Tag Archives: Supply Side Hoax

Wage Discrimination is an Economic, not just family, Issue

Rosie Riveter

Consider the following report from the Institute for Women’s Policy Research:

“Women are almost half of the workforce. They are the equal, if not main, breadwinner in four out of ten families. They receive more college and graduate degrees than men. Yet, on average, women continue to earn considerably less than men. In 2015, female full-time workers made only 79 cents for every dollar earned by men, a gender wage gap of 21 percent. Women, on average, earn less than men in virtually every single occupation for which there is sufficient earnings data for both men and women to calculate an earnings ratio.”

DB’s ranted on about this before: (2013)

“Women are having a tough time in the present economy, and the situation isn’t made any better by the wage gap.  NPWF reports: ” In Nevada, on average, a woman who holds a full-time job is paid $35,484 per year while a man who holds a full-time job is paid $41,803 per year. ” (pdf)  This has some very real economic consequences for the state since 125,402 households in Nevada are headed by women. In 32,479 of those households the income is below the poverty line.  Thus 25.89% of those households are barely getting by.”

And on the GOP filibuster of the Paycheck Fairness Act (2014).  However, it really is necessary to broaden the discussion – equal pay for equal work is not just a “woman’s issue,” nor is it a “family issue.” It’s an economic issue.

Once more, let’s look at the reality of what happens when men and women aren’t paid equally for equal work.

In the state of Nevada right now, the average annual wage for a food service manager is $62,160. Pay ranges from $18.51 per hour to $46.97 per hour with a mean wage of $29.89/hr. [NDETR calc]  Let’s keep all the variables such as experience, tenure, and specialization, the same, and concentrate solely on what would happen if two people of the same level of experience, expertise, and skills were to be paid based on gender.  Let’s have our hypothetical male food service manager paid the annual average of $62,160 per year.  This means that our hypothetical female food service manager would receive 79% of that, or $49,106.

If both our male and female food service managers were being paid $62,160 per year, and if both were in the same household then the household income would be $124,320.  Now, here’s why this is an economic issue and not merely a “gender” one.

If our male and female food service managers are paid along the lines of the 79 cents for every dollar that holds nationally, then the total household income is reduced.  That $124,320 in total household income drops to $112,266, a reduction in income of $12,054.

That $12,054 is money NOT spent at the grocery store, or at the furniture store, or the clothing store, or at the restaurant, or the automobile dealership, or the carpet center, or the movie theater. It is NOT spent on educational expenses, books, and Internet service. It is NOT spent on sporting goods, family entertainment, or automobile parts and service.  It is NOT spent at the florists’ shop, or the cabinet-maker’s store, or the barber shop, or the beauty salon.  It can’t be spent because they don’t have it.

The only way to avoid talking about this simple arithmetic is to prattle on about “Job Creators” and the Trickle Down Economics Hoax. “Supply side economics” is a theory in search of statistics – it doesn’t work in the real world, and it never has.   If there is no demand for goods or for a service, there will be no jobs created.  And, there will be no demand IF people don’t have the money to spend for those goods and services.

Once more, here’s the First Law of Personnel Management:

First Law Personnel ManagementHow are businesses in this country supposed to SUSTAIN demand for goods and services if the female employees in the country, who are doing the same jobs as their male counterparts, aren’t able to contribute the same amount to the family’s disposable income?

So, tell me, how do we grow the economy of the United States of America, an economy based in no small part of consumer spending, if we artificially limit the amount of income contributed to family coffers by women?

There are 123 million women ages 16 and above in the United States, and 72 million (58.6%) are working or looking for work. Women are now 47% of the total U.S. labor force, and they are projected to account for 51% of the increase in the total labor force between 2008 and 2018.  73% of employed women are working full time, while 27% are employed on a part time basis. [DoL]

We are no longer talking about the “little woman” working outside the home for some ‘pocket money.”  We are talking about two-income families, both incomes being necessary to move toward the middle class life style or to maintain it.   If a family of four, with an annual income of $112,266 lives in the Las Vegas metropolitan area, their income is comparable to 56% of those adults in that area. That’s the middle. [Pew Calculator] Diminish the second income and we diminish the whole.

Diminish the whole and we diminish the potential for economic growth.  Equal pay for equal work is simply dollars toward a stronger economy and old fashioned common sense.

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Filed under Economy, labor, Nevada economy, Politics, sexism, women, Women's Issues

The Revenue Side of the Equation: Two Suggestions

ScalesIf the leadership of both major U.S. political parties are truly serious about “paying down” the national debt, and reducing our budget deficit, then both need to move beyond the Austerian economics embedded in the Budget Control Act of 2011 (sequestration).

Perhaps in the rarefied atmosphere of academic debate it’s remotely conceivable that government services could be cut back sufficiently to balance the effects of (1) two major military operations, (2) one major recession, and (3) tax reductions during war time — however, as we discovered during the last government shutdown, “we” want leaner government BUT we don’t want our national parks closed, our NIH studies delayed, our Veterans Benefits deferred, our Indian Health Service programs halted, or our FAA flight safety personnel home on furlough, and so on and on.

