THE RICH GET RICHER AND THE POOR GET...

I usually wouldn't use charts this big on this page, but the dates under each segment are important. As the chart title says, this is the distribution of average income growth during periods of economic expansion. What makes these data interesting is not so much that between 2009 and 2012 the top 10% grew massively while the other 90% had negative income growth. No, what makes this interesting is when you look at the top individual income tax rate during the early time periods.

In 1949 the top tax rate was 82.1%. In 1951 the top rate grew to 91% and stayed at 91% until 1963. Notice anything different about income growth during those years compared to the 21st century? Ya, the lower 90% of earners had actual significant growth in their income during those periods of incredibly high tax rates. Why was this so? Because the economy between 1951 and 1981 grew at an average rate of 3.7%, but between 1981 and 2013 it has grown by an average of only 2.8%.

So lets review. Not only do super high tax rates not hurt the middle class, but they also seem to do no harm to the growth rate of the general economy. And what significant event began in 1981, the year the economy and middle class income growth both started down? The so-called Reagan Revolution and the Trickle Down theory of economic growth. Facts is facts. Just sayin'.

MORE MYTHS

As I noted in the last post, our friends on the conservative side of things seem to believe a lot of stuff that can't pass the smell test of logic. That is to say, if it doesn't walk, quack or fly like a duck... it's not a duck, no matter how much you believe it is one.

Our second myth, then, is simply the entire right wing economic plan and answer to the endlessly repeated question, "Where are the jobs?" But don't worry about it being a long, dry list of policies. Here's the whole thing from a USAToday piece by Cal Thomas.

"Cutting taxes, lowering government spending and reducing the size of the federal bureaucracy would improve the economy... "

Ya, that's all of it. The conservative answer to all that is wrong with the Greatest Nation to Ever Grace the Face of the Earth. That, by the way, is yet more right wing clap trap. Here's the logic problem. If the statement is true then how could there be so much wrong with the country? Just sayin'

So let's dig a little deeper into the Great Plan (GP) and see how it would work to solve all of our economic problems. Cutting taxes. I assume that the idea is that leaving more money in the hands of them that earned it will translate into more investment in private sector businesses which will then produce more hiring and greater economic activity. That's the theory, anyway. Let's look at those ever so bothersome facts.

American businesses are, and have been, sitting on over 2 Trillion Dollars of cash. Not capital, not infrastructure, not warehouses full of product. Cash! There is a glut of mergers going on at the highest levels. And notice how often the deal is presented in terms of cash not just stock and other equity. We also have many large companies doing stock buybacks as a way to offer stockholders short term gain and get rid of even more of that pesky cash. What we don't have is hiring of new employees or raises for existing staff. So please, if you can, explain how giving a business even more cash money in the form of a tax cut will induce, encourage or maybe trick those companies into spending that money by creating jobs?

Businesses do not hire people because they have excess cash laying around the boardroom. They hire to satisfy a need brought on by increased demand for whatever it is that they are selling. Look at the last 6 years. Businesses have lots of money but are not hiring. Or look even farther back to 2001 and 2003. The massive Bush tax cuts, directed mostly toward the top 10% of earners did not result in increased hiring as had been predicted... by conservatives. Here's a chart of the unemployment rate since 2000.

Notice how after the 2001 tax cuts the unemployment rate went up, not down. Also notice that after the 2003 tax cuts the rate did start down, but very slowly and barely reached the level of unemployment recorded on the day George W. Bush took office. Oh, and you might want to notice that the huge upward spike starting in 2007 and ending in the first quarter of 2009 was all on Bush's watch.

So, two huge tax cuts... no effect on hiring. Tell me how this works!

Well, surely lowering government spending will do something positive for the economy. Maybe not. As I alluded to in the first myth post, government spending puts money into the economy. The logical extension of that statement is that reducing government spending removes money from the economy. But the conservative theory says that that money will still me spent and invested by the private sector which knows much better than bad old government where to pour that cash. Okay, but there may be a few problems. For example, it may be unstated but the conservative assumption is that money not spent by government will be returned to the taxpayers in the form of tax cuts (see above). This, of course, ignores the other unmentioned part of the right wing GP, the debt and deficit. I would think that any savings of tax dollars brought on by spending cuts should first go to reduce the deficit (the amount of money we borrow and then spend) and then to reduce the debt (the amount of money that we owe to those entities which lent us the money to excessively spend). They, conservatives, wale and moan about the D and D almost as often as they mention Obama's War on Coal. Which is to say, all the time. So I only think it would be fair to use spending reductions for those purposes. Want to bet on that one?

More importantly for our busting of myths (see how I avoided problems with the copyright laws), how would cutting spending, regardless of were any savings is redirected, "... Improve the economy?" I don't think it would. And I'm in agreement with the majority of economists. I'll say it again, government spending puts money into the economy. And, by the way, it also increases the moneys coming in from taxes. No, this is not some perpetual motion machine that runs forever on its own output energy. It is the simple fact that the federal government taxes transactions.

We pretty much only think of the government taxing income, but income, and in the case of businesses, profit, can also be viewed as transactions. Your part of transaction is to put in your 40 hours of working for your employer and your employers part is to give you money for your work. The same, of course, holds true for businesses. Buy 100 widgets from Widget World and they send you widgets and you pay them money. So really, all of what we call economic activity is just one transaction after another. And they're all taxable.

Those who haven't been there might be surprised to learn that unemployment payments are... taxable. Yep, all of those lazy takers receiving unemployment benefits so that they can lay around and play video games all day on the taxpayers dime are, in fact, required to pay taxes on the money they receive. One member of the household working while the other is disabled or retired? Social Security payments are also taxable under certain circumstances.

Grants from the government are generally not taxable, every transaction from that point on, is. So a science grant of say $500,000 to study hens teeth may seem like a half million dollar waste, but just remember that the half million dollars is now buying lab equipment (taxable) lab coats (taxable) paper, pens, computers, cell phones, lab assistants, etc. (all taxable). And the people who are paid for their work or their products take that money and buy bread and milk and shoes and diapers and more lab coats and stuff to sell AND IT'S ALL TAXABLE.

This basic fact is why Europe, which chose spending cutting as their way to recover from the Great Recession, is suffering under double digit unemployment and why the USA, which, by way of the FED, chose stimulus rather than austerity, has an unemployment rate of 6.1%. Facts are facts.

Okay, that's enough for now. The part about reducing the size of the federal bureaucracy is really just reduce spending said in a different way and is, as we've seen, just as meaningless. This stuff sounds good, in a kitchen table, checkbook balancing, kind of way, but the federal budget is not your checking account. The general economy doesn't work like that and believing that it does is a very big part of the problem.

MYTHS

Every so often I read or hear something said by a politician or political pundits that just sets my teeth on edge. Why? because I know that what is being said is not true. And I'm not talking about Presidential birth certificates or other such bull crap that is passed off as true in certain circles. No, I'm talking about things that are false on their face by real evidence or logical deduction. For example:

In an op/ed piece from our local, very right wing, newspaper a Republican Congressman and committee chairman expressed the thought that he didn't think that the American people wanted any higher taxes since that just took more money out of the economy. And there it is. The myth of the black hole of government taxation.

First, the obvious question should be, "Where does the money go?" I can't for the life of me figure that one out. Is there a super computer out in the desert somewhere that adds up all of the tax dollars that, because they've been collected, now must disappear from view. Of course given the government's fine record of efficiency I figure that super computer is a couple of Apple II's and a dial up modem.

This little myth, which has and is repeated regularly on the right, flies directly in the face of the other side of the conservative mantra; out of control government spending! What do these folks think is being spent? Let's see, the government taxes people and corporations, who are really just people too, haven't you heard, takes that money and hides it somewhere so that it is no longer in and usable in the regular economy and then, I guess, borrows money from China to spend on all of the worthless programs that the government over spends on. Or something like that. See what I mean. This whole concept fails a simple test of logic.

No, the government does not remove money from the economy when it collects taxes. It might remove money from your economy or from your businesses economy and that could certainly piss you off, but if you step back and look at the bigger picture it's clear that redistribution of money by the government may stick in your craw, it's what governments at all levels do.

