosted economic activity and generated more jobs than were lost as a direct result of the increase in the cost of hiring low-wage workers. [CBO pdf]

There’s our old friend “aggregate demand” again, if more workers have more money there will be more demand for goods and services and hence more employment.  Unfortunately, Senator Heller is still locked into his mantra “less regulation, more tax cuts (especially for the 0.01%), “rein in government spending” (unless that means loopholes for corporations), and supporting comprehensive energy policies (read: support the oil and gas giants and the Canadian XL Pipeline).” [Heller]  None of this is substantiated by the conclusion reached in the February 18, 2014 version of the report issued by the CBO. Nor is the conclusion all that solid.

“Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers, or 0.3 percent, CBO projects (see the table below). As with any such estimates, however, the actual losses could be smaller or larger; in CBO’s assessment, there is about a two-thirds chance that the effect would be in the range between a very slight reduction in employment and a reduction in employment of 1.0 million workers.”

With all due respect to those who toil diligently at the CBO to provide economic analysis, a conclusion that there is a 66% chance of a range of employment displacement from “very slight” to 1 million isn’t all that robust.   However, this seems sufficient to support Senator Heller’s proclivity for hugging his favorite talking points.

At the risk of over-simplifying his position, the core of it is essentially Trickle Down Hoaxsterism with Austerity for All and Prosperity for A Few.   Somehow we are to believe that cutting taxes (especially for the 0.01%) and deregulating Wall Street will “create jobs” … sometime…somewhere.  Meanwhile, social safety net programs are subsidizing the poverty level wages being paid by major corporations. [HuffPo]

Meanwhile back in the real world, and in the state of Nevada — of those 161,317 workers directly affected by an increase in the minimum wage increase 68,247 are non-Hispanic whites, another 54,572 are Hispanic, and 12,957 are African American.  [EPI pdf]

As to the argument that minimum wage jobs tend to be part time, the EPI statistics don’t support that myth either — 81,115 are full time employees.  56,971 are mid-time employment, i.e. from 20 to 34 hours per week, and only 23,230 are actually part time jobs with 20 hours per week or less.    Nor are the people working a minimum wage jobs necessarily “drop outs” — 64,606 are high school graduates, 40,187 have some college or post secondary education, 5,824 have an associate’s degree, 12,051 have bachelor-level degrees; leaving 38,639 with less than a high school diploma or its equivalent.  [EPI pdf]

The notion that when speaking of minimum wage workers we’re talking about teens, females, and drop outs isn’t sustained by the actual numbers, in fact, while there are more Nevada women holding down minimum wage jobs (83,079) there are 78,238 men trying to maintain life on the minimum wage in Nevada. [EPI pdf]

We might summarize by concluding that Senator Heller would far rather support further tax cuts for the 0.01%, and more deregulation of the Wall Street Casino, and yet more “austerity” for those who work for corporations paying below living wages, than he would care to support legislation to support at least 15% of Nevada’s working men and women.

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Filed under Economy, Heller, Politics

Amodei, Heck, Right Face, Left Face, Backwards, March

Joe HeckRepublican members of the Nevada Congressional delegation Joe Heck (R-NV3) and Mark Amodei (R-NV2) are following the Tea Party script in the ever evolving rationale for the impasse created when the House passed a Continuing Resolution (defunding the implementation of the Affordable Care Act).  The Senate received the CR, stripped out the defunding section, voted on the clean version, and sent it back to the House.  The House has yet to vote on this measure.

Remember when, not so long ago that the House version of the CR was all about repealing “Obamacare?”  That horrible no good terrible job killing freedom smashing liberty restricting socialist communist anti business law of the land to allow people to buy private health insurance policies in a competitive marketplace?  Well, no longer — NOW the House refusal to bring a clean CR up for a vote is all about — The Debt and The Deficit.

Representative Heck tells the Las Vegas Sun his views on a clean Continuing Resolution:

“It would have to be a bill, and I don’t comment on hypothetical bills,” Heck said when the Sun asked if he might consider signing on.

But in theory, Heck is not on board.

“What is there associated with the clean (budget resolution)?” he asked. “How are we going to address our debt and our deficit?”

How are the debt and deficit to be addressed in the Senate version of the Continuing Resolution?  How about like this?

Clean CR Senate

What we have here is another instance of the Republicans refusing to take “YES” for an answer.  The Clean CR is $217 billion less than the Obama Administration’s proposed budget.  It is $109 billion less than the previous incarnation of the Ryan Budget.  The Senate CR is $80 billion less than the 2011 Budget deal, and only $19 billion more than the proposed 2014 Ryan Budget.  Is Representative Heck saying that he’s in favor of allowing the federal government to go into default for $19 billion?   Just to put that number into perspective, the blundering F-35 program has cost the U.S. taxpayers some $400 billion since 2001, [Time] a number which comes down to about $30.76 billion per year.

Amodei 3Nevada District 2 Representative Mark Amodei, has also changed the marching tune, offering this variation:

“We ain’t repealing Obamacare, we ain’t defunding Obamacare, we get that,” Amodei said. “It’s not just health care. It’s $2 trillion more in debt. If you get policy concessions in order for having more debt, what’s the matter with that? What’s the evil in that?”

Amodei may not have as purple a district as Heck, whom, he surmised, has “gotta be mindful of who his folks are.”  [Las Vegas Sun]

Herein, Representative Amodei engages in a bit of obfuscation.  Where did that $2 trillion more in debt come from? It may be the total of all federal debt.  It might be the number being bandied about in right wing circles for the national debt, or it might refer to the number the Congressional Budget Office projected as necessary to begin reducing the national debt in relation to the Gross National Product to 31% (below the 40 yr. average.) [Reuters] However, no matter the origin of the number, it represents long term budgetary goals and figures — and only tangentially relates to the Continuing Resolution to keep the government floating for the time remaining until the next GOP tantrum.

Bottom Line: IT, if by IT Representative Amodei means the Senate’s version of the Continuing Resolution, doesn’t add $2 trillion to the national debt.

Evidently, NOW the dismantling of the Affordable Care Act is reduced in GOP parlance to the status of a “policy concession.”

For the sake of clarity in this squabble, which threatens to take the United States of America into a default, let’s review some basic points:

(1) The raising of the debt ceiling has NOTHING to do with increasing the national debt.   President Obama isn’t the first President to ask for a “clean CR,” President Reagan wanted one in a 1986 battle with a Democratically controlled Congress in 1986. [NYT]  What President Obama understands now, and President Reagan understood then, is that a Continuing Resolution merely authorizes the Treasury to pay bills we have already incurred.  It doesn’t increase the amount of future appropriations.  Representative Amodei’s and Representative Heck’s concerns notwithstanding — the CR doesn’t add to the debt — it authorizes the payment of current debts.

(2) The Senate version of the Continuing Resolution IS a compromise between the Administration’s budget proposal, the Senate budget, and the House budget.  In a normal environment, after the two versions of the budget were passed by the respective houses in March, a conference committee would have been appointed to work through the differences and to bring a compromise budget to the original houses.  Senate Budget Chair Senator Patty Murray (D-WA) has asked 19 times for the Senate to appoint conferees to a budget compromise conference committee and has been rebuffed by Republicans each time.  The House has not appointed any of its members as conferees to such a committee.

