Tag Archives: Congressional Budget Office

Remove Government Intervention And Let’s Get On With It!

After being beaten down by the inevitable regulatory stranglehold that the government imposes on anyone attempting to do anything disruptive and creative that might revolutionize the banking industry, and probably any other, I am inspired to spew my general contempt for government intervention in anything. My apologies in advance.

Through decades of research, American neurobiologist James McGaugh discovered that as humans learn information and encounter new experiences, the part of the brain known a the amygdala plays a key role in retention.  The amygadala is activated primarily by stress hormones and other emotionally arousing stimuli.  Memory consolidation, or the forming of long term memories, is typically modulated very strongly by the amygdala.  Put simply, events that invoke significant amounts of emotion make a bigger imprint on one’s brain.

Emotion, while an important element in man’s array of mental tools, can unfortunately triumph over reason in crucial matters.  Excessive anger can lead to violent confrontations.  Heartbreak can lead a person to do drastic things in order to woo back a lost lover.  In the context of simple economic reasoning, today’s intellectual establishment often disregards common sense in favor of emotional-tinged policy proposals that rely on feelings of jealously, envy, and blind patriotism for validation rather than logical deduction.  “Eat the rich” schemes such as progressive taxation and income redistribution are used by leftists who style themselves as champions of the poor.  Plucking on the emotional strings of envy makes it easier to arouse widespread support for economic intervention via the state.

In the aftermath of the financial crisis of 2008, economic growth predictably slowed down in most industrialized countries.  Many commentators on the political left have grasped onto this opportunity to point to the vast amount of income inequality which exists in the United States and reason that it played a part in causing the crash.  This argument is typically paired with a proposal to raise taxes on the rich to balance out societal incomes.  It is alleged that having government brutes step in order to play the role of Robin Hood is the best and most justified way to alleviate income inequality.

Presently, income inequality in America is at its highest peak in decades.  In 2011, a study by the Congressional Budget Office concluded that after tax income grew by 275% for the top 1% of income earners between the years of 1979 and 2007.  The top-fifth of the U.S. population saw a 10 percentage point increase in their share of total income in the same period while all other groups saw their share decrease by 2 to 3 percentage points.  The data undoubtedly shows that income inequality has been increasing over the past few decades.  New York Times columnist and economist Paul Krugman has latched onto the evidence and is suggesting that rising income inequality plays a part in causing recessions.

Economist Joseph Stiglitz, who recently wrote the book “The Price of Inequality,” has argued that without a fair share of the national income, the middle class is unable to spend enough to keep aggregate demand elevated.  Both economists see income inequality as a danger to the prosperity of a nation.   Such a message is appealing to the greater public because it plays on their perceptions that the world is unfair.  It almost seems intuitive to think that the rich posses too much wealth or that a prosperous society is one in which income is more equalized.  Comfortableness in these beliefs paves the way for income redistribution efforts by the ever-scheming political class.

With income inequality a hot topic of debate going into the fifth year of the biggest economic downturn since the Great Depression, the question remains: does income inequality have a negative impact on society as Stiglitz and Krugman suggest?  And is growing income inequality an inherit part of capitalism?

First and foremost, the idea of equality for man in physical attributes, mental fitness, and material security  is essentially anti-human.  The most appealing aspect of mankind is that every person varies from one another in a myriad of different ways.  Some are better athletes, some are quicker studies, some have outer features that make them generally more attractive.  It follows that some men and women will be more apt at producing or better attuned to the demands of the marketplace.  They will have higher incomes by virtue of their own entrepreneurship or capacity to produce.  So, in a sense, income inequality is a fact of the free market.

But it is the possibility of inequality and the ability to achieve a higher income that makes capitalism work.  Punishing those who excel at making consumers better off punishes the very market mechanism that leads to better living standards overall.  In a free society, income inequality is not good or bad; it is part of the functioning order.  Any attempt to make incomes more equal through state measures is unjustified plunder of the rightful earners of wealth.

But what of the inequality in income that exists in today’s state-corporatist economy?  Did the 1% acquire its wealth solely through hard work?  The answer is hardly in many cases.  Though there are some innovative businessmen who became rich by providing new and better products, the sharp increase in income inequality over the past two decades is due to an economic phenomenon outside of normal market operations.  Krugman and Stiglitz rightfully point out that the greatest periods of income inequality in the United States were the late 1920s and the period since the mid-1990s.  What they fail to mention is that both these periods were not defined by capitalism run amok but by massive credit expansion.

