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

Linda Beale op-ed on the dysfunctional politics of the US economy

by Linda Beale

Trillion Dollar Coins, Fourteenth Amendment Powers, Executive Duties versus the Zanies on the Right who Want to Send us to Economic Purgatory: Krugman on the dysfunctional politics of the US economy

Paul Krugman appeared on Bill Moyers PBS program Sunday night, talking sanely and rationally about the economy and why jobs (should) come first–and along the way noting how politics now dominates what and how we can talk about economic policies.  See Moyers & Company, Paul Krugman on Why Jobs Come First (Jan. 11, 2013). 

(While you are at the site, also watch Moyers’ essay, The Crony Capitalist Blowout, about the goodies that corporations got out of the fiscal cliff deal, which included everything from immediate expensing to the active financing exception and the R&D credit–all subsidies for big corporations that spent lots of lobbying power ensuring they would get them).

We have all kinds of reasons to know that the US is not Greece and will not be like Greece–we are a powerful economy, we have our own currency, and our debt is widely respected.  Nonetheless, the right-wing radicals want to destroy the New  Deal programs–Social Security, Medicare, and Medicaid, and they are willing to take the entire economy hostage to try to get their way.  Just look at Pat Toomey in the clip Moyers shows on the show, threatening to put the US government into default unless the majority in Congress accedes to the will of the wacky minority.

That wacky minority hopes to use brinksmanship games around the debt ceiling to force progressives to yield on their dream target–decimating the New Deal.

The radicals on the right don’t really care about the debt ceiling–look at the way they willingly raised it throughout the Bush administration, even while viciously cutting taxes for the wealthy and creating huge deficits out of the surplus existing when Bush took office!  They don’t really care about deficits.  Look at the way they viciously cut taxes for the wealthy and spent on military budgets and preemptive wars when Bush was in office!

What they want is a radical restructuring of the economy in a way that will maintain and further the new gilded age, where bankers and private equity titans get rich off the labor of ordinary folk and ordinary folk find themselves eeking out a living at more or less the same rate they were before the Bush decades.  The top 1%, as Moyers pointed out, have seen a 275% increase in incomes over the last decade (due in large part to the Bush tax cuts, but also to the misappropriation of productivity gains by the rich).  Meanwhile, average American workers have seen their wages barely increase by $1.23 an hour…..not even keeping up with inflation.

Obama has said he will not negotiate on the debt ceiling.  He must hold firm.  There are various ways he can combat their “leverage”.  The obvious one is that it is unconstitutional for Congress to pass laws that require spending, pass laws that raise too little revenue to pay for that spending, and then refuse to permit the government to borrow to make up the difference that they have legislated into being.  That is irresponsible, and can be viewed as a violation of their constitutional obligation to ensure that the nation can pay for the debts it has already incurred.  See Taylor, Top Dems Urge Obama to Weigh Unilater Debt Hike, (Jan. 13, 2013).  Obama is correct when he highlights this.  And surely as President, his power reaches to borrowing to fund the government that he is obligated by Congress to run under the laws he is obligated to implement.  He should make it clear that he is willing to risk impeachment to test that power rather than be held hostage by their petty, selfish games.

What about the “trillion dollar platinum coin” idea?  This is the law that grants the executive the right to mint platinum coins of any denomination.  Why not mint a few that add up to a trillion, and then pay it to the Fed and draw cash from the Fed based on that coin, to pay our bills?  That is perfectly legal–Congress did not limit the use of the coins in the legislation authorizing them.  If Congress can play brinksmanship games by threatening to put the US in default and destroy our economy unless the majority enacts the pet legislation of the minority to destroy the Social Security, Medicaid, and Medicare safety net programs, then the Executive should be willing to use every tool at his disposal to prevent that.  Of course, Treasury today said it wouldn’t do that.  See Anne Lowrey, Treasury Won’t Mint Coin to Defy Debt Ceiling, New York Times (Jan. 12, 2013).   Stupid of them to do so, since it is clearly within the law.  Obama cannot “wimp out” on this debt ceiling issue (to use Krugman’s term):  if he lets the  zanies in the GOP use these tactics to force changes in the safety net programs, he will have destroyed the Democratic party and the recovery from the Grand Recession in one fell swoop.

Remember, the analogy of US government debt to household debt is a silly one, just as is the analogy to Greece.  The government is not a family; our income is not the fixed wages of a head of household; our debt may feel staggeringly large for ordinary people to comprehend, but it is not too large a share of our GDP and our cost-of-funds right now is incredibly low.  We should borrow while the borrowing is good, to pay for the vital infrastructure repairs that need to be made and to ensure that we do not default on a key obligation to our people–the provision of a decent standard of living through measures that encourage job creation (by creating demand) and provide security against job loss and the vulnerabilities of old age and sickness.

