Free Markets, Free People

tax cuts

House votes to keep current tax rate

Dear media, the House vote last night – which sends the bill to President Obama for his signature – wasn’t an $801 billion tax cut bill, as the NYT headline blares. Certainly there are tax cuts in it, but not to the tune of $801 billion. Nor did "millionaires" get a “tax cut. “

All that happened is the House voted to maintain the current income tax rate for everyone. Nothing changes. No one gets "more" in terms of tax savings than they do right now and have gotten for most of a decade.  Well, except, perhaps, those who don’t pay any taxes into the system.  They may get more in the way of a “refundable credit”.

So quit spinning this as something it isn’t.  There is no permanent tax rate.  They aren’t “Bush era tax cuts”.  They’re the current tax rate. Period.

Keeping that rate doesn’t "cost" the government one red cent, because they never had the money to begin with. Pretending that somehow anticipated revenue from an increase in taxes is somehow a "cost" is a perversion of the English language as well as a misuse of an economic term.

Quit it.

Thank you.

~McQ

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Deciphering Paul Krugman’s latest message

Get your “Captain Krugman” decoder rings out and follow me through this Paul Krugman piece.

Today the line of attack on what he calls the “Obama-McConnell tax cut deal ” is to put forward the argument that the reason we’re in this mess to begin with is because of the debt carried by American families. Yes, that’s right – you did it, now shut up and take the medicine. Oh and the banks – yes, the banks because they “abandoned any notion of sound lending and because everyone assumed housing prices would never fall”.

Yeah, you guessed it  – not a thing about the Community Reinvestment Act, Congressional pressure on banks to lend to very marginal borrowers or Freddie Mac and Fannie Mae.  It was you, dear citizen … and the banks.  The government?  Sparkly clean by omission.

Anyway, because that debt is so high in relation to income and the families are in the middle of trying to deleverage that debt, they’re not spending much – or as much as is needed to kick start the economy, in Krugman’s opinion (they might if they had more but then that means even deeper tax cuts and Krugman ain’t going there).  And of course there’s that problem with high unemployment to factor in as well.

So, backing into this favorite theme of the past two years (Deficit?  Screw the deficit – spend, spend, spend), what or who should be spending to get the economy going?

Why yes Sparky, he means the government.

What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained: we’re not talking about a brief burst of aid; we’re talking about spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived, with much of the positive effect already gone.

It’s true that we’re making progress on deleveraging. Household debt is down to 118 percent of income, and a strong recovery would bring that number down further. But we’re still at least several years from the point at which households will be in good enough shape that the economy no longer needs government support.

But wouldn’t it be expensive to have the government support the economy for years to come? Yes, it would — which is why the stimulus should be done well, getting as much bang for the buck as possible.

Remember that last phrase because that’s the point of the post.  Now, with all of that background, Krugman says that this “Obama McConnell tax cut deal” will provide some stimulus but not the sustained stimulus Krugman says is needed from government.  And that first stimulus was too small – even though it was much larger than Krugman said was necessary at the time.  Nope  a massive stimulus is still needed no matter what we have to do to pump that money out there (even while the Fed is trying to sponge up the multi-trillion dollar spill of cash they tossed out there before):

The point is that while the deal will cost a lot — adding more to federal debt than the original Obama stimulus — it’s likely to get very little bang for the buck. Tax cuts for the wealthy will barely be spent at all; even middle-class tax cuts won’t add much to spending. And the business tax break will, I believe, do hardly anything to spur investment given the excess capacity businesses already have.

This is the point where cognitive dissonance smacks right into the Krugman “reasoning”.  A) he wants a new and much bigger stimulus – that’s no secret.  B) he claims this bit of stimulus (tax cut deal) will “cost” more (deficit) than it will deliver (bang for buck).  C) you can’t be trusted (shades of Clinton) to spend your own money the way the government would (perfectly, of course – properly, with no waste, and at exactly the right time and in the right place – having a coughing fit yet?).

For such a supposedly gifted economist it is like he missed Econ 101 in favor of Propaganda 101.  Either that or he really does believe, in the face of much evidence to the contrary, that a government spending money in a recession always returns “more bang for the buck” than does an individual (millions of individuals) in a market being allowed to keep and spend more of his money.  I am forever at a loss to explain that sort of thinking.

