Prior to getting into who pays what in taxes, it may be interesting to look at just where the money goes. In discussions on the economy, I still run into people who believe most of our tax dollars go to welfare and foreign aid. The following looks at federal tax dollars. Many welfare programs were either eliminated or pushed down to state responsibility during the welfare reform programs of the Clinton years. The information is taken from a no-partisan group: the Center on Budget and Policy Priorities, which may be found at http://www.cbpp.org/. Figures are for the 2007 budget.
Defense and Homeland Security related expenditures compose 22% of the $2.7 trillion dollar budget; that's $590 billion, with $125 billion of that total going toward the wars in Iraq and Afghanistan. Recently, Barney Frank suggested the defense budget could be cut by 25%. While I disagree with this, he probably is referring to ending the Iraq/Afghanistan expenses. I believe both wars have seriously deteriorated our armed forces and that we have probably not spent sufficiently on homeland defense (port, nuclear and chemical plant protection, etc.). Without a detailed study, I would guess defense spending could be held to roughly 20-25% of the total budget or about 5% of GDP.
Social Security takes 21% of the budget or $590 billion. This provides 34 million retirees with an average payment of roughly $1000/month. I don't foresee any immediate change in this, although due to shifting demographics, it is not a sustainable program over the long run. We may be forced to "means testing" down the road.
Medicare, Medicaid and SCHIP (State Children's Health Insurance Program - partially funded by the federal government, but administered through the states) claims another 21% of the federal budget, or $572 billion. With the political tide for some sort of universal health care program, I would not foresee any substantial reduction in this category, although increased efficiencies, elimination of corruption, etc. might improve costs by 10-20% (say $150 billion).
Safety Net Programs, such as the earned income and child tax rebates, school lunch programs, low-income housing assistance, food stamps and the various programs one would think of as "welfare," compose 9% of the budget or $254 billion. In a serious economic crisis, it will be difficult to hold spending to this level, without eliminating programs. Obama's tax plan increases the earned income credit, but for the sake of argument, let's assume this category could be cut in half, for a fifty percent savings (say $127 billion).
Interest on the national debt takes roughly the same amount of the budget, 9% or $237 billion. No much can be done here and as borrowing increases at a rate aster than income growth, this percentage will only rise.
Everything else comprises the remaining 18% of the federal budget. The 18% is divided roughly as follows: 6% for federal retirees and veterans benefits; 3% for for scientific and medical research; 2% for transportation and infrastructure; 2% for education; 1% for non-security related foreign aid; other miscellaneous 3%.
In terms of restoring the nation's basic infrastructure and encouraging new industries with new jobs, scientific and medical research, transportation and infrastructure and education probably all need increases in funding and a larger percentage of the total budget.
The point in reviewing these figures is, however, to show that if we hold defense spending and continue to fund entitlement programs, there is not a whole lot of discretionary spending available to reduce. If the above is even approximately correct, the best we could hope for is roughly $300 billion out of a $2.7 trillion dollar budget (approx. 10%). It is more likely that that savings would be shifted toward research, infrastructure and education.
According to the Center on Budget and Policy Priorities, in 2001, budget experts were projecting a $710 billion surplus in 2009; today we are instead expecting a $546 billion dollar deficit (and I believe these figures were prior to the recent bail-out of financial institutions). This means that during the Bush Administration the federal budget picture worsened by $1.3 trillion, not including the recent additional increases. The Center also studied where this money went: 42% in the Bush tax cuts; 40% in defense and security increases; 12% in entitlement increases; and 6% in discretionary spending increases.
My argument is that we do not resolve the overall budget problem with "tactical changes" such as getting rid of earmarks ($18 billion/year) or freezing discretionary spending to present levels and extending the Bush tax cuts and providing additional tax incentives to American corporations to enable them to better compete globally. In fact, policies designed to help us better compete globally have largely led to the destruction of the middle class and failed financial system.
Next: Who Pays the Taxes and How to Create Meaningful Employment
Friday, October 31, 2008
Monday, October 27, 2008
The Economy - Part IV
Following 9/11 and the identification of Al Qaeda as the perpetrators, I assumed that George Bush had to do two things to have a chance at re-election in 2004. He had to destroy Al Qaeda and bring Bin Laden to justice and he had to scrap his tax cuts, which were, by all objective measures, aimed toward business and the wealthy. He did neither and managed to squeak by a second time to win in 2004. So much for my political astuteness.
Bush's legacy, however, is another matter. During his first term, he effectively destroyed American foreign policy and the post WWII western coalition that had essentially brought down communism. During his second term, he effectively destroyed the United States' leading role in the global economy and, although the jury is still out, much of that economy itself. Whatever international participation there was in the fiasco called the American economy and however deluded western intelligence may have been regarding the threat posed by Iraq, we began the Bush Presidency as the global military and economic leader and leave the Bush Presidency with our leadership in both in shambles. From the present perspective, Bush may go down in history as the worst President we have endured.
Bush managed to win the Presidency based on two factors; in 2000, a conservative, pro-Bush Supreme Court overruled the Florida Supreme Court and handed him the election. While I remain one of the few Democrats who believes that Bush "probably" actually won Florida, had events taken their usual political course and the Supreme Court decided against interference in the Florida State electoral system, Gore would have probably become President.
In 2008, Bush pulled out another "squeaker," with the deciding state switching from the electoral votes of Florida to the electoral votes of Ohio, although he did escape from becoming a "minority President," by carrying the overall popular vote by 500,000. Kerry's defeat was based on both the "fear" campaign waged by Republicans, coupled with intra-Party friction among Democrats. [I would contend that the Clintons preferred a Bush victory in order to clear the way for a Hillary nomination in 2008.]
Both of these elections will, hopefully, someday be seen as "aberrations" within our democratic system. But in 2008, the choices are incredibly clear. Whatever one thinks of the Obama policies (foreign policy, the use of military force, taxation, universal health care, etc.), McCain has offered no substantive change from Bush foreign and domestic policy.