We can clearly see that the Congressman's statement is false. Is this a deliberate lie on his part? I have no way of knowing. More troubling is the thought that he actually believes this nonsense. That would be the result of decades of ideology being endlessly repeated and never challenged by our dog whipped main stream media. They, the media, are so afraid of charges of bias from the right that they'ed find someone to express an opposing position after a guest states that the earth is round. What scares me is that this guy writes laws that I have to then follow. He doesn't know how the economy works. That's not a good mix.

Okay, that's all for now. Think about this a little, please. Myth number two coming up.

ON RAISING THE MINIMUM WAGE THE GOP IS JUST ...WRONG!

First, a little housekeeping. Yes, I'm back. Like a bad penny I have returned from an almost year long battle with a rather persistent, but not life threatening, infection. The main problem was that the combination of the infection, and the antibiotics to fight it, knocked me for an energy loop. As in, I didn't have the energy to sit at this computer and write. But I miss it, so I'm back. Now on to the topic.

As the President said in the State of the Union speech Tuesday night, we need to raise the Federal Minimum Wage to $10.10/hour and we need to do it soon. This, of course, produced the usual screams from Republicans that raising the minimum wage will cost jobs and do great harm to the economy and, I think, cause dandruff to break out across the land. As one law maker lectured a TV reporter this morning, it's just simple Econ 101: The Law of Supply and Demand. If you have a higher cost for something, in this case labor, you will use less of it by either not hiring new workers or by laying off workers that you have now.

I'm guessing from that position that, first, the Congressman never actually took Econ 101 and, second, that he never owned a small business with employees. Here's what the Congressman, and the Republicans, pretty much to a man, fail to understand about what actually happens when the minimum wage goes up. Businesses raise prices! It would seem, if you listen to the GOP that the idea of raising the price of a good or service in our economy is right up there with the Seven Deadly Sins. They don't like and they won't stand for such a thing. Oh, they don't actually hate prices increasing if it throws off more profit for the company and increases the wealth of the stockholders. But thou shall not cause prices to increase to pay for increased cost of labor. I'm sorry, that is just nuts.

Now, here's what actually happens when the minimum wage, either State or Federal is raised. I know these things from first hand experience. My darling wife and I owned and operated two locations of a certain fast food franchise. We employed 120 people between the two restaurants and we had to deal with a minimum wage increase during that time.

The first thing that blows up the logic of the Republican position is that labor follows need. No good small business person employs unneeded staff. But by the same token, your employees have value to the business because they make you money. Maybe not every day. Maybe not every hour. But over all, a business will operate at close to the correct number of employees for the amount of business expected. In fast food we had the ability to add staff for certain parts of the day (you know, meal times) and have fewer people on the clock during slow times. This is because there are many possible part time positions available in the fast food business. Students who work after (or before) school, workers with other full or part time jobs, and older folks who don't wish to work a full time schedule. But remember, labor follows need. When the minimum wage went up the very last thing we thought about doing was laying people off so that our labor costs didn't go up. If we were doing the job right, we had the number of people we needed for the business which we anticipated. If we were over staffed because business was slow we should have laid people off sooner. If we were understaffed because business was growing, we needed to add employees whether or not they would be paid more under an increased minimum wage. The way we dealt with the increased cost of labor was to raise prices a little. Not across the board and not by a huge percentage. What was the result?

Our business increased and we needed to add staff! And that's not an unexpected result. There are scores of studies and surveys which agree. Raising the minimum wage doesn't cost jobs, it helps in the creation of jobs. Why, you ask? Because that Econ 101 idea of supply and demand does work when dealing with actual products or services being sold. More money in the hands of your staff, and in the hands of every other minimum wage businesses' staff, means more demand which leads to more staff. This idea is not new. Henry Ford was soundly criticized by the business community of his day when he took the outrageous step of paying the workers building Model Ts on the assemble line the unheard of wage of $5.00/day. His reasoning was simple. If I pay them that high wage they will be better able to buy the cars that they are building. Which will mean I'll sell even more cars and, of course, make more money. It worked.

The second thing the GOP doesn't seem to get is what I mentioned above: everybody is in the same boat. We could raise prices because every other fast food restaurant also had to pay a higher wage and, thus, also needed to raise prices. If my competitors could gain no advantage, in the long term, they either raised their prices too, or ate the increased cost. In the fast food world, and in fact in most minimum wage businesses, you can only do that for a little while. The profit margins are too tight.

So, as you go about your business, when you hear Congressman so and so or pundit such and such go all Rambo on the very idea of raising the minimum wage, ask yourself if the Congressman or pundit is smarter than Henry Ford. I bet I know the answer.

ARE WE REACHING THE TIPPING POINT ON HEALTH CARE COSTS?

I just finished reading a very informative article in last weeks Time magazine about the health care costs that we, insurance companies and the government pay. One can certainly be outraged at being charged $1.50 for a single Tylonal  tablet that cost the hospital 1.5 cents. But maybe this is pointing to an even bigger outrage; that fact that middle class earnings have declined since the 1970s while the price of health care has only increased. At what point do we find that people just can't afford to get sick? And have we already reached that point?

I think that we're there and have been for a while. The single biggest driver of personal bankruptcy are medical bills. pretty much everybody can name a friend or relative (or themselves) who were charged huge sums for simple procedures and short hospital stays. The usual response from the political class is that greater competition and more transparency will make people better consumers of health care and thus drive costs down. It just never seems to happen. People aren't all that excited about asking the price of a needed health procedure. They're either insured in some way, so that they never actually deal with the price, or they are in no condition to haggle. "Gee, I'm going to have to check that other hospitals price to repair my broken leg." "I'll get back to you." We're not buying washing machines here.

That concept, that health care is not like other goods and services, is at the heart of the problem. When you need medical attention, you need it. In many cases, if you don't get that attention, you will die. Or suffer disabling after effects. Or disabling after effects until you die. None of these is a good outcome for the consumer. But, as the Time article lays out, this produces some very good outcomes for the medical industry. They make loads and loads of money.

Now, it's pretty clear that suggesting that maybe doctors and hospitals and drug companies charge less is seen by some to be... un-American. It brings into question the entire capitalist system that we have created and defend. But, I think that if we can look at it from a slightly different angle, or two, we might just see some light at the end of the tunnel that isn't a train.

As I asked at the start, has the health care industry reached the tipping point beyond which people just can't afford to pay any more? If your health insurance goes up 20% and your paycheck hasn't gone up in three or four years, you may have to do without the insurance. The same is true of increasing co-pays and deductibles. And for the uninsured medical bills can be just devastating. If things don't change, each year will see fewer and fewer consumers of health services. From a business standpoint that would be a very bad thing for the health care industry.

But we don't ever seem to get to that point because health care is a necessity of life. So maybe we need one of those different angles to solve this.

As a society we have determined that for certain things necessary for life we don't want to leave outcomes to the free market economy. The water that comes into your home, even if it's from a private, for profit, company, is heavily regulated. Joe's Water Service can't really compete on price or service because Joe has to meet the same quality level as the city water department. The same is true for sewage collection. We assume that these services will be provided by our city or town, or by a public service district. It wasn't always like that.

In the days before the urbanization brought about by the Industrial Revolution fresh, potable water was hard to come by. Rain barrels and hand pumped wells in the towns and, sometimes, water collected from creeks or streams out in the country. If you were lucky, or your ancestors were smart in selecting their homestead, you had a nice fresh spring bubbling out of the hillside behind the house. Whatever the source, your water needs were pretty much your own problem to solve. And, again, the same is true for sewage and other waste. In the country it was dig a hole and put a shed over it and in the cities, well you really don't want to know about the cities. After the age of throwing "slop" out of the window into the street came the age of cess pools in the back yard and a wagon with a tank, and a hand operated pump, used to empty the nasty pit that your grandpa told you to never play near. (Not a problem. The smell took care of protection just fine) These services were provided by private companies which started with two guys and a wagon and grew to rather large firms with dozens of trucks. Notice, though, you were still on your own. You had to contact the company so have them come and pump out the pit.