Pushing money out into an economy just to be getting it out there isn’t going to solve our economic problems.   In fact, if government has to be the big consumer of loan money to do so, guess what there’s less of for the private side of things?  Can you say “vicious circle”?And what does Krugman think a pure borrowing-based second stimulus plan is going to do to the debt?  Given the “bang for the buck” we received with the last stimulus, what makes Krugman think this one would be a better deal and superior to letting people keep more of their own money?

What I expect, instead, is that we’ll be having this same conversation all over again in 2012, with unemployment still high and the economy suffering as the good parts of the current deal go away.

The long and short of it is, this about isn’t economics, it’s about politics.  What Krugman wants is anything he can call economic improvement because he knows that Obama and the Democrats are in awful political shape.  His belief is if the Obama administration will quickly pass a huge stimulus and pump money into the economy, things will look somewhat better than they do now and he can make rosy predictions that should help carry the day for Obama’s re-election in 2012.  If it all collapses after that, who cares?  There will be plenty of time to make stuff up on the fly again and, of course variously blame the Republicans, the American people and, of course, the banks for any problems the economy may suffer.

~McQ

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Politics now takes center stage as tax deal moves to Congress

Let’s get a few things straight, shall we?   For the most part, this deal between Obama and the GOP on the Bush era tax rates isn’t a “tax cut”.  It is a maintenance or extension of the current tax rates.  There is nothing – absolutely nothing – permanent about any tax rate.  They’ve ranged all over the place in the history of the income tax and are, in fact, subject to the whims of Congress.  Within this package  there are some tax cuts (payroll taxes for a year) and tax giveaways (EIC, etc).  Other than that, it’s about keeping the current tax rates for everyone in a time of economic hardship.

Consequently it isn’t costing the government anything except a few rosy revenue projections if it had been able to increase taxes on the wealthy.  And consequently, at least that part,  adds nothing to the deficit.  Got that?  Nothing.  What adds to the deficit is spending based in borrowed money.

And that problem is found in the extension, again, of unemployment benefits.  So if there’s a spending negative, that’s it.  Some may argue that it’s necessary.  I personally wonder about that. 

Anyway, it is important, as the spin begins to come out on both sides about this deal that the basics be understood.

Yesterday a petulant president tried to defend the deal at a hastily called news conference.   Once into questioning, a bit of bitterness began to show through.  This particular quote struck me:

And I will be happy to see the Republicans test whether or not I’m itching for a fight on a whole range of issues.  I suspect they will find I am.  And I think the American people will be on my side on a whole bunch of these fights.  But right now I want to make sure that the American people aren’t hurt because we’re having a political fight, and I think that this agreement accomplishes that.

It reminded me of the kid picking himself up off the dirt of the playground after getting his rear end kicked and yelling “next time your butt belongs to me” at his antagonist.   Obama then goes on to call John Boehner a “bomb thrower” and compare the Republicans to hostage takers (to be fair, he was none to kind to the “professional left” and even took a shot at the New York Times).

But the bottom line remains, the GOP succeeded in getting the tax rates extended for all to include thousands of small businesses who would have otherwise been hit with higher taxes.  And what Obama is left saying is, “you know that line in the sand about doing away with tax cuts for millionaires, the one I drew 3 years ago and have promised to do away with ever since?  Yeah, well, wait till 2012, by gosh”.

Another interesting quote from the newser was this:

So the issue — here’s the choice.  It’s very stark.  We can’t get my preferred option through the Senate right now.  As a consequence, if we don’t get my option through the Senate right now, and we do nothing, then on January 1st of this — of 2011, the average family is going to see their taxes go up about $3,000. 

Is that a fact?  What have we heard for years concerning what the left continues to call the “Bush tax cuts”?  That they were primarily “tax cuts for the rich”.   Of course, they were much more than than and as is obvious, Democrats can’t allow them to expire or that nasty little truth would suddenly become widely known.

Finally, this struck me the wrong way:

This country was founded on compromise.

