I Thought We Didn’t Negotiate With Terrorists?


“The Debt Ceiling is the only leverage the GOP has to get some spending cuts.”

Debate from my previous post, What Republicans Want… I Don’t Know, prompted a commenter to write that sentence. The sentence, although not filled with heated rhetoric or vitriol, encapsulates the dysfunction within the Republican Party and our current political system.

Before I get to why, a little lesson on the debt ceiling is needed. The debt ceiling is an artificial problem with profoundly real consequences. Each year, Congress passes laws concerning taxation levels and spending programs. If spending is greater than the tax revenue brought in then the government has to borrow money to make up the difference. That borrowing, is “raising the debt ceiling.” The money has already been spent, but needs to be paid back. This is important to understand. By not raising the debt ceiling the government is not saving money or acting fiscally responsible; it is simply not paying its bills. Which by the way is against the law.

In effect, Congress is fighting with itself; arguing about paying for programs already passed as law. Republicans can talk all they want about spending cuts, but that is not related to the debt ceiling. Once again, it is money already spent. Republicans are simply using the debt ceiling as a bargaining tool to get what they want. As I said, it’s an artificial problem. Raising the debt ceiling will not make us worse off or increase our debt. Congress agreed to a certain amount of spending, they spent that money, and now Republicans don’t want to pay it back.

Although this is a fabricated problem by Republicans; the consequences of their threats are all too real. If the U.S. government defaults on its debt it would wreak havoc on still fragile financial markets as well as hurt our standing on the world stage. If that seems too abstract, the Washington Post’s Ezra Klein puts it in very real terms:

” The FBI will shut down. The people responsible for tracking down loose nukes will lose their jobs. The prisons won’t operate. The biomedical researchers won’t be funded. The court system will close its doors. The tax refunds won’t go out. The Federal Aviation Administration will go offline. The parks will close. Food safety inspections will cease.”

The debt ceiling is not just government jargon, economic fuddling, or accounting trickery; it is very real, and the effects of not raising the debt ceiling will be felt very quickly. Which brings me back to this sentence: “The Debt Ceiling is the only leverage the GOP has to get some spending cuts.”

The debt ceiling debate, the one manufactured by Republicans that would cause devastation and hardship, is a game for conservatives; something they can use as leverage. Republicans are willing to devastate the economy in order to don’t get what they want. That is not how governance in this country works; we do not govern via a system of threats and hostage negations, well, not until now. Republicans are strapping a bomb to themselves, threatening to detonate it unless their spending cuts (demands) are met.

holding americans hostage

The GOP realizes this is the only way to pass their out of touch and unpopular agenda. And here lies the problem with our political system. One Party, one crazy enough to default on our debt, is wielding control through unprecedented governing and threats of economic collapse. A successful two-party system necessitates compromise with both sides willing to give; obviously, this isn’t happening. Republicans have decided to forgo normal negations for one with which they use the health of the economy as a bargaining chip.

Instead of addressing real problems like high unemployment or a warming planet we are debating whether or not to pay our bills. And the GOP thinks this is totally fine. As my one commenter said it’s the GOP’s only leverage to cut spending. It’s sad we are dealing with threats from inside our own government. It’s sad Republicans think our economic and financial stability is all just a game. And it’s sad the Grand Old Party thinks it’s just fine to hold the wellbeing of our country hostage to get what it wants.

Advertisements

What Republicans Want… I Don’t Know


gop_elephant__question_lgAs the fiscal cliff debate unfolded over these past couple of months, one thing became clear – the Republican position is murkier than ever. I honestly have no idea what the right wants concerning issues like entitlement reform, spending cuts, and the debt.

We know Republicans want tax cuts; specifically for the wealthy. The fiscal cliff became a battle waged solely over the Bush tax cuts for top earners. The small percentage of people affected by those top-tier tax cuts became the most important Americans, and the Republican Party was willing to let taxes increase on everybody in order to make an ideological statement.

