Thursday, December 9, 2010

The "Deficit Duo": Maybe the Real Adults Here

Watching part of a press conference this morning conducted by White House press secretrary Robert Gibbs, I was nearly impelled to hurl a cup of coffee at the tv set when a blow-dried media freak emerged later and stated matter of factly that Gibbs was "trying to be the grown up here". In other words, all those who've complained about this misshapen tax plan and criticized Obama for it are essentially spoiled brats who don't know what's best for them. Excuse me!

Unlike Obama, many of us can see very precisely and clearly the calamity this farce is inviting. We aren't econ geniuses, and most of us have only studied it on our own, but we do know some basics, such as the fact that the debt ceiling will have to be increased to nearly $15 TRILLION by April next year....else the whole U.S. government will go into forfeiture and every damned aspect will come to a screeching halt.

We also know that, led by Sen. Jim DeMint, a truculent band of tea partiers are entering congress and many- like Rand Paul- absolutely have indicated they will not raise that debt ceiling. Thus, if approved, there will very likely have to be massive spending cuts elsewhere in the budget to appease these barbarians. Just where do you think those cuts will come from? I will give the savvy readers three hints, two of which don't count!

Now, we keep hearing from those in the WH that oh boy, if this is not passed by the end of the year, all the ice in the Arctic will melt at once, the sky will split asunder, the stars will fall and oh....we will see a "double dip recession"! Hardly! Look at how the stock market shot up after this deal was announced. Also, since the GDP and growth per quarter indicators already have indicated we ARE OUT of the 2007-incepted recession HOW CAN IT BE DOUBLE DIP? Technically it would have to be continuous to be double dip (e.g. W -shaped), but the stalwarts in the think tanks have assured us the 2007-incepted one ENDED months ago. Hence, if a new recesson occurs it can only be a "new recession", and not double dip.

Are there ANY REAL adults anywhere amidst this political three ring circus? Well, it seems there are. Those happen to be the two Deficit Co-chairs, Alan B. Simpson and Ernest Bowles - who I castigated in previous blogs. However, when even two clowns do something correct they must be applauded and lauded. (Besides, we know even a broken clock is correct twice a day!)

As I noted in prior blogs, one simply cannot claim to be fretting over a massive $13.8 trillion deficit and how to reduce it, and also talk about tax cuts. The two are mutually exclusive propositions. They are irreconcilable. If the deficit is serious and warrants serious and timely attention, then it follows ANY tax cut plan especially one totalling nearly $900 billion is a bad idea.

According to reports in today's paper, both Deficit Commission co-chairs are extremely displeased by this half-assed tax cut deal. The report noted they both see the deal "as heartbreaking and doing nothing to solve the cancer-like problem that will drive the United States off a cliff".

The report (from The Denver Post, p. 1A) added that both Bowles, a Democrat and college president, and Simpson, a Republican, "candidly scolded the president and members of congress who endorsed an extension of tax cuts" that will cost $900 billion. As well they should.

As percipient Rep. John Cummings (D-Ga) pointed out to an MSNBC talking head (Savannah Guthrie) this morning, in two years or so when the deficit is exploding the Tea Party-driven Reeps will be the first to call for massive funding cuts to contain an explosive deficit thanks to "Obama's nearly $1 trillion stimulus". Yes, you can be sure that is how they will frame it, and as we always see- the Reeps inevitably win the message war because they have: a) more balls, b) more brains at creatively deploying semantics, and c) more sheer chutzpah to stand up and defy the putative leader of the D-party and his cohort.

And as Cummings further noted, look for them to go after the biggest fish in the sea: Social Security and Medicare. Just in time as nearly 12 million baby boomers are to enter those programs.

Why Obama, a supposedly bright guy (former head of the Harvard Law Review) can't see all this is beyond me. I mean even he came out openly in the wake of the November mid-term drubbing and stated:

"We need to reduce our deficit so we don't leave our children a legacy of debt and we're not racking up the credit for the next generation".

REALLY? Then WHY have you just appeased the Repukes while adding a potential $900 billion to that deficit? The words and actions do not add up!

At least, say one thing -say the next, Bowles and Simpson are consistent. They are foursquare against anything that increases the National Debt, and they understood if they supported this tax cut malarkey they'd look like putz-faced hypocrites. Hence, their position to "scold" the President and congress. Well, good for them, someone of stature has to!

Now, we keep hearing the parade of pro-tax cut pundits, wags and pols claiming that if we don't get this deal done all hell will break loose, the economy will go into paralysis and other horse shit. But that is exactly what will happen IF they go through!

A Financial Times Analysis (9/15, p. 24) of the effects the Bush tax cuts over 2001-08 shows that it would be an even bigger calamity than the GAO has projects (nearly $3.7 trillion in additional deficits piled up over the next ten years).

The tax cuts, passed in 2001 and 2003 with the latter reducing taxes on capital gains from investments to 15% (thereby delivering an unequal status to rentiers over workers) have been almost totally responsible for the deficit mess we’re in especially since 70% of the hit transpired after 2006.

The Financial Times analysis by Richard Bernstein notes (ibid.)