(3) We have been on a trajectory to significantly reduce the federal debt.   IF we accept that $4 trillion target for budget reductions over the next ten years, then the Obama Administration has been remarkably well focused.  There’s good news and bad news with this target, summarized as follows concerning the President’s budget:

“Cutting an additional $1.5 trillion would indeed stabilize the debt, leaving it growing at about the same rate as the broader economy for the rest of the decade, the CBO said. However, the debt would remain above 73 percent of gross domestic product — the highest level in U.S. history except for the period after World War II. [WaPo]

However, someone needs to ask the question: Is debt reduction an appropriate focus during a recessionary period or exceptionally slow recovery?  It’s important to notice at this point that Austerians focus on cutting government spending — even though government spending is part of the GDP formula — to the exclusion of consideration of the possibility of tax increases, and the increased revenues available when wages and salaries are also increasing.  This position is analogous to expecting a camp stool to balance on only one of its three legs.

Meanwhile back in the real world, Governor Sandoval is already feeling the bind:

“… the consequences have already started. In a meeting with his cabinet, Sandoval warned that Nevada would soon run out of money to process unemployment benefits or cover food stamps, and that National Guard vehicles had already been grounded because of a lack of funds to pay for basics, such as gas.”  [LVSun]

So, Representatives Heck and Amodei continue their forward, backward, left face, right face, backwards march in step with the Tea Party leaders in the U.S. House of Representatives, while the Nevada National Guard isn’t going anywhere…

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Filed under Economy, Health Care, Nevada politics, Politics

Quick Hits

hammer** The Las Vegas Sun has a quick list of bills that made it past the “Tuesday Deadline” for consideration in the Nevada Legislature.  Looking for bills that failed to meet the deadline? It’s here.  For information on other bills start with this link.

** Heads up: The Reno Gazette Journal will run an article on Sunday concerning the closing of the ATF office in Reno, NV, and how this has impacted the efforts to stop gun trafficking.  The Leahy-Collins amendment to curtail gun trafficking in the U.S. failed in the Senate on a 58-42 vote during which Republicans sustained their filibuster of the amendment. [TheHill] Senator Dean Heller (R-NV) voted to sustain the GOP filibuster. [Vote 99]

** Did we know? “Sixty-six Americans were killed in mass shootings by non-Muslims in 2012 alone, twice as many fatalities as from Muslim-American terrorism in all 11 years since 9/11.” [Politicususa] And, did we know that the NRA and Conservatives in Congress have made it more difficult to track or monitor non-Muslim extremists in this country since 2001?  Crooks and Liars posts a list of recent “eliminationist” attacks.

** It’s been a bad week for the Austerians.  First, comedian Stephen Colbert launched a devastating critique on the economic theorists.  Additionally, many others have piled on.  There’s Austerity as Flim-Flam.   There’s Who is Defending Austerity Now?  There’s rethinking austerity.   There’s the EU calling for diminishing austerian policies.  And, for good measure, there’s the choking effects of austerity policies in the UK.  Thus the House GOP budget plan is based on a seriously flawed study.

** What economic recovery? For 7% of this country it’s been a nice rebound, for the remaining 93% not so much.

“During the first two years of the nation’s economic recovery, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%, according to a Pew Research Center analysis of newly released Census Bureau data.” [PewResearch]

Graph it out and it looks like this:

Uneven Recovery

** Watch H.R. 1549 carefully. It would “Give sick people without insurance temporary access to crappy private plans at exorbitant rates as part of a strategy aimed at pulling the rug out from under them entirely at the end of the year, all the while mewling about one’s concern for sick people.” [WashMon]  When astro-turf organizations like Freedom Works and AMAC line up for something it’s time to head the other direction.  The best description for this legislation is “ruse and trap.”

** Republicans Behaving Badly.  Let’s start with the Tennessee legislator who thinks pressure cooker bombs are humorous.  Followed, of course, by his non-apology-apology.  His rationale is that advocates of sensible gun safety legislation should have stayed quiet after Newtown…  Then there’s the Conservative group that photo-shopped ethnic minority people from its mailer about voting restrictions.  And who could have missed GOP behemoth, Rush Limbaugh, comparing the Boston bombers to Trayvon Martin?  That Arkansas legislator who called for using “2nd Amendment” solutions to Medicaid expansion, “Most likely won’t kill lawmakers who support Medicaid expansion.”  Most likely? How nice.

** Lady’s Days:  Ann Coulter, scourge of all operative grey cells residing in every cerebral cortex, calls for women to to prosecuted for wearing the hijab.  So, do we tell nuns to refrain from wearing their habits?  A Washington state pastor tells women to submit to their husbands and not nag “like Chinese water torture.”  The adherents of the Church of Perpetual Intolerance (aka the Family Research Council) are trying to convince us that “many” experts believe Plan B contraceptives should not be available over the counter — there are a few critics, and those critiques tend to be based on religiosity not science.  Rebuffed last year, Ohio Republicans are taking another swipe at funding for Planned Parenthood women’s health care services in that state.

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Filed under Economy, Gun Issues, Health Care, Heath Insurance, Nevada legislature, Nevada politics, Women's Issues

What’s Reinhart-Rogoff and why would Nevadans care?

Question Mark 2Last January the Las Vegas Sun published an article reporting that economic development was costing Nevada about $30,000 per job created.  As noted in the publication, we need to be cautious tossing numbers about concerning “per-anything,” because the denominators in any arithmetical calculation are subject to interpretation.  However, Nevada has demurred on tax collections (revenue) and this does mean there are costs for economic development.  We may be incentivizing as fast as we can but the economic growth in the state is lagging as a result of “lackluster growth in construction and hospitality.” [Pew]  When the Governor proclaims we need to emphasize economic growth there are several ways to interpret this statement.  Let’s return to the Governor’s comment: “We cannot cut our way out, we cannot tax our way out, we can only grow our way out,” because it relates directly to some of the larger economic issues under debate.

As noted in a previous post, the statement is problematic because it disconnects three essential parts of the same question: How do we provide an acceptable level of public services with the current tax revenues?  Part A of the answer is that there are some expenditures which might be reduced.  Part B is that there are serious flaws in our significantly regressive system of taxation in this state with its emphasis on sales taxes while other sources of revenue remain low to barely consequential.  Part C  assumes that economic growth is predicated on a given set of ideological standards.  For some economic growth is a function of reduced regulation and “pro-business” policies, among which are debt reduction, low or no taxation, and tax breaks for businesses such as those which have benefited from our economic development efforts.

In light of the controversy over the Reinhart-Rogoff Study we need to take some time considering the austerity focus which was supposed to create a national business climate conducive to economic recovery.

One of the most oft-cited pieces of evidence used by those lawmakers and public figures enamored with austerity is that too much debt will eventually squash a country’s growth. The academic basis for that claim is a study done by economists Kenneth Rogoff and Carmen Reinhart that claims economic growth starts to slow when a country’s public debt-to-GDP ratio hits 90 percent. [USNWR]

The inferences drawn by various and sundry politicians at the national level from the Reinhart and Rogoff study tended toward the austerity camp (We Can Cut Our Way To Prosperity) and the latest incarnation of the House GOP budget proposal exemplified this thinking.  We should be paying attention to this for the following reasons:

#1. Austerity economics assumes that economic growth, as measured by the GDP, will be enhanced if the government cuts spending at the federal level.  The problem with this assumption is that government spending IS part of the formula by which we measure economic growth.  [Formula]

#2. Cuts at the federal level have implications for state economies, even if the states are required to have balanced budgets except for capital expenditures.   If we determine we cannot afford assistance for infrastructure investment, new technologies, or other innovations to diversify a state economy, then public investment in economic activities related to these efforts is reduced and consequently so is the state’s capacity for augmented economic growth.

