Relevant and even prescient commentary on news, politics and the economy.

Private Real GDP in Recoveries

Update: Paul Krugman at Conscience of a Liberal points to Spencer England’s post in his column 8/1…Dan

I thought it would be interesting to post this chart of real private GDP in recoveries.

It clearly shows that since the great moderation we have experienced three recoveries that compared to previous recoveries were very weak.  Whether this is the new norm is open to debate.

But interestingly, at this point in the recovery this measure of real private GDP is exactly the same as it was in the last cycle under Bush that Larry Kudlow called the “Goldilocks” recovery.

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Bull In a China Shop

Romney said a Polish leader told him during his visit that his country’s economic philosophy is, “You don’t borrow what you can’t pay back.” The presumptive Republican presidential nominee used the line to draw an implicit contrast with President Obama, saying the world — and, by definition, the United States — should emulate Poland’s economic and societal transformation toward smaller government.

“Rather than heeding the false promise of a government-dominated economy, Poland sought to stimulate innovation, attract investment, expand trade and live within its means,” Romney said. “Your success today is a reminder that the principles of free enterprise can propel an economy and transform a society.”

Well, the big debate among political pundits today is, of course, whether Romney’s bull-in-a-china-shop performance will hurt his election chances, given that, after all, it’s economics issues that will determine the outcome of the election.  The consensus seems to be that it won’t.  I think it will—given that it’s economics issues that will determine the outcome of the election.

The state of the economy, and its immediate prospects, certainly will be a key issue in most voters’ minds.  But so will the apparent competence of Obama’s challenger—and the likely effect of the challenger’s policy proposals on the economy and on the larger panoply of budgetary (taxing and spending) policies on both the near-term economy and on the very nature of American society. 
The supposed raison d’être for Romney’s candidacy, at least as advertised to the general public (if not to, say, the Koch brothers), is his claim that he would be a more competent steward of the economy that Obama has been.  But although most of the public doesn’t yet know it, that claim is based less on his role as a private-equity game player (and stellar tax avoider or evader) and on his role as savior of the Salt Lake City Olympics than on his policy proposals: to significantly increase spending on the proverbial military-industrial complex and dramatically decrease both domestic spending and tax revenue. Contrary to the punditry’s meme, Romney hasn’t been unspecific about his proposals. He spelled them out clearly during the primary season, e.g., in a speech last February to the Detroit Economic Club, leaving only the simple math computations to be completed by the media and the Obama campaign, and some members of the high-profile media finally have begun to complete them.  But Romney has been in successful Etch A Sketch mode since wrapping up the nomination, and thus far has been able to make the public think that what matters is his competence level—and that he’s competent.

No more, I suspect. In the Washington Post article I referenced above, a Romney aide named Stuart Stevens who is traveling with the candidate is quoted as telling reporters, “He has a tendency to speak his mind and to say what he believes, and whenever you do that, there will be those that disagree with you, and there will be those that agree with you.  That’s what he’s done in these situations. I think people like that. I think that this idea that you have to not speak your mind is something that’s not very appealing to people.”

One problem with this is that Romney has a habit of only rarely speaking his mind and, instead, of speaking what he thinks is the mind of the political constituency he’s targeting at the moment—and that on this trip he did both, and both revealed serious incompetence.  People find unappealing this idea that you have to not speak your mind.  But they also find unappealing this idea that you don’t know when it’s inappropriate to speak your mind, and that you don’t consider or don’t even recognize, the potential consequences of what you say and where, and in what context, you say it. 

I suspect that people will find it unappealing that if this candidate appears so lacking in judgment or so utterly self-interested that he either didn’t recognize or didn’t care about the obvious international implications of his comments, he is unlikely to possess the judgment to recognize the consequences of his decisions in economic policy—or to care about the broader consequences for the country.  His interests are narrow and they correspond to those of the Koch brothers and of the private equity set.  And, whether by design or unconcern or simple cluelessness, nothing else will matter to him.