The efficacy of the Austerian solutions to the economic doldrums in Europe has already been questioned.  As of May 2013 members of the European Union were seriously questioning the “dogma of Austerity.” [CSMonitor] [Slate][USNWR]  Predictably, there were voices from the financial sector replying that “real” austerity would have worked, and that the philosophy wasn’t truly implemented.  [Forbes]  Once more we tread into Academia, the land in which the theory of “true” austerity drives headlong into the realities of governance.  We may want lower taxes in general, but we also want inspected food, safe air travel, veterans paid what they were promised, scientific trials for cancer treatments, national parks and memorials open and protected, unpolluted air, clean water, regulated nuclear power plants, disaster aid and relief, insurance for livestock losses, and all those other “details” swamped in the rhetoric of the Austerian ethereal-ism.

Sequester Savings

The focus on Austerity Economics (and politics) places singular focus on cutting expenditures — but there is another side to the equation — loath though political leadership may be to discuss it — increasing revenue, otherwise known to  one and all as “raising taxes.”

Let’s begin with the premise that current levels of income disparity are counter-productive to growth in the United States economy.

Income inequality graph 2

The concentration of wealth (and income) in the upper echelons of American income earners doesn’t create the level of aggregate demand which could be achieved if more people had more money to spend for more goods and services.   So, let’s talk about Tax Reform.

On one hand we have the Ryan Plan:

“The tax proposals in the budget that the House approved on April 15 place a top priority on cutting  taxes for high-income people, while doing nothing to reduce budget deficits, themselves.   In addition to making the Bush tax cuts permanent and continuing to provide relief from the Alternative Minimum Tax (AMT) at a cost of nearly $4 trillion over ten years, the House budget advances a series of additional tax cuts that would primarily benefit high-income households at a cost of nearly $3 trillion over that period, most of which is assumed to be offset by reductions in tax expenditures that are left unspecified. ”

Not to put too fine a point to it — but this is austerity on steroids — and there is probably a reason those reductions in tax expenditures are left unspecified.  As we saw during the shutdown, it doesn’t take much pressure to make Republicans cave for specific funding categories.

Options

#1. Financial Transaction Tax could be one way to increase revenue by transactions which would not exacerbate income disparity, would be relatively easy to administer, and might address some of the volatility issues in our current equities markets.  A fuller explanation is available from the Center for Economic and Policy Research, published in 2010.  More information is available from the Center for American Progress (Feb 25, 2013).  See also: Zero Hedge, Nov 2009).  For those who really want to get into the weeds of the European Council’s consideration of a financial transaction tax, there’s Bruegel.Org’s “Benefits of a Transaction Tax,” available in download (pdf) at this link.   The Irish Congress of Trade Union published its “Case for the FTT,” (pdf) Nov 2012.  “FTT: Europe Needs It,” published by the World Economic Review, March 2012. (pdf)

#2. Modify the capital gains tax.  Our current tax system taxes actual w-o-r-k done by human beings at a higher rate than income earned by money.

Most long term capital gains are subject to a top rate of 15%. [TPC] The individual income tax rate (+$400,000-$450,000) are subject to a maximum rate of 39.6%. [TPC]  This system doesn’t serve to ameliorate the income disparity in this country, and is popular only among those who serve the interests of the financial sector and adhere to the principles of the Supply Side Hoaxsters.

Additional information on the current state of capital gains taxation can be found at “A Tragedy in Two Acts,” Bloomberg, Dec. 9, 2012.  CNN “Money” March 1, 2012.  “Who Pays Capital Gains,” CTJ, and
“Ending Capital Gains Tax Preference.”  “Rising Income Inequality and the Role of Shifting Market-Income Distribution, Tax Burdens, and Tax Rates,” EPI, June 2013.   “Capital Gains Tax Rates, Stock Markets, and Growth,” Brookings, November 2005.

Not that we can expect members of the Nevada congressional delegation like Rep. Mark “Alamo” Amodei (R-NV2) and Senator “Default Dean” Heller (R-NV) to give these proposals much serious consideration, but perhaps those more inclined to balance the scales in our tax system will give modification of the capital gains taxes and the enactment of a financial transaction tax a serious thought or two.

 

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Filed under Economy, Heller, Politics, tax revenue, Taxation

Are We Serious About Discussing The National Debt?

OK, let’s talk about the debt and the deficit — but let’s have a serious, adult, conversation.  Here are some suggested rules for this road:

We need to talk about our national debt as a fiscal policy matter, not as a political propaganda talking point.

#1. One of the crucial points we need to acknowledge is that we were involved in two very expensive wars between 2000 and 2013.  We racked up some significant debt during military operations in Afghanistan and Iraq.   The military endeavors in Afghanistan have been, and continue to be, exceedingly expensive:

“The fact remains, however, that if the CRS and OMB figures for FY2001-FY2013 that follow are totaled for all direct spending on the war, they reach $641.7 billion, of which $198.2 billion – or over 30% – will be spent in FY2012 and FY2013. This is an incredible amount of money to have spent with so few controls, so few plans, so little auditing, and almost no credible measures of effectiveness.” [CSIS]

The removal of American forces from Afghanistan will curtail future expenditures, but the debt remains.  Whether we like it or not, we have to pay for both the direct expenditures for military operations, and we have to allocate funds for indirect costs which we may reasonably expect to incur.  There will be Veteran’s benefits to distribute, survivors’ benefits, and other VA services.