"Winning" in Iraq and bringing home the troops with "honor" might be termed the "feel good strategy." McCain had the opportunity to reformulate the Bush Doctrine of pre-emptive war and offer a substantial new approach to foreign policy and the use of military force. He did neither. Outside of his claim of being correct on the tactics of the "surge" in Iraq and the need for a similar surge in Afghanistan, McCain's foreign and military policy is based virtually entirely on: "I have more experience; trust me." In the absence of offering alternatives to the Bush policies, one must assume that he concurs - i.e.silence is affirmation. The McCain goals of "victory" and "honor," lack definition and do not constitute in themselves a "strategy." Lacking such a strategy, McCain fails as Commander-in-Chief.
As the campaign shifted away from Iraq and Afghanistan toward the economy and what voters apparently believe is of a more urgent priority, McCain's arguments have been similar and offer little more than the standard Republican matra of supply side and trickle down economics. If Bush, in 2004, managed to get re-elected with the message of: "I've made mistakes, but Kerry will make more," based on foreign and military policies, McCain seems to be trying the same tactics in 2008 regarding the economy.
As with the wars in Iraq and Afghanistan, McCain's arguments with Bush on the economy are not strategic differences, but tactical. On the former, McCain never questions the policies of Bush or the decision for pre-emptive war (he doesn't discuss it); on the latter, the economy, it's simply more of the same. Indeed, McCain apparently believes he can right the economy by vetoing Congressional earmarks, freezing government expenditures (except for defense and entitlements...which compose 75% of the total budget) and providing additional tax breaks for corporations and the wealthy.
In other words, by pursuing strategies basically identical to Bush, he will somehow achieve better results, through small tactical changes. This fails to address the magnitude of our current economic problems.
Reaganomics, which has steered the Republican Party since Reagan, died with the recent Greenspan testimony before Congress, in which he noted that he did not foresee the errors of the banks and had assumed they would have been more protective of their stockholder interests - in other words, the free, unregulated market failed.
Ironically, the recent $700B+ bail-out of what-to-date has been a bailout of failed banks and financial institutions, approximates in dollars the Bush 2001 tax cuts. Looked at another way, the 2001 tax-cuts designed to stimulate real economic growth, instead were "blown" via the bubble of an over-valued real estate market, kept alive by ignoring basic lending rules, easy credit, and shady - if any - accounting practices.
Worse, the objective position of the United States-in-the-world has not changed and has probably gotten worse. Two of the three "axis of evil" are still in place. Al Qaeda is growing. Bin Laden is still at large. Domestically, incomes haven't risen, credit is virtually gone, home foreclosures increasing, unemployment growing, energy prices rising over the long term, infrastructure ignored, etc., etc. So what's the answer? More of the same?
We have, I believe, reaching "the tipping point." Four more years of essentially Bush policies will put this country into economic Depression.
This is not an indictment of the theories of free enterprise; supply side economics may work (and, in the past, has worked). But, in a global economy, it will not work for the middle class or the poor, unless accompanied by real growth in GDP and wages, instead of the phony growth in overvalued assets and easy credit.
At this juncture, it is important to shift economic policy back to a national focus. The fastest way to recovery is to temporarily step back from free markets, until they can be reformed, and to utilize taxation as a means for redirecting capital back to neglected national infrastructure and the creation of meaningful employment. The reason is simple. We cannot afford to continue to pursue national goals which demand expeditures far in excess of income. The best means of increasing that income, over the long run, is through the economic restoration of the middle class, so that they once again assume an important role in the overall tax burden.
Next: Why 40% of Americans pay no taxes.
Bush's legacy, however, is another matter. During his first term, he effectively destroyed American foreign policy and the post WWII western coalition that had essentially brought down communism. During his second term, he effectively destroyed the United States' leading role in the global economy and, although the jury is still out, much of that economy itself. Whatever international participation there was in the fiasco called the American economy and however deluded western intelligence may have been regarding the threat posed by Iraq, we began the Bush Presidency as the global military and economic leader and leave the Bush Presidency with our leadership in both in shambles. From the present perspective, Bush may go down in history as the worst President we have endured.
Bush managed to win the Presidency based on two factors; in 2000, a conservative, pro-Bush Supreme Court overruled the Florida Supreme Court and handed him the election. While I remain one of the few Democrats who believes that Bush "probably" actually won Florida, had events taken their usual political course and the Supreme Court decided against interference in the Florida State electoral system, Gore would have probably become President.
In 2008, Bush pulled out another "squeaker," with the deciding state switching from the electoral votes of Florida to the electoral votes of Ohio, although he did escape from becoming a "minority President," by carrying the overall popular vote by 500,000. Kerry's defeat was based on both the "fear" campaign waged by Republicans, coupled with intra-Party friction among Democrats. [I would contend that the Clintons preferred a Bush victory in order to clear the way for a Hillary nomination in 2008.]
Both of these elections will, hopefully, someday be seen as "aberrations" within our democratic system. But in 2008, the choices are incredibly clear. Whatever one thinks of the Obama policies (foreign policy, the use of military force, taxation, universal health care, etc.), McCain has offered no substantive change from Bush foreign and domestic policy.
"Winning" in Iraq and bringing home the troops with "honor" might be termed the "feel good strategy." McCain had the opportunity to reformulate the Bush Doctrine of pre-emptive war and offer a substantial new approach to foreign policy and the use of military force. He did neither. Outside of his claim of being correct on the tactics of the "surge" in Iraq and the need for a similar surge in Afghanistan, McCain's foreign and military policy is based virtually entirely on: "I have more experience; trust me." In the absence of offering alternatives to the Bush policies, one must assume that he concurs - i.e.silence is affirmation. The McCain goals of "victory" and "honor," lack definition and do not constitute in themselves a "strategy." Lacking such a strategy, McCain fails as Commander-in-Chief.