In other words, you don’t borrow what you can’t pay back, except to increase military expenditures—in part to enable the wars that Romney seems to want to get us into or that he may accidentally precipitate, and in part as his preferred version of crony capitalism and Keynesian economics—and to ensure an ever-lower tax rate for the wealthy.  And Poland—which (surely) has a more progressive tax code than the U.S. does (what is Poland’s top tax rate, anyway?), and which probably has national universal health insurance, and which has a strong labor movement and surely more-regulated financial institutions than ours, and which didn’t experience a crazy housing and private-debt boom and bust in the last decade, and whose government likely spends a good deal on infrastructure projects—is a reminder that the principles of free enterprise can propel an economy and transform a society. 

Just like our country was, back in the era that Romney says was anti-free-enterprise.  Those high tax rates, and all that regulation of banks and industry back then, y’know.

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‘Deficit Debate Driven by the Wealthy’

And another view on the upcoming election deals we need to worry about in addition to party agendas and deals. Doubling down on upward distribution of wealth remains the name of this game…it is hard enough to debate real budget issues without this party going on:

Deficit debate driven by the wealthy, by Michael Hiltzik, Commentary, LA Times: …The fiscal cliff is supposedly what lurks at the end of this year, when billions of dollars in tax cuts expire and government spending cuts mandated by the big deficit deal in 2011 kick in. According to the bipartisan Congressional Budget Office, the combination of a steep increase in the tax bite and a steep reduction in spending across the board could cut economic growth in 2013 to 0.5% from a projected 4.4%… The CBO says that by any traditional reckoning, that would mean recession.

Yet there’s still reason for most Americans to fear the deal-making aimed at avoiding the fiscal cliff. For one thing, the debate seems increasingly to be driven by the wealthy, who can be trusted to protect their own prerogatives while declaring everyone else’s to be wasteful. Just two weeks ago, a squadron of CEOs and bankers, including Dimon and hedge fund billionaire Pete Peterson, lined up behind a campaign to impose adult supervision on our squabbling Congress.

Their working brief is a document grandiosely entitled “The Moment of Truth.”It’s a deficit-reduction plan cooked up by former Sen. Alan Simpson (R-Wyo.) and Erskine Bowles, an ex-investment banker claiming Democratic Party cred from his nearly two-year stint as chief of staff in the Clinton White House. …

In any environment of serious debate, Simpson-Bowles would be dismissed out of hand. … “The Moment of Truth” bills itself as a roadmap to deficit reduction, but it’s really a guide to cutting services and benefits for the working and middle class while raising revenues only modestly, if that. …

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‘The One-Sided Deficit Debate’

Via Economist View comes James Kwak at Baseline Scenario on the early deal made on the the ‘fiscal cliff’:

‘The One-Sided Deficit Debate’

James Kwak is pessimistic about the deficit debate:

What’s more, the “consensus” of the self-styled “centrists” is what now makes the Bush tax cuts of 2001 and 2003 seem positively reasonable. With Simpson-Bowles and Domenici-Rivlin both calling for tax rates below those established in 2001, George W. Bush now looks like a moderate; even many Democrats now endorse the Bush tax cuts for families making up to $250,000 per year, which is still a lot of money (for most people, at least).

But some of the blame for this state of affairs must rest with Democrats, liberals, and their usual mouthpieces as well. For over a year now, the refrain of the left-leaning intellectual class has been that the only thing that matters is increasing growth and reducing unemployment, and any discussion of deficits and the national debt plays into the hands of the Republicans. It may be true that jobs should be the top priority right now, but the fact remains that many Americans think that deficits matter (and most of those left-leaning intellectuals would concede that they matter in the long term). Those Americans are currently getting a menu of proposals with Simpson-Bowles in the right, Paul Ryan and Mitt Romney on the far right, and Fox News on the extreme right. There is no explanation of how to deal with our long-term debt problem in a way that preserves government services and social insurance programs and protects the poor and the middle class.

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The Cut Social Security Gang

Barkley Rosser at Econospeak opines on:

Bill Keller Joins The Cut Social Security Gang

In today’s New York Times, former editor Bill Keller has an especially obnoxious column about baby boomer entitlement. I am not going to dispute at all his listing of various selfishnesses that we baby boomers have indulged in from Gordon Gekko type follies to self-obsessing about 60s music and other such stuff. Fine. However, partway in the column morphs into yet another of these Social Security bashes by yet another of the Very Serious People, all for the purpose of reducing the deficit to save the future generations from the awful selfishness of the otherwise overly entitled baby boomers. I grant that he briefly mentions taxes and defense spending, but only to dismiss them as insufficient to solve the problem (that is, by raising the former and cutting the latter). Social Security is what must be seriously hit.