The Peterson Institute is spending half a billion dollars to distort the public’s understanding of debt and deficits, in order to convince Americans that we should run the government like they run their households, in terms of amount of debt.  But Peterson is a right-wing billionaire whose views are antiquated and wrong for the time.  Keynes is the only one who has had it right, and we should listen to Keynes, not Friedman’s brute capitalism theories of a “free” market in which the wealthy control the assets and confiscate the rewards, not Peterson’s cacophonous sounds about debt.

Look again at Moyers’ program.  He runs a tape where Lloyd Blankfein–head of Goldman Sachs, filthy rich, and one of the culprits of the financialization of the economy and the speculation that threw us into the Great Recession–talks about how ordinary people will have to give up on their expectations from Social Security and Medicare.  Entitlements, he says, just can’t deliver what people want–we can’t afford it.  This from a guy who has socked away millions garnered from the everyday lives of ordinary people.  This from a person who has ridden the easy street rail line of subsidized profits for his banking firm (cost-of-funds extraordinarily low due to the government bailout; and subsidies in the code both internationally (active financing exception) and at home (the tax treatment of derivatives has been extraordinarily kind to banks in terms of sourcing and therefore taxability), etc.  This from a person who has enjoyed a priviledged preferential rate of taxation on much of his income, lobbied for through the revolving door of Treasury officials and banksters and their attorneys.

No, Obama shouldn’t listen to the Blankfeins of the world, or the Norquists, or the Toomeys.  He should turn a deaf ear to Mitch McConnell and to Rand Paul and all of those who insist that we have to keep funding the military-industrial oligarchy but that we can’t afford to keep funding the earned benefit programs that have made the difference between an intolerable standard of living and a decent standard of living for millions of Americans.

The Matrix: The Intersection of War, Economic Theory, and the Economy

Passing along a note from Michael Perelman at Econospeak:

The Matrix: The Intersection of War, Economic Theory, and the Economy

Vincent Portillo and I are working on a new book, The Matrix: The Intersection of War, Economic Theory, and the Economy. So far it is still remains an exploration rather than a finished research project. We intend to post our progress from time to time, hoping to initiate some comments and conversation.

Thank you in advance.

Here is the link.
Posted by michael perelman at 10:19 AM

Real business fixed investment.

Yesterday I compared real private GDP in cycles.

Today I would like to look at  real business fixed investment.

If you listened to CNBC — otherwise known as the Republican Propaganda Channel — or the campaign claims you would think that all the uncertainty created by Obama was destroying business confidence and that real business fixed investment was collapsing.

But the data shows a different story.  Three years from the economic bottom  real business fixed investment is up some 18.0%, or about the same as during the Clinton years.  In contrast, during  the
“Bush Investment lead Boom” it was up only up 6.9%, or about a third of the current cyclical rise.

(Update…slightly edited for readability…Dan)

Andrew Sullivan reviews "Red Ink"

Andrew Sullivan reviews the book Red Ink.

Here are some shocking facts that I learned from “Red Ink: Inside the High-Stakes Politics of the Federal Budget. Where the Trillions Come From, Where They Go, and Why Inaction Imperils Our Future.”

  • An amazing 64 percent of the 4.4 million employees on the federal payroll are either uniformed military personnel or work for Defense, Veterans Affairs and Homeland Security. The U.S. defense budget is “greater than the combined defense budgets of the next 17 largest spenders.”
  • In 1981 Medicare and Medicaid accounted for 9.5 percent of all federal outlays. Twenty years later, that number had jumped to 25 percent. By 2021, if current trends continue, it will probably hit 31 percent.
  • “Today, Americans pay less of their income in taxes than citizens of nearly every other developed country.”
  • “In the early 1950s more than 30 percent of federal revenues came from the corporate income tax — in 2011, 7.9 percent.”

“Red Ink” is an extraordinarily useful book. It is exactly what author David Wessel, economics editor for the Wall Street Journal, claims it to be: “a collection of uncomfortable, indisputable facts showing the unsustainable fiscal course the U.S. government is on.”

Perhaps asking clearer questions might help? How does a person ask clearer questions?

Is Ireland the Poster Child of Growth?

by Rebecca Wilder

Is Ireland the Poster Child of Growth?