The logic of this position is still baffling. Republicans were fighting to keep taxes low for the top 2 percent with the threat of raising taxes on 100 percent of the population. While arguing higher taxes would hinder economic growth, more than half of House Republicans voted to go off the cliff and raise taxes on everyone. It was an illogical position from the start.

We can be sure Republicans want to cut taxes for the rich; however, the same cannot be said for the middleclass and less affluent. Although there was very little discussion over the payroll tax cut, an EPI study concluded extending the payroll tax holiday would provide the greatest benefit to cost ratio of all the taxes that were scheduled to increase on January 1. Disappointingly, Democrats did not fight too hard for an extension, but it shouldn’t have even been a fight. Why would the Party so concerned about cutting taxes for the top 2 percent be against extending tax cuts for everyone else? Possibly because the payroll tax cut largely benefited the middleclass, not campaign donors “Job Creators.”

Delving deeper into convoluted Republican positions, one doesn’t have to listen to John Boehner too long to hear talk of reforming entitlements and getting the debt under control. Both ideas sound very conservative, but without any substantive policies back those ideas, it’s nothing more than base-appeasing rhetoric.

Concerning entitlement reform: throughout all the negations, Republicans proposed no actual entitlement reforms, instead, demanded President Obama lay out his own reforms. Besides being a cowardly political move (fearing reform proposals would be fodder for a future attack), why should that be the President’s responsibility? The President wanted to raise taxes and Republicans wanted to reform entitlements. It would make sense for each side to devise a plan according to their desire. The President did his part, but Republicans did nothing, and then blamed Democrats for inaction.

Furthermore, President Obama actually offered changes to Social Security. He proposed calculating Social Security benefits with a chained CPI method. Fancy talk for a benefit cut that slows growth in Social Security spending. Republicans rejected this offer because it would have meant going against their illogical and ideological position to never raise taxes (on the rich). So what do Republicans mean when they speak about entitlement reform? They offered no ideas of their own and rejected the one put forth by President Obama. To be fair, the Ryan Plan did offer changes to entitlements, but they were not reforms. They fundamentally changed the programs; drastically cutting benefits, with no evidence of actually working in practice.

Beyond entitlement reform, is talk of debt management. But where is the evidence Republicans care about decreasing the debt? Their whole position is to lower taxes and magically increase revenue. It is no coincidence that as tax rates are at all time lows, tax revenues have also been at all time lows. Republicans say closing loopholes will bring in revenue, but have yet to mention a specific loophole they are willing to close. They say they want to rein in entitlement spending, but haven’t offered any reforms to those programs besides simply cutting them. And they say they want to cut wasteful spending, but at the same time favor allocating more money to defense than the next 13 countries combined (and still want more!).

Truly, I am confused about the Republican position. Yes, they want lower taxes, but really only for the rich. Other than that, who knows? They talk big about reforming entitlements and decreasing our debt, but none of their policies reflect those beliefs.

Not Makers and Takers, Just People


One theme that emerged from this most recent election (and from the comment section of this post) is that the American electorate is divided into two categories – the makers and the takers. This being embodied by Mr. Romney’s “47 percent” comment (those who pay no federal income tax) and his post-election comment about President Obama’s victory being the result of him promising gifts. Fox News agreed with this line of thinking, which prompted Bill O’Reilly to say half the country just wants “things.”gifts

Where I disagree with Bill O’Reilly is that he believes only half the country wants “things” – the whole country does. Every single person wants some “thing.”   The nation isn’t made up of makers and takers – it’s made up of HUMANS. Take any Econ (micro) 101 class and at the core is the basic principle that people act out of self-interest. People make decisions to maximize utility, or as I had one Professor put it, “People make decisions to make them happier.”

It’s not that we have a nation of have’s and have not’s or makers and takers; we have a nation of people. People who want to maximize their wellbeing. So it shouldn’t come as a surprise when people vote in their own self-interest. Women, Hispanics, and the youth tend to vote more Democratic because Democratic ideals and principles align more closely with their self-interest. Conservatives can say Democrats are in the business of giving away gifts, but this same practice goes for Republicans as well.