No.  It wasn’t.  It was a nation founded in a principle – that which said people have the right to be free from oppressive government and have the right to do what is necessary to accomplish that.  Any compromise had to do with the particulars of accomplishing the principle, not in the principle itself.  Obviously politics is the art of compromise.  What isn’t to be compromised is that founding principle and it is the ongoing compromise of it – or at least an attempt to do so – that has people figuratively up in arms.  Those Gadsden flags are waiving for a reason.

Anyway, each side is busily spinning a “win” for themselves on this particular deal.  All the while, political resistance is forming on both sides of the aisle in Congress.  Pelosi and Reid both seem less than enthusiastic about it and have signaled by their language that they may not have the votes to pass it.

Politically, the next few days should be interesting.

~McQ

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Chart of the day – tell me again why we need another “stimulus”?

Because as I read this chart, what is being proposed by the Obama administration is about what remains unspent from “Porkulus I”, er, the first stimulus bill:

chart-of-the-day-stimulus-sept-2010

 

We already know this hasn’t worked.  That’s the implied reason for the second stimulus (although unstated, of course).  So there’s no reason to assume the second stimulus – mostly a smaller repeat of what failed in the previous rendition – is going to do any good either.

Here, I have an idea – go ahead with the $65 billion in remaining tax cuts, combine them with the tax cuts in the new stimulus and cancel all spending left in the first and that proposed in the second.

And watch Paul Krugman melt down.   Yeah, that’s the ticket.

~McQ

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Obama puts politics above the economy

From The New York Times:

President Obama on Wednesday will make clear that he opposes any compromise that would extend the Bush-era tax cuts for the wealthy beyond this year, officials said, adding a populist twist to an election-season economic package that is otherwise designed to entice support from big businesses and their Republican allies.

Mr. Obama’s opposition to allowing the high-end tax cuts to remain in place for even another year or two would be the signal many Congressional Democrats have been awaiting as they prepare for a showdown with Republicans on the issue and ends speculation that the White House might be open to an extension. Democrats say only the president can rally wavering lawmakers who, amid the party’s weakened poll numbers, feel increasingly vulnerable to Republican attacks if they let the top rates lapse at the end of this year as scheduled.

But the problem is that raising taxes in a recession is considered by all objective thinkers to be folly.  In fact, the President said so himself as I reminded you recently:

Normally you don’t raise taxes in a recession, which is why we haven’t and why we’ve instead cut taxes. So I guess what I’d say to Scott is—his economics are right. You don’t raise taxes in a recession. We haven’t raised taxes in a recession.”

But they are going to raise them in a recession now.  “Scott”, by the way, was a person who submitted a question at an Obama townhall through MSNBC’s Chuck Todd.  Obama admitted that it was the wrong thing to do in a recession.  And folks, we’re still in a recessionary period whether or not the spin artists with the administration prefer “recovery summer” (another flop) or not.

The NYT goes on:

It is not clear that Mr. Obama can prevail given his own diminished popularity, the tepid economic recovery and the divisions within his party. But by proposing to extend the rates for the 98 percent of households with income below $250,000 for couples and $200,000 for individuals — and insisting that federal income tax rates in 2011 go back to their pre-2001 levels for income above those cutoffs — he intends to cast the issue as a choice between supporting the middle class or giving breaks to the wealthy.

Of course, he’s presenting a false choice.  There’s a third choice – keep the tax cuts for all and cut spending.  But, you can’t stir up class warfare and spend more money unless you demonize the rich and claim you’ll be spending their money for the benefit of the “middle class”.

Any American that falls for the sort of populist class envy nonsense is most likely fine with the government we have and any silver pieces they can siphon off as a result.

That said, the NYT’s first sentence in that paragraph says a lot.  Does Obama have the heft to carry this off.  We all know the GOP will be the whipping boy for any failure, but unless every Democrat in both chambers of Congress stand up and vote for it, it will be a difficult thing to sell to a skeptical electorate who’ve heard all this nonsense before.

Politically, however, the president is, in effect, daring Republicans to oppose the plan, in that way proving Democrats’ contention that they will block even their own ideas to deny Mr. Obama any victories. And by proposing business tax breaks that, according to nonpartisan analyses, would do more to stimulate the economy than extending the Bush tax rates for the wealthy, Mr. Obama hopes to buttress Democrats’ opposition to extending those rates.