Although we are no longer a significant military presence in Iraq, the debt for our military actions and “reconstruction” is still on the books.  As of March 2013, the Iraq war cost $1.7 trillion which should be added to another $490 billion in benefits owed to Iraq War Veterans. [Reuters]

However convenient it may be to run on about “out of control” and “rampant” spending — it is absolutely necessary to be honest about the major elements included in the total indebtedness — and we cannot honestly discuss our national debt without acknowledging its major components, such as the wars in Afghanistan and Iraq.

At some point the national discussion must answer the question: How do we pay down what we owe for these wars without jeopardizing the promises we made to the men and women we sent to fight in them?

Secondly, we need to address the issue raised in the CSIS report, i.e. how we account for and administer our military expenditures?  There have been several attempts to improve Pentagon auditing, but the situation remains alarming.  The Defense Contract Auditing Agency, which is supposed to prevent over-payments, fraud, and abuse is in disarray.

The DCAA has a budget of $573 million, and a backlog of 24,000 audits.  This means that at the rate it is operating it cannot clear its backlog until 2016.  [BusinessIns] Note, it isn’t that the Pentagon doesn’t want to audit its contracts, it is that with current personnel and resources — it can’t.   Audits in 2011 (the last year for which figures are available) the DCAA recouped about 9% of the $128 billion in costs  it audited.   If we apply the 9% rate to the current backlog of $574 billion we could expect to recoup some $54 billion. [BusinessIns]

Therefore, another question we need to raise when discussing “waste, fraud, and abuse” in a significant portion of our national expenditures is:  Have we allocated the resources necessary to perform the audits imperative to the reduction of wastefulness?  It makes precious little sense to argue for either a reduction or increase in allocations to the Department of Defense unless we are willing to provide the necessary fiscal oversight of those allocations.

#2.  There needs to be an agreement as to what does and does not contribute to national indebtedness, especially in terms of earned benefit programs.

First, while we may argue about the philosophy underpinning the Social Security program, there is no argument about how it is funded.   The Social Security Administration explains why some have been confused about the “debts owed to the SSA”:

Most likely this question comes from a confusion between the financing of the Social Security program and the way the Social Security Trust Fund is treated in federal budget accounting. Starting in 1969 (due to action by the Johnson Administration in 1968) the transactions to the Trust Fund were included in what is known as the “unified budget.” This means that every function of the federal government is included in a single budget. This is sometimes described by saying that the Social Security Trust Funds are “on-budget.” This budget treatment of the Social Security Trust Fund continued until 1990 when the Trust Funds were again taken “off-budget.” This means only that they are shown as a separate account in the federal budget. But whether the Trust Funds are “on-budget” or “off-budget” is primarily a question of accounting practices–it has no effect on the actual operations of the Trust Fund itself.  [SSA] (emphasis added)

From 1984 onward the Social Security Administration was empowered to hold special issue securities which are non-public securities, not available on the commercial market, that can be redeemed as the SSA determines it needs in order to make its revenues meet the amount of benefits to be paid.  In short, it was the Reagan Administration’s intent that there be a “savings account for the trust funds” to address the retirement of the Baby-Boomers, and the increased number of beneficiaries who would be eligible for benefits.

While it might be advisable to decrease the need for the Social Security Administration to dip into its Special Issue reserves, it cannot be rationally argued that the SSA contributes in any significant way to the national debt.

There are alternatives to decreasing benefits, the most common being an increase in the earnings cap.  The current contribution and benefit base is set at $113,700 meaning that all income above that level is not subject to taxation.  [SSA]

“Currently, earned income in excess of $113,700 is entirely exempt from the 6.2 percent payroll tax that funds Social Security benefits (employers pay a matching 6.2 percent). 5.2 percent of working Americans make more than $113,700 a year.” [NYT] (emphasis added)

When the Congressional Budget Office released its report on Social Security in July 2010 (pdf) altogether too many focused on the problems sections and insufficient attention was paid to the options the report presented.  There was, for example, Option 6, removing the cap:

Under this option, Social Security’s total revenues would increase by about 0.9 percentage points of GDP in 2040, or by about 18 percent relative to current law. This option would improve the 75 year actuarial balance by 0.9 percentage points of GDP and would extend the trust fund exhaustion date beyond the 75 year projection period. As a result, payable benefits would be higher from 2039 onward, especially for people born later. This option would primarily affect taxes paid by high earners. (emphasis added)

When we discuss options regarding the “reform” of earned benefits (“entitlements” if you will) ALL the options should be on the table — including the removal of the regressive cap on income subject to the Social Security taxes.   [See also NYT]

There’s nothing intrinsically wrong with discussing “entitlement reform” as part of future budget and funding planning.  However, there is something very wrong about assuming that all such ‘reform’ be borne by the 95% of the U.S. population who are to accept reduced benefits,  for the benefit of the top 5% of income earners.  A person earning an adjusted income of $1,000,000 annually isn’t paying any Social Security tax on $886,300 of his or her income; the equivalent of 16 people who earn the U.S. median wage of $54,000.

Those wishing a fuller account of the elite assault on earned benefits should read, or review, Thomas B. Edsall’s excellent commentary in “The War on Entitlements,” NYT, March 6, 2013.