As the campaign shifted away from Iraq and Afghanistan toward the economy and what voters apparently believe is of a more urgent priority, McCain's arguments have been similar and offer little more than the standard Republican matra of supply side and trickle down economics. If Bush, in 2004, managed to get re-elected with the message of: "I've made mistakes, but Kerry will make more," based on foreign and military policies, McCain seems to be trying the same tactics in 2008 regarding the economy.
As with the wars in Iraq and Afghanistan, McCain's arguments with Bush on the economy are not strategic differences, but tactical. On the former, McCain never questions the policies of Bush or the decision for pre-emptive war (he doesn't discuss it); on the latter, the economy, it's simply more of the same. Indeed, McCain apparently believes he can right the economy by vetoing Congressional earmarks, freezing government expenditures (except for defense and entitlements...which compose 75% of the total budget) and providing additional tax breaks for corporations and the wealthy.
In other words, by pursuing strategies basically identical to Bush, he will somehow achieve better results, through small tactical changes. This fails to address the magnitude of our current economic problems.
Reaganomics, which has steered the Republican Party since Reagan, died with the recent Greenspan testimony before Congress, in which he noted that he did not foresee the errors of the banks and had assumed they would have been more protective of their stockholder interests - in other words, the free, unregulated market failed.
Ironically, the recent $700B+ bail-out of what-to-date has been a bailout of failed banks and financial institutions, approximates in dollars the Bush 2001 tax cuts. Looked at another way, the 2001 tax-cuts designed to stimulate real economic growth, instead were "blown" via the bubble of an over-valued real estate market, kept alive by ignoring basic lending rules, easy credit, and shady - if any - accounting practices.
Worse, the objective position of the United States-in-the-world has not changed and has probably gotten worse. Two of the three "axis of evil" are still in place. Al Qaeda is growing. Bin Laden is still at large. Domestically, incomes haven't risen, credit is virtually gone, home foreclosures increasing, unemployment growing, energy prices rising over the long term, infrastructure ignored, etc., etc. So what's the answer? More of the same?
We have, I believe, reaching "the tipping point." Four more years of essentially Bush policies will put this country into economic Depression.
This is not an indictment of the theories of free enterprise; supply side economics may work (and, in the past, has worked). But, in a global economy, it will not work for the middle class or the poor, unless accompanied by real growth in GDP and wages, instead of the phony growth in overvalued assets and easy credit.
At this juncture, it is important to shift economic policy back to a national focus. The fastest way to recovery is to temporarily step back from free markets, until they can be reformed, and to utilize taxation as a means for redirecting capital back to neglected national infrastructure and the creation of meaningful employment. The reason is simple. We cannot afford to continue to pursue national goals which demand expeditures far in excess of income. The best means of increasing that income, over the long run, is through the economic restoration of the middle class, so that they once again assume an important role in the overall tax burden.
Next: Why 40% of Americans pay no taxes.
Thursday, October 23, 2008
The Economy - Part III
In the late eighties and early nineties several enormous changes in the global economic picture began occuring which would have tremondous impact on American society. Among those were: the recovery of much of the world from the damaging effects of WWII, as evidenced in the growing economic and political strength of the European Union and the developing countries of southeast Asia, including the growth of market capitalism in South America; the mass utilization personal computing and its impact on global capital flows, transportation and logistics, as well as manufacturing; the end of communism and the sudden approximate doubling of the global labor force, which driven by free trade, essentially "devalued" much of the American work force.
The combined influence of these differing factors equated to "a perfect storm" for the American worker. To illustrate this, I would turn to the "piece of the pie" analogy frequently used. At any given moment, the global economy may be seen as a large pie, with each country possessing a slice of the pie, determined by the size and strength of its national economy [Note: This is an "old economy" analogy. Today, it might be difficult to determine exactly where one slice differs from the next.] Following WWII, the U.S. had more than fifty percent of the entire pie. We wisely understood, that such dominance was not to our long term benefit and would undoubtedly lead to additional wars and global instability if we did not help in dividing the pie more equally.
The trick in doing this while simultaneously allowing your share of the pie to either remain the same or grow slightly larger is to increase the size of the total pie - or the global economy - over time, and this is largely what has occured. Developing countries such as China, India, Russia have tended to grow at a faster rate than the Developed countries of Western Europe and the United States. While good Chinese growth in Gross Domestic Product is roughly 10%, reasonable U.S. growth is around 5%.
This does mean that all else being equal, the global economy will become roughly the same over time. This doesn't mean everyone will be equal, but that the extremes of wealth and poverty will be reduced and tend toward a more or less stable "middle."
With all of our dissatisfaction about our own system, the corruption that has crept in, etc., it is extremely important to understand that "sharing the wealth" of the planet has been a deliberate and intentional bi-partisan goal from Harry Truman to George Bush. And, that this "sharing" and promotion of global economic growth is seen as an alternative to World Wars.
In my opinion, this policy is unique in human history and represents a major step forward in human development and away from the laws of the jungle and the survival of the fittest. It is, in essence, an extension of the idea of social contract. And, although I do not agree with many aspects of the Bush Doctrine, its basis...i.e. stable and peaceful democratic societies adhereing to a democratic-capitalistic economic system, in which everyone gains. [George just uses the laws of the jungle to get there.]
Our present dilemma - i.e. the threat of global economic collapse - lies in trying to take "short-cuts" to the end goal. Short-cuts in the form of everything from pre-emptive war to economic policies that negatively impact the American economy.
In the great scheme of global economics, historically, economies are initially built on exports. In other words, initially, workers do not have the money to purchase the very goods they produce. They achieve this through exports, accumulating savings, financing their own development, creating economic strength and a middle class, eventually evolving into a mature economy.
Participating in this global system, the United States shipped so-called "obsolete jobs" overseas, anticipating that those jobs would be replaced by new jobs in the New Economy. The new economy jobs were to be found in three major areas: services and high tech products. Services had two basic components: low wage retail service workers, ranging from store clerks, to restaurant workers, to yard mowers and higher paid financial services workers. Segments of the financial services and high tech categories (as well as the entertainment industry) were to provide the "export" segment of the American economy. We called it the New Economy or the Post Industrial Economy.