After the Industrial Revolution caused cities to explode in size and density, and the old model of taking care of your own needs fell under the weight of too many people need too much food and producing way too much waste. In order to protect the public, as a whole, from water borne and waste borne diseases the cities and towns took over these services. They became public utilities.

The same thing happened with natural gas and electricity. Even though we may be supplied by a private, for profit, company, they and their price structure are regulated by public utility commissions. We really don't want price competition on natural gas services. The safety of the population trumps capitalism in these cases. Electricity and natural gas are just too dangerous for price wars and such. Interestingly, heating oil, and propane have not followed this trend. The reason has to do more with infrastructure (pipelines and wire) than with any other economic or public safety issues. You just can't pump heating oil to individual homes by way of a network of pipes. Particularly in the winter. With respect to electricity the problem is economy of scale. It doesn't make economic sense to generate power all over the map when that power is going to be generated with the burning of coal. Or the damming of a river. Or nuclear power. Those are big business and government projects.

So, we see that certain necessities of life are better distributed to citizens by either their government or companies regulated by their government. And then there's health care.

In the case of health care we have turned the whole on its head. We have huge companies, making huge profits, providing the needs of the citizens with lots and lots of outlets for their "products," with some government regulation, but mostly with the attitude that any other system is socialized medicine and a very bad thing. I just don't get it.

We have a necessity of life, health care, that we purposely leave in the hands of private enterprise, and we wonder why the cost keeps going up. Please note that, even though Medicare and Medicaid are government programs, they're designed as a way to pay private health care providers. Not to provide health care. And that is the heart of the matter. We didn't dream up "sewage-aid" or "water-care" to help pay for those necessities of life. No, governments stepped up and took the burden on themselves. Your public utility provides the water or the sewage removal.

I'm afraid that only such a public utility model can cure the health care mess that we find ourselves in. I think we have to look at what the rest of the industrialized world has done and pick out the best practices and adopt Universal Public Health Care for all. Not some patched together Frankenstein monster like we have today, but a real national health care provider. The doctors would work for the government and nonprofit hospitals would actually not make huge profits. The government would fund drug research directly and the consumer would reap the benefit of cancer drugs that don't cost $15,000 a dose. We could, in fact, become civilized. Oh, who am I kidding. Civilized doesn't buy politicians. The health care industry sure does! 

CAUSE AND EFFECT

We live in a cause and effect universe. Things don't just happen by themselves. For every effect, there is a cause and without that cause no effect will occur. This is a basic law of physics. Why is this blinding flash of the obvious important, you ask? Because  it seems to me that the Republican Party, and Mitt Romney want to repeal this physical law of the universe. Let me explain.

We have been told, time and again, that the only way out of our current post recession economic doldrums is to cut taxes on the well off and rich, the so called job creators, and eliminate strangling regulations from business. Do that, the GOP says, and the economy will perk right up. Why Mr. Romney has even said that such a course will create 12 million jobs in the next four years! It sounds good, doesn't it? But the same problem keeps nagging at me. How does it work? What is the cause that leads to the 12 million job effect?

For the life of me I can't find one. If the idea is that companies will have more money because they will be paying a lower tax rate and, thus, will use that money for hiring, I remain unconvinced. Look around. Businesses in the USA are posting record profits. And they're not spending much of it either. The last number I heard was $3 trillion. That is, businesses in this country are sitting on $3 trillion in cash money. So seriously now, how much more cash do they need from tax cuts before they start hiring? Will another trillion do it? How about $2 trillion more? See the problem. There doesn't seem to be any particular amount that will cause the effect of more hiring.

We do know that the other guys also have a plan for increasing hiring and creating jobs. They may call it investing in infrastructure, but we all know that means government spending. But guess what? There really is a cause and effect relationship between spending and job creation. One can yell from the top of the highest mountain that "government can't create jobs," but there's no question that government can create demand and that leads directly to...jobs! If government needs 20,000 new hammers you can best believe that some business person will try to sell those hammers to the government. They might be over priced. They might be horribly delayed. But somebody will make said hammers and will sell them to the government. And since hammers don't just grow on trees, somebody will need to be hired to do the making. Government creates a demand that is then filled by the creation of new jobs. Thus, one step removed, government created new jobs.

But the tax and regulation cutting method doesn't have that same connection. What makes Mr. Businessman add workers? Because if what the government does under a Romney Presidency can't cause the desired result, can't make the effect happen after the cause, then Mr. Romney and friends really don't have a plan at all. What they have is Magical Thinking. They believe that a causal link exists, in this case between lowering taxes and job creation, when in fact there is no such connection. But they sure do believe it to be so.

But has anyone actually thought about how this might work in the real world? Because it seems to me that what has to happen is as follows:

First, government cuts taxes on the job creators.
Then, the job creators, having more money than they had before the tax cuts, open wide the factory gates to the hoards of job seekers who will then have jobs, will pay taxes and the country will be back on the road to prosperity. You can almost see the CEOs standing at their penthouse office windows looking down on the masses as they line up to be hired. He, or she, may spread their arms wide in a gesture of welcome, even if the soon to be new workers can't see such a gesture from the ground. That looks to me like the entire Republican job creation plan, at least from the vantage point of the "Job Creators." Because remember, there's no actual cause for the desired effect.

But what does this look like from the people at the gate? It looks like they line up and beg the job creators to grant them a job, doesn't it? Should one approach on bended knee, perhaps? Should one be careful to not look the "Job Creator," in the eye, in case that might offend? Since nothing the government did in cutting taxes actually made a company start hiring, I think some variation on begging for a job may be the only solution.

And if that's the case, would someone please explain how begging rich folks for work offers more freedom than being dependent on government to send out a Social Security check or pay the doctor that you just had to see. Anyone? I didn't think so.

THE MYTH OF THE ZERO SUM ECONOMY

In a prior posting here I talked about the apparent lack of understanding between our political parties. It seems that each side is using different definitions of words and concepts. This becomes clear when one listens to the most basic ideas of how the American economy works. An example might help.

When discussing that most hated of all things government; taxes, politicians on the right will invariably trot out two arguments that they are sure will convince the simpleton asking the question of the, if you'll excuse the pun, rightness of their position.

First, they will tell us that, back home in their district, business people come up to them and tell them that if the incredible tax burden that they are under and the job killing regulations they face were just lifted, why then all would be well and jobs would flow forth as if from a fountain. Or something like that. Bottom line, business people want lower taxes and less regulation. Fair enough. But does it bother anyone else that this is like asking an eight year old if he wants more ice cream. You sort of know what the answer is going to be before you ask the question.

Second, and more to the point of this post, those on the political right will sometimes lecture an interviewer with a little lesson from Econ. 101. It goes like this. " We shouldn't raise taxes on the 'Job Creators'." "When we do that we just extract money from those 'Job Creators' and then redistribute it to poor people." "Since no new money is created in the transaction, the economy gains nothing." "In fact," they will say, "Those extracted dollars are no longer available to create jobs so taxing and redistribution are BAD for the economy." This is usually said with a bit of a smug smirk, as if the speaker is sorry that the interviewer is too stupid to understand such a simple concept.

Now, the problem that I have with this explanation is that it only seems to make sense in an Econ. 101 text book. Or maybe in a game of Monopoly. "Oh my, if you charge me for landing on your Boardwalk I'll be unable to buy a hotel for Illinois Ave. Think of all the hotel workers who won't have jobs." Ya, that makes sense. It's a zero sum game. There's only so much money to go around. If I give it to you, by way of the government taxing me, then I don't have the money to invest.

Back here in the real world things are a bit different. We have to deal with a global economy where rich people and corporations invest in businesses and securities from around the world. Where they park millions of dollars in off shore bank accounts. Where they spend billions on capital investments in other countries. Now just how does any of that square with the zero sum tax and redistribute game that they say explains our economy? Simple answer - it doesn't.

Those off shore or out sourced dollars offer no benefit to the general economy here in the USA. They only benefit the corporation, its investors and the country where the money now lives. So while extracting taxes from the rich for redistribution may look like it takes funds out of our economy, the rich aren't really playing a zero sum game at all. In fact it can be argued that their out of country investing is (one of) the actual reasons for our national unemployment problem. It's those dollars that have been removed from the economy, not the dollars extracted by taxes.