#3. We need to factor in the impact of the recession.   There’s really no way around this:

“Including all the stimulus spending, tax cuts, bank bailouts and automatic stabilizers, the Great Recession will add about $4.2 trillion to the federal deficit by the time the economy has fully recovered in 2016, based on back-of-the envelope calculations using figures from the Congressional Budget Office and the congressional Joint Tax Committee.”  [MarketWatch]

Or we could review the report from the Dallas Federal Reserve, and the Recession looks even worse if we look at total costs to the overall economy : “Last month, the Federal Reserve Bank of Dallas published a staff paper estimating the costs of the 2007-2009 financial crisis. The conservative estimate came out at 40 to 90 per cent of 2007 output, roughly US$6 to US$14 trillion.” [INET]

Recessions reduce income, reduced income reduces tax collections, reduced tax collections reduce government revenue, reduced government revenue increases debt.

If “tax reform” is advocated as a way to recoup the losses from the Great Recession, then we need to move beyond the Supply Side Hoax.   The notion that lower taxation would lead to more government revenue, was then — and is now — a theory in search of reality.    From the “been there, done that” corner:

“Supply-side economics starts from the generally accepted economic insight that tax policy can influence private-sector decisions by changing the incentives to work and invest. But supply-side acolytes take this relatively mundane observation to an extreme conclusion. They argue that lowering taxes for people, especially for those who have a lot of money to invest, will always lead to better economic results, and furthermore, that lower taxes is the single most critical intervention the government can undertake to stimulate growth.

This assertion—that lower taxes for the rich will lead to improved economic results—is testable. Of course, pure natural experiments in economics are few and far between, but over the last 30 years the United States alternated between economic policies that were heavily influenced by supply-side ideas, then were not, then were again. This variation allows us to compare economic performance in the various eras. If proponents of supply-side theory are correct, then the supply-side eras should outperform the non-supply side era. But that’s not what happened.” [CAP]

Reduced to a single chart we can see the results of the Supply Side Hoax applied to the U.S. public debt.

Supply Side TrendsWhen we apply Supply Side policies the blue line (national debt) increases, when we don’t the national debt is reduced.

It would follow from this that the “No New Taxes” (aka Supply Side Mantra) line makes a lovely and enticing slogan, but the application of the policy hasn’t resulted in better levels of investment growth, significant gains in productivity, better overall economic growth, better employment numbers, more income for the middle class, or better wages for working Americans.  These are all associated with increased federal revenue levels, we would obviously benefit from adopting a more realistic pro-growth tax policy than simply adhering to the narrow “no taxes = pro-growth” incantations from the Supply Siders.

When the push runs into the shove, a discussion of tax policy in regard to the reduction of the national debt should realistically incorporate the means why which federal revenues can be increased, without exacerbating the already serious level of income inequality, stagnating wages and salaries, and burdens on the American middle class.

If we’re truly serious about discussing the means by which we are to address the level of the national debt, then pontificating and nibbling around the edges of the 15% of the Federal Budget which concerns non-defense discretionary spending doesn’t suffice.   Are the advocates of cutting the food assistance programs really trying to convince us that they are taking important steps to curtail federal spending when those programs comprise some 0.24% of the federal budget? [InteractiveCP]

There are, indeed, some very serious questions to be answered when the question of the National Debt is raised: Not is sound bites and slogans, but in sound economic thinking and earnest efforts on behalf of working Americans.

 

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Filed under Economy, Politics, privatization

The Great Balancing Act: US on the high wire

High Wire ActThe previous post was, in essence, a set up for this one.  Those looking for illustrative examples of radical economic philosophy will find none better than the musings of Nevada Representatives Amodei (R-NV2) and Heck (R-NV3).   When radical economics combine with radical politics the resulting admixture is toxic, and dysfunctional.  Witness the 12% approval rating for the Congress. [HuffPo]

So, why is the economic theorizing beloved by our two Tea Party darlings from the Silver State to be categorized as “radical?”

#1. It turns classical economic theory on its head.  Traditional economic theory asserts that an equilibrium price, and optimal market function,  can be determined when supply and demand for goods or services converge.  To give undue attention to one side or the other of the equation is asking for trouble.  Since the perpetration of the Supply Side Hoax, the “job creators” (corporate executives) have been attended to like medieval monarchs, with the Congress bowing, scraping, and otherwise engaging in obsequious behavior before members of the CEO class.   In sum, the Supply Side economics offered by the radical Republicans of the 21st century is little more than a political agenda masquerading as an economic theory. (1)

#2.  It eviscerates the guiding principal set forth in the founding documents of this nation which contends that we do better as a country when we take an interest in our communal welfare, and economic interests.  The preamble to the U.S. constitution notes that one of our foundational principles is the notion we should “promote the general welfare,” not that we should promote the interests of the rentier class, or any other specific class for that matter.  One of the first charges leveled at King George III was that he had “refused his asset to laws, the most wholesome and necessary for the public good.”  (Declaration of Independence) Note that the criticism wasn’t that the monarch had not attended to the good of “some” but of “all.”