In this, however, three critical mistakes were made: a failure to comprehend the extent of failure in the American education system; a failure to control borders and virtually unlimited illegal immigration; and a failure to understand how easily the "new technology" transferred across borders. Failure to adjust free trade policies and the flight of American manufacturing jobs abroad to these realities coupled with a failure to obtain intellectual property rights to protect our high tech innovations suddenly left a situation wherein instead of remaining the same or slighly increasing, the average American's "slice of the pie" began getting smaller.
Much of this began during the Clinton Administration. Falling real exports, due to these factors, led to the alternative of attracting foreign investment. If we couldn't compete in the global import-export market effectively, we'd make it up by "selling a piece of America itself." This, in turn, meant that the U.S. consumer market had to remain strong, in the face of falling or stagnate wages. The means for achieving this was through cheap money and easy credit.
In this manner, the total U.S. economy continued to look good to voters and foreign investors, while in reality we began to build the house of cards. Rather than being based on the production of actual goods and services, GDP growth now became dependent on "over-valued assets." It hit first with the dot.com bubble under Clinton and the housing bubble under Bush.
Next comes: If cutting taxes in time of economic decline is stupid, cutting taxes in time of war is self-destructive.
The combined influence of these differing factors equated to "a perfect storm" for the American worker. To illustrate this, I would turn to the "piece of the pie" analogy frequently used. At any given moment, the global economy may be seen as a large pie, with each country possessing a slice of the pie, determined by the size and strength of its national economy [Note: This is an "old economy" analogy. Today, it might be difficult to determine exactly where one slice differs from the next.] Following WWII, the U.S. had more than fifty percent of the entire pie. We wisely understood, that such dominance was not to our long term benefit and would undoubtedly lead to additional wars and global instability if we did not help in dividing the pie more equally.
The trick in doing this while simultaneously allowing your share of the pie to either remain the same or grow slightly larger is to increase the size of the total pie - or the global economy - over time, and this is largely what has occured. Developing countries such as China, India, Russia have tended to grow at a faster rate than the Developed countries of Western Europe and the United States. While good Chinese growth in Gross Domestic Product is roughly 10%, reasonable U.S. growth is around 5%.
This does mean that all else being equal, the global economy will become roughly the same over time. This doesn't mean everyone will be equal, but that the extremes of wealth and poverty will be reduced and tend toward a more or less stable "middle."
With all of our dissatisfaction about our own system, the corruption that has crept in, etc., it is extremely important to understand that "sharing the wealth" of the planet has been a deliberate and intentional bi-partisan goal from Harry Truman to George Bush. And, that this "sharing" and promotion of global economic growth is seen as an alternative to World Wars.
In my opinion, this policy is unique in human history and represents a major step forward in human development and away from the laws of the jungle and the survival of the fittest. It is, in essence, an extension of the idea of social contract. And, although I do not agree with many aspects of the Bush Doctrine, its basis...i.e. stable and peaceful democratic societies adhereing to a democratic-capitalistic economic system, in which everyone gains. [George just uses the laws of the jungle to get there.]
Our present dilemma - i.e. the threat of global economic collapse - lies in trying to take "short-cuts" to the end goal. Short-cuts in the form of everything from pre-emptive war to economic policies that negatively impact the American economy.
In the great scheme of global economics, historically, economies are initially built on exports. In other words, initially, workers do not have the money to purchase the very goods they produce. They achieve this through exports, accumulating savings, financing their own development, creating economic strength and a middle class, eventually evolving into a mature economy.
Participating in this global system, the United States shipped so-called "obsolete jobs" overseas, anticipating that those jobs would be replaced by new jobs in the New Economy. The new economy jobs were to be found in three major areas: services and high tech products. Services had two basic components: low wage retail service workers, ranging from store clerks, to restaurant workers, to yard mowers and higher paid financial services workers. Segments of the financial services and high tech categories (as well as the entertainment industry) were to provide the "export" segment of the American economy. We called it the New Economy or the Post Industrial Economy.
In this, however, three critical mistakes were made: a failure to comprehend the extent of failure in the American education system; a failure to control borders and virtually unlimited illegal immigration; and a failure to understand how easily the "new technology" transferred across borders. Failure to adjust free trade policies and the flight of American manufacturing jobs abroad to these realities coupled with a failure to obtain intellectual property rights to protect our high tech innovations suddenly left a situation wherein instead of remaining the same or slighly increasing, the average American's "slice of the pie" began getting smaller.
Much of this began during the Clinton Administration. Falling real exports, due to these factors, led to the alternative of attracting foreign investment. If we couldn't compete in the global import-export market effectively, we'd make it up by "selling a piece of America itself." This, in turn, meant that the U.S. consumer market had to remain strong, in the face of falling or stagnate wages. The means for achieving this was through cheap money and easy credit.
In this manner, the total U.S. economy continued to look good to voters and foreign investors, while in reality we began to build the house of cards. Rather than being based on the production of actual goods and services, GDP growth now became dependent on "over-valued assets." It hit first with the dot.com bubble under Clinton and the housing bubble under Bush.
Next comes: If cutting taxes in time of economic decline is stupid, cutting taxes in time of war is self-destructive.
The Economy - Part II
Supply side economics presumably originated in the University of Chicago School of Economics and largely with Milton Friedman. [Note: Interestingly, the University of Chicago was founded by John D. Rockfeller].
Until this event, American economics (and, more generally, western democracy economics) had been largely dominated by followers of John Maynard Keynes since the Administrations of FDR.
Without going into details (about which I admittedily have little in depth knowledge), and to contrast Keynes with Friedman; Keynes argued for more intervention in the economy by government, particularly in times of crisis. One of the reasons behind this was that government, theoritically, is able to act faster and more precisely direct expeditures than a free market. Keynes was certainly in favor of free markets and capitalist of high order; it was said that he became personally wealthy by playing the London Stock Market while having breakfast in bed.
