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Karl Rove on the so-called "fiscal cliff"

by Linda Beale

Karl Rove on the so-called “fiscal cliff”

In a video interview available from Dow Jones/Wall Street Journal, “Karl Rove Doubts a Fiscal Cliff Deal Will Get Done” (Nov. 20, 2012),  Karl Rove’s pre-Thanksgiving news to the world is exactly what one would expect from one of the most successful GOP strategists.  He urges Repubicans to do everything possible to find “reasonable compromises without sacrificing principles”, which means entitlement reform coupled with offsetting revenues without increasing tax rates.

I. This is nothing new. 

Rove doesn’t want the GOP to accept any rate increases and he does want the GOP to play the obstructionist role to the hilt unless they get their longed-for undermining of the New Deal Social Security, Medicare, and Medicaid programs.

The flawed argument is the same as Romney’s arrogant economic message in the presidential campaign–that increased revenues will come from economic growth gained from running the country’s economy to support Big Business.  And the GOP insists that it will only happen if they can get the purported bad-guy Democrats to accede to the Republican policy demands of continued preferential taxation of the wealthy and corporate America, increased spending for the military, continued regulatory inattention to the financialization of the economy, combined with spending cuts to safety net programs. 

Rove’s position essentially insists on the government folloowing the GOP’s long-debunked market fundamentalism that assumes that the “dynamics” of spending cuts to the GOP-hated so-called “entitlements” (and not to the GOP-loved military budget) will immediately cause the economy to bloom and result in all the revenues needed (by the “appropriately” shrunken federal government), while the elite continue to rip-off the economy with “rent” profits.  And even if the “compromise” was to allow some increase in tax payments through cutting back deductions that primarily benefit the elite, one can imagine that those cutbacks will be relatively minor and short-lived.

II. The strategy is nonetheless revealing.

What is most interesting here is not Rove’s continued reliance on the same old failed Reaganomics arguments from the past re adhering to GOP “principles”.  It is his post-election strategy for how to achieve it. He is “dubious” that a deal can get done in the few days left in this congressional session. His solution–Congress should agree to carry on the “status quo ante” for a few months andthen arrive at a solution.
Rove knows what progressives know (and what I’ve insisted on in this blog): the Democrats have the rare upper-hand at this point in the legislative cycle.

The Republicans agreed to the passage of a law (the so-called “sequester”) that cuts otherwise slated increases to the military and also cuts a variety of domestic non-military expenditures.  The Republicans also joined with Democrats to pass a two-year extension of the Bush tax cuts two years ago, when they thought that they would control the White House and  the Senate after the 2012 elections and be able, finally, to deliver on their original intent to make the “temporary” Bush tax cuts permanent, thus guaranteeing a crop of preferential tax provisions for the very wealthy and multinational corporations while carrying out their long-term objective of privatizing and reducing safety net programs like Social Security, Medicare and Medicaid.
Republicans have less ammunition to carry out their obstructionist and New Deal-defeating agenda–the laws that cut the military budget, protect the safety net programs, and increase tax rates are already enacted.
Unless the GOP can convince the public and the Dems in Congress that there really is a fiscal “cliff” that spells suicide for the US economy, they are caught short in their legislative strategy.  They relied on a wipe-out victory in the 2012 elections.  Permanent reductions in taxes for the rich, deregulation, privatization/decimation of the New Deal safety net programs, and ever-increasing support for the military are much less easily put into law without one-party control.

The Democrats should not be willing to negotiate against interest just to kick the ball down the road to a period when they will have fewer strategic advantages on their side!  Democrats–with Obama in the lead–should insist on enactment of a bill making permanent tax cuts for the lower-middle and lower-income classes–ie, a group that almost no one thinks should have to pay more in a time of continuing slow growth out of the Bush recession years.