This expansion in credit, aided and abetted by the Federal Reserve’s loose money policy, is the real culprit behind vast income inequality.  Economist George Reisman explains:

“the new and additional funds created in credit expansion show up very soon in the financial markets, where they drive up the prices of securities, above all, common stocks. The owners of common stock are preponderantly wealthy individuals, who now find themselves the beneficiaries of substantial capital gains. These gains are the greater the larger and more prolonged the credit expansion is and the higher it drives the prices of shares. In the process of new and additional money pouring into the financial markets, investment bankers and stock speculators are in a position to reap especially great gains.”

Since it’s so important, the main point just made needs to be repeated: credit expansion creates an artificial economic inequality by showing up in the stock market and driving up stock prices.

Money acts as a medium of exchange but is not neutral in its effects on receivership.  Those first receivers are able to bid up the price of goods before any other market participants.  As the newly created money flows into the economy, the general price level rises to reflect the new volume of currency.  In practice, credit expansion which brings about a reduction in interest rates also increases the amount of time businesses can go without making deductions for depreciation on their balance sheets as they purchase capital goods.  Because investment tends to go toward durable goods during periods of credit expansion, there is less funds left over to devote to labor.  Profits end up being recorded while wages sag behind.  Since credit expansion and inflationary policy go hand in hand in distorting relative prices and must eventually come to an end, the bust that occurs reveals wasteful investment.  Recession sets in shortly thereafter.

Printed money is not the same as accumulated savings which would otherwise fund sustainable lines of investment.  And it is only through adding to the economy’s pool of real savings that productive capacity is able to increase in the long term.  The wealthy have a higher propensity to save precisely because they have a higher income.  It is through their savings that new business ventures are funded and the economy is able to grow without the faux profits from government-enabled credit expansion.  This is why raising taxes on the rich is a backwards solution to income inequality.  Taxation only funnels money out of the productive, private sector and into the public sector which focuses on spending to meet political ends rather than consumer satisfaction.  All government spending boils down to wasted capitalThe truth is that capital is always scarce; there is never enough of it.

Pointing out this fact is by no means corporate shilling.  Many corporations and well connected businesses lobby for tax increases in order to burden their competitors.  Currently in California, Governor Jerry Brown is campaigning for a ballot measure which would raise taxes on the state’s richest residents.  According to the Wall Street Journal, companies such as Disney, NBC, Warner Bros., Viacom, CBS, and Sony have each already pitched in $100,000 for the initiative.  Various energy companies are financially supporting the ballot measure to make sure that a 25% tax on natural gas and oil extraction isn’t next.  As the scope of government becomes all the more encompassing, big business starts seeing profit opportunity in using its forceful authority to better its own competitive position.  In their unceasing tirades over income inequality, Stiglitz and Krugman recognize the trouble rent-seeking poses to competitive markets yet both reason that the problem doesn’t lie with the state but with those politicians and bureaucrats who occupy its enforcement offices.

To put it bluntly, this notion isn’t just juvenile; it rests on the fallacious assumption that government is staffed by only the most well-meaning of individuals in society.  As history and reason dictate however, good souls are not attracted to positions of absolute power.  The state, by Max Weber’s definition, holds the monopoly over force in a given area.  Practically every action taken by state officials introduces violence or the spoils from violence into an otherwise free society.  It follows that only those seeking to use state authority for their own benefit naturally gravitate toward politics.

Krugman and Stiglitz believe, as most do, that Americans should be born with the opportunity to succeed.  To create an environment of fairness, they propose a variety of government policies so that even the most impoverished individuals will have a shot at the American Dream.  Their arguments rest largely on emotion instead of reason and are aimed at inspiring reactionary protest.  What they fail to see (or refuse to acknowledge) is that the free market provides the best opportunities for someone to make a decent living by providing goods and services.

In a totally uninhibited market, profits come only to those who satisfy consumers more than their competition.  Contrary to Stiglitz’s suggestion, Henry Ford wasn’t a great businessman because he paid his workers a high wage.  He made his fortune by streamlining the process from which cars were built in order to sell them at a lower price.  The employees at Ford were able to increase their productivity, and thus wages, through the previous accumulation of capital and investment in machinery.  Ford’s massive profits didn’t last long however as domestic and foreign competition copied the mass production model and were able to attract market share of their own.  The greater the amount of cars on the market meant lower prices for all consumers in the end.

Again, in a truly free market the only way to maintain a rising income is to continually produce at a more efficient and more innovative rate.  In an economy plagued by the heavy hand of government, the market becomes rigged in favor of those connected to the ruling establishment.  Competition is decreased by the rising cost of adhering to regulations, innovation stagnates, and more income flows to the top.  Through central banking and credit expansion, profits are able to be recorded by the financial industry and first receivers of money before the rest of the population; which in turn leads to further evidence of income inequality.