Now good old Dean Baker takes him to task pretty strongly today at . He focuses on how rich Bill Keller is, and how he will not be affected by cuts the way most people will be. He also brings up the point that it is health care costs that are most responsible for the dramatic upsurge in past and projected future entitlement spending, which Keller simply said nothing about, thereby really making himself look Seriously Foolish. That is a killer for Keller right there. While he did not comment on Keller I also note Bruce Webb’s latest post on angrybear in which after going through a lot of useful analysis he recites his old ditty: “If privatization is necessary, it won’t be possible. If privatizatization is possible, it won’t be necessary,” which about sums it up, at .
Let me add two more points particularly to Dean’s justified screed against Keller’s pompous silliness. One is that he left out the matter of economic growth. We know how the surplus that Clinton left got turned into the current massive budget deficit. There were the tax cuts, vaguely recognized by Keller. There were those two wars, not quite fully finished, which Keller did not name but did also vaguely note defense spending. But then there was the recession, which has been the biggest souce of the problem. If this could be overcome and we could return to growth of the sort we have previously seen, this would do wonders for alleviating the deficit, and also for putting us back into the second condition noted by Bruce Webb, that we would not need a privatization fix for social security because it would easily fund itself. Of course cutting Social Security and other spending while raising taxes threatens to be the sort of growth-killing austerity we see all those Europeans dragging themselves down with, thus undercutting the effort to get growth going again.
The other point, which may be the key to the real tendentiousness of the hypocrisy of this column, is that he is calling for sacrifices by the baby boomers while guilt tripping the lot of us, the people who would really pay for his proposed social security changes would not be baby boomers at all, but those very young people he is supposedly standing up for against our wickedness. Everybody knows that any changes will affect neither those already on SS, which includes some front end baby boomers already along with some set that will be due to get onto it pretty soon, which will probably expand the set of the unaffected at least haflway down into the baby boomer pile, with only some of the rump end tagalongs vulnerable. No, while changing cost of living indexes may affect even current recipients, the effects will be much greater down the road for those much younger who are supposedly being protected, and of course any increases in future eligilibity ages will be borne by those much younger than baby boomers. Keller is basically selling a fraud here.
So, we are back to one of my favorite lines. Those seeking to convince the young on the basis of the spoiled wickedness of the baby boomers that they should support cuts in future Social Security benefits are being told in effect, “Accept definite cuts now in your future Social Security benefits, because otherwise you might have to accept some cuts in the future to your future Social Security benefits!” Gag.

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Culture Indeed Makes All the Difference. (Just not necessarily in the way Romney meant.)

JERUSALEM — Republican presidential candidate Mitt Romney angered Palestinian leaders on Monday when he suggested here that the Israeli economy had outpaced the economy of the Palestinian territories in part because of advantages of “culture.” …

Romney said he had studied a book called “The Wealth and Poverty of Nations,” searching for an answer about why two neighboring places–the U.S. and Mexico, for instance, or Israel and the Palestinian areas–could have such disparate prosperity.

“Culture makes all the difference. Culture makes all the difference,” Romney said, repeating the conclusion he drew from that book, by David Landes. “And as I come here and I look out over this city and consider the accomplishments of the people of this nation, I recognize the power of at least culture and a few other things.”

Wait.  Culture makes all the difference?  I thought it was tax rates on the wealthy and on corporations that makes all the difference.   Oh, and not having national universal health insurance. 

But aren’t Israel’s tax rates on the wealthy and on corporations much higher than the tax rates here during the 1990s—the tax rates that Obama wants to reinstate and that Romney says would amount to socialism?  And certainly during the last decade?  And doesn’t Israel have national universal health insurance? 

Gosh.  Maybe it really is culture, rather than tax rates that so favor the wealthy and a minimal social safety net, that determines economic prosperity.  At least concerning tax policy, that’s certainly been true for the United States, whose economic prosperity seems directly negatively correlated to low tax rates for the wealthy and for corporations, and to deregulation.  And whose culture regarding tax and regulatory policy has changed dramatically in the last three decades.  