If the Republicans refuse to pass such a law, the Dems should not kow-tow to the GOP’s so-called “compromise” position of re-extending the full Bush tax cuts and caving to earned benefit program cuts.  Instead, the Dems should let the Bush tax cuts expire as slated and do nothing about the sequester and by all means do nothing to reduce benefits to Social Security, Medicare or Medicaid.  In January, President Obama and the progressives in the House and Senate should mount an aggressive campaign to pass a well-considered slate of tax cuts for the lower and lower-middle income distribution and a few well-targeted stimulus measures in support of public infrastructure and lower-income unemployment relief.

Only after those measures are in place should there be any discussion of an “overhaul” of the tax code–and that overhaul should be handled in the context of raising sufficient revenues to pay for things we as a people know we should provide–decent retirement and health care for elderly Americans, decent educational support for young Americans, decent opportunities for a sustainable life for poor Americans, and the revitalization of the middle class who have been the losers of the last decades of class warfare.  The super-rich elite don’t deserve much attention at all in this debate–they have been the winners and their winning has not in any way built a sustainable, job-creating economy.

cross posted with ataxingmatter

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Housing wealth effect, Baker, Goldfarb and Waldmann

by Robert Waldmann

Everything is possible and I think that Dean Baker just lost a debate with a Washington Post reporter.
Post reporter Zachary A. Goldfarb  wrote

The two economists compared what happened in U.S. counties where people had amassed huge debts with those where people had borrowed little. It had long been thought that when property values declined in value, homeowners would spend less because they would feel less wealthy.
But Mian and Sufi’s research showed something more specific and powerful at work: People who owed huge debts when their home values declined cut back dramatically on buying cars, appliances, furniture and groceries. The more they owed, the less they spent. People with little debt hardly slowed spending at all.

among other things.  The link is his.

Dean Baker wrote

The housing wealth effect is one of the oldest and most widely accepted concepts in economics. It is generally estimated people spend between 5 and 7 cents each year per dollar of housing wealth. This means that the collapse of the bubble would be expected to cost the economy between $400 billion and $560 billion in annual demand.

among other things  Again the link is his.
Baker’s main point is that low consumption by underwater home owners is not a plausible explanation of the sluggish recovery.  However, he also confidently asserts that the housing wealth effect is linear based on “google it”.  I think that he has decided that new empirical research is irrelevant, because he already knew how economies work.
My comment below the fold.

In the comment I define your disagreement with post reporter  Zachary A. Goldfarb as a disagreement about whether reduced but still positive home equity causes a reduction of consumption on the order of between 5 and 7 cents each year per dollar of housing wealth or on the order of zero.

That is, I won’t address you valid points that the recovery of consumption was roughly normal while the recovery of house construction was not.

Notably Goldfarb cites empirical estimates based on micro data.  He claims there is a significant change in the slope of the home equity effect on consumption at home equity equals zero.  To say he is wrong, you must convince me that the 5 to 7 % estimate is valid for a sample containing only homeowners with positive equity.
An estimate with aggregate data just does not address the claim in the article which you criticize.
Notably, in this case the Washington Post cites specific research by named economists.  You, in contrast, cite what all macroeconomists know.
I am shocked to find that I call this one for The Washington Post.  Your conclusion may be correct, but your reasoning is based on the assumption that all functions are linear.  I don’t like to be square, but that’s not true.

cross posted with  Robert’s Stochastic thoughts

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Marginal Rates and Economic Growth: They Go Up Together

With Republicans frantically clinging to discredited ideology and digging in their heels on raising top marginal tax rates, I thought it would be worth revisiting a post from a couple of years ago, showing some excellent long-term evidence that higher marginal tax rates are not associated with slower growth. Quite the contrary, in fact. Here you go:

Mike Kimel once again does yeoman’s duty to compare the two:

Tax Rates v. Real GDP Growth Rates, a Scatter Plot | Angry Bear.

In this post commenter Kaleberg adds a very cool scatterplot.

Each dot is a year (t), compared to another year one to four years later (t+1, t+2, etc.).

Bottom axis is the top marginal tax rate in the starting year. Left axis is annual GDP growth over the ensuing one to four years.

Starting years from 1929 to 2008.

