Archive for the ‘Economic Policy’ category

A New Kind of Capitalism

February 20th, 2011

“Capitalists have done a remarkably poor job of safeguarding the future of capitalism.” (source)

Capitalism can mean dramatically different things to different people. To a Wall Street executive it means being able to accumulate unimaginable wealth. To big business it may be a competitive game that must be won at all costs, even at the expense to the public interest. To a small businessman with a great idea, it might mean being able to turn his passion into an occupation, and enjoy the freedom of self-employment. To many, it is a system that has increased the standards of living for millions. To its victims, capitalism is a monster whose greed leaves many behind, and even commits great crimes against vulnerable citizens. Which view is correct? All of them.

If by “capitalism” we mean creating markets that meet the needs of the public, allowing the best ideas and products to succeed through demand, then this is a highly democratic system that should be encouraged. If capitalism means “greed is good,” and we should look out for our own self-interest at all costs than this is a very anti-social, destructive philosophy that must be tempered.

According to Mother Jones Magazine, “Just before the market crashed, one Wall Street manager wrote to another, ‘Let’s hope we are all wealthy and retired by the time this house of cards falters.'” This is one small example of how the greedy version of capitalism can lead to untold suffering (market crash, lost retirements, unemployment, etc.).

Over the past two years, as the dust of the Great Recession began to settle, a host of business leaders and prominent economic leaders have started to imagine a new kind of capitalism; one that is responsible, broadly-enjoyed, and sustainable. Below, we have included excerpts from these leaders, including Bill Gates, Michael Porter, Elizabeth Warren, James Galbraith, Joseph Stiglitz, Fareed Zakaria, and others.

There are common themes in their writings, including the need to regulate corporations, balance the interests of the public and private profit, and the need to have a strong social purpose that goes beyond the profit motive.

Keep reading. » Read more: A New Kind of Capitalism

Infrastructure: The Best Government Investment

February 5th, 2011

In his recent State of the Union speech, President Obama promoted infrastructure development as an essential component to remaining competitive in the world, for providing jobs, and keeping our economy strong. Here’s what he said:

“Our infrastructure used to be the best, but our lead has slipped.  South Korean homes now have greater Internet access than we do.  Countries in Europe and Russia invest more in their roads and railways than we do.  China is building faster trains and newer airports.  Meanwhile, when our own engineers graded our nation’s infrastructure, they gave us a “D.”

We have to do better.  America is the nation that built the transcontinental railroad, brought electricity to rural communities, constructed the Interstate Highway System.  The jobs created by these projects didn’t just come from laying down track or pavement.  They came from businesses that opened near a town’s new train station or the new off-ramp.

So over the last two years, we’ve begun rebuilding for the 21st century, a project that has meant thousands of good jobs for the hard-hit construction industry.  And tonight, I’m proposing that we redouble those efforts.  (Applause.)

We’ll put more Americans to work repairing crumbling roads and bridges.  We’ll make sure this is fully paid for, attract private investment, and pick projects based [on] what’s best for the economy, not politicians.”

Infrastructure spending was only 7.5% of the 2009 stimulus. Yet one dollar invested in infrastructure has a return of $1.59 in GDP growth, while most tax cuts don’t even return 50 cents.

“The performance of the nation’s transportation system is not keeping pace with the rate of growth of the demands on that system,” said Thomas J. Donohue, president and CEO of the U.S. Chamber of Commerce. “As our economy recovers, the nation’s transportation infrastructure must be prepared to meet the projected growth in freight and population. Yet our index shows that from now through 2015 there will be a rapid decline in the performance of the system if we continue business as usual. Right now we’re on an unsustainable path.”

Nobel Prize-winning economist Paul Krugman explained, “The one thing we know is that the good thing about federal spending is it’s actually spent, that it actually does boost the economy. And if it’s infrastructure, it also leaves you with something of value afterwards. Whereas if you do it the way the Republicans want to do it, which is always tax breaks, first of all, it might not be not be spent or it might not help the economy at all. And then, you’ve got nothing to show for when the thing is over.”

See this press release by the U.S. Chamber of Commerce.

Chris Farrell’s Bloomberg article, “U.S. Infrastructure Spending: No Time to Get Cheap,”

“Spending now on infrastructure stimulates the economy in a way that will help provide for long-term higher economic growth that will increase future tax revenue and bring down the debt-to-GDP ratio,” says David Aschauer, economist at Bates College.