The wealthy, the ones who vote Republican, are voting in their own self-interest. The Republican Party is committed to lowering taxes on corporations and top earners. They are committed to fewer environmental regulations. And they are committed to rolling back financial reform. All these are gifts to many Republican donors and voters. It’s pretty simple; both parties offer “gifts” – then the people vote accordingly.

The right doesn’t see it this way though because they believe their model is not just about helping the rich; they believe their model will benefit everyone – that wealth trickles down. It’s a convenient way of thinking, but it’s disconnected with reality. Taxes are at all time lows and have been on the decline since the 80’s, yet we’ve seen no economic boom, only an increase in income inequality. Lax environmental regulations have contributed to an increasingly warmer planet. And dismantling regulations like Dodd-Frank would get rid of the one piece of legislation attempting to prevent another financial collapse.

Republicans like to believe Democrats want people to stay reliant upon the government, which is why the left is usually more in favor of expanding the safety net. However, unlike the Republican model, the Democratic model has historically been successful. Democrats believe in the idea that wealth and prosperity do not stem from the rich or the ‘job creators’; they believe it starts with the average worker. And contrary to a lot of conservatives, this isn’t liberal dogma or some high-minded moral sentiment, it’s actually economically backed. Economies operate on simple supply and demand. As overall demand (or aggregate demand) increases the economy responds and grows.

Demand starts with the many, not the few. It starts with the average person spending their disposable income on goods and services. So in times of recession when people are out of work or their hours are cut, they have less disposable income and the economy slows. This is where government can help, it can step in and provide people with income assistance to not only ensure people can survive, but to actually help get the country out of its slump. It was government spending that got us out of the Great Depression, and although Republicans will disagree, economist are pretty much in agreement that Obama’s stimulus helped in this recovery. So it’s not that Democrats want people to stay reliant upon government, rather, Democrats realize government can help; government can do good.

The right can say Mr. Obama gave people gifts, but it’s no different than when Republicans offer gifts to their supporters. The only difference being that Democrats’ gifts have to lead prosperity in the past while the Republican gifting model has only lead to sharp income inequality, lackluster economic performance, and oh yeah, all those tax cuts that have done nothing but contribute to our debt.

Understanding a Progressive Tax Code


FeaturedImageAs confusion over tax rates and the fiscal cliff dominates the conversation in Washington, it is becoming apparent people do not understand how a progressive tax code works. . A progressive tax code increases a person’s tax rate as their income increases unlike more regressive taxes, which set a uniform rate regardless of income. The federal income tax, being the most progressive tax, has 5 different brackets or tiers. As an individual earns more, that income is taxed at a higher rate with rates set at 10%, 25%, 28%, 33%, 35%. The top rate of 35%, which gets all the attention, is only paid on income over $200,000 for an individual or over $250,000 for a couple.

Now, if a person makes $251,000 a year, all that income is not then taxed at 35%. Only $1,000 (the amount over $250,000) is taxed at 35%. Everybody, from business owners to the working poor, pays the same amount in taxes on the same amount of income. Whether it’s a CEO who makes a million dollars a year or a factory workers who makes $50,000 a year, both pay the same tax rate on the first $50,000 they earn. The difference is the CEO goes on to make much more, and that money, and only that money, is taxed at a higher rate.

Understanding people will not all of a sudden be forced to pay exorbitantly more in taxes because they make more money has important implications for a lot of the arguments thrown around in tax rate discussions.

It seriously weakens the argument that raising taxes will disincentivize people to make more money – the “why work harder if Uncle Sam is just gonna take my money” people.  This argument falsely assumes if you make too much money then you will be bumped up into the next tax bracket and therefore have a greater tax burden. As noted before, it is only those dollars above the set limits that are taxed at the higher rate; it’s only the dollars greater than $250,000 that are taxed at 35%.