I wanted to familiarize myself with the economic statistics in Ireland, so I thought that I’d share my findings with you all. Many politicians refer to Ireland as the poster child of austerity – according to the contentious thesis of expansionary austerity (a review from the IMF .pdf here), is it therefore the poster child of growth? In this post, I review the cyclical data and find that the Irish economy is quite divergent with optimism only evident in the industrial and export sectors. In aggregate, there’s really been no momentum at all.
On the one hand, the industrial sector seems to be holding in okay, with the manufacturing PMIs remaining above 50 since March 2012. Furthermore, international saving, or the current account, moved from a 6% of GDP deficit in Q3 2008 to a small surplus in the fourth quarter of 2011 (4-qtr moving average). However, the current account has been deteriorating slightly at the margin, beginning in the second half of 2011.

Note: Except where noted in the legend, all charts below relate to the Irish economy.

In contrast, the consumer sector is suffering quite explicitly. After yesterday’s revisions to previous months, we now see the harmonized unemployment hovering near its peak rate, 14.6% in May vs. 14.8% peak (in the chart below, the red line maps the pre-revised unemployment rates). Consumer confidence is very low, which implies that retail sales could tumble a bit in coming months. Furthermore, price inflation lost some steam, although it remains above the deflationary period that ended in 2010 by the headline measure. Core inflation dropped off in the last couple of months to just 0.4% Y/Y in May. Finally, for all of the optimism on Ireland, Q4 2011 GNP and GDP are just 1% and 0.7%, respectively, higher than their 2010 lows.

It’s probably too early to fully discount the orthodox expansionary austerity thesis – but at the minimum, it does appear as if any economic momentum has been gained primarily through global trade, and that sector is struggling. In all, I’d say that Ireland looks more economically depressed than ambitious and not the poster child of growth.

Rebecca Wilder

crossposted with The Wilder View…Economonitors

Conflict of Interest

The Wall Street Journal reports:
Under new rules adopted by the American Economic Association at its annual meeting here last week, economists will have to disclose financial ties and other potential conflicts of interest in papers published in academic journals. Backers argue such disclosures will help restore faith in the profession by giving both policy makers and the public more information with which to evaluate economists’ advice.

Peter Dorman also comments.

Dr, Goose supplies some of the sarcasm I felt concerning transparency and the field of economics with this post:

Conflict of Interest

Said an econ professor named Booth,
While instructing America’s youth:
“The Original Sin
Of the business I’m in
Is to advocate, heedless of truth.

Members of the American Economics Association took a big step forward this past weekend at their annual meeting in Chicago, when they voted to adopt a code of ethics to address conflicts of interest. The 2010 Academy Award-winning documentary film “Inside Job” shone a harsh light on the ties of well-known economists to companies that later went bust in the financial crisis. Director Charles Ferguson charged that social scientists’ lucrative and undisclosed ties to corporate interests caused them first to miss the signs of the impending crisis, and then to recommend policies that benefited their clients at the expense of the broader economy. Inside the AEA, professors such as the University of Illinois’ Deirdre McCloskey echoed and amplified that view: “The master sin, in American economics especially, is advocacy without regard for the truth,” she said to fellow delegates.

The new code of ethics is a first corrective step, limited to disclosure of potential conflicts of interest. AEA members will now have to disclose all sources of financing for their research and all “significant” financial relationships with groups or individuals with a “financial, ideological or political stake” therein.
(reposted with permission from the author.)

What’s a person to do? or ‘motivated avoidance’

What’s a person to do? or ‘Motivated avoidance’

 From the American Psychological Association comes two studies here and here.

Individuals are often confronted with information that they do not know how to comprehend or evaluate, even though this information can be of critical importance to the self (or society as a whole). In the case of energy, nearly 40% of respondents in a Public Agenda (2009) survey could not identify a fossil fuel. Nearly one third could not identify a renewable energy source and incorrectly believed that solar energy contributes to global warming. This lack of knowledge should be of concern to these individuals, as 89% of respondents worry about increasing fuel costs, and 71% worry about global warming.
The economy serves as another example.

Approximately half of surveyed adults did not know what an increase in gross domestic product meant and thought that “money holds its value well in times of inflation” (National Council on Economic Education, 2005). Worse still, in a national survey of American adults, 54% of respondents did not know what a subprime mortgage was (Center for Economic and Entrepreneurial Literacy, 2009), despite the fact that the subprime mortgage crisis was a significant contributor to the economic recession that began in 2008, and almost certainly affected some substantial portion of those surveyed. In short, it is apparent that a solid grasp of the basics (let alone the complexities) of these domains elude many people, and there appears to be a discrepancy between how much people know about social issues and their importance and relevance to one’s day-to-day life.