The most striking example in U.S. history of the economic payoff from infrastructure expenditures has been largely obscured with time: the building of the Erie Canal. It was a 363-mile-long canal dug through the middle of New York State. A bold adventure, it cost about $7 million, an astounding sum equal to more than a third of all the banking and insurance capital in New York State (and more than three-quarters of the federal budget in 1810). The Canal was started in 1817 and finished 8 years later, after much political wrangling.

Perhaps even more striking (considering the current economic climate), after the panic of 1818 the price of money and labor fell sharply when the economy sank into recession. “By 1820, the canal commissioners were drawing contracts at prices 30 percent to 40 percent below what they had paid during the first three years of construction,” notes the late Peter Bernstein in Wedding of the Waters: The Erie Canal and the Making of a Great Nation.

When it was done, the cost of commercial transport plunged. For instance, it had taken three weeks and $120 to send a ton of flour from Buffalo to New York City before the canal opened. Afterwards, it took 8 days and $6. “The Erie Canal would prove to be the most consequential public works project in American history and make New York, both state and city, the linchpins of the American economy for more than a century,” writes historian John Steele Gordon in An Empire of Wealth. (source)

“In their 2005 paper, ‘Healthy Returns,’ they calculated that Americans gained more than $788 billion a year from transportation infrastructure and paid taxes and fees of $185 billion to support that infrastructure…’These findings establish clearly that strong commitments to surface transportation and the spending required to support it well serve America’s economic interest,’ they concluded.

Conclusion

The construction industry is in a depression, with about 20% unemployment. A national infrastructure investment will immediate improve the lives of hundred of thousands of workers in the construction industry, it will revitalize this critical part of our economy, it will improve public safety by improving our run-down public infrastructure, and it will inject new money into the economy in a way that will give us a strong return. Enough fear-mongering about the deficit. We need a substantial injection of capital into infrastructure now. Republicans need to stop filibustering initiatives to pass infrastructure investments. And Democrats need to make this priority number one! It is a priority that will affect all Americans in a positive way.

Further Reading:

http://www1.worldbank.org/publicsector/pe/pfma06/EdwardGramlich.pdf

http://www.bos.frb.org/economic/conf/conf34/conf34b.pdf

http://www.uschamber.com/press/releases/2010/september/us-chamber-commerce-releases-first-ever-indexes

There’s a War Going On!

December 10th, 2010

In his recent speech on the Senate floor,  Senator Bernie Sanders passionately declared, “There is a war going on…a war being waged by some of the wealthiest and most powerful people in this country, against the working families of the United States of America, against the disappearing and shrinking middle class of our country” (see his video speech below). There are a number of data points that indicate the truth of Senator Sanders claim. Let’s look at a few of these:

  • Corporations are enjoying record profits (source)
  • Unemployment is at a 30-year high (source)
  • The unemployed tend to be out of work longer than ever before (source)
  • US hit the highest poverty level in 15 years (source)
  • Top earners’ income continue to grow while wages are stagnant for everyone else (source)
  • Union membership has declined from one-third of the labor force in 1960, to 10% by the year 2000 (private sector union membership)(source)

We need to think about what is causing these trends and how they can be countered. We know they are not countered by extended income tax cuts for the wealthy or raising the estate tax exemption amount. Republicans seem to be doing everything in their power to speed up these trends; and taking the House this year will give them some power to continue the status quo. It it worth think about what kind of country we end up with if they have their way. It is not pretty for anyone, not even the rich. These trends need to be reversed if we are going to preserve our way of life.

Senator Bernie Sanders really says it all:

See additional graphs by clicking “read more.” » Read more: There’s a War Going On!

Paul Ryan’s Road Map to Disaster

November 21st, 2010

In a previous column, we looked at the Republican agenda. Knowing how Republican’s plan to govern as they take control of the House next year should be of interest to every U.S. Citizen. Specifically, our column looked at the Republicans’ “Pledge to America.” The Pledge is one of two recent Republican platform proposals. The second document is Representative Paul Ryan’s (R – WI) “A Roadmap for American’s Future.” The Roadmap continues the conservative fear-mongering about deficit spending, which we have also addressed in a previous column.