This also has important implications for the debate over whether or not to let the Bush tax cuts expire. The Bush tax cuts were across the board cuts for every income bracket. If they do expire the 10%, 25%, 28%, 33%, and 35% rates will increase to 15%, 28%, 31%, 36%, and 39.6% respectively. It is unlikely we will see all these rates go up, but what is likely to happen is the top two rates will go up (33% to 36% and 35% to 39.6%).  This has prompted rage from the Republican Party, and is the basis for the claim that the President is engaging in class warfare.  The richest Americans will pay higher taxes on some of their income, but as Ezra Klein has pointed out, “It’s an under appreciated fact that extending the Bush tax cuts on income up to $250,000 cuts taxes for rich people, too.”

Republicans also defend low rates on the top 2 percent of people by deeming it as an attack on small businesses citing those that file their earnings as personal income.  Small businesses, ones that pay their taxes on an individual basis and make more than $250,000 would see a higher tax burden if those top rates expired. But, those businesses still receive a tax cut on their income up to $250,000. And 97 percent of small businesses do not fall into this upper echelon.

So as the parties continue to wage debates over tax rates and the Bush tax cuts remember the importance of a progressive tax code in all these discussions.

Are Republicans Turning Keynesian?


With the election over, all attention is now being directed at the fiscal cliff. Basically, at the beginning of 2013 a series of tax cuts are set to expire like the payroll tax break and the Bush tax cuts. Along with the expiring tax cuts is a slew of mandatory spending cuts.  Both parties agree this could throw the country back into a recession. Both parties agree this contraction in spending will hurt the economy. And both parties agree this is something we need to avoid.

Before I continue, I’d like to rewind the clock a couple of years back to when Republicans took control of the House. In 2010 a Republican wave swept into Congress and changed the national dialogue from economic recovery to deficit reduction. They made the national debt and deficit the central issue. They claimed that addressing the nation’s spending problem would put us on a ‘path to prosperity.’  The story went something like this: We have to stop the reckless spending in order to restore confidence in the markets, this will in turn lead to an increase in investment, and we will then see a robust recovery. In economics this is known as expansionary austerity i.e. Europe’s recovery plan.

Now, fast-forward to today where the Republicans could get everything they wanted back in 2010 by simply doing nothing. If Republicans truly bought their argument that government was spending too much money, and the best way to improve the economy was to cut spending then Republicans should be more than willing to drive right off the fiscal cliff. The expiring tax breaks combined with the mandatory cuts would reduce government spending by over $700 billion just in 2013 (5.1% of GDP). The deficit hawks of 2010 should be drooling over this, but instead of embracing the fiscal cliff, Republicans agree with Democrats that this is an issue that needs to be addressed.

So, back in 2010 Republicans believed government spending was the problem and needed to be reined in, but now Republicans are arguing that cutting government spending will throw the economy back into a recession. Essentially saying that not only can government spending be helpful, but cutting it would be hurtful. The Republicans have officially becomes Keynesians!

So what happened?

Is the Republican Party really changing? No. Although Republicans talk about being fiscally conservative, and talk even louder about solving the ‘debt crisis’ – they really don’t care about the debt. The poster child of fiscal conservatism, Paul Ryan, devised a plan that would take over two decades to balance the budget.

What’s going on in the Republican Party is much more cynical. They are using the guise of fiscal responsibility in order to advance their agenda of changing the role of government. They believe in a minimalist government. Not one that actually tackles the debt problem, but one that cuts taxes for the wealthiest Americans and sets up a system for the rich to get richer, the poor to get poorer, and the middle-class to disappear. They envision an Ayn Rand world where government has no responsibility to take care of the less advantaged. Hence the reason why the Ryan Plan cuts Medicare, and makes even deeper cuts to Medicaid. And why the vast majority of the savings in the plan comes not from bloated defense spending, or slight tax increases on the top two percent of earners, but rather to programs that benefit the poor and the needy.