With everything trending up and to the right, it sure looks like higher marginal rates and faster growth go together. But it’s hard to eyeball these kinds of things, so I pulled correlations. For ending years t+1 through t+4:

0.27 0.28 0.28 0.27

I also dropped in Real GDP/Capita in place of Real GDP. Of course the growth rates are slightly lower — the population (the denominator) was growing. But the graph looks basically the same.

Here are the correlations with marginal tax rate — also lower, but darn close:

0.23 0.23 0.23 0.21

Very consistent.

Short story, there is a statistically significant positive correlation between marginal tax rates in year X and both GDP and GDP-per-capita growth over ensuing years.

It’s pretty small, but consistent and consistently positive – a higher marginal tax rate in year X correlates with faster growth over the ensuing four years.

Especially interesting: this encompasses a huge range of marginal rates — from a low of 28% (’88 through ’90) to highs of 84-94% (1944 to 1963 — when we saw the fastest growth in U.S. history; ’64-’69, the top marginal rate was over 70%).

It’s worth noting that the lowest rate since 1928 was 24% — in 1929.

Cross-posted at Asymptosis.

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Screw the Rich to Protect Super-Rich Campaign Contributors?

This item raised my eyebrows when I saw it. Joshua Tucker at The Monkey Cage points out that the Republicans are proposing we do exactly that.

The idea (NYT, emphasis mine):

tax the entire salary earned by those making more than a certain level — $400,000 or so — at the top rate of 35 percent rather than allowing them to pay lower rates before they reach the target, as is the standard formula.

This to avoid the inevitably apocalyptic increase of the top marginal tax rate by 4.6%, from 35% to 39.6%.

As Tucker points out, this proposal increases the taxes for everybody making >$400K by the same amount whether their income is $500K or $50 million.

Holding up my thumb and squinting, I’m thinking the extra taxes for those folks would be $50-100K. This would be a massive percentage increase for $400K earners, but a drop in the bucket even for $4-million earners, much less the $40-million crowd.

Avoiding that 4.6% top marginal tax rate increase saves a $20-million earner almost a $1 million a year.

As Tucker also points out, this is a stupendous gift to those who have the means to really give back to elected officials — the donors who can make or break a campaign by signing a single check.

But I’m sure the Republicans haven’t considered that. They’re just trying to do What’s Best for America.

Cross-posted at Asymptosis.

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Politics and specific policies

by Robert Waldmann

At Frum forum Justin Green extensively quotes Jeb Golonkin on how conservatism could be much better if conservatives made specific policy proposals.  Sad but true, almost all of the proposals that have been signed into law are by Barack Obama.  This is not a rare event.  While many conservatives stick to slogans, some try to come up with constructive alternatives to the stimulus (ARRA) and Obamacare (PPACA).  I don’t remember where to link but the phenomenon of “Obamacare is horrible and we should replace it with Obamacare” is quite common.

Golonkin’s proposals are in bold, and then another of my comments follows. Recall that the PPACA is Obamacare and the ARRA is the stimulus bill.

Golonkin’s problem is that Obama has been there and done that.  Golonkin’s innovative conservative proposals are mostly existing liberal policies.

Golonkin:  Somewhere along the way, we conservatives stopped innovating and stopped explaining, preferring instead to fall back to “small government is better.” Well, maybe it is and maybe it is not. But the notion that government is always useless simply does not ring true in a world where people look to the government to provide Medicare, a national defense, FEMA relief, and public education. This being the case, we would do well to start probing for specific policy solutions that affect people in concrete ways. What is the government doing that is hurting small businesses today? What is the government not doing that it could be that could help small businesses?

It is not now organizing health insurance exchanges to remove big businesses advantage in insuring employees, because big business work forces are automatically large pools of policy holders helping big but not small businesses interacting with health insurers avoid the adverse selection death spiral.  It would also be nice, above and beyond the call of eliminating a market failure, to offer them subsidies.  See ‘healthcare fiasco’.

Golonkin: What about student debt? 