Let him dare the Republicans.  If they’re smart (and that’s always debatable) they’ll use the President’s own words against him.  That would be their most effective tool.  And that would also put Democrats in marginal districts on notice that if they vote not to extend the cuts, they’re doing what their President once admitted was a terrible  idea in bad economic times.  And, they should understand, they can count on hearing that repeated in ads in their districts along with how they voted.

~McQ

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20 months after taking office, Obama considers tax breaks to stimulate economic growth

All sorts of things to talk about under that title.  So that calls for a bit of a ramble.

First and foremost, the title tells the story.  Why is it we’re 20 months into this administration and we’re just now considering tax breaks to stimulate the economy?  Note the word – considering.  According to POLITICO, there’s been no decision at all made on doing such a thing – if you thought the administration dithered about its strategy change in Afghanistan, this makes that look like a snap decision.

Let’s review:

Last November, Obama announced that he would turn his attention to unemployment, calling it "one of the great challenges that remains in our economy." He declared the same intent two months later, telling House Democrats he would focus relentlessly on job creation "over the next several months." Senior aides went on television pledging that the mantra would become "jobs, jobs, jobs."

But other matters – health care, the BP oil spill – continually stole the limelight, creating the impression, some Democrats complain, that the president was barely focused on the economy at all.

And now, “suddenly”, two months before an election, he’s “focused like a laser beam”.  A soft weak lit laser that sort of doesn’t do much but emit, well, words a bit of light.

I mean, read this explanation and tell me those who offered this as proof of his attention to the economy aren’t both tone deaf and just plain politically stupid:

His advisers described his attentiveness – noting, for example, that he discussed the economy with New York Mayor Michael R. Bloomberg (I) for 15 minutes before golfing – but got little traction.

Really? What in the freaking world has NY Mayor Michael Bloomberg got to do with anything to do with the economy. I mean, oh, goodie, he spent 15 minutes being "attentive" before they hit the links. That’ll fix everything. Oh, and what “traction” was he seeking?

In reality what happened was Obama was sold a bill of goods by his economic advisors about the effect of government stimulus.  Congress got a hold of the idea and larded it up with pork.  Result: spectacular FAIL.

They’re reduced to justifying the stimulus like this:

Many economists say Obama’s policies have been reasonably effective at pulling the nation back from recession. Last year’s stimulus package – now estimated to cost $814 billion – protected as many as 3.3 million jobs, according the independent Congressional Budget Office.

“Many” economists say his policies have been “reasonably effective” because some computer model says it may have “protected” – note the new word – “3.3 million jobs”?  Really?

Back to the “this ain’t rocket science” theme, but even if that’s true (and it’s very suspect) that’s about $250,000 deficit funded dollars per job.  And most of those, if I were to guess (oh, wait – “according to my model”) would be found in the non-productive government sector.  Result?  9.6% unemployment, no growth and no jobs.

So why, you ask at this late juncture, is he and his economic staff finally considering tax cuts?

Well, common sense says that the way to immediately impact spending and consumption is to give consumers more money with which to consume.  Make sense?  Yeah, it made sense 20 months ago too.  And there’s another reason that finally has seemed to penetrate their thinking:

All the talk about taxes—whether to raise them to address the deficit or cut them to stimulate the economy—may be having its own effect on growth. Allan Meltzer, an economics professor at Carnegie Mellon University, said the economy wouldn’t fully revive until Washington resolved uncertainty surrounding business costs, including taxes.

"Companies are cutting their expenditures and not hiring because they’re very uncertain" about these costs, he said.

Precisely.  Why in the world – as we’ve been saying for months here – would any business hire and expand in the face of this government made market uncertainty?

Meanwhile the political battle rages with the expected blame-game in full swing:

"Obviously it’s going to be hard to get anything done before the election, but it’s really important for him to try, and to make the case to the American people that he’s trying to do something and the Republicans aren’t letting him," said Steve Elmendorf, a Democratic strategist. "We are at the final moments here."

What the GOP isn’t “letting” them do is wildly throw another huge amount of money we don’t have at the problem.