You may agree with this. You may think government should let everyone fend for themselves – but don’t be fooled into thinking this is fiscal responsibility. Don’t be fooled into thinking the only way we can balance our budget is on the backs of poor by cutting the programs on which they rely. And don’t be fooled into thinking that giving the ‘job creators’ more money will somehow lead to prosperity.

Republicans are not the party of deficit hawks or fiscal conservatives (which is why they don’t want us to go off the fiscal cliff). They are the Party that wants to fundamentally change the role of government in the economy. A role that no longer helps the most disadvantaged in society, but one that caters to the most advantaged

Why the Economy Doesn’t Matter


Okay – obviously it does. We still have weak economic growth, high unemployment, and a lack of consumer confidence. However, as Keynes pointed out decades ago, and as Paul Krugman recently referenced, due to “use, decay, and obsolescence” economies eventually fix themselves. Basically, as products, machinery, or equipment grows old, breaks down, or becomes obsolete – it needs to be replaced. This means businesses and individuals start buying more products, and the economy returns itself to normal.

I bring this up because so often the question in the Presidential race is who is best suited to fix this economy. Not to say this issue shouldn’t be addressed, but it overshadows so many other issues. Since we are in a recession, we as a country forget there are other problems and issues a President must address.

The United States is facing an education crisis; our standing on the world stage continually dropping. Not to mention there are underfunded and understaffed schools across the country.  Both sides have offered little more than campaign platitudes, and good feeling rhetoric like “Hire more teachers!” In fairness to the President though, he does have his Race to the Top initiative, which focuses on increasing funding for k-12 education. (He did a terrible job communicating details of the plan during the debate) Similarly, Democrats have been trying to increase funding for Pell grants, and are working to  keep interest rates low on student loans. Conversely, the Ryan plan slashes education, including cuts to programs like Head Start and Pell grants. Also, we have seen Republican Governors attempt to balance their budgets by getting rid of teachers and other public employees.

The next President is also likely to make two Supreme Court nominees, which means whomever wins this election, his stance on social issues will have a greater bearing on policy than normal. This is troubling, especially considering we have absolutely no idea what Mitt Romney actually believes on the issue of abortion, and in the debate, Paul Ryan hinted he would be in favor of overturning Roe vs. Wade. Furthermore, as state courts contemplate the issue of gay marriage, it is only a matter of time before the Supreme Court weighs in. Yes, jobs are important, but it is also important that women continue to have the right to make decisions about their body, and it is also important we work toward giving all persons equal rights regardless of sexual orientation.

Finally, as I’ve argued before, the greatest threat to this country is not the debt, it’s not China, and contrary to many Catholic groups, it’s not gay people – it’s climate change. Climate change not only threatens the lives  of people across the globe, but it has and will continue to devastate the world economy. The longer we wait, the more expensive it will be to fix, and the harder it will be to reverse. Addressing climate change will be the single most difficult task our country has faced. Not because we don’t know how to fix it, or it’s a problem on too big of a scale to solve – it’s because one of the political parties doesn’t even believe it exists. Even though the scientific evidence is overwhelmingly in support of climate change, the right insists it must be a left-wing conspiracy.

So as election day nears, remember, this country faces more challenges than just the economy. They are challenges of a type that being a businessman doesn’t automatically qualify you to address. As voters we should elect a President who believes in funding the eduction of future generations, not cutting it in the name of fiscal responsibility. We should elect a President who believes in protecting the rights of women and extending equal rights to all persons, not suppressing individual liberties to cater to the extreme wing of the base. And although both parties have stalled on the issue of climate change, for God’s sake, we should elect a President who sides with the scientists (and the rest of the developed world for that matter) and recognizes the threat is real, not one who believes the entire scientific community is pulling some giant prank.

P.S. I also believe Obama is better suited to fix the economy – See here, here, here, and here

The Purpose of a Tax


Taxes* serve two purposes: the first is to provide governments with revenue, and the second is to deter or regulate activity i.e. sin tax on alcohol or trade tariffs.