How about ceasing to pay banks huge amounts of money to handle simple paper work and divide the savings between reducing the federal deficit and reducing the amount students have to pay on their debt.  See ‘healthcare fiasco’

Golonkin: Can we use student loan forgiveness as a way to incentivize bright young people to enter particular fields? We need more primary care physicians if we are going to make this healthcare fiasco work. No one wants to be a primary care physician because primary care physicians get paid less than specialists, which makes it harder for them to pay off their medical school debts. But could we change the way the government reimburses primary care? And couldn’t we partially forgive student loans if borrowers agree to enter into primary care in particular markets for a certain number of years?

See ‘healthcare fiasco’ and click (warning a *.doc will download)
So far all of the bright innovating conservative ideas are provisions of the ‘healthcare fiasco’.  Some are not current policy because they are scheduled to start in January 2014, but mr ‘specifics specifics specifics’ didn’t let that little detail prevent him from arguing that a bill which is largely not yet being applied and of which he demonstrates astonishing ignorance is a ‘fiasco’. 

Golonkin:  What about tax policy: why are we not on the cutting edge of hyper-targeted tax cuts that we can show, with numbers, turbocharge the economy? A wish is not a plan.  Wishing that conservatives can show, with numbers, that there are tax cuts that turbocharge the economy doesn’t make it possible.  There are many conservative academic economists who have looked very hard for proof that some sort of tax cuts turbocharge the economy.  They haven’t shown this, because it is not true.  yes many conservatives consider numbers foreign alien and un-American (especially arabic numbers).  However there are also conservatives who love numbers and are statistical and mathematical geniuses.  The reason they haven’t shown with numbers how wonderful tax cuts can be is that it is impossible to show something false with numbers.  The high respect of ‘numbers’ is for their power as tools for convincing people. 

Golonkin doesn’t need to look at any numbers to be sure it is possible to show with numbers that some tax cuts are great.  This is not the way anyone who knows what data are talks about it.  Conservatives, including Golonkin, have the very serious problem of thinking they know the answer before looking at the evidence.
Also I fear that Golonkin believes his hyper targeted tax cut proposal is pro market.  It is, in fact, based on his conviction that policy makers (provided they are conservative) can guess better than the market and wisely subsidize particular activities. The pro market position is that tax rates should not be targeted but rather that the playing field should be level.

Golonkin:  Why are we not demanding that the government rebuild our cratering infrastructure rather than using taxpayer dollars to invest in projects it hopes will succeed (Solyndra)?

Yes how about spending more on infrastructure ?  Nothing like the ARRA but spending on infrastructure.  How did Golonkin manage to avoid the phrase ‘shovel ready’ ?  He is now calling for the ARRA.  Also he doesn’t recognize that hyper targeted tax cuts are using taxpayer dollars to invest in etc.  It doesn’t matter if the money is called a tax cut or a subsidy or even the market value of a CDS (loan guarantee) as in the case of Solyndra.  The policy he advocates and the policy he mocks are implementations of the exact same reasoning.

Golonkin:  Why are we not pushing pay for performance in the healthcare system AND in our education system?

Pay for performance in the healthcare system.  See ‘healthcare fiasco’ and click
pay for performance in education recall the ARRA and google ‘race to the top’

Golonkin: Workfare?
Workfare was introduced under Reagan and tightened later.  This is the system before the welfare reform of 1996.  It was learned that it costs more to give welfare recipients money and make them work than to just give them money so states backslid and it never amounted to much.  It is an experiment that all agree failed.

Golonkin: Some of these ideas are useless, some of them might have legs, but the point is: specifics, specifics, specifics.

So we see what happens when a conservative tries to think of constructive policy proposals.  There is the wish that conservative claims be ‘shown with numbers’ plus Obama policy after Obama policy after Obama policy. 

I think Golonkin should spend more time and effort on understanding the enemy. He might discover that the enemy is not the enemy but rather what he dreams conservatism might one day become.

The shocking thing is that this pathetic display of ignorance is described as “particularly fine work” by non movement conservative Mark Adomanis in Forbes in a post entitled “Epistemic Closure in Action …”
Golonkin is not the example of epistemic closure.  He is considered a “particularly fine” example of how some conservatives are working to overcome epistemic closure.  The detail that the conservative in question has new conservatives ideas which are almost all either in the PPACA or the ARRA and that he doesn’t know this, does not make the Galonkin essay an example of epistemic closure. 
Rather it is an example of how some conservatives are trying to overcome it and understand liberals before denouncing us. 