#3. The point should be emphasized that there is considerable evidence that a weakened economy means more public indebtedness, reversing the austerian argument. [TP]  In a related vein, there’s also evidence indicating that our national debt isn’t seriously impeding our economic growth: [Forbes] [LAT] “…while there’s no way to know whether the economy would be expanding faster if the debt burden were lower, the traditional way that government debt hurts growth is by raising the cost of money as public sector borrowing “crowds out” private borrowers. That isn’t happening.”  [Bloomberg]

The Reinhart-Rogoff study, so piously intoned by conservative Republicans, was supposed to substantiate the austerity focus by providing statistically reliable and valid evidence that debt restrains economic growth.  Nevada Representative Mark Amodei (R-NV2) announced during his last campaign he’d never vote to raise Obama’s debt ceiling. [RJ] Nevada Senator Dean Heller (R-NV) sententiously announces, “Congress must immediately start to solve Washington’s out-of-control spending that has led to unprecedented debt and deficits. ”  The facts that our spending is not out of control, nor is our debt level unprecedented seem to be lost on Nevada’s junior Senator.  In short, the GOP emphasis on debts and spending is only viable IF we assume the Reinhart-Rogoff study describes economic reality — but it doesn’t.

First, the R&R study was in trouble long before anyone tried to replicate it.  The study attempted to compare some very disparate economies using a few leverage ratios. [BusinessInsider] Goldman Sachs economist Jim O’Neill pointed out:

“… it would seem reasonably obvious that grouping countries together in terms of their debt levels and concluding that the economic consequences are the same is quite a tricky path to tread. Even to apply such arguments about balance of payments current accounts, which to some degree are more of an accounting identifying and therefore less subjective, is tricky, but countries with high debt levels usually share very little else with each other.”

Secondly, there’s that sticky part of science in which the results and conclusions drawn from objective data should be capable of replication.  The Reinhart-Rogoff study didn’t meet this criteria.

“The underlying problem is not that their method is necessarily wrong, but that it is particularly sensitive to outliers. This contributed to the “perfect storm” of errors whose combined effect caused the large decline in average GDP. If the only problem was the weighting, this would not have been sufficient to cause a drastic decline in average GDP growth.  However, it was the combination of the weighting system with the exclusion – for whatever reason – that combined to cause the most significant fall in average GDP growth. There is nothing inherently wrong with their weighting system. However it is unusual and it is their obligation to be open and clear in explaining why they used this unusual methodology.

O’Neill was proven correct — the central assumption, that a study which lumped all manner of countries together and then concluded that their economies would all behave in the same ways despite significant differences was tenuous to the breaking point.  The problems weren’t just spread sheet anomalies and errors — the assumptions underpinning the study could not withstand scrutiny.

When the “scientific” validity of a phenomena is questionable at best, then the great debt debate devolves into emotional arguments.  Thus we are treated to such misinformation as “The federal budget should balance the way a family budget balances.”  No, most family budgets are not balanced in terms of revenues and debt.   The currently reported 4Q2012 Debt Service Ratio for American families stands at 10.38.  [FedRes] For American homeowners  it was 13.60 as of the 4th quarter of 2012. [FedRes]  The only Americans whose budgets balance by the GOP definition are those with no mortgages, car loans, student loans, or credit cards.  Not exactly our average American family.

Another “monster” pulled out from under the bed is the Foreign Owned Debt — or The Chinese are Coming.  Not to put too fine a point to it but the United States doesn’t have creditors — it has investors.  Foreign finance buys U.S. Treasuries expecting to receive interest payments on solid investments, just as we expect the government to pay interest on the EE series Savings Bonds we give to kids on their birthdays or other special occasions.

With no “scientific” study to support the austerity campaigners, and no common sense rationale to substantiate their arguments, it’s little wonder the whole austerity binge is standing on rapidly liquifying silt:

In a speech Monday, European Commission President José Manuel Barroso said the policy of austerity pursued by the EU in recent years no longer has the political and social support needed to work.

The International Monetary Fund last week said the bloc should ease back on austerity, while a number of governments outside the EU have made the same call, arguing its belt-tightening is holding back the global economic recovery and is self-defeating.  [WallStJ]

When you’ve lost the head of the European Commission, and the IMF, there aren’t too many advocates left besides the radical conservatives like Blackstone billionaire Pete Peterson [C&L] and his Republican allies.

Meanwhile, Nevada spends about $30,000 for each job created in an effort to offset the grinding slowness of an economic recovery freighted with a self defeating economic theory which places the interests of the bankers over their customers, clients, and countrymen.

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Quick Hits

hammer** Good news and Bad news: Nevada’s Governor is good at finding money for state programs — on the other hand the money is flowing in because our economy is lagging. [LVSun]  Unfortunately, this comes with an ideological framework, which a person could suppose is meant to sound moderate: “We cannot cut our way out, we cannot tax our way out, we can only grow our way out.”   The phrasing sets up a false choice in which “C” is the sole useful option.  It’s commendable that the Governor acknowledges growth based solutions as the proper course for economic development; it’s not so commendable to see that increasing taxation on economic elements in Nevada who have not been paying their way isn’t part of the total package.

** The Nevada Legislature is looking at the issues related to severe mental illness and gun possession in two bills.  SB 221, which cleared the Senate Health and Human Services Committee with a Do Pass as Amended recommendation, upgrades the background checks required by Nevada law to include private sales, and specifically prohibits a person who, in the estimation of a psychiatrist or a licensed psychologist is likely to be a danger to self or others from “possession, custody, or control” of a firearm.  Once more with urgency:  The only people who would be “inconvenienced” by background checks under Nevada law are (1) felons (2) fugitives (3) minor children (4) domestic abusers, and (5) undocumented aliens.  Surely, it’s not too much to ask that those seeking to transfer “possession, custody, or control” of a firearm would want the recipient to pass a quick background check before selling a weapon to anyone in those categories?

** Those who managed to find a bit of time to keep up with economic news during the Week from Hell, have benefited from “Pete Peterson’s Fingerprints…” at Crooks and Liars.   The Austerians are, indeed, losing the narrative in the national economic debate, and this short article explains who is still promoting  illogical austerity pontification which passes for economic theorizing in Dante’s Fourth Circle of Hell.   For those inclined to get into the mathematical weeds of the R&R mess, Angry Bear has a handy post.  A more general critique is available from the EPI.   As for the prospective denizens of the Fourth Circle, see Naked Capitalism’s post in which Robert Johnson opines of the oligarchs, “they are all standing on the deck of the Titanic looking in each other’s eyes.”