No matter how you slice it, taxation is theft It is indiscernible from highway robbery and devoid of any moral justification.  Income inequality is a problem not because the government isn’t doing enough to combat it but because politicians and bureaucrats never tire of intervening into the private affairs of society.

With government intervention present in practically all market transactions, the solution to income inequality is to remove the intervention; not empower the state further by increasing the amount of funds at its disposal.


The Dangerous Fiscal Path That Looms Before Us.

Dangerous is the path we seem to be headed for: leaving in place all or most of the Bush tax cuts; patching the alternative minimum tax and averting cuts in Medicare reimbursements for physicians; and suspending the automatic spending reductions triggered by the failure of the debt reduction supercommittee. Under this path, by 2022 public debt would be nearly 100 percent of the gross domestic product, a level not seen since just after World War II. Staying on this path will make us look like Greece by 2025.
This is the likely scenario because the two parties largely agree on the biggest component of the additional debt — extending the Bush tax cuts for those making less than $250,000 a year. It is the most perilous because the economy cannot shoulder a debt of that magnitude without potentially catastrophic consequences. The dumb path would avoid the above dangers in a stupid way. It would follow current law, not current policy. Thus, all the Bush tax cuts would expire at the end of this year. The alternative minimum tax would hit a growing number of taxpayers. Medicare doctors would see their payments reduced by 27 percent in March and more in future years. Also in this scenario, the supercommittee failure would result in cuts of nearly $1 trillion to defense and domestic spending.
This path would drive debt to a manageable level — 62 percent of GDP — by the end of the 10-year window. The deficit would fall from 7 percent of GDP this year to well under 2 percent in 2015. But it would apply a dangerously sudden brake to the economy and leave in place poorly constructed tax and spending policies.A large portion of the economic and human costs of the recession and slow recovery remain ahead,” the CBO said, and “those costs fall disproportionately on people who lose their jobs, who are displaced from their homes or who own businesses that fail.” An immense, across-the-board tax increase coupled with sudden spending cuts would make that situation worse.

The least dumb path would deal with the debt in a way that is gradual, balanced between spending cuts and revenue increases and intelligently targeted rather than the current law’s bludgeon. This is the path outlined by debt reduction commissions such as Simpson-Bowles. Unfortunately, it is not the subject of the current debate.

President Obama has called for a balanced solution but has neither proposed serious tax reform nor adequately outlined the ways in which he would get entitlement spending, particularly Medicare, under control. The position of most Republicans, on the presidential campaign trail and in Congress, is wildly less responsible. They imagine a world in which the debt can be tamed by spending cuts alone;  the Republican presidential candidates call for trillions in additional tax cuts beyond extending the expiring ones.

To hope that the CBO report might chasten policymakers is probably too much, but even a glimpse of its conclusions ought to cause them to rethink their approaches.


Rich People Create Jobs!

And five other myths that must die for our economy to live.

Rich guy

 Illustration by Zina Saunders.

In the movie Groundhog Day, Bill Murray‘s character is forced to relive a single day over and over and over—waking up to the same song every morning, meeting the same people, having the same conversations—until, after thousands of repetitions, he finally realizes what a shmo he’s been his entire life. With that epiphany, the calendar starts to flip forward again. His life reboots, and he once again gets to hear new songs, meet new people, and have entirely new conversations.

When it comes to the economy, we’re stuck in our own version of Groundhog Day—and this one doesn’t seem to be coming to an end. America is in a deep and persistent slump, and unemployment is mired at more than 9 percent. Yet when you turn on the TV, all you hear are the same manufactured sound bites delivered in the same apocalyptic tones from the same pack of talking heads—over and over and over. Groundhog Day has turned into the eighth circle of hell.

Unfortunately, these zombie talking points aren’t just wrong; they’re dangerous. If we’re ever going to revive the economy, we’ve got to tackle them head on. Here are six of the worst.

MYTH #1: THE STIMULUS FAILED.

For the first four years of his presidency, Franklin Roosevelt tackled the Great Depression with inflation, easy monetary policy, and government spending. But in 1937, FDR’s advisers persuaded him to reverse gears. After all, interest rates had been close to zero for years, commodity prices were climbing, and fear of inflation was on the rise.

Bust or Boost?

What happened next is now called the “Mistake of 1937” (PDF). Federal spending was cut and monetary policy was tightened up, with disastrous results: GDP immediately began to plummet, and industrial production fell by a third. Within a year everyone had had enough. In 1938 the austerity program was abandoned, and the economy started to grow again.