I am tempted to type “pathetic” but I don’t pity them, I fear them. They are very numerous and their blind ideological arrogance makes them dangerous.

Note, the two conservatives in question are Green and Golonkin.

cross posted with Robert’s Stochastic thoughts

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Wages, prices, "profit", and productivity…and Black Friday too

Black Friday around here in New England begins to night in stores about 8 P.M. On the internet Black Friday’s discounts began last week as the competition heats up between companies with stores and internet based sales. Stores have responded with aggressive discounts, especially visible is Walmart.

This post is relevant to the issue of wages at Walmart, and points to deeper economic issues one has to keep in mind when reading about the economics overall versus a company policy.  This becomes especially poignant as some Walmart workers attempt to draw attention to wages, benefits, and hours the company paints as necessary.

Demos has some figures for thought in How Raising Wages Would Benefit Workers, the Industry and the Overall Economy.   Here’s a summary of the study from Demos:

This study assumes a new wage floor for the lowest-paid retail workers equivalent to $25,000 per year for a full-time, year-round retail worker at the nation’s largest retail companies, those employing at least 1,000 workers. For the typical worker earning less than this threshold, the new floor would mean a 27 percent pay raise. Including both the direct effects of the wage raise and spillover effects, the new floor will impact more than 5 million retail workers and their families. This study examines the impact of the new wage floor on economic growth and job creation, on consumers in terms of prices, on companies in terms of profit and sales, and for retail workers in terms of their purchasing power and poverty status.

“There is a flaw in the conventional thinking that profits, low prices and decent wages cannot co-exist,” says Catherine Ruetschlin, study author and Demos Policy Analyst. “The findings in the study prove the country’s largest retailers are in an ideal position to launch a private sector stimulus, leading the way towards a new model for American prosperity.”

Robert Reich offers his viewpoint below the fold:

Most new jobs in America are in personal services like retail, with low pay and bad hours. According to the Bureau of Labor and Statistics, the average full-time retail worker earns between $18,000 and $21,000 per year.

But if retail workers got a raise, would consumers have to pay higher prices to make up for it? A new study by the think tank Demos reports that raising the salary of all full-time workers at large retailers to $25,000 per year would lift more than 700,000 people out of poverty, at a cost of only a 1 percent price increase for customers.

And, in the end, retailers would benefit. According to the study, the cost of the wage increases to major retailers would be $20.8 billion — about one percent of the sector’s $2.17 trillion in total annual sales. But the study also estimates the increased purchasing power of lower-wage workers as a result of the pay raises would generate $4 billion to $5 billion in additional retail sales.

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Thanks from a reader to Bears

Mr. Dan,

When I started reading Angry Bear I was working as a technical editor (degree in English) and had zero knowledge of economics, but I was watching the (to me) economic weirdness going on in the 2000’s, and started reading economics blogs in a mostly vain attempt to discover what the heck was going on.
I liked Angry Bear because it had posts over a wide range of topics related to economics and current events, but had relatively little jargon, so that I could actually understand them. They generally made sense, and the comments frequently helped to clarify the posts.

I read six or seven economics blogs fairly regularly, and have other favorites like Krugman and Mark Thoma, Crooked Timber and Noahpinion. Other blogs tend to have a a narrower focus than Angry Bear, and sometimes get so technical they go WAY over my head, not to mention the comments.

I hit Angry Bear almost daily these days. Although your contributors and commenters have changed over the years, the blog remains (to me) interesting, accessible, and frequently entertaining, without being simplistic or excessively didactic, and the commenters usually add to the conversation. Either you don’t have any long-winded nit-picking, trolls (who can drive me nuts on other blogs) or you screen them out very effectively.

Angry Bear is the most layman-friendly economics blog that I have found, although Krugman runs a close second, and has stayed so over the years. Does it need to evolve, when it was really good to begin with?
My personal opinion?

Keep it up!


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