THEY DON'T EVEN SPEAK THE SAME LANGUAGE

I had one of those Ah Ha moments the other day while trying to stay cool in front of the TV. Former RNC Chairman Michael Steele was talking to Chris Mathews on Mathews' program during which another guest suggested that President Obama would be politically wise to propose a large public works project before the election. While Mathews and the other guest tried to discuss the merits of such a plan, Mr. Steele kept interrupting with the comment, "With what?" Referring, no doubt,  to the fact that the Federal budget is, and has been, running rather large deficits.

"With what?" he'd say. Then louder, "with what?" The simple message being that in a time of deficit spending and increasing government debt we, as a nation, can't afford to repair our crumbling infrastructure. No way, no how! Ask pretty much anyone on the Republican side of the issue and they will give the same response. No way, no how! Well, they're wrong.

Here are a few uncomfortable facts for Mr. Steele and the GOP. We have been running deficits for quite a long time and the country has not gone under yet. The deficit spending of WWII was, as a percentage of GDP, far higher than the deficit today. And, maybe the most important, we can and are borrowing money about as cheaply as any country in history.

As any good business person will tell you, a business prospers when it uses OPM. That's "Other Peoples Money."  Whether from loans or investments, companies know that leveraging there own, often, limited  resources with the resources of banks or investors is often the only way to grow a business. This is particularly true in the area of capital improvements. Building a new factory or store takes far more resources than any sensible business can, or would, keep on hand. It's good business.

But when it's the countries investments? Not so much. The current GOP thinking is that we can only spend what we have and since we don't have any extra, we can't spend at all. This way of thinking, while seeming to make sense in the "around the kitchen table," type discussion, flies in the face of what governments at all levels actually do. Have the Republicans never heard of local bond issues? You know, for schools and new playgrounds and roads and the like. This is how governments, businesses and people finance today's spending with tomorrows dollars.

And I'll repeat the single most important factor. We, as a nation, can borrow from the investors of the world at incredibly low interest rates. And those same investors are clambering to buy our bonds. They're standing in line and throwing money at the Federal Reserve. Each bond offering gets double or triple the offers than there are bonds available.

So the next time you hear a voice on the right question "with what?" you might want to point out these uncomfortable facts. It won't change their mind, but it's fun to watch them stammer out some lame answer. Hey, it's summer. Without football we need to get our fun somewhere.

WHY GOVERNMENT SPENDING IS NOT LIKE A BLACK HOLE

I recently heard a conservative make a statement which seems to point out one of the right's biggest fallacies concerning the U.S. economy. After lamenting that it takes until some time in May for an American worker to earn enough to pay his taxes, this fellow says, "(that's) a whole lot of money for the government to be taking out of the economy." The problem with that point of view is that it is 180 degrees from the truth.

Government doesn't take money out of the economy. It redistributes money taken in taxes back into the economy. In fact, since we are borrowing $0.40 of every $1.00 of government spending, the government is putting way more money into the economy than it is taking out in taxes. Now, one can be against redistribution, call it socialism, and demand an end to it, but that's not the same as assuming that money taken in taxes just disappears into some black hole of the Treasury Department.

I think this actually gets to the heart of the American conservative idea of how the economy works and why I find the prospect of turning the keys to the whole thing over to them frightening. In their view, since being made to pay taxes takes money from them, that money is then gone and not available to be used by the "job creators." Since the free market no longer has use of those moneys they see this as a net loss that can only be resolved by cutting taxes. No credit is given to the government's use of the money. Government jobs don't count. Government workers have no worth to the economy and besides, we all know that government can't create jobs. Don't we?

As I said, conservative have it backwards. It's not government which takes money out of the economy, it's private sector investment in foreign companies, out sourcing and just sitting on over $2 trillion in cash which takes money out of circulation. Government, on the other hand spends the money taken in taxes by direct hiring, contracting, or in the form of grants to the states. The states, of course, then do the same. And here’s the real dirty little secret of government spending; they get some of the money back in more taxes.

Never forget, boys and girls, that the government taxes transactions. If you work for the government you pay taxes on your income. If a corporation enters into a government contract that corporation (hopefully) pays taxes on its profits. And that’s just the original transactions. That corporation pays wages which are also taxable. Buys products (taxable), services (again taxable), and perhaps invests some of the money (the profit from which is taxable as capital gains).

So, the next time you hear someone on the conservative side complain that taxes take money out of the economy, ask them if they’re kidding, or just confused. Then tell them why.

WE NEED TO TAKE A STEP BACK

There's a saying in business, politics and sports that applies to the general way that we Americans look at problems. That phrase is, "In the weeds." Pretty much everyone understands that when a project or team or political party is in the weeds that they're down in the rough going, beating through the underbrush, trying to find a clearing. Being in the weeds is, therefore, not where you would like to be.

That's where we are as a country right now. Everything is point counterpoint, detail this, data overload on that.   But then you look at a picture like this one and start to realize that we are pretty darn small specks on that vast world, and that world is only the fifth largest of the eight that make up our little solar system. A solar system that is one of maybe 100 billion solar systems in the Milky Way galaxy, which is one of 200 billion known galaxies in the visible universe. Think about that for a second.

Okay, times up. Time for more politics. There is, of course, a reason for my billions and billions rant. Our political system, joined at the hip as it is with the media, has put us all in the weeds when it comes to understanding the economy and its current troubles. We need to take a step back and take in the curvature of the economy, as if seeing it from space. And by the way. This ain't rocket science. Anybody can do it. Even the politicians.

The situation in Europe, in particular the French election of the Socialist Party candidate, points out that not only doesn't austerity work to pull an economy out of recession, austerity also pisses off the voters who, if angered enough, will throw the austerity pushers out of office. Here in the good old U.S.A. we have the austerity crowd as the out of office challengers. They believe that austerity works. They are wrong!

Now, just to be clear, what I mean by austerity is simply, reducing spending by the Federal government below current levels. Remember, we're taking the long view from space here. If we start to address which programs are good, or which are bad, or which are wasteful, or which we just don't like, then we descend back into the weeds. From way up here in space we can't see all those petty differences. A dollar of Federal spending is... a dollar of money spent into the economy. Period.

"But wait a minute," you say. "Some things that the government spends on are stupid and wasteful." At which point starts the list. The list of BAD GOVERNMENT PROGRAMS. Bridges to nowhere, counting spotted tree frogs in the swamp, volcano monitoring and space exploration are on that list. Or not, if it's somebody else who made the list. That's a big part of the problem. Every dollar of spending that I like, somebody else hates, and so on. But that just keeps us in the weeds.

Take a step back. That dollar of Federal spending, no matter what for, gets paid to someone or to some corporation which pays someone. Every dollar that stays in the country goes to somebody's pocket. So, here's the thing. If we a facing high unemployment, (we are) and are coming out of a recession, (yep) why would anyone even suggest that we cut government spending and thus, take dollars out of those pockets?

"$16 trillion in debt and getting worse," you scream. Well, okay, that is a problem over the long haul, but can we take that step back and look at it from a distance. Right now, even after one of the rating agencies downgraded our bonds, we are borrowing money in the world market for just slightly more than 0% interest. And we're not having to chase investors. They're coming to us and throwing heaping gobs of money at treasury bonds which will make then basically nothing over their investment. Why? because we're still the biggest, baddest, and safest economy on the planet. That being said, it means that even though we have to borrow $0.40 of every dollar the government spends, it's incredibly cheap money. It is so incredibly cheap that we should be spending even more of it on the infrastructure of the nation. We can justify the increased spending with another old saying from business. "You have to spend money to make money."

But that's for my next posting.

WE NEED A CHRISTMAS MIRACLE

As it turns out, this is my 100th blog post. Who'd have thunk it! Any how, after a break from blogging I'm ready to take on the second hundred, so let's go.

We, that is citizens of the U.S. of A., sometimes act like cats chasing a flashlight beam. We'll pay attention to a problem right up until the beam moves, then wham, our focus moves to something else. This seems to hold true in just about everything we do as a nation and the question of what to do about the lasting effects of the Great Recession is no different. And that could be a problem.