Notice, neither purpose’s main role is to serve as a catalyst toward economic growth like Republicans believe. Republicans are confident, just so sure, that if we lower taxes the economy will prosper. But understanding the purpose of taxes, and just basic tax history, there is little evidence to support the Republican model. Tax rates have been consistently decreasing for decades, yet the economy has still had its ups and downs. The point is economic growth is not solely determined by tax rates – it’s not that simple.

I think Democrats better understand the purpose of taxes. Democrats do not argue higher taxes lead to economic growth (because it is true at a certain point when taxes go too high they will deter economic activity). When liberals reference the higher Clinton era tax rates, they are referring to the strong economic growth that went on during that time. The significance being high tax rates did not deter economic activity. They did, however, serve the role of raising revenue, which led to 4 years of a balanced budget.

So Republicans are framing the debate around taxes incorrectly. It’s not; we need to lower taxes because that will lead to economic growth. Instead it’s at what rate should taxes be set in order to maximize revenue, but at the same time not deter economic growth.  So the tax rate should not be viewed as an economic starter, but only an economic deterrent.

Given our current tax code, it’s hard to argue that it is high rates that are hindering economic growth. Taxes were slightly higher in the 90’s and drastically higher in pervious decades, and in both cases economic growth was much greater. If taxes now are lower than during an era of greater economic prosperity then there is no reason to believe lowering them more will solve the problem. So the basis of the Republican argument, taxes are too high, is really an unfounded claim.

Now, this is not an argument that government should try to squeeze every penny out of taxpayers it can without hurting the economy. But given the country’s increasing deficits, under funded schools, crumbling infrastructure, growing numbers of people living in poverty, a disappearing middle-class, and a slew of other problems, more revenue is not inherently bad.

The larger point in all this is Republicans’ answer to every problem is to cut taxes. That’s obviously not the solution. Tax rates are historically low, and there’s no evidence that further reducing them would spur on economic growth. Instead we should set tax rates so they can serve their purpose of raising revenue without being a drag on the economy.

We need to look at other ideas to promote economic growth outside of just ‘cut taxes!’ This could be rebuilding our infrastructure, investing in new infrastructure like high-speed rails, investing in new alternative forms of energy, or creating policies that promote hiring here in America rather than overseas. Here is where the Democrats have an edge, the stimulus package that was passed, and The American Jobs Act (that was not passed) were filled with ideas to boost economic activity. They were ideas that went beyond cutting taxes for the rich in the hopes the wealth will trickle down. Although some may disagree, most economists concur that the stimulus did work, and the American Jobs Act would have reduced unemployment.  Economic growth will not come from padding the pockets of the wealthy, but from investments aimed at putting people back to work.

*To make things simple, taxes in this post refers to individual tax rates

The Bush Tax Cuts Are Just Bad Policy


The upcoming election should help settle some of the debate in Washington, but one issue that will not be resolved November 6th, is what is known as the fiscal cliff. In December, when we bring in the New Year, it will be accompanied by sequestration (big spending cuts), and a spattering of tax increases.  One of the tax increases causing a lot of controversy is the expiration of the Bush tax cuts.

Republicans want to extend the cuts for everyone, while Democrats want to extend them for everyone except those making above $250,000.  This would return the top marginal tax rate to the Clinton era rate of 39 percent.  To those who read this blog often, it may not come as a surprise that I am in agreement with the Democrats on this issue, but for different reasons than you may think.

Republicans have called the Democrat’s idea just another form of class warfare. Democrats believe their plan works to even the playing field by ensuring everyone pay their fair share.

I think it’s much simpler than that – the Bush tax cuts are bad policy. Conservatives want to believe so badly that tax cuts for the rich are the solution to any and all economic problems. However, all those who claim lower taxes will increase growth, lower unemployment, and stabilize the debt are simply mistaken. The 1990’s and 2000’s provided a natural experiment on how tax rates affect the economy.

In 1993, when President Clinton raised taxes, the resulting years had much better GDP growth than the Bush years.