In order to make this country work politically, as well as economically, we need to balance the needs and interests of business and labor.  Capital and commerce. Consumers and manufacturers.  When things get out of balance, things go wrong.  Achieving a balance between competing interest demands compromise.  However, when the Republicans in Congress assert their demand that they will not enact any modifications to the debt limit until the President and the Democrats in the Senate agree to repeal the Affordable Care Act and Patients Bill of Rights, accept the Ryan Budget, and privatize Medicare — the unwillingness to compromise produces nothing but manufactured gridlock.  Those who advocate no comprise in the face of opposition to their own exclusive agenda are functioning as anarchists — promoting no government as a solution to any governance.  (2)

Radical Theory Applied to Practical Reality Yields Poor Results

I’ve lost count of the number of times I’ve used the term “aggregate demand” in economic related posts.  However, when the situation becomes unbalanced and the needs of the top 1% of the American public are given greater consideration than those of the other 99% we have a situation in which there are few positive long term results.

Unalleviated promotion of the demands of the 1%, especially in the financial sector, helps to create economic consequences such as an increase in income disparity.  This is NOT to argue for some scheme of income re-distribution imposed by the federal government, but for a market based re-distribution based on the traditionally accepted principles of standard economics — including attention to the necessity of increasing our aggregate demand.

Increasing income disparity means that fewer households control more wealth, and hence have more spending “power.”  It is possible to have a warehouse load of vehicles, BUT the U.S. annually  manufactures some 15,797,864 cars and trucks (as of 2012) [WardsAuto  XL download] and 1% of the population obviously isn’t going to make a dent in this inventory without some significant assistance from the middle class.   The American middle class is less able to contribute to the aggregate demand than it was prior to the last Recession:

“Median household income in the country is nearly $4,000 less than what is was back in 1999. Things have gone from great to terrible since then, and this change has certainly played out in the nation’s median household income number. In September of 1999, the national unemployment rate was 4.2%; in September of 2011, the national unemployment rate was 9.1%.” [Manuel.com]

There are all manner of explanations for this situation, from various positions on the political spectrum.  For the radical right the explanation is to be found in the “high” corporate tax rates and regulation of financial transactions (the politics of prosperity for some and austerity for all).  For the left the explanation often incorporates the nefarious influence of the 1%.  Easy rationalizations miss an essential question.

What does our allocation of interest, energy, and resources tell us about our attention to our economic health?

There is one sector of our economy which has experienced significant growth — finance.  The NBER published a paper in 2007 offering an explanation for this increase:

“The share of finance in U.S. GDP has been multiplied by more than three over the postwar period. I argue, using evidence and theory, that corporate finance is a key factor behind this evolution. Inside the finance industry, credit intermediation and corporate finance are more important than globalization, increased trading, or the development of mutual funds for explaining the trend. In the non financial sector, firms with low cash flows account for a growing share of total investment. […] I find that corporate demand is the main contributor to the growth of the finance industry, but also that efficiency gains in finance have been important to limit credit rationing. Overall, the model can account for a bit more than half of the financial sector’s growth.”  (emphasis added)

Some definitions are in order, for example what’s “credit intermediation?”   The simplest way to describe this is to say that intermediation is the transfer of funds from the ultimate source to the ultimate user.   Our banks “intermediate credit” when they borrow from depositors to make loans to creditors.

Corporate finance runs a gamut of fiscal operations.  However, the standard expression relates to how does a corporation manage its capital investment decisions?  Decisions would be made such as should the company raise funds by the equities route, by issuing debt (bonds), and so forth.

If the NBER report is essentially correct, then the increasing transfers of funds, and the increasing role of corporate finance transactions are driving the increase in the growth of the financial sector.  So what?

The “so what” question may be answered, at least in part, by observing the increasing role of securitization of assets (Remember: One man’s debt is another man’s asset), and manufacturing of financial products in the “intermediation” process.   There’s a cautionary note from a 2009 IMF report (pdf)

“Mobilizing illiquid assets and transferring credit risk away from the banking system to a more diversified set of holders continues to be an important objective of securitization, and the structuring technology in which different tranches are sold to various investors is meant to help to more finely tailor the distribution of risks and returns to potential end investors. However, this “originate-and-distribute” securitization model failed to adequately redistribute credit risks, in part due to misdirected incentives. Hence, it is important in restart ing securitization to strike the right balance between allowing financial intermediaries to benefit from securitization and protecting the financial system from instability that may arise if the origination and monitoring of loans is not based on sound principles.”

What the polite phrasing of the IMF document is trying to say may very well be — “all the fancy ways the investment houses tried to reduce the risk to investors in various schemes aren’t going to be much help IF the underlying assets aren’t very good in the first place.” So, why did the system freeze up in 2007-2008?  Insert “avarice,” or good old fashioned “greed” in the place of “misdirected incentives,” and we have a situation in which all the financial products dreamed up by the “market makers” couldn’t erase the hard cold fact that many of the mortgages and other credit instruments which were securitized into ever more elaborate packages weren’t any good in the first place.

If we’re spending too much of our attention, energy, and finances on manufacturing financial products which are supposed to spin dross into gold for investment houses and major banks,  then we’re not paying attention to the sectors of our economy which need more attention, more energy, and more financing.

