August 3, 2011
A Thought On The Bush Tax Cuts …

From: phroyd.

"My understanding is that the Bush Tax Cuts were supposed to be Temporary, there was an end date, and that end Date was determined specifically by a actuarial prediction based upon a ratio projection: number of jobs possibly created/outside length of time the US could stay solvent with reduced tax revenues.

Now, if the Bush Economic Advisers themselves, planned this termination of the Tax Cuts with the Economy in mind, WTF is wrong with the Current Republican Leaders that they are overlooking the very necessity to have a tax-cut end-date?”

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Politicalprof:

I think it is important to remember that the 10 year time limit on the Bush tax cuts was an entirely cynical political ploy, for at least three reasons.

First, the 10 year expiration date allowed Republicans to treat the tax cut plan as a matter of budget reconciliation—the exact tool that Republicans were outraged at the Democrats for using to make health care reform happen last year. Technically, budget reconciliation measures can only be in force for 10 years, unlike regular laws, which are permanent until overturned or amended. However, budget reconciliation acts are not subject to filibuster, and so only require a simple majority to pass. Republicans used this tool in 2001 to pass the tax cuts, just as Democrats used it to reform health care.

Second, the 10 year automatic expiration allowed the advocates of the tax cuts to claim that they would likely not have a profound effect on the long-term US deficit. This is because the long-term costs for the United States lie in entitlements like Social Security and Medicare, and it would not be until after 2011 that the Baby Boom generation would really be retiring in huge numbers. Hence we would only “need” the money that was forgone under the Bush tax cuts after 2011. Add that money back in after 2011, and the projected deficits would go down in the long term.

It didn’t work quite as expected, because the financial meltdown and Great Recession radically depressed the economy, and hence economic growth, suppressing tax collections. But it was the mathematical reason for the 10 year limit.

Third, it was perfectly clear 10 years ago that it would be very contentious, politically, to let the Bush tax cuts “expire.” It was perfectly clear that, in 2011 (or 2010, as it happened), Republicans would scream that failure to extend the Bush tax cuts would mean imposing the giantest most horrificest and business crushingest tax increases on “the American people” in US history. In 2001, Republicans hoped they would be able to extend the tax cuts going forward after 10 years; Democrats hoped that they would have enough to votes to let the cuts expire. Both parties kicked the can down the road 10 years. The Republicans were on the winning side of that decision.

So, in the end, I don’t think the Bush tax cuts were scheduled to expire in 10 years to help future Americans pay for things like their parents’ and grandparents’ retirements and health care. I think they were scheduled to expire in ten years in the cynical hope that they would keep being extended afterwards.

That’s what I thought 10 years ago, and I have seen nothing to the contrary to change my mind since.

June 8, 2011
How Has Germany Done It?

One of the questions that lurks in the background of the United States’ lingering economic crisis has been, “Germany has robust growth and effective governance. How has it done it? And why can’t the United States?”

The always excellent David Leonhardt of the New York Times has a fascinating look at this question in today’s issue. You can read the whole thing here. But, for the non-Times subscribers, I’ll offer a few of his comments below:

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  • "The brief story is that, despite its reputation for austerity, Germany has been far more willing than the United States to use the power of government to help its economy. Yet it has also been more ruthless about cutting wasteful parts of government.

The results are intriguing. After performing worse than the American economy for years, the German economy has grown faster since the middle of last decade. (It did better than our economy before the crisis and has endured the crisis about equally.) Just as important, most Germans have fared much better than most Americans, because the bounty of their growth has not been concentrated among a small slice of the affluent.

Inflation-adjusted average hourly pay has risen almost 30 percent since 1985 in Germany, the kind of gains American workers have not enjoyed since the ’50s and ’60s. In this country, hourly pay has risen a scant 6 percent since 1985.” …

  • “It cut many benefits, in both duration and level, and it reduced the incentives to retire early. It also began trying to move the long-term unemployed into the labor force.

Specifically, the government took a fresh look at people who had not worked in years to determine who could and couldn’t work. The able and healthy were matched with potential employers. If they took a low-paying job, which was often the case, they would still receive a small portion of their benefits for a time. If they refused to work, their benefits were reduced anyway.” ….

  • "Beyond the job market, Germany has also made a big effort to improve its education system. Eric Hanushek, a Stanford University economist, notes that Germany’s performance on the main international math, reading and science tests have become such a matter of national concern that the name of the tests — Pisa — is now a household word. “In the U.S.,” he says, “Pisa is still a bell tower in Italy.”…..
  • “But the German story is not merely about making government more efficient. It’s also about understanding the unique role that government must play in a market economy.