Similarly, the unemployment rate dropped every year after 1993. That trend was put to an end when Bush took office. Bush did see unemployment drop during his second term, but never to Clinton levels. Also, the decrease in unemployment, in part, was due to the housing bubble, and a massively over-leveraged financial system – 2 of the main drivers of this most current recession.

Finally, contrary to the belief that lower taxes will actually increase government revenue, Bush’s tenure was a mirror opposite of the Clinton years. While Clinton saw government debt to GDP decrease each year, Bush saw it rise. So much for tax cuts paying for themselves.

This is not to say higher taxes caused the good times of the 90’s, but clearly they were not a hindrance. The right’s insistence that lower taxes are the only path to recovery is misguided at best.  If tax cuts really are the solution then the economic climate of the 2000’s should have been much different. In other words, these graphs should look a lot different. The Bush tax cuts didn’t help with unemployment, didn’t boost growth, but did add substantially to the debt.

I know an economy is complex and not all these measures can be chalked up to tax rates. With that said, we can see that higher taxes are not necessarily detrimental, and lower taxes do not automatically equal growth. So all the big-idea-guys on the right have to come up with something else besides tax cuts.

Now, you might say, “if the Bush tax cuts are so bad then why not end them for all income levels?” Well, I believe that should be the goal. However, the Bush tax cuts have proved difficult to kill. Although the President pledged to let them expire in 2010, Republicans forced his hand and they were extended. The fact is ending all the Bush tax cuts is not feasible in the current political climate.

Ending them one step at a time provides the best chance to ending them in their entirety.  Also, let’s not forget, this recession is being driven by a lack of demand. Meaning increasing taxes on those who supply demand, middle-class families, may not be good policy for a struggling economy. Conversely, a tax increase on top earners, as we saw during the Clinton years, does not necessarily act as a drain to the economy.

The Bush tax cuts are bad policy.  They did not accomplish what they were supposed to and Congress should let them expire. Ending them on the high earners first makes ending them for everyone in the future more realistic, politically speaking. And ending them for the wealthy will not have the counterproductive economic impact that could arise from ending them on the middle-class.

Jobs Report – Good Not Great. And How to Make Next Month Better.


Friday’s jobs report was better than expected. The economy added 163,000 jobs, but unemployment ticked up to 8.3 percent. To be precise the unemployment figures changed very little, going from 8.22 to 8.25 percent. Although these are better numbers than we saw in May and June, they are still not cause for celebration.  163,000 jobs barely keeps up with population growth, and on average, only 151,000 new jobs are being added each month – at this pace it will take over a decade to return to pre-recession levels of employment. So, yes, better than expected, but not great.

And that’s really not all that surprising. Macro-economically speaking very little has changed in the past few months concerning economic policy. So it follows very little is going to change in the macro economy. Gridlock has paralyzed Washington into doing absolutely nothing. Republicans in the House are passing bills they know will not pass the Senate, and any bill with a chance to pass in the Senate is filibustered. Effectively, the President and Congress are writing legislation merely to make a political point. So, it’s not surprising we have seen weak growth these past couple of months, and it’s unrealistic to expect anything different when our lawmakers continue to play politics.

The shame in all this is much can be done to improve the country’s economic outlook.  I’m not asking for drastic steps, but rather simple, historically backed measures proven to lead to a strong recovery.

For one thing, the Fed has to start doing more. The Fed, headed by Chairman Ben Bernanke, has a dual mandate: promote stable prices (inflation/deflation control) and work toward maximum employment. Well, the Fed is keeping inflation under control (too under control), but it is not using all its tools to ensure maximum employment. One thing it could do is raise the target inflation rate. It currently is aiming at and achieving a 2 percent inflation rate. A modest increase in that number, not so great as to go against its mandate, could help with unemployment. I’m not asking for hyperinflation, but a target rate of 3-4 percent would help with debt relief as well as encourage investment. Both of which would help alleviate the high unemployment. This idea is not foreign to Mr. Bernanke.  As a professor at Princeton he echoed the same advice to Japan in the 90’s when they faced a similar crisis to ours. As Paul Krugman writes, “Chairman Bernanke should listen to Professor Bernanke.”

