Normative Narratives


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“The Beast” Has Been Starved, Long Live The Beast!

Starving the Beast

What is “The Beast”, and How to Starve It

Starve the beast is the long running small government belief of the GOP that if you deprive the government of tax revenue, it will be forced to cut spending. 

This theory has generally been disproven–despite concerns about “socialism”, social programs tend to be popular once enacted. Instead of starving the beast, when taxes are cut the deficit and national debt get larger as “the beast” continues to grow.

So what is a small government ideologue to do? How can one starve the beast in such a world?

Unlike the Federal government (the main “beast”), most state and local governments cannot run deficits. They are designed to have balanced budgets, which can be a problem when projected tax revenues fall short and expenses unexpectedly rise (like, say, during a once in a lifetime pandemic).

Congress must pass some sort of meaningful state and local government aid package. These governments employ about 13% of all payroll workers in the country. Many of the public servants they employ work jobs providing a broad array social services to the least well off, and their budgets fund non-profits that do the same. They pay for first responders, teachers and schooling, not to mention all the extra costs associated with safely getting kids back in the classroom whenever that happens. 

Don’t give me that tired line about “bailing out” mismanaged states. With careful wording Congress can address legitimate needs without bailing out states from any pre-COVID budgetary issues; it is ideology and partisan saber rattling holding back this aid, not any concern for economic justice or moral hazard. The economic recovery will lag, and poverty will be exacerbated, if state and local governments slash their payrolls and services at a time when both are needed more than ever. 

Another way to “starve the beast” is to go after programs that are funded through specific “trust funds”, like Social Security and Medicare. These programs are funded through payroll taxes, so cutting the payroll tax could effectively starve that portion of the beast. Even though it likely wouldn’t lead to cuts to these popular programs, the legislative fight to reallocate money for them would present the GOP with an opportunity to push for cuts to other important programs.   

So where do we find ourselves now? In the middle of a manufactured fiscal crisis on top of a terrible recession and pandemic. The Democrats passed a bill 3 months ago in preparation for this, but the GOP has neither passed a bill nor negotiated from the Democrats starting point.

So what was the GOPs response? First, to wait until the last second to even try to start developing out a solution. Then to balk at providing state and local governments the aid they need, despite decades of empty rhetoric about how state governments are best positioned to meet the needs of their people. From the Trump administration the plan is to suspend the payroll tax that funds Social Security and Medicare (an idea he’s been floating since March that no one in his own party even wants), and further strain state budgets by asking them to foot part of enhanced UI benefits.

Taken together the GOPs plan was to cynically try to blame the Democrats for not having a deal in place, while starving whatever “beasts” they could.  

The COVID Spotlight

The corona virus has brought the structural inequalities of America to the forefront. Poorer people and persons of color were more likely to lose their jobs and be exposed to and die from the disease due to interrelated factors such as occupation, income, wealth, underlying health conditions and access to medical care.

People have rightfully been critical of the Trump administration’s response to the corona virus, but these issues are different in that they all predate the pandemic. In order to address them, two things are needed:

  1. An economic system that does a better job of promoting equality of opportunity by providing or making affordable the bare minimum needed for people to reach their cognitive potential (early childhood development programs, universal pre-K), care for themselves when they are sick, and receive the education and job training needed to live a life of dignity and meaning.

    We also need a plan to address structural racism, as history and current systems have left persons of color at a disadvantage relative to their white counterparts (perhaps most simply visualized by racial wealth inequality, even when controlling for income). Call this the “Thurgood Marshall plan”.

    Despite what Trump says, racism will not fix itself with economic growth. For too long that lie has been told, as people of color have been “last hired, first fired” recession after recession. If only the expansion had lasted just a bit longer, Trump says, we would’ve achieved economic and racial justice. Don’t point to relatively low black unemployment and poverty rates pre-COVID as proof Trump is right, those metrics obscure the inequality of opportunity and often times insurmountable headwinds facing America’s least well off.

    Being employed and not in poverty are bare minimums, not high-water marks to be celebrated when finally achieved for a brief moment at tail end of the longest economic expansion in American history. The idea that we may get back to that point 10 years from now should not excite anyone–structural changes are needed.

  2. A stronger social safety net, for those who need temporary support when they are down on their luck (or when something completely outside their control, like a global pandemic, uproots their life).

    On a macro level such programs temper economic downturns and prevent poverty from spiking during them. The recent expiration of enhanced UI benefits without any plan in place with have a negative impact on both these fronts. 