David Axelrod piles on:

"We’ll continue to do everything we can, understanding that recovery will require persistent effort. There are no silver bullets," senior Obama adviser David Axelrod said in an interview Thursday. "At the same time, we have to make clear our ideas and theirs, and the fact that the Washington Republicans, having helped create this recession, have attempted to block our every effort to deal with it."

Yet the bar to passing any of this may not be “Washington Republicans”.  POLITICO reports:

But the administration will have a tough time selling nearly any package to some Democrats who increasingly blame the president and his ambitious legislative agenda for their own dismal prospects this November. And further states:

White House press secretary Robert Gibbs has repeatedly said the administration would go small-ball with any plans to boost the economy — and that the Democrat-controlled Congress had no appetite for costly, sweeping measures two months before what promises to be a difficult election cycle for the party. >

Emphasis mine, but you get the picture.  Democrats aren’t sure they want anything but if they do, whatever it is it has to work and work quickly.  Reality, however, is much more stark for the Democrats:

"Substantively, there is nothing they could do between now and Election Day that would have any measurable effect on the economy. Nothing," said the Brookings Institution’s William Galston, who was a domestic-policy adviser to President Bill Clinton.

Indeed.  As I continue to watch the economic three-ring circus this administration has created, I’m reminded of the words of one of my favorite funny men, Oliver Hardy: “Well, here’s another nice mess you’ve gotten [us] into."

Next up, the Three Stooges do ObamaCare.

~McQ

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Bush tax cuts – it’s not your money, so quit whining

William Gale regales us with what he calls "Five myths about the Bush tax cuts" , in the Washington Post today.

Highlights, or lowlights if you will, of a couple of them are as follows.  “Myth” one:

Extending the tax cuts would be a good way to stimulate the economy.

And the ammo that makes it a myth:

According to the Congressional Budget Office and other authorities, extending all of the Bush tax cuts would have a small bang for the buck, the equivalent of a 10- to 40-cent increase in GDP for every dollar spent.

So a 10% to 40% increase in GDP – at this time – is something to sniff at?  Note how he worded the increase.  He used the word “cent” instead of “percent”.  Yeah, no attempt to shade the point at all, huh?

Then this:

As the CBO notes, most Bush tax cut dollars go to higher-income households, and these top earners don’t spend as much of their income as lower earners.

Right.  A) they’re the ones who actually pay taxes – many lower income earners do not.  B) “Spending” is a loaded term.  The high income earners don’t bury their money in the back yard safely tucked into a coffee can.  They invest it.  And, for those paying attention, it is investment in the economy that’s lacking at this time.

The rest of the “myths” are as pathetically argued as the first.

In reality, this is just another in a long line of liberal justifications for taking your money based in the premise that it isn’t really yours to begin with.

If you don’t believe me, look at “myth” 3 which states “Making the tax cuts permanent will lead to long term growth.  Gale says:

A main selling point for the cuts was that, by offering lower marginal tax rates on wages, dividends and capital gains, they would encourage investment and therefore boost economic growth. But when it comes to fostering growth, this isn’t the whole story. The tax cuts also raised government debt — and higher government debt leads to higher interest rates.

Note that Gale tacitly admits that the "myth" is actually true. However he tries to caveat that with a horrible result that I assume he believes effectively destroys the point. The tax cuts “raised” government debt.

Uh, no, they didn’t. Excessive government spending without the revenue raised government debt. These tax cuts have now been in place for years and government debt has grown exponentially. How is that the fault of a tax cut or the tax payer?

Of course it’s not – unless you believe that money, all money, really belongs to government and it gets to decide how much you can or can’t have. How else do you claim allowing an earner to keep more of what he earned as a cause for "increased government debt?"

Of course Gale forgets one of the aspects of letting the tax cuts expire – but I suppose that’s because it’s not a "myth" in his book. A recent study finds the following to be true as a result of letting the Bush tax cuts expire:

The study found that raising just the lowest income tax rate from 10 percent to 15 percent would cost 88 million taxpayers an average of $503 next year.

Lowering the child tax credit from $1,000 to $500 per child would cost 31 million families an average of $1,033 in 2011; the reinstatement of the so-called marriage penalty, a peculiarity in the tax code that forces some married couples to pay more for income tax than they would if they were single, would cost 35 million couples an average of $595 each, according to the preliminary numbers.