As the mortgage/housing bubble burst and banks stopped lending the issue that seemed to join Wall Street, Main  Street, government and the individual was the issue of debt. Everybody had too much of it. Of course, we saw right away that this wasn't that big a problem for Wall Street since the Bush Administration was eager to push forward TARP to ease the pain of that particular segment of our economy. Main Street and the individual debtors were not so lucky. I don't even want to get started on the government's debt situation except to remind you of how much fun raising the debt ceiling was. That gave me nightmares.

So, as the whole countries' attention was focused on debt, and in particular, our personal level of indebtedness, we were cautioned from every corner that we owed too damn much, saved too damn little and the whole thing was, at base, a moral failure of the American people. If only we could change our ways. And, as strange as it may seem, we did change. Saving went from -1% to +5%, on average. Consumer spending all but stopped for a while. Some of this was not just a reaction to the moral dilemma, it was the hard economic reality of losing jobs, worrying about losing jobs and not being able to find new jobs. So, why then has the economy not turned around? We're all being good, moral citizens. We're not using credit to buy stuff we don't need. We're saving more. What the heck is the problem?

The problem is our short attention span and "all or nothing" way of dealing with problems. If the problem is too much debt we just need less debt, right? Wasn't that the rallying cry of the GOP during the fight over stimulus spending. "The first thing you do when you find yourself in a hole is... stop digging!" That makes perfect bumper sticker sense, doesn't it? Well, yes and no. And in our economy no is the better answer.

The U.S. economy, before the crisis of 2008, was 70% consumer driven. That is, 70% of all economic activity was people buying stuff. And not just buying stuff, but buying stuff on credit. So clearly the answer had to be, stop digging. But what if the hole one finds oneself in is starting to cave in. In that case one needs to keep digging in order to keep breathing. Go back to that 70% number. When consumers stopped digging, that is buying stuff, layoffs got worse. More people lost their jobs. More companies went under. More pain ensued. Why?

Because a consumer driven economy can't change over night to a saving and investing economy. There is way too much economic inertia. Just open the yellow pages, assuming that you still get such a thing. You'll find page after page of businesses dedicated to selling stuff to you, the consumer. Remember, 70%. No matter how much moral indignation is raised against our borrowing and spending ways, that's what the economy is set up to do. And, unless and until the consumer can start doing some of that spending again the recovery will remain weak. So what can we do?

We need, rather than tight money and increased saving, looser lending and a return to some pre-recession levels of consumer spending. We're seeing some of the latter this holiday season and I think that the results may surprise some folks. I know this sounds like I'm encouraging a return to the bad old days, but I'm only saying that this economy can't change over night, and to expect it to is a recipe for a double dip recession. Yes, we should encourage saving, but when the same banks that want to (and do) charge double digit interest on personal loans and credit card accounts can only offer savers <1% interest on saving accounts I really can't see the value to society of removing any money from the market place. Later, when the crisis is behind us? Sure. Now? Not so much.

So, let's all have a joyful holiday season and get out there and spend. Your country is counting on you! 

THEY SAY THE STIMULUS FAILED...

Ah, autumn. Leaves changing, football on TV (Let's Go Mountaineers!) and the Republicans still telling the same tired lie about the President and the 2009 so called stimulus. What lie is that, you ask? Well, it's actually a compound lie. One which can indite the president and his policies in multiple ways. They go like this.


"Obama lied because..." Or, "The stimulus failed because..." Or the ever popular, "Obama is a failure because..." See the cleaver combining of the President himself with the failed program. So what is all this lie telling and failing about? It's about one little number... 8%.


Here's what happened. During the run up to passing the American Recovery and Reinvestment Act, the said "stimulus," one of the President's advisors, Christina Romer, then chair of The Council of Economic Advisers, made the prediction that the ARRA would bring unemployment down to the aforesaid 8%. Since that time, of course, the unemployment rate has not fallen to 8%, so that, in whatever Never Never Land the Republican Party resides, the entire program was a failure. Period. No discussion needed. Oh ya, and since Obama said it (by way of an adviser's words) he lied to the American people.


This is A number 1, super high quality BS, and to my mind anyone who holds and expresses that position not only shouldn't run for office, he or she should probably be treated for a mental disorder. Let's start with the "Obama lied," group.


No matter how you cut it, paste it, or fold and spindle it, Ms. Romer's statement was, is and always will be, a prediction. The American Heritage Dictionary of the English Language defines the term:
1. The act of predicting
2. Something foretold or predicted; a prophecy
Nothing in the definition of the word relates in any way to the truth of the statement. In fact, we are faced with predictions all the time which we know may not happen. We may say, when we go to work without an umbrella and it rains, that the weatherman lied, but everyone knows it's not a lie. It was a prediction. If that's not enough how about these gems of prediction: "The fighting won't last more than six months." "The war will be paid for by Iraqi oil." "They will greet us as liberators."  Or my favorite, "We know Saddam has WMD and we know where they are." Each of these came from Bush folks before we invaded Iraq. Each was wrong. Point this out to Republicans and see how many rise up on their hind legs and say that George W. Bush lied. So I think we should agree that predictions that prove false are not, on their face, lies.


But, you say, what about the obvious failure of the stimulus to meet the goal that was predicted. Again, one must start from the proposition that a failed prediction or prophecy as to the result expected from some program or action does not necessarily mean that the program or action was a failure. It just means that the particular program or action didn't match the prediction. I can predict that WVU will win tonight's game by 30 points. If they only win by 20 does that mean that the WVU football team is a failure? It may show that I'm a failure at predicting, but it really doesn't say anything about the success or failure of the team.


Likewise,  while Ms. Romer's prediction missed the mark, I think it's a stretch to then declare the entire program a failure because of it. What Ms. Romer is guilty of is a failure to follow Scotty's first law of engineering: When the Captain asks how long the very important repair to the warp engines will take, tell him three hours if you think it will only take an hour. That way being done in an hour, or even two, means you did better than your prediction and the good captain will keep you around. Had Ms. Romer only thought to predict that the ARRA would hold the unemployment rate below 12% we wouldn't be talking about this almost three years later. And let's not ignore a very important fact. The Great Recession was far worse than anyone predicted it would be. In fact the full extent of the downturn is not yet fully known, but just this year we discovered that it was far deeper and wider than was reported even just a year ago. Under those circumstances it looks to me like the ARRA was a success. But then I'm one of those strange fellows that think that any money pushed into the Main Street economy, so long as it stays in the U.S.A., will act as a stimulus.


Now, it may be that the Republicans aren't just mouthing the talking point of the week when they call the stimulus a failure. It just might be that they have a different view of what a prediction should be. Maybe they like that part of the definition that says a prediction is prophecy. Couple that with their often repeated swipes at the President's acting as if he's "The One," and it all makes sense. Of course, to make the logic work out Obama has to actually, you know, be "The One." I don't think their willing to accept that, so their arguments that the ARRA was a failure, or that the President lied, just make them look stupid. It's going to be such a fun election season. I may have to take up knitting!

KEEPING PROMISES

One of the big issues floating around right now is the problems companies and units of government are having meeting the pensions which they have promised to past and current workers. We hear that this or that public pension fund is way underfunded, or that such and such corporation went through bankruptcy in order to shed long term pension responsibilities and if it's not your pension they're talking about we just sort of move on with life. But it is somebody's pension and breaking that promise to a worker carries harm far beyond that worker alone.


Pensions, either private or public, are simply a future benefit earned by today's work. It's a promise to the worker that funds, either from the worker, the employer, or both will be set aside to be given to the worker when he or she retires. At least that is the intent. Of course, we've heard for years about this or that union boss or politician who raided the union's pension fund for their own gain. So now we have 401ks and defined contribution pensions and all manner of other vehicles to provide the benefit and avoid the graft. But what about the promise itself?

It must be remembered that a worker, and her family, whether consciously or not, took the promise of a benefit into account when accepting the job in the first place. That was one of the reasons that government jobs were considered by many to be real plum employment. The government pensions were great.