NOTE: I removed an earlier draft of this post in order to repost it with needed editing. (Funny, how the misplacing of two commas in a sentence can make the sentence say the opposite of what you intended.)

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Simon Johnson on Barclay’s and markets

Simon Johnson at Baseline Scenario

points to basic fraud on the business practices for LIBOR:

The behavior at Barclays has all the hallmarks of fraud, pure and simple – intentional deception for personal gain, causing significant damage to others.

The Commodity Futures Trading Commission nailed the detailed mechanics of this deception in plain English in its “Order Instituting Proceedings” (which is also a settlement and series of admissions by Barclays). Most of the compelling quotes from traders involved this scandal come from the Order, but too few commentators seem to have read the full document. Please look at it now, if you have not done so already

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Euro area troubles, banks, and sovereign debt connections

Economist Mark Blyth talks on Europe and rescuing the banks…

See 35 minutes in on context for LIBOR troubles. (70% of the special investment vehicles designed to pump and dump mortgages belong to European not American banks … Euro banks listed their periphery debt as Tier One Capital under Basel.)

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Tax evaders (and those who aide them), not regulatory complexities, cause tax evasion

by Linda Beale

Tax evaders (and those who aide them), not regulatory complexities, cause tax evasion

The July 24 New York Times Magazine carries an article by Adam D entitled My Big Fat Belizean, Singaporean Bank Account.

The author shows how easy it was for him to establish a secret offshore bank account that would allow him to evade US (and other nation’s) taxes with ease. It only cost around a thousand dollars, and the firms that do this for a living can set you up with a fake corporation in one tax haven and a real bank account in another, both of them sworn to secrecy about your identity as a US citizen and complicit in aiding wealthy taxpayers in avoiding required reporting to the IRS.
And that means a lot of moolah gets stashed abroad, and a lot of taxes remain unpaid.

The Tax Justice Network, a global research firm that advocates against such havens, suggests that the amount hidden offshore is between $21 trillion and $32 trillion. If properly taxed, that could yield more than $200 billion in revenue around the world. Furthermore, because a 2010 McKinsey & Company report estimated the world’s financial assets at about $200 trillion, somewhere around 10 percent or more of the world’s wealth is effectively invisible. And it’s also almost certainly in the hands of the people and institutions that most actively influence major investment decisions. Id.

So far, so good. But where the author goes wrong is in his ruminations about the reasons such shenanigans go on. He thinks it is because regulations and tax laws are so complex.

One often-overlooked lesson of the financial crisis is that shenanigans don’t happen in the absence of regulation; they happen when regulations are exceedingly complex and involve confusing, overlapping regulatory authorities.

Pshaw. This is, quite simply, garbage regulatory mythology. Shenanigans happen in brute force capitalism–the kind we’ve had in place for the last few decades–until there is one dominant beast who controls everything. Regulations ain’t the cause.

Every simple rule becomes an opportunity for “inventive” tax lawyers and those with wealth desirous of hiding it or evading taxes on it to come up with “creative” solutions that skip around, over, or under the law. When tax administrators find out what is going on, they can sometimes take immediate steps. Often it requires legislation and regulation, and in the time it takes to create the lock on the door that the evaders broke through, lots of taxes have been evaded. And as soon as the lock goes on, the inventive tax lawyers and wealthy tax evaders get busy at their manipulative game again. So there is a spiral of complexity to deal with the problem caused by sophisticated taxpayers seeking sophisticated help to avoid or evade taxes.

This “regulations and complexity are the cause of offshoring and tax cheating” nonsense sounds about like the 2001 arguments made by many on the corporatist right for reducing tax rates. First, the proponents of lower taxes noted that there was a considerable amount of cheating via tax shelters by the wealthy and big corporations. Then, the illogical next step was taken: if only the wealthy just had to pay a little less in taxes, they’d be good citizens and quit using tax shelters, the Republican head of the Joint Economic Committee opined. HA. If you lower the rate today, the greedy ones just demand a lower rate than that the next day. We’ve seen that play out as the corporate lobbyists got a twenty-year-long wish list fulfilled in the 2003 Bush tax cuts, then came back for more the next year and the next (and are still demanding even more today).

cross posted with ataxingmatter

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A Social Security Ditty: "If Privatization is Necessary—"