To finance government expeditures, Keynes called for high taxes and the government re-direction of the economy...while this was not "socialism" per se, it was much closer to socialism than the philosophies advocated by Friedman. Friedman argued the opposite; that the strongest economies are built on as free markets as possible, because such markets were based - in democratic societies - on the free choices of its citizens. This called for low taxation, small government, and as little government regulation as possible. In a phrase: the market is King and all wise.
Practically, Friedman's theories evolved into Reaganeconmics; the theory that by keeping taxation low, people would have more disposable income to reinvest in the economy, whether in their own bsinesses or through the financial makets. These investments would create new capital for new industries and general economic growth. As the economy grew, so would the demand for additional labor. The competition for the additional labor would, in turn, drive up the cost of labor, increasing wages and enriching the total economy.
John Kennedy expressed the theory with: "In a rising tide, all boats are lifted." And, Kennedy cut taxes resulting in economic growth. Reagan did the same - although it should also be noted that the overall federal deficit increased under each of them; modestly under JFK and historically, under Reagan.
Despite fundamental changes in the national economy and the evolution of that economy into a global economy, Republicans (and a few Democrats) have held onto the Friedman theories.
Neither Keynes or Friedman are "right" or "wrong" and each has to be judged within the context of times in which their theories have been in vogue. Each represents a particular philosophical view; each may be "true" for specific conditions. I would contend that various historic changes in global economics has, in recent years, created national conditions within the global context that obsolete much of Friedman's thinking and, as a result, are now driving us back to Keynesian economics. The best recent example of this is the recent $700B+ government bailout of the financial services industry. In other words, there are times when it is advantageous to follow Friedman's theories and times in which we must follow Keynesian theories, in order to return to the stability needed for Friedman.
Underlying the various factors which are undermining supply side economics is what I would define as three fundamental economic truths: The first is that no one invests capital in a project/product of any sort wherein the value of that project/product is less than its cost. This would be "irrational" and all of our economic edifices rest on the proposition of rationality.
The second "truth" is a collary of the first: Capital investment - whether by government or individuals - is made in order to obtain a gain of somesort. In the case of an indivdual, this may be simply money. In the case of a small businessman it may mean additional means of production (people or machines) in order to increase the size of the business to, ultimately make more money. At the government level, it may social programs such as social security or medicare, which fullfill a recognized societal need. It may be unemployment insurance, which promotes stability. It may be better education, better health care, subsidies for new industries, better roads, national defense, etc., etc.
The point is that, in my opinion, no reasonable, "rational," person would disagree with the proposition that some type of division of wealth must be made between the realms of the individual and government for the future prosperity of both the individual and the society as a whole.
The third "truth" is the real kicker and one largely ignored in recent years, particularily under the Bush Administration (and in certain areas, under the Clinton Administration as well), namely: commitments must equal resources and resources must equal commitments.
In the next post, I will try and show how the violation of these three "rules" has led us both individually and collectively to the verge of economic collapse.
Until this event, American economics (and, more generally, western democracy economics) had been largely dominated by followers of John Maynard Keynes since the Administrations of FDR.
Without going into details (about which I admittedily have little in depth knowledge), and to contrast Keynes with Friedman; Keynes argued for more intervention in the economy by government, particularly in times of crisis. One of the reasons behind this was that government, theoritically, is able to act faster and more precisely direct expeditures than a free market. Keynes was certainly in favor of free markets and capitalist of high order; it was said that he became personally wealthy by playing the London Stock Market while having breakfast in bed.
To finance government expeditures, Keynes called for high taxes and the government re-direction of the economy...while this was not "socialism" per se, it was much closer to socialism than the philosophies advocated by Friedman. Friedman argued the opposite; that the strongest economies are built on as free markets as possible, because such markets were based - in democratic societies - on the free choices of its citizens. This called for low taxation, small government, and as little government regulation as possible. In a phrase: the market is King and all wise.
Practically, Friedman's theories evolved into Reaganeconmics; the theory that by keeping taxation low, people would have more disposable income to reinvest in the economy, whether in their own bsinesses or through the financial makets. These investments would create new capital for new industries and general economic growth. As the economy grew, so would the demand for additional labor. The competition for the additional labor would, in turn, drive up the cost of labor, increasing wages and enriching the total economy.
John Kennedy expressed the theory with: "In a rising tide, all boats are lifted." And, Kennedy cut taxes resulting in economic growth. Reagan did the same - although it should also be noted that the overall federal deficit increased under each of them; modestly under JFK and historically, under Reagan.
Despite fundamental changes in the national economy and the evolution of that economy into a global economy, Republicans (and a few Democrats) have held onto the Friedman theories.
Neither Keynes or Friedman are "right" or "wrong" and each has to be judged within the context of times in which their theories have been in vogue. Each represents a particular philosophical view; each may be "true" for specific conditions. I would contend that various historic changes in global economics has, in recent years, created national conditions within the global context that obsolete much of Friedman's thinking and, as a result, are now driving us back to Keynesian economics. The best recent example of this is the recent $700B+ government bailout of the financial services industry. In other words, there are times when it is advantageous to follow Friedman's theories and times in which we must follow Keynesian theories, in order to return to the stability needed for Friedman.
Underlying the various factors which are undermining supply side economics is what I would define as three fundamental economic truths: The first is that no one invests capital in a project/product of any sort wherein the value of that project/product is less than its cost. This would be "irrational" and all of our economic edifices rest on the proposition of rationality.
The second "truth" is a collary of the first: Capital investment - whether by government or individuals - is made in order to obtain a gain of somesort. In the case of an indivdual, this may be simply money. In the case of a small businessman it may mean additional means of production (people or machines) in order to increase the size of the business to, ultimately make more money. At the government level, it may social programs such as social security or medicare, which fullfill a recognized societal need. It may be unemployment insurance, which promotes stability. It may be better education, better health care, subsidies for new industries, better roads, national defense, etc., etc.
The point is that, in my opinion, no reasonable, "rational," person would disagree with the proposition that some type of division of wealth must be made between the realms of the individual and government for the future prosperity of both the individual and the society as a whole.