Given the psychological discomfort associated with epistemic uncertainty, one appealing way to deal with the anxiety of being unable to comprehend or manage information is to simply outsource personal responsibility to supposed qualified others. This strategy may, at times, be considerably more appealing than seeking
out knowledge and information for oneself, which assumes that people have the time and ability to sieve through challenging, and potentially threatening, information. The amount of information available to us to sort, comprehend, and assimilate has substantially increased due to technological advances, all of which compete for our time and attention. As a result, trade-offs have been made over time whereby society’s members have forfeited a certain amount of autonomy to have these burdens placed onto systems of power composed of knowledgeable others. Society has prescribed that, for example, our health is managed by health professionals, our buildings by engineers and contractors, and, relevant to the present research, our social and economic security is managed by the government. Indeed, survey data show that 88% of adult respondents thought it was very important for politicians to have a good understanding of economics,

only are people motivated to avoid social issues when they feel issues are complex—thus maintaining their present level of unfamiliarity— but this effect appears strongest for those issues believed to be most urgent and serious. It is at times when change is most needed, therefore, that people may become the most likely to
defend the status quo and agents of sociopolitical systems. As such, the present studies suggest that rather than ensuring those in charge are maximally qualified to be in charge, and rather than remaining especially attuned to any limitations of the system, the psychological processes that are instigated when issues are seen as both severe and complex may limit any criticism of the current system and its decision-making process. And, perhaps even more critically, they may also prevent the types of behaviors, such as information gathering, that are necessary to efficacious social action
(Attari et al., 2010; Larrick & Soll, 2008).

italics are mine

This is the reality of a real small business

 By Daniel Becker

This is a bit of an interlude in my writing regarding the income tax of yore. Though, this does involve taxation. This is also a continuation in my postings regarding real world small business experiences. Yes, you are going to get to read about a real situation that involves a real small business and tax policy.
Before I mislead anyone, the taxes of concern are not about income taxation. Your business has to actually have an income for that tax to matter. I’m not talking personal income. I’m not talking capital gains taxes. Darn few honest to goodness small businesses ever have to worry about that in their daily activities. Maybe in the end you will have some capital gains after you pay yourself back all the personal money you put into your small business. I’m not talking payroll taxes cuts. Yeah, on what was a $100,000 payroll you gain maybe a couple thousand dollars, but on what was a ½ million business that is now 55% of what it was with payroll adjusted to match, it means little. I mean, that business is sure going to be hiring new people with that!
 Oh, just in case you think I’m off the mark, consider this poll from 11/10.   In the poll, 90% hired what was needed or fewer than needed. The catch: Only 1% hired because of the a new tax break. 41% were to replace an employee. When asked why they hired fewer than needed: 79% worried that sales or revenue would not justify more employees. However, 13% did hire because business was better. The lucky ones. So go ahead, keep giving me tax cuts, blah, blah, blah and all that monetary relief because that US Chamber of Commerce sure represents my thoughts and desires. NOT! Idiots!
Some perspective on small business.

“In 2009,there were 27.5 million businesses in the United States, according to Office of Advocacy estimates.The lastest available Census data show that there were 6.0 million firms with employees in 2007 and 21.4 million without employees in 2008. “

I know it is soothing to croon over the days when the Dodge Brothers, Ford, Colt, Walton and Gates were small and became major examples for their time of the American Dream of economic power. But really, the truth is most small business were and are people earning a living on their own vs working for Microsoft (the definition of part time abuse) or Walmart or GM, or GE or Boeing… They were huge numbers of small local retail. All gone. Small local banks? Going. Small local agriculture (RI used to have a state fair), forget about it.  Look around.
So lets get to the heart of it. First a bright spot. The flower shop had it’s first month this year that was better than last year. August. No, I’m not assuming this is a trend and here is why.

The city of Woonsocket has lost it’s Walmart to the town of North Smithfield, it’s neighbor. Major tax hit to the city. N. Smithfield got the Walmart because it decided that building a 650K sq ft shopping development would offset their rising taxes. I mean really, when in the last 30 years have we seen big business pay enough in taxes such that they actually were paying for their presence? Cut, cut, cut has been their chant. So, I can expect my property and inventory taxes to rise unless something replaces that Walmart. Say the state stepping up. Which tends to happen via the state giving less to the towns like North Smithfield.
I wrote about this type of tax chasing in one of my first posts.