I came up with this around ten years ago to put a point on the logical trap Social Security privatizers (often unwittingly) find themselves in. It goes like this:

If Privatization is Necessary, it Won’t be Possible
If Privatization is Possible, it Won’t be Necessary

To understand the trap we need to do some parsing on ‘privatization’ and ‘crisis’. Now traditionally ‘Social Security crisis’ was equated to ‘Trust Fund Depletion’, which is the point in the future when the Social Security Trust Fund balance projects to go to zero. Over the last twenty years of Social Security reporting the date of Depletion has been projected by the Trustees at various points between 2019 and 2042 (and the reasons for the variation are interesting) but are in recent Report years put in the mid to late 2030s. ‘Depletion’ has often been sold in terms of ‘Social Security won’t be there’ in the sense of ‘no check for me’, particularly to the under 40s but a few seconds of thought shows that ‘no check’ is not a possible outcome as long as payroll tax is being collected, that is benefits can be paid out right up to the amount allowed by then current income. Instead we are talking about a benefit cut, and one relative to the current law baseline (and examining that baseline is interesting as well-subject for later posts). The amount of that benefit cut has been projected variously between 22% and 25% of the ‘scheduled benefit’ or to flip it around a payout of between 75-78%.

So in our first sum-up we have ‘Social Security crisis’ = ‘Trust Fund Depletion’ = ‘25% benefit cut’. In these straightforward terms the solution to ‘crisis’ is to prevent ‘benefit cuts’ and this can be done only with some combination of the following three methods: a direct increase in contributions (i.e. tax increase), an improvement in those economic numbers that contribute to solvency (mostly employment and Real Wage), or a better return on contributions than the current combination of Pay/Go and Trust Fund investments provide.

And it is here that the jaws of the logic trap start to close on privatizers. Detailed discussion below the fold.

The annual Reports of the Trustees of Social Security define ‘crisis’ in terms of ‘actuarial deficit’, or the gap between ‘scheduled benefits’ and ‘payable benefits’ and express that gap alternately as percentage of payroll, or of GDP, or in ‘present value’ dollar terms. Taking ‘percentage of payroll’ first, this is given in terms of the amount of tax increase that would be needed immediately to backfill the actuarial deficit over the 75 year projection period or in terms of the amount needed at the point of Trust Fund Depletion. And these alternatives are spelled out in the Conclusion of the Report Summary, or the first section of the Social Security Report itself:
Short version: immediate increase of 2.61% of payroll vs increase in 2033 starting at 4.3% and ultimately reaching 4.7% or a total of 17.1% combined compared to today’s 12.4%. What Social Security doesn’t do, but CBO does (using slightly different assumptions), is to score intermediate approaches that would phase in these increases, which  would split the difference with an ultimate increase of around 3.5%.

If an immediate increase of 2.61% is the bitter medicine what then would sweeten it somewhat? Well one approach, that of phased increases has just been referenced and is also the methodology of the Northwest Plan for a Real Social Security Fix (the work product of three Angry Bear reader/commenters led by Dale Coberly).

It turns out there are two different possible sweetening agents, one being economic growth and the other pursuing better returns on investment (ROI). To understand how growth alone can save the day we need to back up and examine the three different economic models used by the Trustees to project solvency or actuarial deficit. These three ‘Alternatives’ are ‘Intermediate Cost (IC)’, ‘Low Cost (LC)’ and ‘High Cost (HC)’.

Intermediate Cost represents the mid-point of economic expectations and is backed up in the Reports by a variety of probability studies designed to prove it is a good faith effort. As such almost all economic reporting and most policy analysis simply assumes IC as their point of departure. For example the Northwest Plan explicitly assumes IC numbers even though some of the authors have private doubts about either the economic or demographic assumptions, doubts that by the way would drive the gap in different directions. Meaning that for this particular planning purpose it is perfectly reasonable to accept IC as a baseline set of assumptions.