All analogies break down at some point, but for illustrative purposes only contemplate what might happen to an individual who owns a home with a set of broken steps to the front porch.  These steps are a risk for the homeowner.  However, instead of fixing the broken stairs the homeowner buys an extra insurance policy to offset his risk, then the benefits of the policy may be securitized, the security may be further offset with hedges, bets, and other derivatives — and in all the revenues generated and all the fees and commissions collected everyone appears to forget that the entire financial contraption is built upon a set of broken stairs.   When the steps collapse, as they inevitably must, the policy must pay out, along with those who bet against the policy being paid out and those who bet on the policy in favor of the  benefits being paid…. and so it might go.

The moral of this hypothetical is that if we are paying more attention to devising ways to mitigate risk, and manufacturing more financial products to do so, and we are not attending to correcting the faulty underlying assets — then we ought not complain when the house of cards falls in a heap at our feet.

Further, if we are studiously attending to generating revenue from the transfer of risk among credit intermediaries and corporate finance offices, then we are consequently paying less attention to our education system, our infrastructure, our manufacturing and business lending operations, and our fundamental  banking soundness.  Further, as more finance is sucked into the Shadow Banking system, the very real one is in danger of being neglected.

Worse still, according to the Economic Policy Review, the emphasis on the shadow system isn’t leveling off:

“Looking ahead, the authors contend that despite efforts to address the excesses of credit bubbles, the shadow banking system will likely continue to play a significant role in the financial system for the foreseeable future. Furthermore, increased capital and liquidity standards for traditional banking entities are “likely to increase the returns to shadow banking activity” partially because reform efforts have done “little to address the tendency of large institutional cash pools to form outside the banking system.”

This really doesn’t give much hope that financial institutions and major corporations will be excited about investments in manufacturing, infrastructure, or work force concerns, at least not in the foreseeable future.

Increasing aggregate demand, and thereby increasing our GDP, requires more earning power in the wallets of more residents and citizens.  The shadow banking system is not designed to take into consideration the credit needs of American car buyers — only to securitize and minimize (and then bet on) the credit worthiness of the underlying loans.   If banks made “good” home and auto loans then there would be less need to offset risks — which need not stop the shadow system from continuing to bet on the prospects of default anyway.

Finance and The Family Wallet

Looking back at the mess created by the Mortgage Meltdown of ’08, several observers were wont to ask — Why did the banks make those shaky loans in the first place?  And, no, it wasn’t because they “had to” because of the consumer finance laws — they made them because the loans could be originated quickly then securitized even faster. Once securitized the financial sector could manufacture  products to paper over the risks to the bankers — here came the hedges, bets, derivatives, swaps, etc. — and if the revenue generated from the manufacturing of those paper products could be greater than the loss from the loan default — then where was the incentive to make good and proper loans?  Someone wasn’t looking at those faulty front porch steps?

That was then, this is now and those who are playing derivative games with the underlying assets originally residing the family wallet aren’t taking kindly to being regulated, to being required to be more transparent, to being litigated against because of their manipulations.  Some more attention needs to be paid to that crucial line from the IMF report: “Hence, it is important in restarting securitization to strike the right balance between allowing financial intermediaries to benefit from securitization and protecting the financial system from instability that may arise if the origination and monitoring of loans is not based on sound principles.”

Balance

There’s that word again — we need some balance between competing interests (capital and commerce, labor and ownership) and balance requires — demands — compromise.  Those standing on the ramparts of their own idiosyncratic battlements of ideological purity, refusing to compromise with the dreaded Other, are jeopardizing not only the political life of this nation but the economy of the country as well.

(1) For more on this topic see: The Trickle Down Hoax, AmericanThinker, July 15, 2012.  The Political Genius of Supply Side Economics, Financial Times, July 25, 2010. (registration required) Supply Side Economics Explained, Reign of Error, September 23, 2005.  The Six Biggest Hoaxes in History, Huffington Post, May 23, 2013.

(2)  See also: Gridlock and Harsh Consequences, New York Times, July 7, 2013.  Gridlock in Congress, CNN, May 21, 2012.  Five Reasons Gridlock Will Seize Congress Again, Washington Post, January 4, 2013.   Congress Shows Few Signs of Ending Gridlock, Bloomberg News, July 8, 2013.

Comments Off on The Great Balancing Act: US on the high wire

Filed under Economy, Politics

If It Ain’t Broke What Are We Fixing? There is a spending problem, just not the GOP version

Labor paintingWe know the YOY reduction in filings for unemployment insurance benefit claims dropped by 13.5% from last year to this, [DETR]and we now know this bit of happier news from DETR (pdf) about the current employment situation in Nevada:

“Annual adjustments to Nevada’s labor market show the state’s unemployment rate for 2012 dropped from a preliminary estimate of 11.6 percent to 11.1 percent and that Nevada gained 18,100 in employment over the year, up from the previous estimate of 9,300.”

We can combine this with the following national report this morning from the Bureau of Labor Statistics:

“Total nonfarm payroll employment increased by 236,000 in February, and the unemployment rate edged down to 7.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in professional and business services, construction, and health care.”

More people with more money to spend should spell a less bumpy recovery for Main Street, but wait — the Bureau of Economic Analysis is less enthusiastic about the Q4 2012 reports:

“The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, decreased.”  (emphasis added)

Yes, personal consumption increased, non-residential fixed investments were up, as were residential fixed investments — what wasn’t moving up? Private inventory investments and federal government spending.  Two quick points should be made here.