But now we are in the age of the disappearing pension. Funds are under funded. Public pensions are seen as an undeserved perk for already over paid drains upon the body politic.Workers with 20 or 30 years in worry if they will get any of what has been promised and fear for their future. And that fear is where the harm spreads to the whole economy.


As I, and just about anyone looking at the state of the economy who avoids Fox News, have said repeatedly, we are in a demand crisis. Before the Great Recession 70% of the US economy was consumer spending. Now I have heard some on both the right and left applauding the recent upsurge in consumer saving (from less than 0% to 5%) and in so doing framing the consumption vs. saving argument in moralistic terms. It would be wrong, they say, to go back to our wicked excessive consumption ways. Now, whether it's wrong, wicked or even evil to be a consumer is not for me to say. But anyone who thinks that our broken economy is going to turn around just because folks are putting a little away for a rainy day is, in a word, deluded! It is not possible to transform a consumer driven economy into a saving and investing economy over night. Or even over decades. It can't be done. If we are going to recover it is going to have to be because people start to consume again. Buy things. Use things up and then buy more. That's what we are as a country and we are not going to change any time soon.


The problem is, when someone worries that the pension that they have been promised won't be there when they retire, they don't spend the money that they have. They start to hold on to it. And that means less demand in a demand driven economy.


I have little hope that this state of affairs will change any time soon, but I think we really need a national conversation about promise keeping. That to me is the morality problem we face, not whether or not someone is putting a little back. The threat of losing one's pension thus sweeps across the entire retail landscape. And if that threat, as most do, impacts thousands or hundreds of thousands of workers, like teachers and police and firefighters, then that threat can hold our whole economy back.


You want stability in our broken economy Mr. Politician? Stabilize the countries pension nightmare first. That stability will then spread. Just like the fear.

THIS MIGHT WORK

In looking back over my growing list of postings I've spotted a scary trend: I've written more posts with the Money label than any other topic. This could be because we are deep into a national financial crisis, or because, just as one thinks a lot about the beach in the dead of winter, I think a lot about money because I don't have much. Whichever it is doesn't really matter. Here's yet another one.

If, as I and a whole bunch of actual experts believe, the country is in a demand crisis not a too high taxes and too much regulation crisis than we need ideas that help create demand for American products and services. The Obama administration is proposing an extension of the 2% reduction in the Payroll Tax passed last December as a way to put more money in the hands of consumers who will, most likely, spend the extra money. This is fine, but since it only extends something already in place it can't really help much more than it already has. It won't create any new spending. We need something more. We need to reform the Usury Laws at the Federal level.

In brief, Usury is the act of charging too high an interest rate on loans and borrowing. Most states have such laws, as does the Federal government. And you would be very surprised to find that the legal limits are far below what Pay Day lenders, sub-prime mortgage lenders and, most importantly for this idea, credit card companies, charge their customers. Why?

Without going all lawyer on you the simple answer is that the U.S. Supreme Court ruled in the 1978 case of MARQUETTE NATIONAL BANK OF MINNEAPOLIS v. FIRST OF OMAHA SERVICE CORP. ET AL.   that National Banks can charge credit card interest based upon the Usury law of the state where the bank is located. They said basically that:

The National Bank Act provision codified as 12 U.S.C. 85,  authorizes a national banking association "to charge on any loan" interest at the rate allowed by the laws of the State "where the bank is located,"

Why does that matter, you ask? Just take a look at the address where you send payments to your credit card company. Delaware and South Dakota seem to predominate. These states, South Dakota in particular, took one look at the Marquette decision and realized that they could attract Credit Card companies who could then charge out of state borrowers based upon South Dakota's Usury rate. Of course, there is no usury limit in South Dakota. That's why so many credit card companies locate there.

So here is my proposal: Congress should amend 12 U.S.C. 85 to allow national banks to charge on any loan interest at the rate allowed by the laws of the State where the borrower resides. That's pretty much it. Of course it would have to apply to all existing balances. The screams of the bankers will be heard throughout the land, but there certainly is precedent for making changes to the terms of a credit card contract after the fact, so to speak.

The credit card contracts themselves provide the answer. They can change pretty much whatever term of the agreement that they want to and we, the borrowers pretty much have to take it. Oh, you don't want to pay the new and improved rate of 26% on your existing balance? Well, just close the account. You can't charge any more on that card, but you do have to pay the balance owed under the original terms. In my proposal the States and the Federal government would be acting for the consumers as their representatives (imagine that) in the clearly unfair and unequal contractual agreements that now exist.

The immediate result would be lower payments on high interest rate cards and other consumer loans which puts more money in the hands of consumers just like the Payroll Tax reduction, but this would act as a new stimulus rather than a continuation of an already in place tax cut. And it really isn't such a big change in the law anyway. Most states have Usury laws and have had them from the beginning. Why, even the hard core of the GOP can't bitch too much. Usury is forbidden by the Bible [Exodus 22:25] [Leviticus 25:36] [Leviticus 25:37]!

OBAMA AND THE DEMOCRATS ARE TRAPPED

It looks to me like the President and the Democrats in Congress have let themselves be pushed into a 2012 election trap. Pretty much any deal made with the GOP on raising the debt ceiling and/or dealing with the deficit will now have to contain provisions which will increase, rather than decrease, unemployment leading up to the election. Why?

Okay, just to review a little: The GOP wants to cut lots of spending and taxes on corporations and wealthy individuals, you know, the groups that they call the "job creators." The Dems for their part now want to cut spending by trillions of dollars and raise some taxes. That's really about all that they can't agree on. The taxes part of the equation. But as far as the President's reelection prospects are concerned either option is equally bad.

I think we have to look at the basic assumptions of each position. The basic assumptions under which the GOP is operating are that:

1. All tax cuts increase revenues, and
2. If we cut taxes on the "job creators," they will, well, create jobs, and
3. Cutting government spending will stimulate, and increase, spending in the in the private sector and thus create jobs.

On the President's side the assumptions are:

1. In order to increase revenues we must increase taxes, and
2. The level of taxation has little, if any, effect on hiring or expansion, and
3. Government spending stimulates the economy, thus helping the creation of more jobs.

Now it's pretty easy to see that the two sides will never really agree on anything since their respective world views are so completely different. But go back and reread the second paragraph. The Dems are willing to ignore their assumption #3 and make massive cuts to spending. This is the President's first reelection hurdle. I've said before, almost redundantly, that I think that cutting spending will cut jobs. My logic goes like this: if you take dollars out of the economy those dollars can no longer be paid as wages.


"But we're broke," screams the GOP, "40% of that dollar was borrowed. From China." "We can't afford that spending." Well okay, for the sake of argument I'll agree with the GOP here. But only for the sake of argument. The point is, they're looking at the wrong side of the equation. At the place were the dollars actually get spent their source matters not one wit. What matters is that somebody got paid with that government dollar and now, after spending cuts, they will not get paid. Of course the GOP counters that, if the program in question has merit, the private sector will step in, make investments and no one will lose their job and everything will work out fine. Back on the farm I used to have to shovel that stuff!

The GOP's reliance on the "private sector" to step in and save us all is a recurring theme. Just look at the GOP #2 above. It's a nice fairy tale. It just has no basis in fact. But it works really well as a political club. And that's where Obama's problems arise.


If the President agrees to huge spending cuts, as seems likely, something like $3 to $4 trillion will be removed from the economy over 10 years. That will, in my opinion, result in a spike in the unemployment percentage of from .5% to 1.5%. Since we are now at 9.2% it doesn't take a rocket scientist to see that this would be very bad news for Obama. But how about that tax increase/tax cut part of the equation?

If the GOP is right, and they get an agreement including tax cuts, then the jobs picture should improve, which is a net plus for the President's reelection hopes. Does anyone believe that the GOP wants that result? And really, what kind of policy is it that gives money to one segment of society and then simply hopes that they will hire more people because of all the extra money they have. Oh ya, it's called a conservative policy.