** Republicans behaving badly: Second Amendment Solutions?  One GOP lawmaker in Arkansas would like to activate them in terms of the expansion of Medicaid under the terms of the Affordable Care Act. [Think Progress] Ohio legislators would like to prohibit instruction in health education classes about “gateway sexual activity.” [TP]  As if the kids haven’t  just about figured out the “gateways” already?  Texas state legislators dislike the meddling old EPA — and they have a blasted out neighborhood in West, Texas to prove it. [Politicususa] In the mean time, would someone explain to me how any Planning and Zoning Commission could possibly approve plans to build residential developments next to a fertilizer plant — or a fertilizer plant near a residential neighborhood? Much less in proximity to a junior high, a high school, and a nursing home?!

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Filed under Economy, Gun Issues, Nevada legislature, Nevada politics, Uncategorized

Okun’s Law and Sequestration

GDP formula

This isn’t rocket science.  For anyone wondering why Austerity doesn’t produce Prosperity, the answer lies in this simple formula.  We measure our economic growth in terms of the gross domestic product, the GDP.

Investopedia explains:

“GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country’s standard of living. Critics of using GDP as an economic measure say the statistic does not take into account the underground economy – transactions that, for whatever reason, are not reported to the government. Others say that GDP is not intended to gauge material well-being, but serves as a measure of a nation’s productivity, which is unrelated.”

In short, we can critique the use of the GDP as a measure of our economic well being for not including bartered transactions, or private sales in which sales taxes aren’t applied, or we can note that the notions of productivity and economic health aren’t necessarily related.  However,  what we can’t do is dismiss the utility of the formula, nor can we argue it isn’t one of the most commonly used (and understood) metrics applied as an economic description.

So, why is this formula plastered on this blog for the umpteenth time?  Because when Uncle Fester brashly opines that “We’ve got to cut government spending and get the economy back on track,” he’s offering up a classic demonstration of his ignorance about how we measure our economic situation.

Consumers buy things.  That’s the C in the formula. Companies and corporations buy things.  That’s the I in the formula.  Governments buy things. That’s the G in the formula.  We sell things to other countries, and we buy things from other countries. Those are the X and the M in the formula.  The greater the DEMAND for goods and services (aggregate demand in some explanations) the more wealth is generated.

Now let’s bring this down to Uncle Fester’s level by considering the life of the lowly paper clip.  Consumers buy paper clips, which are mostly used to hold sheets of paper together, or may find themselves altered to perform other tasks like being poked in the little hole in the electronic gadget to “reset” the thing, or to hang Christmas ornaments, or whatever a person might think to do with a piece of bent wire.  Businesses buy paper clips.  And, yes, various levels of government purchase paper clips.  In fact, there are about 11 billion paper clips sold in the U.S. every year.  [WSJ]

Now, imagine the impact of taking one part of the formula out of the whole.  What if government cut backs caused agencies to scale back on the purchase of office supplies?  This is the point at which the artificial demarcation between enterprise and government breaks down.  If the government manufactured it’s own paper clips there would be no need to put the G in the formula, but it doesn’t.  The federal government, like the consumers and the companies, gets its paper clips from one of two domestic producers of bent wire clips. [WSJ]

Here comes the obvious.  When the government scales back purchase orders for office supplies (like our lowly paper clip) that represents a decline in demand.  And, guess what! The formula for Aggregate Demand is exactly like the formula for the GDP.  [Investopedia]

“The total amount of goods and services demanded in the economy at a given overall price level and in a given time period. It is represented by the aggregate-demand curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide. Normally there is a negative relationship between aggregate demand and the price level. Also known as “total spending”.  [Investopedia]

To see an example of the classic aggregate demand (AD) curve click here.   The FRED graph for our GDP to date looks like this:

GDP Chart to 2012

The gray area shown on the chart is the recent Recession.  The blue line graphs the trajectory of our GDP to date, and the thinner red line is more technical. It’s the “Nominal potential gross domestic product,” [CBO 2001 pdf]  which assumes that the line would show what happens if everyone who wanted a job had one, and all resources were being used efficiently.  [See also: KCFED, pdf] Frankly, this one is a bit technical for Uncle Fester, so let’s keep it simple.

If the demand for paper clips is reduced, when consumers, businesses, and governments stop purchasing, the micro-graph for the subcategory of office supplies and the sub-classification of paper clips,  would mirror the overall aggregate demand.  And, the bottom line?  That which reduces the aggregate demand also reduces the GDP.

This simple, but basic, proposition from classical economics is precisely why austerity measures never produce prosperity — which we measure by using the gross domestic product.

If we can hold Uncle Fester’s attention this long, perhaps we can introduce Okun’s Law.   Okun’s Law observes that for every 1% decline in unemployment there’s a 3% increase in the GDP.  There are some issues with the “law” the first of which is that it’s not really a law, but an observable component of the United States’ economy; and, it’s a bit funky when we add in some other variables like productivity.   That said, for all its imperfections, when we reduce unemployment in the United States the GDP moves up.   This isn’t just common sense — it’s an observable and quantifiable fact.

Now we get to the meaty part.  If Uncle Fester is adamant about reducing federal spending because it’s a drag on the U.S. economy, then we can respond by saying if we lose 700,000 jobs as a result of the sequestration austerity measures, then according to Okun’s Law we will see a reduction in the U.S. gross national product.

A reduction in federal purchasing means a reduction in demand for goods and services.  Each decrease in demand means layoffs or reduction in production or offering of services and in turn means a reduction in the gross national product.   This is probably the point at which Uncle Fester will want to change the subject to something like “wasteful government spending.”

This recitation doesn’t assume that all government spending is productive.  The Pentagon has already said it doesn’t want some items Congress is enthusiastic about procuring.

“In February, the Pentagon released a budget that began the process to cut at least $487 billion in defense spending over the next 10 years. This included terminating the Global Hawk, which the military estimated would save $2.5 billion over five years; the C-27J, at a savings of $400 million; M1 Abrams updates, saving hundreds of millions of dollars; and cutting roughly 5,000 positions from the Air National Guard and reducing that agency’s budget about $300 million.”  [Military.com]

Since the cutbacks in these examples would come from Ohio, it’s predictable that Ohio representatives in Congress would revert to Okun’s Law and decry the loss of jobs in their districts.

“The budget is expected to be finalized after the November election, though the struggle over continued funding could extend long beyond that. Grant Neeley, professor of political science at University of Dayton, called this a “collective action problem.”

“(Legislators) need to cut the budget but (won’t) take those jobs in our state. Especially in an election year in a battleground state,” he said. “They’re going to provide rationale, but at the end of the day, it’s about protecting jobs in their district. If they have the choice between making a cut in their district and making a cut somewhere else, which one do you think they’re going to choose?” [Military.com]

What we can’t do is proclaim austerity begets prosperity calling for wider and deeper cuts in government spending — which turns the aggregate demand, the GDP measurements, and Okun’s Law upside down — while at the same time demanding that jobs not be cut from corporations and businesses within Congressional districts because of what will happen to aggregate demand and the local GDP and assuming Okun’s Law is still applicable.

Let’s guess that this is the point at which Uncle Fester pontificates that 25% of our federal budget goes to foreign aid.  In the fact based universe this isn’t the case: “Since the 1970s, aid spending has hovered around 1 percent of the federal budget. International assistance programs were close to 5 percent of the budget under Lyndon B. Johnson during the war in Vietnam, but have dropped since.”  [WaPo] OK, it’s not foreign aid, then it has to be “welfare.”