First, little wonder the U.S. GDP [C+I+G + (X-M)] isn’t moving up as positively as we’d like when one factor in the equation drops — federal spending.  Secondly, there is a spending problem during this recovery period, but it’s NOT the “Spending Is The Problem” of recent Republican banners.  Here’s why:

The hoary Supply Side economics hoax only emphasizes one element of the GDP formula, assuming that all reductions in government (public sector) spending will have a positive effect on the others (consumer and business spending).   Harken back to those days in Algebra I — the days when both sides of an equation had to balance — in order to see why the Supply Side Hoax is little more than an excuse for lowing corporate taxes and minimizing the taxes on the upper 0.1% of American income earners.

Since both sides of the equation must balance,  if we reduce one element, such as government spending on the right side of the equal sign, then we have to decrease the value on the left side of the equation.  Most 8th graders have a reasonably good grip on this concept, which makes it all the more alarming that some presumably mature business advocates do not.

If we understand this premise, then the next statement from the Bureau of Economic Analysis makes perfect sense:

“The downturn in real GDP in the fourth quarter primarily reflected downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in PCE.”  (emphasis added)

Now we come to another formula, Private Inventory Investment, or “The difference between goods produced (production) and goods sold (sales) in a given year is called inventory investment.”   More simply stated as: PII = Production – Sales.   In other words, in a given period of time if the company has produced more than it has sold then the inventory is “positive.” If the firm has produced less, then it’s negative.  Those who wish to get down in the weeds about how private inventory investments are computed by the BEA should click on this link to their (pdf) explanation.

Inventory to sales ratios

Note that during the Recession (shaded gray) inventories were high, sales were down, and the ratio of inventory to sales moved up alarmingly.

Another element discussed by the Bureau of Economic Analysis, was the down turn in federal government expenditures.  But, Gee if we look at another FRED graph this certainly doesn’t seem to be the problem?

Federal General Expenditures 2000-2014

#1. Note, however that the graph is structured such that there are two year intervals between major points — and we’ve been talking about quarterly reports of GDP levels.   #2. The second problem with looking at the graph and believing that “federal spending” has skyrocketed since 2000, is that we have to factor in the costs of two wars between October 7, 2001 when the U.S. invaded Afghanistan, and March 3, 2003 when the U.S. invaded Iraq.  We had a major presence in Iraq for nine years and toted up an approximately $4 trillion bill for it. [MarketWatch] That would be about $80 B for the next fifty years.  There’s another big tab looming for our military operations in Afghanistan:

“The fact remains, however, that if the CRS and OMB figures for FY2001-FY2013 that follow are totaled for all direct spending on the war, they reach $641.7 billion, of which $198.2 billion – or over 30% – will be spent in FY2012 and FY2013.” [CSIS]

Add to this the unfunded changes made to the Medicare Program when Part D was added in the Medicare Modernization Act of 2003.  While nothing like the costs of military operations in Iraq and Afghanistan, the MMAct added a $9.4 trillion unfunded liability to the Medicare program [CMS report] over the next 75 years. [NYT]  And, then our banks fell apart in 2008…

To paraphrase the late Illinois Senator Everett Dirksen, “A trillion here, a trillion there, and pretty soon we’re talking about major money.”   As we wind down military assistance to Iraq, and bring troops home from Afghanistan, the spending trends should slacken.  This brings us to the third problem with taking the graph at face value.

#3.  It is misleading to show a federal spending graph, speak of “out of control Federal spending,” while NOT mentioning that non-defense discretionary spending — the kind of spending the GOP wants to cut has barely moved, if at all since 1991.   If we look at all discretionary spending as a percentage of our GDP, it looks like this [CBO pdf]:

Fed Exp Discretionary percent

What portion of federal discretionary spending is for Defense?  The CBO illustrates that too:

Defense Spending Discretionary

If we drill down into the numbers even further, we find that in 2011, we allocated $699 billion of our discretionary spending on the U.S. military, and $647 billion on everything else. [CBO] The bar graph illustrates the point: (click on the graph for the original size)

Discretionary Spending Fed

What has been happening to the lower bar on the graph?  Non-Defense discretionary spending has been trending downward:

Non defense discretionary spending trends

All the information on the graphs and charts leaves more questions than answers about the Congressional GOP insistence on screeching “The Debt Is Coming, The Debt Is Coming…”  They wish to maintain current level of discretionary military spending, even in light of the fact that it makes up a bit more than 50% of ALL our discretionary spending.  They wish to imply that “Federal Spending Is Out Of Control,” in spite of the fact that federal discretionary non-defense  spending is trending downward, and has been since 2011.

There is a formula for addressing the “spending problem” — just not the GOP incited version in which legions of the Great Unwashed are pocketing the bounty of hard working Americans — (1) Wind down military expenses in Iraq and Afghanistan; (2) Cut discretionary programs the Department of Defense has already said it doesn’t want; (3) Allow the savings accrued under the terms of the Affordable Care Act to take effect — as the most recent incarnation of the Ryan Budget proposal already does; and  (4) Make adjustments to Medicare Part D, such as allowing the Department of Health and Human Services to negotiate for prescription drug prices.