That role starts with serious regulation. American regulators stood idle as the housing bubble inflated. German banks often required a down payment of 40 percent.

Unlike what happened here, German laws and regulators have also prevented the decimation of their labor unions. The clout of German unions, at individual companies and in the political system, is one reason the middle class there has fared decently in recent decades. In fact, middle-class pay has risen at roughly the same rate as top incomes.

The top 1 percent of German households earns about 11 percent of all income, virtually unchanged relative to 1970, according to recent estimates. In the United States, the top 1 percent makes more than 20 percent of all income, up from 9 percent in 1970. That’s right: only 40 years ago, Germany was more unequal than this country.

Finally, there are taxes. Germany does not have a smaller budget deficit because it spends less. Germany, you’ll recall, is the original welfare state. It has a smaller deficit because it is more willing to match the benefits it wants with the needed taxes. The current deficit-reduction plan includes about 60 percent spending cuts and 40 percent tax increases, Mr. Hüfner says. It’s like trying to lose weight by both eating less and exercising more.”

November 29, 2010
A Christmas Miracle?

Everyone is looking for a Christmas miracle.

Of course, the miracle in question is not religious in nature—or, at least not explicitly religious in nature. Rather, what people around the world are hoping for massive is sales of goods and services this Christmas sufficient to restart the global economy.

The reasons for this hope are completely understandable. If sales are sufficiently high, increased demand will require new hirings to make the goods and services that are in demand. This hiring will tend to stimulate more demand, since people with jobs consume more readily than do the unemployed. As a consequence, more and more people must be hired to meet this increased demand. Hiring begets hiring; jobs beget jobs; and the global economy can get a jumpstart towards alleviating the suffering of millions of un- and under-employed people. Job growth offers a hope that things will get better.

Growth in jobs also offers two positive effects for governments, at least those with social safety nets. First, it removes lots of unemployed people from the rolls of welfare, unemployment insurance recipients, and health programs for the poor. Indeed, one of the major reasons global government budgets are so far out of whack right now is that lots of people demand government services in tough times. When things get better, demands for services goes down. This helps reduce a government’s budget deficit.

Second, employed people pay taxes. More employed people pay more taxes. Accordingly, governments collect more taxes, potentially closing the gap in the government’s budget.

Growth thus seems a magic bullet solution to what ails us. It both reduces demands for government services and increases government capacity to pay for the services it provides. It’s a seeming win-win.

However, what is usually missed in this conversation is the question of how growth is paid for.

The ideal type of growth happens when wages to increase relative to inflation. Such real income growth means that people can buy increasing amounts of goods and services, at least in combination with new consumers—children coming of age, immigrants (illegal and legal both). In such circumstances the economy grows AND people get richer.

In the American case, however, from the middle class down real wages have stagnated or have declined  for most of the last 30 years. Growth has been entirely concentrated in the top strata of the income spectrum. It has been extraordinary at the very top.

Supply side economists insist that this inequitable growth is fine since the wealthy are expected to spend and invest and thus stimulate growth. The empirical record has shown this is not true, however—or at least it has shown that such spending is not adequate to promote real wage growth. The rich control vastly more US wealth than they did 30 years ago (the top 10% control something like 90% of wealth in the US, while the top 1% control something like 50% of US wealth), but their spending and investments have not promoted growth in jobs and real incomes in the US.

A second way to grow is massive borrowing.
This is the way growth was concocted in the last 30 years. Both citizens and governments consumed more than they could afford, and borrowed on credit cards and even home equities in an endless effort to consume more than incomes allowed. Sometimes, as in thoughtful home loans or, in the case of governments, selling bonds to build roads and schools and electric grids, some debt is productive: it returns vastly more value than the financed costs. But in the last 30 years we financed electronic consumer goods, pizzas, everything, to a staggering degree. And no pizza has much of a multiplier effect. Moreover, the electronic goods were produced internationally, creating sales and tech jobs in the US, and making the products cheaper here, but also financing the (mostly) Asian/Chinese boom.

In any case, given Americans’ contemporary over-indebtedness, as well as the collapse of the housing market, there is little capacity for a debt-driven recovery. At least not a consumer-driven one.

The plain fact is that there is no miracle cure for what ails us. There is no magic, painless bullet that will resolve the equation in a way that means we can continue to consume at the same—or increasing—rates that we once consumed, all while governments provide goods and services at a high level. It’s going to take spending cuts and tax increases and service reductions—in short, changes to our expectations of life and the standard of living.

As Wesley puts it in The Princess Bride: “Life IS pain…. Anyone who says differently is selling something.”