The total spending for Temporary Assistance to Needy Families program uses up a grand total of o.7% of our entire federal budget. [Klein]  “But, but, but,” squeals Uncle Fester, “There are more Takers than Makers…” whatever that means.  What it doesn’t mean is that there is an upward trend in the number of people participating in the TANF program.

tanf participitation

Nor does it mean there’s an upward trend in Food Stamp program participation and costs.  (SNAP)

SNAP

In our factually based universe, all federal programs for those in poverty comprise about 7% of the total federal budget. [MJ]  Yes, this is where Uncle Fester breaks in with the anecdote that he saw someone at the Food Bank who was driving a newer pickup than his.

However, all the mis-information, mis-conceptions, and anecdotal observations don’t repeal the basic rules of capitalism, and its basic understanding of Supply and Demand.  Nor, do they discredit the veracity of Okun’s Law.

We do need to reduce unnecessary spending, and we do need to increase revenue by closing loopholes which only serve to place more of the taxation burden on the middle class for the benefit of the top 0.1%.  What we do not need to do is torture the rules of American capitalism into a contortion which renders them risible and unrecognizable.  Okun’s Law is still functional, and as we see from the unfortunate examples in the Eurozone, austerity doth not begat prosperity.

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Cliffs, Hostages, and Charts: Passing S. 3412 is good policy

The one element of the current fiscal flap which has attracted most people’s attention is the expiration of the Bush Tax Cuts, and the reversion to the tax rates of the Clinton Administration.  Senate Majority Leader Harry Reid (D-NV) commented today:

“It took four months, but Republicans are finally realizing the way back from the fiscal cliff has been right in front of them all along.  In July, the Senate passed legislation to give economic certainty to 98 percent of families and 97 percent of small businesses – to every American making less than $250,000 a year.  For four months we’ve been one vote away from a solution to this looming crisis.  And for four months, House Republicans have refused to act.  Instead they have held the middle class hostage to protect the richest 2 percent of taxpayers – people who have enjoyed a decade of ballooning income and shrinking tax bills.”(Senator Harry Reid, 11/29/12)

The bill to which Senator Reid is referring is S. 3412, passed in the Senate on July 25, 2012 on a 51-48 vote.   Interestingly, Senator Dean Heller (R-NV) voted against the bill.  The bill has since languished in the Republican controlled House of Representatives.

To restate the obvious, since the end of July 2012 the Congressional Republicans have made it abundantly clear that they will not accept any tax increases on the upper 2% of American income earners.

Every pundit from Bangor to Chula Vista has opined about the various political implications and ramifications of this GOP position.  If we step away from the Chattering Cable-ites momentarily, we can see that tax policy is (1) a rather blunt instrument by which to manipulate economic behavior, and (2) while a reversion to the Clinton area rates is advisable, there really is more that can be done to better secure fiscal stability.

With all due respect to the mathematicians who have crafted all manner of elegant algorithms to predict economic behavior — even if the entire transaction is computerized there is still a very human element involved.  An algorithm is written with a human purpose.  In this case it might be to automate the purchase or sale of particular “things” at a specific price.  The essential problem with capitalism is that prices are determined by human beings who pre-judge the value of the “things” in terms of their own desires and motives.  The motive might fall anywhere along the spectrum from pure speculation to pure long term investment strategies.

Given this context, consider momentarily the currently popular Republican refrain that if marginal tax rates are “too high” investment will be stifled and economic expansion constrained.   The essential economic question at this point is not how many petulant plutocrats does it take to impede any political action in regard to tax rates — but, at what marginal rate does tax information become a significant factor in the investment decision?

As the chart from the IRS indicates, the marginal rate of taxation on the highest income earners has dropped since the mid 1960′s.  The taxation on capital gains is now below 20%.   The next question: What is the statistical relationship between marginal tax rates and investment?

The Congressional Research Service (pdf) studied the relationship between top marginal rates and private savings ratios and created these illustrations of the data:

If the data points look a bit scattered — it’s because they are.  The CRS drew the following conclusion:

“The bottom charts in Figure 3 show the observed relation between the private fixed investment ratio (investment divided by potential GDP) and the top tax rates. The fitted values suggest there is a negative relationship between the investment ratio and top tax rates. But regression analysis does not find the correlations to be statistically significant (see Table A-1 in the appendix) suggesting that the top tax rates do not necessarily have a demonstrably significant relationship with investment.”

Translation: While the charts tend to lead the eyeballs toward seeing a negative relationship, when we actually crunch the numbers the results could just as easily be the result of good old fashioned chance.

There is a place for anecdotal evidence from financialists whose self interest dictates the championing of lower marginal tax rates as a significant factor in their investment decisions, however it’s not in the midst of a rational argument about economics.   Therefore, investor extraordinaire Warren Buffet’s question remains valid:  ‘If I called you in the middle of the night and told you I had the best investment opportunity ever seen in the world — would you ask me about the tax rate?

This ragged relationship between effective rates on capital gains and the returns investors receive as a percentage of GDP is illustrated below:

The first points to note are along the pink line (circa 1996) when the average effect tax rate on capital gains was 25.5% but the trend line for realized gains was going up.  The ‘conventional wisdom’ held for the period between 1996 and 2000, at which point the trend lines no longer support the contention that lower average effective tax rates mean greater realized gains.  Between 2000 and 2004 the average effective tax rates decline, but so do the realized gains, and from 2004 until the last data available from the Tax Policy Center in 2007 the tax rates remain essentially the same but the gains increase.  Go Figure?  What we could conclude with more certainty is that the tax rates and the realized gains aren’t operating in tandem, and there’s more to “economic decisions” than considerations about marginal tax rates on capital gains involved.   Again, Buffett is probably right.

If reducing the effective tax rates on capital gains isn’t a sure fire way to increase earnings and entice yet more investment, then what about tax rates in general?  That doesn’t quite work either as illustrated by the following chart from Business Insider:

… and we know what happened in 2007 through 2008.  If a relationship cannot be demonstrated between lower capital gains taxes and the gains coming from economic growth AND we cannot demonstrate a relationship between overall marginal tax rate reduction and economic growth, WHY are the Republicans so intent on preserving the tax breaks for the top 2% of the nation’s income earners?  George W. Bush may have stated more truth than he meant when he quipped during the 2000 Alfred E. Smith banquet attendees, “This is an impressive crowd. The haves and the have-mores. Some people call you the elite. I call you my base.”

For all of Senator Reid’s efforts to move the Congressional Republicans into the real world of average Americans, nothing has worked thus far to convince them to abandon frivolous pledges from scions of anti-tax activists, which at this point serve little purpose other than to widen the income gap, and to deplete the capacity of middle income earners to generate the aggregate demand necessary to stimulate the economy.

It really can’t be argued that all economic decisions are dictated by human behavior, but neither can it be successfully asserted that an economy is not essentially a very human institution.   There are reasons well beyond the political optics of S. 3412 for Republicans to give serious consideration to pass the bill in the House of Representatives; it’s good economic policy.