The third "truth" is the real kicker and one largely ignored in recent years, particularily under the Bush Administration (and in certain areas, under the Clinton Administration as well), namely: commitments must equal resources and resources must equal commitments.
In the next post, I will try and show how the violation of these three "rules" has led us both individually and collectively to the verge of economic collapse.
The Economy
I have just finished watching four hours of Congressional testimony on the subprime motgage mess by Greenspan, Cox and Snow. The following is my take on their testimony and my own understanding (or lack thereof) of the overall mess.
Greenspan - Greenspan, based on his testimony, is now re-evaluating his basic economic philosophy. He half-heartedly admited to errors during his term as Federal Reserve Chairman and offered, in some cases, what I believe to be a legitimate defense - such as his attitude in regard to derivatives and hedge funds. He correctly pointed our that both continue to do well in their original areas of origin - essentially a hedge on equity prices and foreign exchange. He admitted that the area he failed to see was in mortgage securitization and its rapid growth due to demand.
When questioned about neglecting the Federal Reserve's oversight responsibilities (given by Congress in a 1994 law, which he generally ignored), his answer was that he believed that area needed more study internally by the Federal Reserve and they had basically "tabled" implementation of the law to explore its intent and means of implementation. A weak answer.
Greenspan is a self-described "libertarian." Basically, within economics,that means a believer in minimum government interference and deregulation to allow the free markets to operate on their own. The philosophy has always impressed me as one of failing to consider the imprefections of human nature...in this particular case, greed and corruption of the political/financial institutions. That subject is worthy of a separate and lengthy essay, but in a phrase: Greenspan was too involved in econometrics, with an overall niave economic philosophy.
But, and this is a very important "but," Greenspan's lack of action was in large measure due to his political masters, both Democratic (Clinton) and Republican (Bush). They both used him. Perhaps the best lesson to take away from his reign is that he stayed too long. We should consider a law that limits the amount of time a Fed Chairman may serve. Greenspan was around long enough for both parties to learn how to play him (18 years).
If Greenspan was the niave idealist in the trio, Chris Cox was the political realist. Cox is a man who all of a sudden has found religion, namely that of additional oversight and regulation. This new religion is appropriate for the moment and I don't doubt his sincerity. Yet, during his tenure as head of the SEC he pretty much followed the Administration's economic policies of deregulation, unrestricted markets, etc. Cox impresses me as one smart enough to have had serious doubts about the Administration's direction, but just went along. Cox is to the Administration's economic policies as Powell was to its foreign and defense policies. Although he will undoubtedly be gone shortly as SEC Chairman, he may have a promising future in helping to rebuild the Republican Party.
Former Secretary of the Treasury Snow was the "organization man" of the trio. The answer to past failures and future successes lies in "reorganization," eliminating duplicative and "stove pipe" regulatory organization, etc. Snow, who came out of corporate America, has much of its current philosophy - anything can be accomplished with the right organization. Much of what he testified to, I believe to be true, but much was neglected and he, like Greenspan and Cox, "bought in" to the Administration's misguided philosophies and policies.
What they all agreed upon, to one degree or another, was a need for both reorganization and expansion of government oversight and regulatory authority.
Another major observation of the testimony and questions was the intensity of the some Republicans to escape blame for the economic disaster. The exceptiopn to this was Republican Tom Davis of Virginia, who seemed to steer away from party politics and asked serious questions (another candidate for rebuilding the Republican Party). Aside from Davis, the very clear Republican position on the financial melt down is that it's all the fault of Democratics and their treatment of Freddie Max and Fanny May.
There is certainly SOME truth to this argument. However, none of the witnesses (Greenspan, Cox or Snow) felt it was the primary cause and Henry Waxman, the Democratic Chairman pointed out that at it's peak, both organizations held less than 15% of the total subprime market.
Nevertheless, Democrats such as Barney Frank, Chuck Schmur, Chris Dodd and a collection of others, primarily from the New York region have serious questions to answer in regard for their support of an untenable financial system. Obama, has the 2nd largest receipant in the Senate of Banking interest contributions probably falls into this category as well, although because of his relative newness, was probably being "cultivated" for the future. However, all of these contributions pall in comparison to the amounts raised in his Presidential campaign and it is a question mark as to the influence of these past industry contributions on his future behavior as President.
Basically, I see the issue as not one of Party per se, but rather one of "Pro-Wall Street vs. Anti-Wall Street," with the former primarily responsible for deregulation. Within that category, and very broadly, Republicans seem to have acted in regard to economic philosophy, while Democrats acted in regard to campaign contributions. Yet, regardless of motivation, the extent to which deregulation and lack of oversight occured has, in my opinion, seriously endangered the global financial system.
Next Post will be a reasonably lengthy overview of how we got into trouble and why Reganeconomics has failed.
Greenspan - Greenspan, based on his testimony, is now re-evaluating his basic economic philosophy. He half-heartedly admited to errors during his term as Federal Reserve Chairman and offered, in some cases, what I believe to be a legitimate defense - such as his attitude in regard to derivatives and hedge funds. He correctly pointed our that both continue to do well in their original areas of origin - essentially a hedge on equity prices and foreign exchange. He admitted that the area he failed to see was in mortgage securitization and its rapid growth due to demand.
When questioned about neglecting the Federal Reserve's oversight responsibilities (given by Congress in a 1994 law, which he generally ignored), his answer was that he believed that area needed more study internally by the Federal Reserve and they had basically "tabled" implementation of the law to explore its intent and means of implementation. A weak answer.
Greenspan is a self-described "libertarian." Basically, within economics,that means a believer in minimum government interference and deregulation to allow the free markets to operate on their own. The philosophy has always impressed me as one of failing to consider the imprefections of human nature...in this particular case, greed and corruption of the political/financial institutions. That subject is worthy of a separate and lengthy essay, but in a phrase: Greenspan was too involved in econometrics, with an overall niave economic philosophy.