[…]

Income tax rates will rise for almost every bracket, with the bottom rate going from 10 to 15 percent and the top rate going from 35 percent to 39.6 percent. Dividends and capital gains taxes also are expected to rise.

So the “your taxes won’t increase by a single dime” pledge for the gullible 95% was a crock and they should have known that when Obama promised to end those tax cuts.  But it’s hard to do that when you’re also gulled into believing that they were only tax cuts “for the rich”.

In fact, they were across the board tax cuts and now the middle-class will discover that at the end of the year as they crank up the Turbo Tax and are shocked, shocked I tell you, that their taxes have increased.

And that’s no myth, my friend.

~McQ

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Is Keynesianism finally dead?

By that I mean the belief that massive public deficit spending is the cure for an economic recession/depression?

It should be. And that’s the argument going on in at the G20 meeting in Toronto. The US is urging Europe and the rest of the world to “pump it up”. The rest of the world, rightly in my estimation, is resistant to the plea. The WSJ reviews why for us, using the US’s experience as the case study:

Like many bad ideas, the current Keynesian revival began under George W. Bush. Larry Summers, then a private economist, told Congress that a “timely, targeted and temporary” spending program of $150 billion was urgently needed to boost consumer “demand.” Democrats who had retaken Congress adopted the idea—they love an excuse to spend—and the politically tapped-out Mr. Bush went along with $168 billion in spending and one-time tax rebates.

The cash did produce a statistical blip in GDP growth in mid-2008, but it didn’t stop the financial panic and second phase of recession. So enter Stimulus II, with Mr. Summers again leading the intellectual charge, this time as President Obama’s adviser and this time suggesting upwards of $500 billion. When Congress was done two months later, in February 2009, the amount was $862 billion. A pair of White House economists famously promised that this spending would keep the unemployment rate below 8%.

Seventeen months later, and despite historically easy monetary policy for that entire period, the jobless rate is still 9.7%. Yesterday, the Bureau of Economic Analysis once again reduced the GDP estimate for first quarter growth, this time to 2.7%, while economic indicators in the second quarter have been mediocre. As the nearby table shows, this is a far cry from the snappy recovery that typically follows a steep recession, most recently in 1983-84 after the Reagan tax cuts.

The chart in question:

2.7% is not good, especially when most of the spending is government spending. Or said another way – this isn’t a great advertisement for over a trillion dollars spent to “stimulate” the economy.

And, as you see here – for the money, job creation has been absolutely abysmal, except for government jobs.

Now couple all of that with the awful news about house sales this past month (down 33%) and it would appear, economically, that the “stimulus” has essentially failed in its dual role of stimulating economic and job growth, wouldn’t you say?

Yet it seems the spin doctors in the administration want to pretend otherwise and, by the way, hook the rest of the world on their public spending addiciton. Thankfully, at least for their citizens, most of the rest of the world isn’t buying into the scheme. We, however, are stuck with the world’s most profligate spendthrifts in the guise of the Obama administration and the Democratic Congress.

We are told to let Congress continue to spend and borrow until the precise moment when Mr. Summers and Mark Zandi and the other architects of our current policy say it is time to raise taxes to reduce the huge deficits and debt that their spending has produced. Meanwhile, individuals and businesses are supposed to be unaffected by the prospect of future tax increases, higher interest rates, and more government control over nearly every area of the economy. Even the CEOs of the Business Roundtable now see the damage this is doing.

That’s a long way of saying the anticipation of raised taxes to pay off this unprecedented and massive assumption of public debt is keeping businesses on the sidelines and the business atmosphere unsettled. They’re not about to expand their businesses until they have a much better handle on what it will cost them to do so. That’s why, for what little recovery is taking place, it is mostly a jobless one.

Most who understand at least rudimentary economics knows that some “stimulus” from government spending, coupled with other government actions, such as tax cuts for individuals and businesses, may have a beneficial effect in times of recession. The stimulus funds get money in circulation and the tax cuts encourage businesses to expand and hire.

What we’ve seen is nothing but “stimulus” – no tax cuts, no incentive for businesses to come off the side lines. Additionally we’ve seen attacks on the business community, calls for much more draconian regulation and new mandates imposed by legislation such as health care reform.