“You know what is missing in this discussion (a discussion happening in every town USA)? The question: Compared to what? What are we basing the above statements on? Is it simply that we have less money after the bills are paid? Well, from 1955 to 1998, GDP rose by a factor of 20. Tax burden as a percent of income rose by a factor of 26.7. But income for a family of 4, 2 people working (sound familiar) only rose by a factor of 11.5. From 1976 to 2001 the top 1 % share of income went from 8.6 % to 21%. Yes, we have less money at the end of the day. Unfortunately, not benefiting from the national wealth as we had in 1955 (when the tax burden was 18% of your pay and would be today if all was equal) is a national policy issue.”

This is the issue of small business. See, we are all just trying to earn an income. Just like the person who works for the multinational. The income is much less because business sales are down. So, how should I plan for the pending tax rise? Do not just give me an answer that involves further big business moving into the area, because as I showed in the post on property taxes and development, it’s not so simple as welcoming Mr and Mrs. big business into the neighborhood.

“But, for my purposes Smithfield (an abutting town) presented the most interesting data. They had a new retail development go in, but ½ the size of that proposed for my town. It’s citizens have seen since 1999 in sequence a 9.8, 4, re-val, 5.5 and 8.7 percent rise in the tax rate. It’s commercial development has been only 10% industrial. My town only had a 6.4% total rise in the same time span.”

Oh save me great god of the mega corporations from the evils of local taxation. Yeah, I didn’t think praying would work.
Next up involves a CVS move. CVS is headquartered in Woonsocket. It obviously has some new hot shot who has a better way. They are looking to own their stores and not lease. They are consolidating 2 stores into one bigger store on new property. Yes, about ½ the property was zoned commercial, the other ½ was residential (real houses on it) turned commercial. This is important, because the CVS consolidation will leave 2 existing commercial spaces empty. We’ll add them to the Walmart space and potentially the Lowe’s space as it is suppose to be moving to the new North Smithfield development which is built on what was 126 acres of woods.
Sticking with Woonsocket, the location of my flower shop, the city has managed to add to its commercial property stock while turning a good portion of it into none productive commercial property stock. How soon do you think those empty places will fill up? Don’t hold your breath.
Some more good news. I managed to cut a major expense for the shop just this June to the tune of $379/month. We were in a unique position in that they kind of needed us. It’s not going to happen again. $4548 per year. Nice. It’s the heating expense for a year assuming the speculators don’t get active again. Yep, get rid of those government regulations as they sure are doing me harm. NOT!
The plaza that one of the CVS stores is moving out of is a customer of ours. We do seasonal decorating for them. It is about $3900/yr. Well, we’re not decorating with mums this fall and Christmas looks to be out too. How much you wanna bet spring next year and for some years to come is out? Gonna bet enough to do Washington a favor and higher someone?
Are you seeing where all this is going? I saved us some big coin. I’m loosing the same amount. Now, this is not the first hit from a CVS decision. Some other person there decided to make it simple for them to pay for their flower needs by going with Pro Flowers instead of feeding the 4 local florists which they had done for decades. They think they are getting a 20% discount from Pro Flowers. Little 
do they understand the flower business. Not the first time mega corps thought they new more than the little guy. It represented about 2.4% of our business at the time. May not sound like a lot, but when you consider the extra business generated by CVS using one’s shop to send flowers, it becomes significant.
Let’s add a third issue. Refi. Time to take advantage of the low rates. The purpose is to improve, that is reduce your monthly cash outlays. But as any real small businesses owner learns, there is no such thing as a fixed rate. We have paid off 22.2% of the loan that combined the original purchase of the business and property with the rehab that needed to be done in 2004. We have about 36% of the tax appraised value in equity of the property.
Here’s the concern, do you take a 20 yr loan with a rate of between 5 to 5.5% to be reset in 5 years or do you take 6 to 6.5% to be reset in 10 yrs? Do I bet that in 5 years business is better because the economy is better which could also mean all that projected inflation do to the Fed monetary policy and at least protect my self for 10 yrs? Or do I bet that nothing will be much better and try to preserve my cash flow (in a small business it’s always about cash flow, accrual be damn) and go for the 5% figuring the Fed money flood won’t roost for at least another 5 yrs? Oh, the refi cost are going to run you about $4000. There goes that big saving from my hard nosed negotiations again.
Your facing tax increases beyond the usual but, not because the public employees are paid too much. Your running out of area’s to cut. Major corporation moves are working against you just as off shoring is working against the middle class, the very class of your concern as you are in it and draw your income from it. And all the policy talk being pushed has little to do with the issues that you are facing because the number one issue you are facing is a lack of a middle class.
Have you heard of the “hourglass strategy”? Look it up. Ah, no it’s not a strategy you can use, but is one that will work against you.