But, and this is a very important "but," Greenspan's lack of action was in large measure due to his political masters, both Democratic (Clinton) and Republican (Bush). They both used him. Perhaps the best lesson to take away from his reign is that he stayed too long. We should consider a law that limits the amount of time a Fed Chairman may serve. Greenspan was around long enough for both parties to learn how to play him (18 years).
If Greenspan was the niave idealist in the trio, Chris Cox was the political realist. Cox is a man who all of a sudden has found religion, namely that of additional oversight and regulation. This new religion is appropriate for the moment and I don't doubt his sincerity. Yet, during his tenure as head of the SEC he pretty much followed the Administration's economic policies of deregulation, unrestricted markets, etc. Cox impresses me as one smart enough to have had serious doubts about the Administration's direction, but just went along. Cox is to the Administration's economic policies as Powell was to its foreign and defense policies. Although he will undoubtedly be gone shortly as SEC Chairman, he may have a promising future in helping to rebuild the Republican Party.
Former Secretary of the Treasury Snow was the "organization man" of the trio. The answer to past failures and future successes lies in "reorganization," eliminating duplicative and "stove pipe" regulatory organization, etc. Snow, who came out of corporate America, has much of its current philosophy - anything can be accomplished with the right organization. Much of what he testified to, I believe to be true, but much was neglected and he, like Greenspan and Cox, "bought in" to the Administration's misguided philosophies and policies.
What they all agreed upon, to one degree or another, was a need for both reorganization and expansion of government oversight and regulatory authority.
Another major observation of the testimony and questions was the intensity of the some Republicans to escape blame for the economic disaster. The exceptiopn to this was Republican Tom Davis of Virginia, who seemed to steer away from party politics and asked serious questions (another candidate for rebuilding the Republican Party). Aside from Davis, the very clear Republican position on the financial melt down is that it's all the fault of Democratics and their treatment of Freddie Max and Fanny May.
There is certainly SOME truth to this argument. However, none of the witnesses (Greenspan, Cox or Snow) felt it was the primary cause and Henry Waxman, the Democratic Chairman pointed out that at it's peak, both organizations held less than 15% of the total subprime market.
Nevertheless, Democrats such as Barney Frank, Chuck Schmur, Chris Dodd and a collection of others, primarily from the New York region have serious questions to answer in regard for their support of an untenable financial system. Obama, has the 2nd largest receipant in the Senate of Banking interest contributions probably falls into this category as well, although because of his relative newness, was probably being "cultivated" for the future. However, all of these contributions pall in comparison to the amounts raised in his Presidential campaign and it is a question mark as to the influence of these past industry contributions on his future behavior as President.
Basically, I see the issue as not one of Party per se, but rather one of "Pro-Wall Street vs. Anti-Wall Street," with the former primarily responsible for deregulation. Within that category, and very broadly, Republicans seem to have acted in regard to economic philosophy, while Democrats acted in regard to campaign contributions. Yet, regardless of motivation, the extent to which deregulation and lack of oversight occured has, in my opinion, seriously endangered the global financial system.
Next Post will be a reasonably lengthy overview of how we got into trouble and why Reganeconomics has failed.
Thursday, October 09, 2008
Character(s) and Economics
First of all, I note that this is a first post after a two month absence. Facing what is perhaps the most significant Presidential Election of our times and an economics debacle not matched since the Great Depression, I decided some months ago to move from my former Rocky Mountain National Redoubt to the Cascade National Redoubt and have spent the last two months doing just that.
Now to the topics. The Presidential campaign is now entering its last pre-election phase. Has we get into the "down and dirty" segment, one issue seems to be: Whose past associations are worse? Is it the Obama-Ayers connection, or the McCain-Keating connection?
Both have been thoroughly gone over in the past. Based on memory, here is my own take.
The Obama-Ayers association apparently began a number of years ago, when Obama decided to try his hand in Illinois State politics. He ran for the seat of a retiring Democratic, with her endorsement and support. One of his early fund raising events, which was set-up by the retiring Democrat, was held at the home of Ayers. At that time Ayers, while not renouncing his radical past, had become a more-or-less mainstream Democrat liberal in the Chicago political milieu. In all probability, Obama was grateful for his early political support and sort of "inherited" the connection from his predecessor.
Ayers' radicalism stemmed from is participation (and leadership) within the anti-war, anti-capitalism organization termed the "Weathermen," after Bob Dylan's famous song line: "You don't need to be a weatherman to know which way the wind is blowing."
The group was a coalition of various "anti" individualists falling somewhere between socialism and nihilism and everything in between. Ayers and his wife were early group founders. The Weathermen advocated "direct action," namely in violent protests, including bombings of symbolic military-industrial targets. Initially, these bombings were aimed solely at property destruction and a great deal of planning went into making sure that no one was actually hurt.
Subsequently, however, the group split into two factions: those who continued to insist on non-violent violence and those who became more historically traditional terrorists.
Naturally, and correctly, the government (primarily the FBI) did not see a great deal of distinction between the two factions and pursued both. Most were either caught or disappeared into obscurity with the end of the Vietnam War, but not before destroying a few targets and killing a number of people, including armored car guards in a hold-up to finance Weathermen operations. Their single most violent event, however, was the destruction of a Greenwich Village townhouse, in which six of their own were killed during the course of their bomb-building activities.
I believe Ayers was in the violent, non-violence faction and both he and his wife went to "ground" and disappeared. Years later, seeking to return to society and tired of running, they turned themselves in. They were arrested, but the government eventually decided not to prosecute, apparently for lack of evidence connecting them with killings.
Ayers eventually joined the Chicago campus of the University of Illinois faculty and both became active in ultra liberal Democratic circles. Ayers joined the board of a trust philanthropy set up by the conservative Republican Walter Annenberg. Obama also served on this board.
Subsequently, Ayers gave an interview, prior to 9/11, in which he stated that roughly: "we should have done more bombing," thus confirming his "non-repentant," attitude. Coincidentally, the interview was publish around the time of 9/11, but the statement was not his response to 9/11.