The truth is that stimulus worked in 1933 and it worked in 2009. So why is our economy still in such bad shape? For one, partly due to political considerations and partly because it was rushed through Congress, the 2009 stimulus wasn’t as well designed as it could have been. It was also sold badly. If the bill passed, administration economists predicted, unemployment would peak at 8 percent and then start declining (PDF). But the recession was far worse than the White House originally thought. Unemployment peaked in the double digits, and that’s made the stimulus a fat target for Republican critics ever since.

But as awkward as it is to argue that things would have been worse without the stimulus—”Not as bad as it could have been!” isn’t a winning slogan—well, the truth is that things would have been a lot worse without the stimulus. Everyone from the nonpartisan Congressional Budget Office (PDF) to private-sector forecasting firms have concluded that it increased economic growth, reduced unemployment, and put millions of people back to work. It just wasn’t big enough, or long-lasting enough. Unfortunately, this has given conservatives an opening to demand tighter money and lower spending—exactly the same mistake we made in 1937.

MYTH #2: THE DEFICIT IS OUR BIGGEST PROBLEM RIGHT NOW 

If your credit card company offered you $30,000 interest-free to buy a car, would you take the deal? Sure you would. It’s a three-way win: You replace your clunker, the auto industry keeps its assembly lines humming, and the credit card company is happy to have made a safe loan, even at no interest. Apparently, they think you’re a pretty good credit risk.

The Bush Effect

This is pretty much the situation the US government is in now. If our national debt were really at dire and unsustainable levels, as conservative economists and Republican leaders have taken to arguing, nervous investors would be driving up interest rates on federal borrowing. But just the opposite has happened: As I’m writing this, 10-year real treasury yields are at 0.00 percent. The seven-year rate is actually negative. Apparently, the financial markets think we’re a pretty good credit risk.

It’s true that the United States needs to address its long-term deficit problem—a problem almost entirely due to Medicare and other health care expenditures. (Domestic, defense, and Social Security spending have actually decreased as a percentage of GDP over the past 40 years, and there’s no reason to think that’s about to change.) But that’s in the long term. Right now, our problem is a sluggish economy and too many people out of work. The real answer to future deficits is to spend money now to get the economy growing again.

America’s infrastructure is crumbling, there are people who could be put to work fixing it, and banks are practically begging us to take their money. A trillion dollars in infrastructure spending would be good for our economy today, good for economic growth tomorrow, and thanks to those low interest rates (and the increased revenue that would come from growth), it wouldn’t even increase our debt much. As they say, only an idiot turns down free money.

Only an Idiot Turns Down Free Money

MYTH #3: LOWER TAXES ARE THE BEST WAY TO GROW THE ECONOMY.

There’s no greater orthodoxy in the Republican Party than unconditional fealty to tax cuts. In a recent GOP debate, when the candidates were asked whether they’d walk away from a deficit deal that included just $1 in tax increases for every $10 in spending cuts, every single hand shot up.

Taxes have been the third rail of American politics ever since the California tax revolt of 1978. Even Democrats are nervous about touching them: President Obama has famously called for letting some of the Bush tax cuts expire, but he’s always careful to make it clear that he wouldn’t change rates for anyone earning less than $250,000 per year. In other words, he’d repeal less than a quarter of the Bush tax cuts.

This fear is easy to understand. No one likes paying higher taxes. But do lower taxes actually spur economic growth? Bruce Bartlett, an economist in the Reagan administration, has compared tax rates in various rich countries in 1979 to each country’s growth rate since then. His conclusion? There’s virtually no correlation.

Recent US history backs this up too. Bill Clinton raised tax rates in 1993, and Republicans insisted it would cripple the economy. Instead, the economy boomed. In 2001 and 2003, George W. Bush lowered taxes and Republicans insisted the economy would flourish. Instead, we got the weakest expansion of the past century. Republicans are simply wrong about taxes: Within reason, high tax rates don’t hinder growth, and low tax rates don’t stimulate it.

But don’t high taxes reduce the incentive for people to work? Actually, no: For ordinary wage earners, participation in the job force and total hours worked barely respond to taxes at all. (According to tax specialists Joel Slemrod and Jon Bakija, this is “a rare example of a question on which there is a broad consensus among economists.”) The same is true for rich people. As a trio of prominent economists concluded last year after reviewing the literature, “there is no compelling evidence to date of real economic responses to tax rates” (PDF).