On the other hand it is true that ‘Low Cost is Out There’. In operational terms Low Cost is rather simply defined: it is precisely that set of economic and demographic assumptions that would produce a fully funded Trust Fund through the 75 year actuarial period. Mind you this is not how the Trustees define it, instead they present it as a best case scenario hovering at the outside of the probability bound. But whether you accept that or not the numbers produce the outcome they do as seen in the following Figure in the 2012 Report where ‘I’ represents Low Cost:
Figure II.D6.—Long-Range OASDI Trust Fund Ratios Under Alternative Scenarios
 Under Low Cost the Trust Fund Ratio dips perilously close to zero around 2075 but shows as slowly rising through the end of the projection period. As it turns out this result DOES NOT meet the Trustees’ test for ‘Long Term Actuarial Balance’ or ‘Sustainable Solvency’, that would require TF ratios never dropping below 100. On the other hand Low Cost WOULD deliver 100% of scheduled benefits with no changes in FICA tax rates.

The differences between Intermediate Cost and Low Cost (and the more pessimistic High Cost) Alternatives are set out in a series of six Tables from V.A1 to V.B2 showing selected demographic and economic assumptions for all three models. 2012 Report List of Tables  The interactions between these numbers are complex and to some extent produce contradictory results, or example improvements in Real Wage serve to boost future income but also increase future cost in nominal terms. On the other those improvements also move the baseline, so that benefit cuts might be more or less in percentage terms but still produce a better result. But these complications can be hashed out in comments and future posts. I want to return to the Ditty and the Logic Trap.

If Low Cost numbers happen (they are by definition WITHIN the probability bound) then there will be no Trust Fund Depletion and so by the terms used here no Social Security Crisis. Meaning that neither a tax based fix or privatization would be necessary, we would have dodged the bullet.

But that bullet may have ended up lodged in the heart of privatization. Because Privatizers explicitly assume Intermediate Cost in their projections of ‘Crisis’, every single scary number they produce whether that be in terms of benefit cuts at depletion or ‘unfunded liability’ over 75 years or over the ‘Infinite Horizon’ derives directly from the specific economic and demographic numbers deployed by that particular model. Meaning that any different economic assumptions they insert arithmetically move those ultimate numbers away from IC projections. And to the precise point of this post the closer that any such numbers get to the supposedly improbable ones in Low Cost the less necessary privatization becomes as a means of solving ‘crisis’ AS DEFINED.

My contention here, and asserted in bare form so as to invite specific responses using real numbers is that privatizers can’t deliver. Not without using numbers that would fix Social Security along the way. So to parse the ditty:

“If Privatization is Necessary” meaning needed to avert ‘crisis’ and so benefit cuts at Depletion it has explicitly (although silently) endorsed Intermediate Cost economic assumptions. My assertion is that no privatization solution based on the spread between equities and bonds and any ancillary effects will work under the employment and wage assumptions of Intermediate Cost. Meaning “Privatization Won’t be Possible”.

On the other hand “If Privatization is Possible” meaning among other things requiring historical rates of return on equities, “It Won’t be Necessary”. Because any rate of GDP growth and wage and employment improvements needed to fund what is in the end worker funded retirement accounts starts bumping up against Low Cost numbers which as the Figures and Tables in the Reports show deliver 100% of scheduled benefits anyway.

Economist Dean Baker posed this question is slightly different form in Nov 2004 under the title ‘No Economist/Policy Analyst Left Behind’ Challenge (NELB) and was backed in that by Paul Krugman, all of which I blogged about right here back in 2008 with this AB post Double books and the ‘No Economist Left Behind’ Challenge

To my knowledge no one has met this challenge and few have tried. Those that have tend to rely on models that produce better ROI by suppressing Real Wage growth going forward and/or relying on returns from overseas investment. Which ignores the fact that worker funded retirement accounts have to be funded by workers, proving that the 1% can make out like bandits doesn’t translate to a privatization solution to the CRISIS AS DEFINED. And of course neither do current attempts to simply slash benefits starting immediately, not if we equate ‘crisis’ with ‘benefit cuts at TF depletion’.

So privatizers can use scare tactics based on benefit cuts or ‘no check for me’ but in order to avoid charges of being big, fricking liars they need to show that they can produce better results than IC at lower increased costs to workers than a simple payroll tax increase along NW Plan lines would require OR produce better returns than IC without resorting to economic assumptions that trend towards LC. Can’t be done. Or else prove it CAN be done.

If Privatization is Necessary, it Won’t be Possible
If Privatization is Possible, it Won’t be Necessary

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