The result has been a seemingly perpetually unsettled business atmosphere that has provided absolutely no incentive for companies to expand or hire.

What we should have all taken from this is that government “stimulus” funded by massive public debt isn’t the answer we were led to believe it was and, when it is all that is done, is more of a problem than any sort of a solution. All the “stimulus” has managed to accomplish is the promise of large tax increases to pay down the debt it created.

The other service it hopefully has rendered is to prove defective the once cherished Keynesian belief that government can spend us out of recessions.

~McQ

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Magical Thinking

The progressive base is having conniptions over the failure of President Obama to get his agenda through Congress despite having supermajorities. Now that Obama is making token gestures (however feeble [via:HA]) towards fiscal sanity, they are experiencing political apoplexy:

As noted in quick hits by BDB and rayj, [UPDATE] and by David in a diary that just caused me to push back this diary’s publication time, Obama has now gone off the deep end. After passing a stimulus that most economists (not just liberal ones) said was too small, and that was made even more inadequate by being heavily tilted toward poor-performing tax-cuts, Obama is now intentionally recreating FDR’s mistake of 1937, when he prematurely cut back spending to try to balance the budget, and sent the country into a new recession.

[...]

Specifically: He’s going to announce a spending freeze on domestic programs (but not, of course, on the military) that is “projected to save $250 billion.” The rationale is that he wants to appease folks worried about runaway deficits. Which is just what FDR was worried about in 1937.

This is Bush-style idiocy. There is no other word for it.

The cause of this consternation is magical thinking on the part of the author, Paul Rosenberg.

Here, to remind you, is the chart I put together during the stimulus debate, showing, among other things, the relative ineffectiveness of tax cuts vs. spending in generating jobs, which is the key to getting the nation out of this recession–the only way that we can rationally hope to start bringing down the deficits:

While some tax cuts are much better than the real stinkers, it’s virtually a given that once Obama starts talking about tax cuts, the GOP is going to start demanding that Bush’s tax cuts be made permanent. Not only–as you can see from the chart–are these about the least helpful tax cuts of all, they are also heavily skewed toward helping the rich and the super-rich.

If you look closely at the chart you will be unsurprised to find that government spending is calculated to provide substantially more “bang for the buck” in creating wealth and jobs. That’s unsurprising because this chart is intended to support a progressive prescription for the economy. Of course it will show government as the answer.

Without arguing the statistical or modeling specifics behind the chart, there is one glaring item that reveals how much magical thinking went into its creation. By far the most “stimulating” actions set forth are “Temporary Increase in Food Stamps”(calculated to create 9,803,333 jobs), “Extending Unemployment Insurance” (9,236,667 jobs), and “Increased infrastructure Spending” (9,010,000 jobs). The closest tax-cutting measure, according to this analysis, in job creation is a “Payroll Tax Holiday” which is estimated to create 7,253,333 jobs. Do you see the problem?

How, exactly, do food stamps and unemployment benefits create jobs? Arguably, spending on infrastructure could create construction jobs on a temporary basis, although that hasn’t proven to be the case with the stimulus bill that was passed. But there is simply no logic to the idea that providing government benefits to the poor and unemployed will serve to create jobs, much less 9 to 10 million of them. That’s just magical thinking.

Rosenberg provides this explanation for the employment fairy (from Mark Zandi of Moody’s Economy.com):

Income support

The House stimulus plan includes some $100 billion over two years in income support for those households under significant financial pressure. This includes extra benefits for workers who exhaust their regular 26 weeks of unemployment insurance benefits; expanded food stamp payments; and help meeting COBRA payments for unemployed workers trying to hold onto their health insurance.

Increased income support has been part of the federal response to most recessions, and for good reason: It is the most efficient way to prime the economy’s pump. Simulations of the Moody’s Economy.com macroeconomic model show that every dollar spent on UI benefits generates an estimated $1.63 in near-term GDP.x Boosting food stamp payments by $1 increases GDP by $1.73 (see Table 2). People who receive these benefits are hard pressed and will spend any financial aid they receive very quickly.