See this Critique of Paul Ryan’s “Road Map by economist Dean Baker; and this report. Dean Baker found 20 inaccuracies and 4 references to raiding Medicare in the Road Map. See also Nobel Prize-winning economist Paul Krugman’s critique of the Road Map. He points out that Ryan’s plan would reduce federal government revenues by $4 trillion over the next decade, which would add significantly to the current deficit (something Republicans see to worry about on the surface). Krugman goes on to state that, “the Road Map wouldn’t reduce the deficit. All it would do is cut benefits for the middle class while slashing taxes on the rich…even as it slashed taxes at the top, the plan would raise taxes for 95 percent of the population.” The Road Map assumes zero dollar growth in domestic discretionary spending (including energy, education, the courts, etc.), but, outside of Medicare, he does not say specifically what specific programs he would slash.

Representative Ryan’s proposal, if implemented, would be a disaster for the economy, for working families, and would essentially redistribute wealth upward. Ryan is really proposing the same destructive policies that have been pushed bu Republicans for the past thirty years, usually with painful result for low-income and middle class families. In 2012, voters will have a choice about whether they want to live in a society of massive inequality and increased vulnerability for the majority of hard working Americans, or the more-centrist approach that Obama and the Democrats are pushing for. To read excerpts from Paul Ryan’s Roadmap, click the “more” button. » Read more: Paul Ryan’s Road Map to Disaster

Deficits Don’t Matter?

November 7th, 2010

In a moment of honesty, Vice President Dick Cheney told a reporter, “Reagan proved deficits don’t matter” (source). Yet, more often the Republicans and their fringe backers, Fox News and the Tea Party, have made the public debt a source a public anxiety and anger. The reality is that deficit spending is required for a healthy economy, and we have been in much more debt in the past (i.e., during WWII) and we experienced the greatest boom and largest middle-class in our history (source). This is not an endorsement of “welfare for the rich, capitalism for the poor.” I think it is a crime when the government bails out corporations who have been irresponsible, and the public gets stuck with the bill. No, I strongly disagree with what went on during the Bush and Reagan years: Redistribution of lower-income/middle-class wealth to the rich, through corporate welfare (i.e., tax cuts/loopholes/shelters, no-bid contracts, bailouts, deregulation, privatization of public resources, etc.). But being against welfare for the rich does not mean all deficit spending is a bad thing. In fact, it may actually be essential for a thriving economy.

(Rick Seaman of Portland, Oregon, made this chart from data he found on TreasuryDirect.gov.)

Republicans seek to spook the population into balanced budget spending, but then they go on a spending spree when they are in power (see the chart above). Keynesian economics have proven over and over, and history bears this out, that during economic downturns government spending is essential for recovery. Some economists even insist that ongoing deficit spending is required for a vibrant economy, and deny that there is a downside. Republicans pose as the “fiscal conservatives” who are for “fiscal responsibility,” but this is a ridiculous claim. It is Democrats that have been the fiscal conservatives, and have tried to balance the budget during economic booms.

Joe Conason of Salon.com wrote that, “In our time, the Republican Party has compiled an impressive history of talking about fiscal responsibility while running up unrivaled deficits and debt. Of the roughly $11 trillion in federal debt accumulated to date, more than 90 percent can be attributed to the tenure of three presidents: Ronald Reagan, who used to complain constantly about runaway spending; George Herbert Walker Bush, reputed to be one of those old-fashioned green-eyeshade Republicans; and his spendthrift son George “Dubya” Bush, whose trillion-dollar war and irresponsible tax cuts accounted for nearly half the entire burden. Only Bill Clinton temporarily reversed the trend with surpluses and started to pay down the debt (by raising rates on the wealthiest taxpayers)…Not all of the warnings about deficit spending are false. Wasteful federal spending can eventually lead to inflation; excessive deficits can cause interest rates to rise, although that doesn’t always occur. But as Clinton proved in confronting the huge legacy of debt left over from the Reagan era, it is possible to raise taxes and slow spending without damage to the broader economy” (source).

According to their own stated standards, Republicans regularly commit the unpardonable sin of massive deficit spending. If we buy-in to their fear-mongering about deficit spending (even during recessions) then we must give Republicans very poor ratings. It is worth mentioning that when Republicans implement deficit spending, the spending usually ends up in the hands of the ultra-rich, who tend to save; whereas Democrats typically channel deficit spending to the middle-class, who are likely to spend, which leads to a stronger economy. There is a big difference between awarding no-bid military contracts to Haliburton and Blackwater, and on the other hand, extending unemployment benefits. Only the later actually ends up helping the economy.