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Filed under Economy, Heller, Reid, Taxation

Talking Turkey in the Thanksgiving Season

Now that the Trick or Treaters have departed, the election is over, and Thanksgiving is upon us — it’s time to consider what arguments may break out with Crazy Uncle and which debate techniques will be utilized over the bird carcass.   Forewarned is forearmed, and the following is intended to prevent the flinging of cranberry sauce, and the jabbing of forks in anything other than the baked turkey.

Rule One:  Green Bean Casserole does not provide sufficient cover to prevent onslaughts of “We’re on the Road to Wrack and Ruin.”   Even the most timid inquiry as to why this might be the case will suffice to insure the continuation of the rant — which was probably going to happen anyway.   Continue to smugly munch the sweet potatoes secure in the knowledge that:

Fact: We are not headed the way of Spain, Greece, Portugal, Italy, Ireland … or any other disrupted economy.  The aforementioned countries would love to be in the same “shape” as just one state in this Union — California. [Atlantic]

Fact: Regulations are NOT killing American bid’ness.  In reality a lack of adequate regulation diminishes trust, and diminished trust is an open invitation to corruption — which IS a problem in countries like Greece.  To Wit:

“One issue is trust and corruption. One of the most difficult aspects of modern social life is that the world is a big place and cooperating with strangers is difficult. After all, they might rip you off. You could appeal to the authorities, but the authorities are likely to be strangers, too. In societies with poorly functioning institutions, high levels of corruption, and low levels of social trust, it makes sense to try to stick with smaller-scale entities.” [Slate]

Fact:  There has been no government take over of anything.  That includes health care.  The Affordable Care Act, begotten of the Heritage Foundation and delivered by the U.S. Congress, requires a “free market” solution to individual health insurance coverage by giving tax breaks to companies that provide group health insurance plans, by requiring individuals to purchase individual policies if they can do so, or to purchase their own insurance policies from the corporations participating in the exchanges.

Fact: There is no horrible, heinous, terrible Debt that’s going to immediately hurl the American economy into the Next Great Big Crisis.  Yes, we do need to deal with the residual problems of Bushian Credit Card Conservativism. However,  if we finish operations in Afghanistan, get the millionaires and billionaires to pay tax rates they were paying during the Clinton Administration — when the arithmetic made sense — and get the economy going a a slightly higher rate, most of the horrible heinous terrible Debt will be erased.

Fact: Austerity doesn’t create prosperity.  We have pictures for this.  Here’s a picture of economic growth in the Eurozone:

Now, here’s a picture of U.S. economic growth, from the Department of the Treasury (pdf) :

Rule Two: Crazy Uncle’s contentions, allegations, and assertions will be no more organized than the flight from the table to the television.  All the rules about the construction and presentation of arguments have no more substance for Crazy Uncle than the cream whip on top of the pie.

Tactic:  When losing the point in the face of overwhelming facts to the contrary, change the terms.   For example, when Crazy Uncle asserts that small government is always better and someone has the temerity to mention that national disasters like Hurricane Sandy are not well contained by local agencies themselves reeling in the wake, Crazy Uncle may respond by attempting to compare disaster relief to local nutrition programs.  “Who knows the local situation better? Some bureaucrat in Washington, or the local people in the neighborhoods?”  The analogy doesn’t work any better than those marshmallows on the yams, but there is a sentient response. The answer, of course, is that local agencies do have hands on experience with such local issues, BUT the capacity of the local agencies to provide nutrition programs to the people they know in their neighborhoods often depends on federal funding levels.

Tactic:  When the facts don’t fit deny them.  When Crazy Uncle is faced with the information that the administrative costs for Medicare range from 3.6% to 5% while industry rates range from 11% to 12% [Politifact] expect a reply to the effect that (1) I’ve never read that. OR (2) That’s what the lame stream media says. OR (3) That’s some government figure, can’t trust’em.  Having internalized the notion that no media information is to be trusted from any source other than the notoriously fact free right wing radio environment, Crazy Uncle isn’t inclined to believe anything from anyone about any topic which doesn’t have the imprimatur of a radio ranter.   Forget him — continue to enjoy playing with the wish-bone.

Tactic:  When the territory can’t be shifted, or the facts can’t be denied, implement Operation Bullshit.  Those who watched the Presidential Debates may recognize the Gish Gallop.

“It is often successfully combined with the “point refuted a thousand times” (PRATT). The gallop must consist of as many points as possible, and even old and worn out arguments are useful in overwhelming the respondent and bamboozling the audience. The technique also takes advantage of the one single proof fallacy, since if a respondent only manages to refute 99 out of 100 points there is still one point that proves the galloper correct.

The trick is to press Crazy Uncle on a single point.  Narrow the argument to something like “which economy had the consistently higher rates of growth in 2011 — the U.S. or the Eurozone?”   The necessity of defending a single point at a time puts the reins on the Galloper.

Rule Three:  Since Crazy Uncle has his very own reality distant from, and unrelated to, the remainder of the population on this planet, the only way to completely obliterate his rambling rants is to find a televised athletic event upon which most of the diners can agree, and turn the sound up.

 

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Filed under conservatism, Economy, Health Care, Politics

Limits: Stimulus, Austerity, and the Discussion We Should Be Having

There are functional limits to just about everything.  Unfortunately, when political discourse devolves into a polarized face off between two advocates who cannot or will not acknowledge the kernels of accuracy in bifurcated world views then it’s hard to get anything useful out of the discussion.  Compromise doesn’t mean you adjust to fit my agenda, nor that I must adjust to yours.

Consider the Stimulus vs. Austerity economic prescriptions currently on offer.

The readily apparent limitation on stimulative measures such as infrastructure spending and social safety net (or economic automatic stabilizers) support is that at some point the bill comes due, especially if these activities and supports are based on lending.

The equally apparent limitation on austerity and cutting back the social safety net or automatic stabilizers is that at some point deleveraging becomes deflationary and depressive in an economic sense.  Too much “austerity” and demand declines, and declining demand puts the brakes on economic growth.

Consider also the long and short term repercussions of the application of stimulative and austerity driven proposals.

In the long term, advocates of austerity prescriptions and stimulus injections have to cope with a fact of modern economic life — what can be shipped will be shipped.  Beneath layers of rhetoric is the hard sad fact that a corporation which can avail itself of a labor force willing to accept $0.99 per hour with no benefits will avail itself of that labor force.  Further, a corporation which can utilize a labor force willing to accept low wages, while the housing and quotidian needs are subsidized by the public sector, or are booked as an expense, will probably do so.

Also in the long term, advocates of stimulative measures need to acknowledge that physical infrastructure projects have short term durations, and will not necessarily create “sustainable” jobs.  Nor, will those contracts necessarily yield enough jobs to create a viable platform for future job creation.

How do we define success?

One of the problems with each of these views, untempered by any acceptance of the globalization of labor and the impact of robotic technologies, and equally untempered by the obvious fact that demand is an equal side of the free market equation, is that both have very different desired outcomes.

Austerity advocates tend to think in international terms, and see a global economy in which nations measure their success or failure in financial terms.  The nations are adequately capitalized, have limited liabilities, and offer treasury securities which are solid and reliable.   However, when this is  extrapolated to the ideal, the market for treasury notes would be little better than money in the mattress — because none would have greater risk (and hence greater yields or returns) than any other.   Currently, a U.S. treasury note for 30 years pays 2.83%.   [Treas]  By contrast Irish benchmark bonds maturing in 2025 are paying 5.4%.  [NTMA]   In other words, the bond market would like more stability — but not so much that we approach the ideal in which T-notes from any nation are such a sure thing that there’s nothing to be gained by investing in one or another.