Of the available options to help the economy this should be the easiest to accomplish. The Federal Reserve is not supposed to be influenced by the politics of Washington – although this may not be the case anymore.

Moving onto things Congress should do… but will most likely not, even though many of these options have garnered bi-partisan support in the past.

Both parties are aware our infrastructure is in desperate need of repair – let’s fix that. Besides the fact infrastructure investment is smart productive government spending, and it helps keep us competitive with China, it also provides a boost to one of the weakest sectors of the economy – construction.


Congress also has to bring public sector employment back to historic trends. The chart below shows that if government payrolls had increased at the same rate as they did during the Bush years, there would be 1.7 million more people with a job.

I know conservatives want to cut government jobs because “government can’t create jobs!” Well, it can.  An economy operates by people spending dollars. It doesn’t matter if those dollars come from a government paycheck or a private sector paycheck – a dollar is a dollar. So in effect, a government job is no different from a private sector job. Increasing government payrolls will not only give people a paycheck, but it will boost demand, which in turn will help return the economy to normal.

Finally, Congress has to bring some certainty to the market.  I don’t always buy this argument because I think for the most part businesses know they have to pay taxes, and deal with regulations – that’s just part of doing business. With that said, settling the fiscal cliff issue would provide some extra certainty to the market. Now, the right takes this to mean we have to lower taxes, not necessarily though. If a business knows its taxes are going to be higher that still gives them certainty. It’s the not knowing that’s the problem.

Congress is going to have to compromise and just put an end to the fiscal cliff debate. There are so many things in the economy we can’t control; natural disasters, droughts, the Euro zone etc. we don’t need to shoot ourselves in the foot by creating uncertainty with something with which we do have control.

It’s doubtful any of this will get accomplished, which is disheartening. But knowing that this economy is fixable makes me optimistic. It is a matter of putting the right people in Washington – less than 100 days until the election.

Mitt’s Plan – Tax Cuts for Everyone! If You’re Rich


The election cycle thus far has been one of very little substance – on both sides. It has been attack ads, mixed with vague claims about how to solve the country’s economic woes. This trend only continued when Governor Romney released his plan for tax reform. Like the Ryan budget, it consisted of large tax cuts supposedly paid for by closing deductions and loopholes, and broadening the base.  It is also intended to be revenue neutral; however, Romney gave no specifics on how he plans to accomplish any of this. Since Romney is silent on the issue, the non-partisan Tax Policy Center filled in the details.

The findings of the study, generally speaking, are the tax cuts for the rich are so big that the only way to make the plan revenue neutral is to raise taxes on the middle and lower class. The graph below (from the Tax Policy Center report) shows the percent change in income after taxes for various income groups. Basically those making below $200,000 a year, the vast majority of Americans, will see an increase in taxes while those making above $200,000 will receive a tax break. Further, those making above $1,000,000 a year will see there after tax income rise by 4.1 percent. It is another reverse Robin Hood tax plan with which conservatives seem so enamored.

Team Romney has dismissed the report claiming liberal bias, even though every effort was made to be unbiased including a few generous assumptions. For example, the “Note” at the bottom of the graph explains that to be as progressive as possible all deductions and loopholes were closed entirely for the wealthiest first. However, in order for the plan to remain revenue neutral those deductions and loopholes had to be closed for lower-income people as well.

Although the study tried to make the plan as progressive as possible the result is still incredibly regressive. This is frightening because if Romney happens to win, and this plan goes into effect, there is no “as progressive as possible” guarantee. Meaning the cost of the massive tax cuts for the wealthy could be even more burdensome for the middle class than what is projected. This coupled with the right’s constant demand for spending cuts, which adversely hit low-income individuals, makes the Romney plan a serious threat to middle class growth while benefiting only people like Mitt Romney.

Hooray for fiscal responsibility.