Another advantage is that these programs are already operating and can quickly deliver a benefit increase to recipients. The virtue of extending UI benefits goes beyond simply providing aid for the jobless to more broadly shoring up household confidence. Nothing is more psychologically debilitating, even to those still employed, than watching unemployed friends and relatives lose their sources of support.xi Increasing food stamp benefits has the added virtue of helping people ineligible for UI such as part-time workers.

Whatever the virtues of income support, and even if that support will be quickly spent in the economy, there is no justification for concluding that it will expand the economy. At best, it can stabilize a downturn by maintaining some level of consumer spending. But that does not expand the economy in any way, shape or form, and it certainly doesn’t create jobs an unprecedented level as suggested by Rosenberg.

Indeed, in order to give money to the poor and jobless, the government has to take money fr0m someplace else. Since it doesn’t create anything, the government will either (i) tax those who are working and creating wealth at higher rates, (ii) borrow money, or (iii) print money. Again, these are not wealth producing actions, but instead wealth destroying ones. It is true that, assuming such income support shortens a downturn, tax receipts will eventually outpace the costs of funding those supports. What is not true is that the government benefits will create jobs.

On the one hand, of course, I don’t want to discourage the left from turning on Obama (enemy of my enemy and all that). It just pains me to see it done based on such absurd premises.

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The Republican Alternative Budget

It can be summed up in one sentence: They still don’t get it.

Tax cuts are great, but they’re not real tax cuts unless there’s a commensurate cut in spending. If there’s no cut in spending, they’re simply taxes which are being deferred. And that is precisely what the Republicans offer in their alternative. Long on tax cuts and long on spending. Their only claim to fame is they don’t spend as much as the Obama budget. Well, you’d have to be insane to spend as much as the Obama budget, but claiming that your plan is better because you spend less isn’t much of a recommendation.

For instance:

Discretionary Spending. The budget gives priority to the Federal Government’s most important obligations, national defense and veterans’ benefits. All other appropriated spending is level-funded for fiscal years 2010-14, and then increased at a moderate rate through 2019. The final allocation of these and other amounts will be determined by the Committee on Appropriations.

As long as we’re running a deficit, we can’t afford “increased spending” even at a “moderate rate”. What part of that can’t these people seem to get through their heads? Of course, that means they have to bring the bad news to the people that spending for government provided goodies isn’t going to go up, and, in fact, may go down. And the people haven’t exactly been kind to those who do so. Talking about it is one thing, but unfortunately actually doing it is detrimental to a politician’s career. So their cowardice is understandable if still unacceptable (given their rhetoric)

Mandatory Spending. Total mandatory spending increases by an average of 3.9 percent per year for the next 10 years. This is slightly slower growth than projected in the Congressional Budget Office baseline and the Obama/Democratic budget. It provides for a sustainable growth rate to assure the viability of these programs in the future.

Here is the budget killer – mandatory spending. And what to the Republicans propose? Growing it at almost 4% a year. The inflation rate is what? Well, even now, it certainly isn’t 4%. And while it may rise, you can’t assume that. So this does precisely what they claim their budget does:

To Control the Nation’s Debts. It halts the borrow-and-spend philosophy that brought about today’s economic problems, and puts a stop to heaping ever-growing debts on future generations.

It does not end the “borrow-and-spend philosophy” at all. It merely slows the rate of borrow-and-spend. The claim is nonsense on a stick.

And to cap it all off, they buy into the premise of some sort of universal or nationalized health care.

To Fulfill the Mission of Health and Retirement Security. The budget reforms the health care marketplace by making quality coverage affordable and accessible for every American regardless of pre-existing health conditions. It reinforces the decision-making of patients and their doctors, not government bureaucrats; and it reforms Medicare and Medicaid to make them sustainable. The budget also advances the cause of strengthening Social Security.

So instead of buttressing and supporting the concept of private health care and less government intrusion, the Republicans again commit to the concept of government involvement, but just not at the level of the Democrats. And they also want us to believe this isn’t going to cost much as well.

Disappointing is a mild word for what I see in their proposals. They’re again Democrat lite, buying into all the programs just claiming theirs doesn’t spend as much, and again proposing tax deferral as “tax cuts”, completely ignoring the need to cut spending to make those deferrals actual and permanent cuts.

No wonder they put it out on April 1st.

~McQ

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