Austerity advocates are thus caught in a bit of a bind.  Too much financial “success” and bond rates drop, too little national borrowing and there is less fodder for the bond markets.   What the austerity flock appear to want is a level of national  indebtedness necessary to retain competitive edges in the bond markets, BUT not so much that there is an “unacceptable level of risk” the borrower might default or even that the bankers might take a significant “hair cut.”

Stimulus advocates tend to see the financial picture from their own shores.   As a stimulus advocate myself, I tend to gauge the success of our economy on measures other than financial — an increasing level of aggregate demand, increasing levels of household wealth, increasing manufacturing output, and increasing exports.  While the austerity advocates appear to have an international outlook, but rather narrow definitions of success, the stimulus proponents have broader definitions of economic success but more nationally based perspectives.

Who’s Winning?

Income inequality or distributive impacts are too often discussed in horse race terms.  If the marginal tax rate for those in the top 0.1% are cut by 20% then the ultra-affluent are the obvious winners; but, if the marginal tax rate is raised for that group while we retain the child tax credits and lower the margin for middle income Americans do the ultra-affluent really win anything?  The horses are out of the gate.

In purely financial terms, who’s winning now?

Notice the steep drop between the average family income for the top 0.01% and the top 1%.  Then notice that the average family income for the remaining 90% of Americans is $29,840.

How did the top 0.01% create such a gap? A wealth management specialist, whom I’ve cited previously explains:

“Unlike those in the lower half of the top 1%, those in the top half and, particularly, top 0.1%, can often borrow for almost nothing, keep profits and production overseas, hold personal assets in tax havens, ride out down markets and economies, and influence legislation in the U.S. They have access to the very best in accounting firms, tax and other attorneys, numerous consultants, private wealth managers, a network of other wealthy and powerful friends, lucrative business opportunities, and many other benefits.

Now, why such a gap between the 0.01% and the top 0.1%?

Most of those in the bottom half of the top 1% lack power and global flexibility and are essentially well-compensated workhorses for the top 0.5%, just like the bottom 99%. In my view, the American dream of striking it rich is merely a well-marketed fantasy that keeps the bottom 99.5% hoping for better and prevents social and political instability. The odds of getting into that top 0.5% are very slim and the door is kept firmly shut by those within it.” [Domhoff]

The “winners” in purely financial terms, are the financialists. “Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting.” [Domhoff]  We should remind ourselves that the definition provided by Domhoff’s article includes the top half of the top half of all American income earners, which includes both columns at the left hand side of the graph.

It stands to reason that if the top 0.01% comes from banking or financial services sectors their perspective will be one of Austerity.   The graph illustrates the current wealth distribution but it doesn’t indicate the trends.

The Federal Reserve graph above illustrates the widening gap between the top income earners in the U.S. and those in the lower income brackets since 1967.  So, not only do we have wealth accumulating to the very tip top of the pyramid now, the trend has  been ongoing for the last 45 years.

The Stimulus Argument

One assertion which needs a bit more analysis concerns the tendency to make quick judgments about the nature of the trends.   Capitalism requires the accumulation of wealth such that investments can be channeled from areas of surplus to areas of need.  Arguments about who does the transfer are the hallmark of various forms of political ideologies.   As we can see from the discussion above, especially the observations of Mr. Domhoff, not all government activity which causes the transference of wealth are necessarily socialistic.

If our tax policy, our investment policies, and/or our banking and financial policies favor those who can borrow for almost nothing, can keep production and profits in foreign accounts, can avail themselves of tax havens, and can influence legislation favorable to those elements — then what we have, in essence, is  government intervention which favors the redistribution of wealth to the top 0.01%.   However, the moment anyone objects to this arrangement the financialists immediately cry that this is Communism, or some other form of nefarious -ism, and our Free Enterprise System is Under Attack.

The Core of Capitalism

We all got the message in high school General Business or Economics that capitalism means an economy in which the means of production, distribution, and exchange, are privately or corporately held.   And, that the exchange (or transfer) of wealth is privately distributed.  Also during that first week the teacher explained that finance involves the act of providing funds for business activities, for making purchases necessary for business and commerce, and for investing.    What we ought NOT do is to confuse the two terms.

Nor should we narrow the definition of finance so strictly that it comes to mean only those activities which facilitate the accumulation of wealth.  Finance in a capitalist system means funneling wealth from areas of surplus to areas of need — from the investors or bankers to the contractor who needs a loan to get materials needed for the next job, the car dealer who wants to add inventory, the manufacturer who wants to expand the factory, the restaurant owner who wants to open a new cafe, the garage owner who wants to buy new and more modern engine diagnostic equipment.

Yes, there is a “need” to channel some funds into wealth accumulation — or what good would retirement planning be?  There is nothing intrinsically wrong with some people working very hard in the financial sector to increase the wealth of their investors.  There is something wrong with an investment sector which focuses almost exclusively on increasing investor wealth to the detriment of the real economy.

One more time, let’s return to Tom Armistead’s definition of financialism and its effects:

Financialism is an economic system where the primary activity consists of creating and manipulating financial instruments. Financial instruments – loans, mortgages, stocks, bonds, etc. – are in their original form firmly linked to economic reality: the mortgage finances home ownership; the stock certificate represents ownership of a company that owns physical assets, the bond secures debt incurred to build a factory.

So far so good — the financial instruments are linked to the real economy.  But, remember Armistead’s continuation:

However, when financialism sets in, financial instruments become progressively further removed from their role in supporting commerce in the real world and develop a life of their own, a weird shadow dimension, a hall of mirrors, a distorted alternate reality that intersects and reacts with the real economy in unpredictable and destructive ways. George Soros described this phenomenon as “reflexivity.” Derivatives have a lot to do with it. Leverage and the abuse of easy credit are contributing causes. The shadow banking system is a symptom.

Here’s where the problem begins.  The distorted hall of mirrors in an alternative reality is destructive of the real economy, the one in which those mortgages, car loans, student loans, commercial loans, and business loans are made.   Wall Street stops being a channel by which investment moves, at a profit, from areas of surplus to areas of need and starts being a Casino.

When securitization becomes an end in itself, for the construction of yet more artificial derivatives, and not necessarily for the reduction of risk; when the shadow banking system sucks wealth from the real banks and the real economy — capitalism and finance are in trouble.  The result? Increased volatility, faster cycles of boom and bust, and economic instability.

Let’s ask if the discussion we should be having is NOT one about capitalism vs. “wealth redistribution,” but one in which we talk of capitalism and the incentives to invest in activities which increase real economic growth, not merely the accumulation of wealth for those at the very top of the income period.

If the 0.01% intend to anchor their wealth on something substantial like loans, mortgages, equities, and bonds (from the real economy), or are they content to accumulate wealth in the shadow banking realms and hope the remaining 99.99% don’t fold under the volatile economic  pressures and their declining share of total national wealth?