Our own examination of U.S. non-residential investment indicate the reduction in capital gains tax rates failed to spur U.S. business investment and failed to improve U.S. economic competitiveness

In other words, the FT’s findings were exactly opposite to what had been touted by the 2003 cuts’ cheerleaders (many of the same people who claim that extending the Bush cuts to the wealthiest now is critical for job formation).

The FT’s analysis continues:

The 2000s- that is the period immediately following the Bush tax cuts – were the weakest decade in U.S. postwar history for real, non-residential capital investment. Not only were the 2000s by far the weakest period but the tax cuts did not even curtail the secular slowdown in the growth of business structures. Rather the slowdown accelerated to a full decline

Contrast this with the hike in taxes immediately after Bill Clinton took office, leading to the accumulation of more than $600 billion in surpluses by the time he left office, and the creation of 20 million jobs. The key thing here is contrary to this pile of ripe horse shit, an increase in taxes (especially for the wealthy - and I number those earning anywhere near $250k/yr in that category, sorry!) is actually what we NEED!

For reference, the FT analysis observes that “during each decade from the 1950s to the 1990s, growth in real gross non-residential investment averaged between 3.5 percent and 7.4 percent a decade. During the 2000s it averaged a mere 1%”.

In their own analysis of supply side tax cuts over the Reagan years, authors James Medoff and Andrew Harless, The Indebted Society, 1995, p. 84, 'Let Them Eat Cake', observed that "productivity retreated by more than 30% and debt exploded- exactly the opposite of what we'd been sold". (Even former Reagan Economic advisor David Stockman now assails those Reagan and Bush era tax cuts and says ALL pending Bush tax cuts - middle class and upper tier- ought to expire)

Meanwhile, when Medoff and Harless tracked actual data over the decades, they found (p. 87) that "high tax rates are associated with higher productivity growth" There is a consistent and strong relationship."


The converse, as the FT analysis of the Bush tax cuts shows, is that the opposite is the case! Raising taxes is thus doubly beneficial - contrary to the pundit spin: it will lower the deficit, and also generate more jobs. Meanwhile, by falling into this Bush tax cut trap, you'll effectively be helping the pukes in two ways: likely spiking unemployment which may top 11% by the time the 2012 elections roll around (making you a prime target for removal Palin?) and driving the deficit up to the point everyone and his uncle willl call for massive entitlement cuts.

Commenting once more on the dire effect the Reagan tax cuts had, Medoff and Harless write (p. 23):

"For the health of the economy, Reagan's policies turned out to be just about the worst thing that could have happened: investment did not increase, growth continued to stagnate, and the federal deficit ballooned to new dimensions."

Which totally comports with the FT analysis of the Bush tax cuts. For reference, the top marginal tax rate during the Bush years (for income tax) was reduced to 36% from the 39.5% during the 1990s Clinton Years. Over the 1950s and into the 1960s (until about 1964) the top marginal rate was at 91%, going down to 65% by the mid -60s. The low level of 39.5% wasn’t hit until Reagan arrived in 1980, and passed his tax cuts. (And we note here that the debt as a % of GDP rose to nearly 30% during the Reagan year, caused by his tax cuts in conjunction with military spending that amounted to nearly $2.2 trillion over his tenure.

All of this ought to be known, of course, by Larry Summers - who was Clinton's main man at Treasury during the Clinton years. If he knows all this, and the data is there to support it, why isn't he using it to press Obama to go the correct way and allow all those tax cuts to expire. Why isn't he telling Obama that THIS is how jobs will be created and benefit us all, not this poppycock about "double dip recessions" if we don't!

Another telling statistic from the FT study was that the growth rate for investment in equipment and software for business. They note that this ranged from 5.7% a year to 9.9% in earlier decades but was reduced to 1.9% during the 2000s.

Meanwhile, “average growth in non-residential structures ranged from 1.3% to 5.7% from the 1950s through the 1990s but declined 0.8% during the 2000s.”

The conclusion of the analysis is stark and absolutely uncompromising (ibid.):

The stated goal of cutting taxes to spur U.S. capital investment was not achieved.”

Get that, mein Herren!

This led Bernstein to ask ‘Where did the benefits of the tax cuts go?’

Obviously, if they didn’t redound to the U.S. benefit they had to go somewhere, right?

The FT found: “an increasing proportion of the benefits of U.S. monetary and fiscal policy are leaking outside the U.S.

The FT and Bernstein noted that the tacit assumption of U.S. policy makers and taxpayers is that the U.S. is a “closed economic system” but in fact, it isn’t. Whatever consequences accrue can often be exploited in ways unseen. Indeed, the FT notes that the Bush tax cuts actually encouraged “capital flight from the U.S.” Now, ADD this to the fact that to pay for this extension of the goddamned Bush tax cuts, we'll have to BORROW nearly $600 billion from China, Russia and Saudi Arabia and the landscape is even more horrendous.

The conclusion is clear and obvious: we can’t afford ANY of the Bush tax cuts. Let them all expire. Better that than deficit hawks going after Social Security and Medicare when millions more will need it by the end of the decade. Congress must stand firm on this and not relent. Our very future depends on it!

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