Even capital gains rates have virtually no impact: During the past few decades, they’ve bounced up and down from 40 percent to their post-Depression low of 15 percent. The effect on business investment is nil.

If a Tax Rate Falls…

Will the Economy Notice?

 

MYTH #4: REGUALTORY UNCERTAINTY IS CLOGGING THE ECONOMY.

Are American businesses paralyzed by fear of a tidal wave of new regulations? When McClatchy  reporter Kevin Hall went out and asked small-business owners about this, he got a clear answer. “Absolutely, positively not,” said one. “Government regulations are not choking our business,” said another. In its most recent quarterly survey (PDF) of small-business trends, the National Federation of Independent Business reports that sales—i.e., lack of demand—is the No. 1 concern, beating out taxes, regulations, inflation, and everything else.

The Bottom Line Is the Bottom Line

In any case, regardless of what the Wall Street Journal editorial page says, the Obama administration has hardly been a whirlwind of regulatory activity. Its health care reform will have very little effect on either small businesses (which are exempt) or large businesses (which mostly offer health plans already) and only a modest effect on medium-size businesses (PDF). Its financial reform bill affects only the financial sector. Its proposed new air-quality regulations will mostly affect old coal-fired electrical plants that would have shut down anyway (PDF).

Dumb and outdated regulations are no friends to the economy—and the Obama administration has undertaken a regulatory review that’s projected to save an estimated $10 billion during the next five years. But as welcome as that is, our economy’s biggest problem right now isn’t regulatory uncertainty. It’s economic uncertainty.

MYTH #5: OBAMA IS DEBASING THE DOLLAR.

In one of the most infamous moments of his young candidacy, Republican presidential hopeful Rick Perry decided to tee off on Federal Reserve Chairman Ben Bernanke last summer. “If this guy prints more money between now and the election,” he told an enthusiastic audience in Cedar Rapids, “I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas.”

Bernanke’s sin? Pumping money into the banking system after the collapse of 2008. Although this is widely credited with helping prevent a second Great Depression, tea partiers and gold bugs are convinced that Bernanke’s actions have debased the dollar. There are two problems with that claim. First, it’s not true. Second, we’d be better off if it were.

 First things first: Has the dollar lost value under Bernanke and Obama? No. The usual measure for the strength of the dollar is called “trade-weighted value.” In July 2008, just before the financial crisis erupted in earnest, the greenback’s value stood at 95.4. As of this writing it is sitting at 96.1. Taking a longer view, the dollar lost value under Reagan and Bush I, gained value under Clinton, lost value under Bush II, and has mostly stayed steady under Obama. There’s just no basis to the claim that Obama and Bernanke have debased the currency.

And that’s unfortunate. As economist Dean Baker is fond of pointing out, if we want to get our national savings rate up and our long-term budget deficit down, there’s only one way to do it: by fixing our massive trade deficit. We have to import less and export more, and one way to make that happen is with a weaker dollar. A weaker dollar makes foreign goods more expensive, so we’ll buy less of them, and makes American goods cheaper, so others will buy more of them.

The truth is that we’d be better off if we ditched the loaded “strong/weak” terminology and just talked about an “export dollar” (weak) and an “import dollar” (strong). Sometimes one is good, and sometimes the other is. The Chinese, for example, have done well for decades with an export Yuan. Likewise, an export dollar would be our friend right now.

Bad News for Tourists…

Is a Holiday for Manufacturers

MYTH #6: IF YOU UNSHACKLE THE RICH, THEY WILL REV UP THE ECONOMY.

Think of this as the supermyth—the one underlying so many other fallacies. For decades, America’s economic policies have been based on the notion that catering to corporations and the wealthy is the way to stimulate the economy. Republicans routinely insist that we need to bail them out, lower their taxes, allow them to repatriate hundreds of billions in overseas profits, and free them from annoying government meddling. If we don’t, the “job creators” will stay in a funk, and the economy will stay in a rut.

But here’s a pesky fact neither corporate America nor the GOP establishment is trumpeting: After-tax corporate profits are currently at an all-time high. The problem businesses face isn’t lack of cash but rather a lack of confidence that consumer demand will pick up in the future. So they’re not expanding or hiring at the rate they should be.

Rich people don’t create jobs when we hand them big windfalls. They create jobs when the economy is growing and they have customers for their businesses. And the key to solving that problem, at least during a deep economic slump like the one we’re in now, is to focus like a laser on more stimulus, easier money, higher inflation, and a weaker currency. Unless we want to relive 1937 over and over and over again. As Bill Murray said, “Anything different is good.”

Wall Street’s Gain…

Main Street’s Pain

This November, please vote responsibly!


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