On the other hand, there are federal expenditures which will actually assist in increasing our national wealth — such an investments in infrastructure, research,  and education.  In the mean time we could look seriously at our revenue structure and perhaps even address former FDIC Chairwoman Bair’s question: Why should the manager of a hedge fund pay a low tax rate than the manager of a shoe store?

Why don’t we fix what’s broken and not break what’s working?

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Filed under Economy, Federal budget

Reboots, Revisions, and Reality

President Obama addressed a rally in Las Vegas yesterday [LVSun] including the stump speech line: “In fairness, my opponent’s got a plan, too,” Obama said. “They think that somehow you can lower our deficits by spending another $5 trillion on tax cuts for the wealthy. No matter how many times they try to reboot their campaign and try to explain it, they can’t.”  It’s tempting to conjecture that the Romney campaign has rebooted more often than Microsoft has issued new versions of its operating systems.

One problem is simply that Trickle Down, or Supply Side, Economics is a hoax.  [DB] [Krugman] [Stewart] There’s no way to reboot, re-wrap, re-state, or re-launch an economic program predicated upon a fundamentally flawed economic proposition.  One with its origins in the 1970s:

A group of thinkers, including the economists Arthur Laffer and Robert Mundell and the journalist Jude Wanniski, became convinced that lower taxes and deregulation were the answer. If you lowered taxes, the thinking went, people would take the extra money and invest it in new enterprises, getting the economy started again. [The New Yorker]

Nor did the initial proponents envision the misuse of the theoretical framework they propounded as a foil for reducing government services to its population:

Laffer, whose inspired napkin scrawl was most responsible for popularizing supply side, warned its followers not to look to the theory as an all-encompassing outlook—economic or ethical. “A problem I have with people who follow us,” he told Brooks, “is that they don’t recognize the theory’s shortcomings. They go too far. I don’t think you cut Social Security or unemployment insurance in a down economy. To do that is—well, immoral.” [The New Yorker]

Since the notion that tax cuts and deregulation work to increase revenue is a proposition thoroughly debunked [EPI]; and, since tax cuts and deregulation aren’t effective in creating a stable economy, witness the Housing Bubble collapse in 2007-2008; and since no causal relationship can be demonstrated between tax cuts and employment.  [Bernstein] Then the only straw left in the stack is to decry the Deficit and Debt in order to justify a program predicated on lowering taxes for the wealthy.   It’s both a last straw and a thin reed.

Little wonder vice-presidential candidate Rep. Paul Ryan (R-WI) didn’t want to stand on it when he told Fox News he didn’t have time to explain their tax plan. [TP]  A person could spend a goodly part of the next millennium to attempt an explication of in the inexplicable and still not get the job done. “Revenue neutral” only works when its acknowledged that the money has to come from somewhere.  If taxes are lowered on corporations, wealth management executives, and wealthy individuals then the other side of the equation has to be addressed in the form of higher taxes on everyone else, draconian cuts to public services, or both.   This shouldn’t take much time to explain — any 8th grader in a pre-Algebra class can tell you both sides of an equation must have the same value.

A second problem is that de-regulation, especially in the financial sector, is an invitation to economic instability.  We tried that.  Combining high speed electronic trading with flawed risk management models with the securitization of assets with the creation of synthetic derivative instruments along with third party bets on asset based securities and those derivatives … created the financialist’s flash crashes and the Wall Street Casino.   A volatile financial market is a financialist’s dream — full of opportunities to make big bucks in the margins; it is a Main Street nightmare.

Even the tepid provisions of the Dodd-Frank Act, seeking to re-regulate the derivatives markets, to monitor the liquidity and solvency of the major banks, to require banks to development ‘living wills’ in the case of serious trouble, to impose rational orderly liquidation of banks if they fail — are too much for the confirmed financialists.  The question becomes how generously will financialist Governor Willard Mitt Romney embrace them.

In May 2012, Governor Romney pledged to repeal the Dodd Frank Act, but offered no specifics. [Boston.com] He was still hewing to that position as of May 26, 2012. [TDB] By August 17, 2012 Governor Romney was calling for “transparency and common sense regulations,” while his running mate was publicly supporting a reversion to the Glass-Steagall Act which prohibited banks from indulging in propriety trading. [Politico]  As of September 6, 2012 Bloomberg news reported:

“Mitt Romney has pledged to repeal the Dodd-Frank act. That’s not really going to happen—and that’s just fine with Wall Street. Instead, President Romney would likely try to give the financial industry something it wants more: a diluted financial reform law that would relax restrictions on some of its most profitable—and riskiest—investments but maintain enough government oversight to give the banks cover.”

Somehow, the idea that our government should be primarily concerned with “giving the banks cover,” doesn’t seem to be a particularly good campaign talking point while speaking to middle America.  The Etch-A-Sketch could move into over-drive?

Meanwhile back in the real American economy — the growth of which  President Obama would like to sustain —

Shows steady growth in the last year in the Real Gross Domestic Product

An economy with some good news for Main Street — retail sales and food service are trending into positive territory

Shows continued improvement in private sector employment:

President Obama may be campaigning in Nevada’s largest urban area, but the economic message is right out of the First Rule of Ranch Management — If it ain’t broke, don’t fix it.

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Filed under 2012 election, Economy, financial regulation, Obama, Politics, Romney