Conason also points out that, even though deficit spending is an essential part of sound fiscal policy,”Not all of the warnings about deficit spending are false. Wasteful federal spending can eventually lead to inflation; excessive deficits can cause interest rates to rise,although that doesn’t always occur. But as Clinton proved in confronting the huge legacy of debt left over from the Reagan era, it is possible to raise taxes and slow spending without damage to the broader economy” (source). Tax rates in the U.S. are among the lowest of industrialized countries (only Mexico, Turkey, South Korea and Japan have tax rates lower than ours), and we spend more on our military than all other nations combined—if our deficit become a real problem, we could easily make some changes in these areas, without cutting “entitlements,” and wipe our our debt in a decade. Ron Paul has said, “Deficits mean future tax increases, pure and simple.” Perhaps there is truth to this. However, take a look at countries that have higher taxes. For example: Denmark. » Read more: Deficits Don’t Matter?

Do Tax Cuts Increase Revenue?

July 28th, 2010

On Sunday Treasury Secretary Tim Geithner made the case for letting Bush-era tax cuts for the wealthiest Americans expire later this year. He dismissed concerns that the move could push a teetering economy back into recession and argued that it would demonstrate America’s commitment to addressing its trillion-dollar budget deficit.

Republicans have countered with predictable fearmongering. In a USA Today op-ed, on July 22, Utah Republican Senator Orrin Hatch, wrote that letting the tax cuts expire could potentially “trigger another recession, the last thing out-of-work Americans need…Dr. Christina Romer, chair of the president’s Council of Economic Advisers, found…that there’s ‘a powerful negative effect of tax increases on investment.’ Her analysis showed that $1 in tax cuts results in a $3 increase in GDP, demonstrating why lower taxes are key to investment and an economic recovery.” (OK, Sentator Hatch, then you should be thrilled that Obama gave tax cuts to 95% of Americans…where’s your op-ed about that?)

So we have Treasury Secretary Geithner saying raising taxes back to Clinton-era level is a good thing, but the senior member of the Senate Finance Committee (Hatch) saying it will be devastating to the economy. This illustrates the fundamental differences between Republicans and Democrats is their view of taxes. Democrats believe in progressive taxation–that is, taxing the rich at a higher percentage because a flat tax would take a larger percentage of income from those with lower income; and the past 30 years tells us that it is the Democrats who are the fiscal conservatives when it comes to managing the deficit. On the other side of the aisle, Republicans believe that reducing taxes for high-income earners is better for the economy because it will “trickle down” to the lower income workers in the form of jobs; and they believe that lowering taxes for the rich increases government tax revenues. Repeat: Republicans believe that taking less money from the rich will give the government more money. Yes, they believe this like an article of faith. And they repeat it ad nauseum.

Examples:

President George W. Bush: “You cut taxes, and the tax revenues increase” (2006)

Vice President Dick Cheney: Keeping taxes low, “does produce more revenue for the Federal Government.” (2007)

Senator John McCain:  “Tax cuts … as we all know, increase revenues.” (2007)

Rudy Giuliani: “I know that reducing taxes produces more revenues.” (2007)

Rep. Lynn Westmoreland, Georgia-R: “This Congress must recognize that tax cuts spur economic growth.” (2005)

Carly Fiorina, U.S. Senate Candidate: Let me propose something that may seem crazy to you. You don’t need to pay for tax cuts. They pay for themselves. (2010)

If this concept holds true then the Bush tax cuts should have brought in more revenue and helped decrease the budget deficit. They did the opposite. » Read more: Do Tax Cuts Increase Revenue?

A Case Study in Economic Policy

June 14th, 2010

What economic policies lead to greater economic health? And what political policies will lead to better economic outcomes? These are complex questions, and can be difficult to test scientifically. However, it is useful to look at case studies in an effort to understand what policies work and what policies lead to disaster. Let’s take a look at the Golden State.

California has a $24 billion budget deficit. Unlike other states, California’s constitution requires a two-thirds majority legislative vote. This means the that minority Republicans—making up almost 40% of the state congress—have significant power to block legislation and budget plans that could avert further financial disaster. Because Republicans are against tax increases, the state is struggling to fix their current budgetary woes brought on by the global economic situation. When liberal social policy meets a policy of anti-taxation—and this combination is personified by Governor Schwarzenegger—we end up with exactly what California is facing today: A large budget shortfall, high unemployment, large numbers of foreclosures, and general economic sluggishness. Modest increases in tax revenues, effective utilization of federal stimulus dollars, and cutting costs are the obvious short-term solutions. But California’s budget crisis had been unstable from well before the global recession had an impact. » Read more: A Case Study in Economic Policy