The Obama campaign pretty much went over the above when the Ayers issue arose during the primaries. To the best of my knowledge no additional sinister information has been added since, even by the McCain campaign, although they insinuate there is more to be learned.
The McCain-Keating association is tied to the Lincoln Savings and Loan failure during the broader Saving and Loan crisis. As head of Lincoln Savings and Loan, Keating violated a rule (amid other illegalities) regarding limitations on Saving and Loan Banks direct ownership investment into real estate projects, as opposed to simply loaning developers the money for such projects. Keating was prosecuted, convicted as a felon and spent time in a Federal prison.
Keating had been one of McCain's early supporters, campaign contributor and personal friend. The two families apparently vacationed together in the Bahamas, with Lincoln Savings and Loan picking up most of the tab. As the Savings and Loan crisis deepened and federal regulators moved in on Lincoln Savings and Loan, Keating turned to five of his friends in the U.S. Senate to attempt to pressure the regulators to delay prosecution until he could "fix things." The regulators declined and proceeded. McCain was one of the five Senators attending the meeting wherein pressure was exercised against the regulators. Subsequently, the five Senators were brought before an Ethics Committee investigation. McCain escaped with a mild reprimand. He has called this event a turning point in his life and has since been Mr. Ethics in Congress.
In retrospect, both Obama and McCain probably regret their associations. But, Ayers was never convicted of a crime, while Keating was. And, at worse, Ayers was deluded into believing that symbolic non human harmful bombings furthered some misguided idealism of benefit to the total society, while Keating robbed thousands of people of their life savings with a purely self-enrichment motivation. Hmmm? On balance, I believe I'd call that one at best "a draw."
I'll turn to economics in my next post.
Now to the topics. The Presidential campaign is now entering its last pre-election phase. Has we get into the "down and dirty" segment, one issue seems to be: Whose past associations are worse? Is it the Obama-Ayers connection, or the McCain-Keating connection?
Both have been thoroughly gone over in the past. Based on memory, here is my own take.
The Obama-Ayers association apparently began a number of years ago, when Obama decided to try his hand in Illinois State politics. He ran for the seat of a retiring Democratic, with her endorsement and support. One of his early fund raising events, which was set-up by the retiring Democrat, was held at the home of Ayers. At that time Ayers, while not renouncing his radical past, had become a more-or-less mainstream Democrat liberal in the Chicago political milieu. In all probability, Obama was grateful for his early political support and sort of "inherited" the connection from his predecessor.
Ayers' radicalism stemmed from is participation (and leadership) within the anti-war, anti-capitalism organization termed the "Weathermen," after Bob Dylan's famous song line: "You don't need to be a weatherman to know which way the wind is blowing."
The group was a coalition of various "anti" individualists falling somewhere between socialism and nihilism and everything in between. Ayers and his wife were early group founders. The Weathermen advocated "direct action," namely in violent protests, including bombings of symbolic military-industrial targets. Initially, these bombings were aimed solely at property destruction and a great deal of planning went into making sure that no one was actually hurt.
Subsequently, however, the group split into two factions: those who continued to insist on non-violent violence and those who became more historically traditional terrorists.
Naturally, and correctly, the government (primarily the FBI) did not see a great deal of distinction between the two factions and pursued both. Most were either caught or disappeared into obscurity with the end of the Vietnam War, but not before destroying a few targets and killing a number of people, including armored car guards in a hold-up to finance Weathermen operations. Their single most violent event, however, was the destruction of a Greenwich Village townhouse, in which six of their own were killed during the course of their bomb-building activities.
I believe Ayers was in the violent, non-violence faction and both he and his wife went to "ground" and disappeared. Years later, seeking to return to society and tired of running, they turned themselves in. They were arrested, but the government eventually decided not to prosecute, apparently for lack of evidence connecting them with killings.
Ayers eventually joined the Chicago campus of the University of Illinois faculty and both became active in ultra liberal Democratic circles. Ayers joined the board of a trust philanthropy set up by the conservative Republican Walter Annenberg. Obama also served on this board.
Subsequently, Ayers gave an interview, prior to 9/11, in which he stated that roughly: "we should have done more bombing," thus confirming his "non-repentant," attitude. Coincidentally, the interview was publish around the time of 9/11, but the statement was not his response to 9/11.
The Obama campaign pretty much went over the above when the Ayers issue arose during the primaries. To the best of my knowledge no additional sinister information has been added since, even by the McCain campaign, although they insinuate there is more to be learned.
The McCain-Keating association is tied to the Lincoln Savings and Loan failure during the broader Saving and Loan crisis. As head of Lincoln Savings and Loan, Keating violated a rule (amid other illegalities) regarding limitations on Saving and Loan Banks direct ownership investment into real estate projects, as opposed to simply loaning developers the money for such projects. Keating was prosecuted, convicted as a felon and spent time in a Federal prison.
Keating had been one of McCain's early supporters, campaign contributor and personal friend. The two families apparently vacationed together in the Bahamas, with Lincoln Savings and Loan picking up most of the tab. As the Savings and Loan crisis deepened and federal regulators moved in on Lincoln Savings and Loan, Keating turned to five of his friends in the U.S. Senate to attempt to pressure the regulators to delay prosecution until he could "fix things." The regulators declined and proceeded. McCain was one of the five Senators attending the meeting wherein pressure was exercised against the regulators. Subsequently, the five Senators were brought before an Ethics Committee investigation. McCain escaped with a mild reprimand. He has called this event a turning point in his life and has since been Mr. Ethics in Congress.
In retrospect, both Obama and McCain probably regret their associations. But, Ayers was never convicted of a crime, while Keating was. And, at worse, Ayers was deluded into believing that symbolic non human harmful bombings furthered some misguided idealism of benefit to the total society, while Keating robbed thousands of people of their life savings with a purely self-enrichment motivation. Hmmm? On balance, I believe I'd call that one at best "a draw."
I'll turn to economics in my next post.
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