So, here's my take on all of this. If Obama and the Dems agree to spending cuts (cuts jobs) and no tax increases. The GOP will then point at the unemployment number and claim that it was the failure to cut taxes that caused the problem. Obama loses. Or, the Dems agree to the spending cuts (cuts jobs) and tax cuts. Since I see no real connection between tax cuts and more hiring the result will be the same. Increased unemployment and, Obama loses. See, I think that the GOP knows full well that the surest way to "make Obama a one term president," is massive cuts to spending which will put more Americans out of work. Too bad that that's the one thing both sides seem to be agreeing on.


And one more thing. If Obama were to bring home the troops from Iraq and Afghanistan a great many of those men and women will leave the service for private life. You know, the private life where there are no jobs. Strike Three Mr. President!

A BAD EXAMPLE

Here we are the in spring goofy season, where politicians offer wilder and wilder budget plans to save us from the wild budget plans of their predecessors. I opened the local newspaper today and what should greet me but a front page story about a Chamber of Commerce meeting held last night. One of the speakers was the newly elected Republican Congressman from our district. His words appear regularly in this rag, since I don't think the editors have ever seen a Republican Congressman from our district. Since he not only holds the title but also toes the (tea) party line he stands out as a hero to our local "news" types.

Congressman McKinley, in explaining to the crowd the mysteries of Federal budget making, used an analogy that I've heard from most, if not all, of the current crop of conservatives. It goes something like this. "You see," will say our conservative friends, "our Federal budget is just like your budget at home." "If your family brings in $35,000 each year, but spends $45,000, your family will have to borrow money to get by," they'll explain. "Now that might work for a little while, but sooner or later your little family is going to be BANKRUPT!" After the shock wears off they will go on, "in order for your family to avoid that you'll have to cut how much you spend." This is usually said with a bit of smugness, just to show the listener that the speaker knows something important.

And then comes the zinger! "In the same way, we as a nation must cut our out of control spending or we're DOOMED!" A cheer usually goes up from the attendees at this point followed by much head nodding and conversation in the audience. But something about that nice simple explanation bugs the heck out of me.

You see, the better example might be a family where mom and dad both work, earning $45,000 a year together, but where dad gambles away $10,000 a year leading to the shortfall. This seems to work if you see mom as Main Street or the so called real economy, and dad as Wall Street. But such a construction really doesn't matter. What matters is that part of the "family" isn't contributing to the welfare of the household.

Unlike your families finances, the government has a special, some would seem to think secret, means of balancing the budget that doesn't involve only cutting spending. It's called raising taxes. Mom and dad can't generate their own raises so that more money comes into the family, but the government can.

I'm not going to go into all of the arguments that swirl around talk of tax cuts or tax increases. I've written about the Laffer Curve before and nothing has happened to change my mind. Our citizens are "suffering" through some of the lowest  tax burden in over 60 years. We are not over taxed. Do I like taxes? Hell no. Taxes are, in the main, an immoral burden on the work of some confiscated to benefit others. I don't like taxes at all. But that's the deal we have struck.

The social contract under which we live has to deal with what is, not what we wish was. We burden ourselves (we, the people, remember) with taxes because we need that which only government can provide. Yes, we get programs and projects that waste huge sums and don't benefit "us" but we also get programs and projects to help and benefit many others. It's a tradeoff. At least it's a tradeoff to those who believe in such things as tradeoffs and negotiations and making deals that benefit the largest number of citizens. To the side that believes that the mom and pop story is a real example of how government works, not so much.   

ASK THEM ABOUT THE JOBS

Well now, we've had snow storms, an Egyptian revolution and a very disappointing Super Bowl result so far this month and it's only the 15th. And now even more disappointment blossoms as our elected leaders play fast and loose with the national budget. And part of the reason is that the American people are pretty ignorant of how and where the government spends their tax money.

Bruce Bartlett nicely summarizes some of the many ways that we just don't get it. Case in point:

A Nov. 30, 2010, poll by WorldPublicOpinion.org found that when people were asked what percentage of the federal budget goes to foreign aid, the mean (average) response was 27 percent and the median was 25 percent. When asked how much of the budget should go to foreign aid, the mean response was 13 percent and the median was 10 percent. Actual spending is well under 1 percent.

This is just one small example, but when the public is that far off it says something. It says that either a large part of the public is just, well, dumb, (remember, 1/2 of all the people in your town are below average) or that we have failed miserably to educate ourselves and our children, or that our public servants do a very poor job of explaining just what they do and how they do it. I'm going with all three.


Of course it could be that our elected leaders don't know any more than we do. This is getting on my wires right now in the almost constant chant of, "Cut Spending, Cut Spending, Cut Spending" that we hear from the Right.


Now, no sane person would claim that our mountain of debt is a good thing. Or that running a $1.3 trillion deficit is in any way going to lower that mountain of debt. But, just as the GOP and the Tea Party and right wing radio talkers everywhere can, with a straight face, claim that raising taxes in a recession recovery will kill that recovery, I want to know how cutting government spending during the same recovery won't create even more unemployment. Would someone please explain this to me.


Government spending could just as easily be called government buying. That is, the government uses money collected in taxes and, of course, money borrowed from the Chinese and others, to buy goods and services. Now, before anyone has a fit over the simplistic nature of that claim, let me add that the government does this buying either directly or, sometimes very, indirectly. Let me explain.


Let's say the feds give a community block grant to a small town to help build a much needed sewer system. The town needs to hire and contract for all manner of goods and services in order to complete the job. And, of course as we've discussed before with regard to the Obama stimulus, the money doesn't stop there. The contractor buys some new equipment from a dealer a couple towns over, who then decides to enlarge his showroom with the extra profits by hiring a local contractor, who then employees three carpenters and subcontracts to a tile guy, who then buys a new used truck from a local dealer and...well it just keeps on going doesn't it. And don't forget that every one of those transactions is taxable! In fact, I challenge any of you to come up with a Federal spending line item that doesn't include wages or profit for persons either real or corporate.

Heck, take the most outrageous example of wasteful government spending that you can think of, like studying owl vomit in the Northwest, and somebody is still going to be getting paid, like researchers, their paid staff, the guy who fixes their truck, and on and on. Everything you can think of to do with government spending results in a paycheck for someone. It's just like the point I've made before about our spending on NASA. Honest, they don't pack the shuttle full of $100 bills and release them into orbit. Every dime is spent on earth to pay somebody!

So please, all you folks clamoring for spending cuts during a recovery; how many lost jobs can we afford? Do I think that it's a good thing that we are so far in debt? No! But if we can only stick blindly to our ideologies, even in the face of extraordinary circumstances, then we are well and truly screwed. 

A NEW YEAR, BUT THE SAME OLD INSANITY

Here we are in a brand new year. The sun is high, the air is warm and mild and that lovely young lady in the bikini is about to bring me another refreshing beverage with a little umbrella shading the frosty glass. Not! It's cold and dark too early and it's supposed to snow again tomorrow. I really hate winter.

That said, what, you may ask, has been on the Curmudgeon's mind over this past month of lousy weather? Unfortunately, I'm still thinking mostly about the financial mess we are in and why the answers to it seem so hard for our elected leaders to comprehend. In particular I wonder why the mortgage meltdown continues to expand and why no one seems to have a way to fix it.

Just for fun I'm going to state my position up front and then justify it, rather than build an argument that then ends with my particular point of view. So here goes.

I think that one path out of our current economic quagmire is for the Federal Reserve to print more money! Okay, all you conservatives out there, just take a deep breath and relax. Your Curmudgeon, unfortunately, doesn't have the power to actually do that. But I really do think that the only way out of this hole is to climb over a pile of new money.

Here's the story. As I've noted before, wages for 98% of the country have been flat for decades. Average incomes have only barely, and in some case not, kept up with inflation. And, that inflation has been historically low thanks to the Fed's aggressive low interest monetary policies. Those policies, of course, were a major component in the sub-prime mortgage mess that the banks and courts are now trying to repair. So why do I think that we now need more inflation?