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Filed under Economy, income inequality

Romney’s Blarney

Colbert Show guest Dr. Paul Krugman observed that if the United States adopts the “austerity” model response to our economy, we could end up looking like the Republic of Ireland.  So, what’s the situation on the Emerald Isle?

Austerity. The Republic of Ireland slashed its budget by €4 billion, and public employees accepted 5% pay cuts.  Its VAT (a form of sales tax) has been increased to 23%.  31 Garda Stations (police) have been closed as of December 2011, 10 others were open on  a part time basis. [BelTel] A second wave of closure has been announced for next year. [BelTel] Child benefits have been reduced: “The first of these is a reduction in child benefit, which will save 45 million euro. Payment for third child cut to 148 euro per month, with fourth and subsequent children down to 160 euro per month.” [BelTel] The fuel assistance program has been cut; public service overtime payrolls cut by 10%; and, there’s more:

“Changes to the one-parent family payment will save 20.7 million euro, and the age limit of the youngest child for receipt of payment reduces to seven by 2014.

Weekly carer’s allowance and carer’s benefit rates will not change. Meanwhile, third-level student registration fees will rise by 250 euro, securing savings of 18.5 million euro.

Changes to fee and maintenance support for new postgraduate students, and reducing maintenance grants generally, will deliver savings of 12.6 million euro.

The employer redundancy rebate will also be cut from 60% to 15%, saving 81 million euro. The monthly threshold for the Drug Payment Scheme will jump from 120 euro to 132 euro, saving 12 million euro. And a total of 50 million euro will be saved by securing efficiencies of 2% in disability, mental health and children’s services.”  [BelTel]

Now, there’s some austerity!  So, what has all this gotten them?

High unemployment.  The Irish Times reports:

“Unemployment will remain high next year but the economy is expected to grow, albeit weakly, according to a new forecast from the Economic and Social Research Institute (ESRI). [...]

The institute estimates that job losses will continue to mount in 2012 with the unemployment rate hitting 14.9 per cent before easing slightly next year to 14.7 per cent.” (June 18, 2012)

Youth unemployment stood at 29.1% in 2011. [PAI] and the long term unemployment rate increased YOY from 7.8% to 8.9&.  [CSO pdf] Repeating an all too familiar motif — emigration is expected to “relieve” some of the unemployment pressure.

Stagnant Growth. Again, from the Irish Times:

“The ESRI forecasts that gross domestic produce (GDP) will grow by 0.6 per cent this year but remain unchanged when measured by gross national product (GNP) – a narrower measure of economic activity which excludes multinational firms.

GDP is expected to rise by 2.2 per cent in 2013 with GNP increasing by 0.5 per cent.

The ESRI says with domestic demand still expected to act as a drag on the economy this year, exports will again likely be the principal factor determining growth in the Irish economy.” (emphasis added)

Notice the part wherein the “domestic demand” will be a drag.  When unemployment is high, long term unemployment is high, public sector employment is cut by 5.4% [COS pdf] and all the “austerity” measures like increasing the VAT kick in — what would a rational person think would happen to aggregate domestic demand levels?  The ESRI report didn’t mince words about the future, “It adds that household consumption is likely to weaken further this year and next year as disposable incomes continue to decline.”

Weak housing market.  Does this sound familiar?

“The institute says that with house prices weak and demand levels remaining low, it is unlikely that there will be growth in the volume of house building in the near future.

“It is difficult to be more precise as to when the bottom of the cycle will be reached but an important factor in any stabilisation will be price expectations. Continued uncertainty about prices, combined with a desire to see a sustained stabilisation before people enter the market means that housing demand is likely to remain weak in 2013.”  [Irish Times]

Incredibly enough, the report cited by the IT recommends NO domestic stimulus, without explaining why this wouldn’t work other than to say that money spent on imports won’t do the domestic economy any good, and the nation needs to be “competitive” and increase its exports.   Unmentioned in the previous report is any indication that the Republic could do with some improvement in infrastructure — as in the case of its outmoded communications networks.  [SiliRp]  The U.S. isn’t the only nation on the planet with a very skeptical engineering community.

Infrastructure needs.  Engineers Ireland, a nonpartisan association of engineers, issues their own domestic report card.  The engineers cite rail lines and seaports as being in need of improvement, upgrades, and maintenance.  Rural roadways are in need of improvement, as are airports outside the Dublin area. [EI pdf]

Romney’s Blarney

Governor Romney has been vague to the point of opacity on specific suggestions concerning the economy, but we do have some partial views of his program, and one thing he hasn’t ruled out is the VAT.

“He says he doesn’t “like the idea” of layering a VAT onto the current income tax system. But he adds that, philosophically speaking, a VAT might work as a replacement for some part of the tax code, “particularly at the corporate level,” as Paul Ryan proposed several years ago. What he doesn’t do is rule a VAT out.”  [Forbes]

Even the arch-conservative Cato Institute doesn’t care for the VAT idea.

Cutting public employees.  Governor Romney tried to slide out from the “we don’t need more teachers, etc.” flap by saying that these individuals are employed locally, and therefore the federal government doesn’t have anything to do with their employment.  [MSNBC] [WaPo] Actually, the federal government has been supporting educational, first responder, and police programs at least since the 1980s, and much before if we count the National Defense Education Act.

Hands Off Housing.  This one hits close to home: “Romney turned off some Nevada residents when a housing-related comment he made to the Las Vegas Review-Journal editorial board went public.  “As to what to do for the housing industry specifically and are there things that you can do to encourage housing: One is, don’t try to stop the foreclosure process. Let it run its course and hit the bottom,” said Romney. ” [MoneyMorn] [Zillow] Ouch.  The GOP candidate has been very critical of the housing market situation under the Obama Administration, but has yet to offer specific solutions — other than to let the market sort it out — which would assist underwater homeowners.

Hands off employment.  Mr. Romney recently “promised” a 6% unemployment rate but that’s not all that hard to come by.   We simply continue the current growth under the Obama Administration and the non-partisan CBO projects that’s just about where we’ll be:

“Though 6 percent unemployment is significantly lower than the current 8.1 percent rate, the feat isn’t all that remarkable. In fact, it is exactly where multiple government agencies project unemployment will be at the end of that time frame. The Congressional Budget Office predicts that unemployment will average 6.3 percent in 2016; the Office of Management and Budget, meanwhile, projects unemployment will hit 6.1 percent and ultimately fall below 6 percent the same year.”  [TP]

With Liberty and Austerity for all.   Governor Romney does have a tax plan: “Mitt Romney has proposed permanently extending the 2001-03 tax cuts, further cutting individual income tax rates, broadening the tax base by reducing tax preferences, eliminating taxation of investment income of most individual taxpayers, reducing the corporate income tax, eliminating the estate tax, and repealing the alternative minimum tax (AMT) and the taxes enacted in 2010’s health reform legislation.” [TPC pdf] The program results would be about as follows:

Professor Krugman may indeed have a point — if we’re interested in regressive taxation, a hands off approach to the housing market, no increased spending for infrastructure, and a “market” solution to employment — then we could easily end up looking very much like the Republic of Ireland with high unemployment, domestic demand dragging the economy down, and a mired housing market.  Perhaps the places to which we might emigrate would be so kind as to not allow NANA signs in shop windows?

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Filed under 2012 election, Economy, Romney