All through the past decade, until it all went bust, we, the country and its citizens, pretty much lived on debt. At the state and federal government level we see that, sooner or later, the piper must be paid. But at the personal level the bust was much more devastating to many. It is estimated that $1.2 trillion of the value of our real estate has been lost over the last 3 years. $1.2 trillion! Gone! Now, there are a couple of ways one can look at that huge number. First, and this has been my position until recently, it doesn't really matter if your house is worth less than your mortgage unless you're trying to sell or refinance. Just keep making the payments and all will be fine. What I didn't take into account with that position was the cycle of debt that had developed over the last 10 or 15 years. Our collective borrowing, whether by credit card, purchase mortgage, refinance mortgage or whatever, was based upon a simple assumption; we'll be able to pay off the debt because our real estate will grow in value. Want to add a new bath to your home? No problem. New bathrooms add almost what they cost to your home equity. Wait a year or two and your house will be worth more that when you started the remodel. Simple and elegant. And, as we now see, wrong. And it's that wrongness that has thrown sand into the gears of recovery. If I can't feel and believe that the value of my home has, and will continue, to increase than my plans as a consumer have to change. I must, therefor, stop spending.

This is no different than what a business faces. In fact, I've argued before that the American homeowner has been acting much like a business by using leverage from their home's increases in value to support their lifestyles. But now the value is gone. $1.2 trillion simply wiped out.

Now, remember, 70% of the US economy had been driven by consumption. Business growth and hiring requires demand for the products and services those businesses provide.  No demand, no hiring. And $1.2 trillion is a whole lot of demand. So, what can we do about it?

The value of our property will, given enough time, recover. But we don't have a lot of time. Pouring federal dollars into the top of the hopper (the bank bailout) didn't work. Not that I thought it would, mind you. The amount that could trickle down to the consumers of this country was limited by the unmitigated greed of the bankers and brokers at the top. The tiny amount of money that escaped their hands would barely dampen a tissue, let alone create a trickle. Rewriting or adjusting mortgage loans isn't working because the foreclosure system starts from the assumption that the borrower is the wrongdoer. Any so called help for borrowers thus looks way to much like charity.

No, I'm afraid that the only way to recover the $1.2 trillion of lost wealth is to print money and get it into circulation. We need some inflation. Inflated dollars make debt, from the position of the debtor, easier to pay off. Across the board inflation means bigger paychecks and creates the urge to make purchases now, before prices go up. A little inflation, then, would be a good thing.

Now, clearly, inflation, in a general way, is a bad thing. But, as we have seen from Japan in the eighties and nineties, deflation is much worse. I'm in no way suggesting that we would all be better off with Zimbabwean style $100 trillion bank notes in our wallets (that will be $552 trillion for your cheeseburger sir, would you like fries with that?) or, like prewar Germany where it took a wheelbarrow full of money to buy a loaf of bread. What I am saying is, since the government can't cover the homeowners' losses on their property in the same way they covered the banks' losses with the bailout, inflation is the only way to get back the value that has been lost.

Well, another day another wacky idea. Happy New Year all.

HERE'S A LITTLE BRAIN TEASER

During the recent discussions on the Bush era tax cuts one little thing keeps bothering me. Actually, it's two things.

First, it's absolute Republican dogma that all tax cuts increase revenue flowing into the government doing the taxing. This is, of course, based upon our old friend the Laffer Curve. You remember, right. As tax rates go up one reaches a point at which peoples economic behavior changes and they start to work less, thus lowering tax revenues. 

As you can see, the government gets zero revenue from a 0% tax rate and, according to the theory behind the curve, zero revenue when the tax rate reaches 100%. Now, the problem with this nice simple formulation is that the curve doesn't work to predict anything. See, there's no way to figure out where the actual tipping point (labeled Equilibrium Point on the chart) lands. Are we now at the point that any increase in tax rates means less revenue or are we on the left hand side where increased rates equal increased revenue? There's no good way to know. According to the Republicans, of course, we're always on the right hand side.
 
The second bit of dogma is the Republican concept of "Starve the Beast." The easy definition:

"Starving the beast" is a fiscal-political strategy of some American conservatives to use budget deficits via tax cuts to force future reductions in the size of government.

 We hear this a lot when the conversation turns to those nasty entitlement programs. If the Republicans could just lower taxes that would take care of all our problems because then the Democrats wouldn't have the money to fund their Socialist wealth redistribution programs and so on.

Okay boys and girls, we've learned two political terms. So, would someone please explain to me how they can both be right? How the heck can cutting taxes both increase revenues and starve the beast at the same time?  One or the other (or both?) of these must be wrong. Or maybe I just need to take a nap until my head stops hurting.

WHY THIS RECOVERY IS JOBLESS

The latest employment numbers are out and things are not looking good. The unemployment rate increased last month from 9.6% to 9.8%. While I think everyone can agree that this is not a good thing it surprises me that folks who should have a handle on this don't seem to. For example, Davis Leonhardt in the New York Times, says with regard to the bad jobs numbers, "What’s causing this? No one knows, to be honest."

Okay, so no one knows why hiring has stalled. Now, maybe I'm fooling myself, but it seems to me that the answer is really quit simple. It goes like this:

Before the Great Recession the single biggest driver of the U.S. economy was consumer spending, amounting to over 70% of the total economy. This may, or may not, be viewed as a good thing, but it is what it is. Americans purchase goods and services. Most of us don't manufacture anything, that's done in other countries now. Most of us don't grow things to eat, that's done by factory farms using (illegal) immigrate labor. No, what Americans are good at today is consuming. But the financial meltdown, and resulting recession, put a stop to that in a big hurry. Why, you ask?

Because many more Americans than anyone wanted to admit have been living on debt. Not living in debt, living on debt. Let me explain. It's pretty clear that a calculation of many, if not most, American's net worth would yield a negative number, both today and before the recession hit. When the average home price reached $200,000, while at the same time the average new vehicle costs close to $20,000, it's not hard to see that your average family of 4 making $50,000 was behind on the debt to equity ratio as it applied to their stuff. You could add up the value of everything that family owned, but when you subtract what they owe on just the house, the car, and the credit cards the number, in a lot a cases, is less than zero. Negative net worth. In fact, by most definitions, a lot of folks in this country are bankrupt. But, before the recession, they weren't broke. So how does that work?


It's like I said, we were living on debt. We have, as a nation, been spending more than we make, year in and year out. Today, after seeing what a bad downturn can do, that concept seems, well, silly. But make no mistake, it was happening. Remember, wages have been mostly flat for the past decade. The economy created far fewer jobs over the last ten years than were needed just to break even for those young people just entering the job market. So we borrowed. We borrowed from the banks to finance and refinance our homes. We borrowed to buy that car. We borrowed from our credit cards to buy Christmas presents. We could do this because we all knew in our hearts that our jobs were secure, and our house would only increase in value, so we'd be able to make the payments each month. If an emergency came up we knew that another refinance of the house would put thousands into our hands. No worries, be happy.


So, when the hydra-headed monster of this recession emerged we were faced with a host of insurmountable problems. House values tanked so we couldn't tap the old refinance ATM. More importantly, the so called credit crunch meant that even if you had equity in your home the banks weren't lending. Credit cards? In a totally predictable manner, as soon as the credit card companies got wind of "credit reform" raising its head in Congress they raised interest rates and cut available credit for millions of card holders, bad risk, good risk or whatever. So, that money source also dried up. And then came the layoffs. As the number of unemployed Americans skyrocketed, even the most free spending of us pulled up short. As consumer spending declined that lack of demand for goods and services caused even more job loses. And around and around we go. And, contrary to right wing conventional wisdom, companies are not waiting for an extension of the Bush tax cuts to jump start the economy. They're waiting for demand to come back.

So, why do some say they can't figure out why employment is still down. It beats me. All together now, lets follow along:

• 70% of the economy was consumer spending.
• Much of that spending was fueled by debt.
• Debt was an acceptable way to live because with a good job and increasing home prices debt can be "managed."
• Falling home prices, tight credit and a shaky job market means people don't have the money to spend now or in the foreseeable future.
• Consumers not spending means that the demand for goods and services also stops.

• Fixing just one (say jobs) without fixing the others (real estate values and tight credit) just won't work.

I'm sorry. There isn't any magic answer to this. Until that 70% of the economy gets their hands on some (borrowed) money the problem will continue. I just hope that the dunderheads in the government don't make things worse. Anyone want to bet on that?