As the past few months have laid bare, a lot of work remains to be done. As comedian John Oliver put it:

“There is no better argument for a permanent welfare state then watching the government desperately trying to build one when it’s already too late. Because make no mistake, the real test here isn’t whether or not our country will get through this, it will. The question is how we get through this, and what kind of country we want to be on the other side…”

Trying to build an adequate safety net from scratch has led to some truly remarkable inefficiencies in our response, from unemployment claim backlogs to small business and hospital aid flowing to undeserving wealthy interests, to outright fraud. In other words, America paid a premium for slapping things together at the last second.

Creating a more just economic system is a more difficult undertaking, but ultimately even more important. In addition to creating a fairer society, getting that right would lead to more long term economic growth as a larger pool of innovators and entrepreneurs reach their potential. It would also lead to savings in our criminal justice system, poverty reduction efforts, mental healthcare, and other “safety net” programs, as fewer people would be reliant on them. To quote Fredrick Douglass, “it is easier to build strong children than to repair broken men”.

In other words America has long been paying the price for our structural inequalities. These costs have just been unfairly ascribed to the very people weighed down by the systems that have failed them, in the largest scale example of victim blaming you will ever see.

Feeding The Beast

Both of these undertakings–building a more just society and a stronger safety net–require not only political will but also large sums of money. America was already heavily indebted before it devoted almost $3 trillion to “managing” the COVID outbreak (if you want to call what the Trump administration has done “managing”). Then there is the stalled stimulus bill that will ultimately need to be passed in some form or another, which will probably settle around $2 trillion

Believe it or not, none of this spending is actually an economic recovery plan (think jobs programs, infrastructure spending), which itself will also likely be in the trillions. All this spending needed to address a bungled COVID-19 response, combined with the GOPs tax reform bill that is projected to reduce tax revenue by over $1 trillion over the next decade and unresolved long-term structural issues funding Social Security and Medicaid, and America’s fiscal outlook is bleak. 

But there is hope. We can pay for the many demands Americans have on their governments. After all our governments are not beasts to be starved, but rather the most important institutions we have in promoting the twin goals of justice and economic dynamism. 

The good news is that the GOPs unpopular tax reforms can be undone, and “tax justice”–raising enough revenue to pay for the programs society needs–can be achieved. But it will take an administration that believes in both the ability of government programs to improve people’s lives and in international coordination on tax dodging (because of how easily money can be moved around the world these days). These are two things the Trump Administration is diametrically opposed to.

Because this is a global pandemic, governments around the world find themselves in the same boat–with the demands of their people far outstripping their current abilities to bring in tax revenue. Debt levels have exploded as spending increases and tax revenues shrink. This presents a unique opportunity to engage in truly meaningful action against “base erosion and tax avoidance” (BEDS), one that must not be wasted. Outliers must be treated like pariahs; the global community needs to sanction them until it is proven that white collar crime doesn’t pay.

It may be odd to hear me say it, but generally speaking now is not the time to be raising taxes. At any given moment appropriate fiscal policy is context sensitive and “counter-cyclical“. This is exactly what all this stimulus spending now is for (to prop up the economy during a deep recession), and another reason why the GOPs tax bill was not only regressive but unnecessary (stimulus mostly for the rich during an economic boom). 

But if we try to raise taxes now, when we are beginning what is likely to be a prolonged global recession, it could choke off any recovery we might otherwise realize. This is less true of tax reforms that target the wealthy, or just funding the IRS enough to effectively audit wealthy dodgers, but generally speaking this is not the time to be raising taxes, particularly on small and medium sized businesses. 

This absolutely does not mean there aren’t meaningful steps to take on taxation. Now is when America must do the heavy lifting of leading the global effort to setup a tax framework that works for the 21st Century by plugging up all the holes. If we can accomplish this difficult task it will be relatively easy to raise not just the statutory tax rate (what the tax code says), but more importantly the effective tax rate (what is actually paid), when the time is right.

 


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This Time’s Different (But the GOPs Response is the Same)

Low borrowing costs for the Federal government further support massive stimulus to counter this crisis

With the Coronavirus pandemic, the world is clearly facing its greatest economic challenge since The Great Recession.

Back then there was a narrative amongst conservative lawmakers that overly generous lending to poorer people caused the housing crisis. If pro-poor policies got us into this mess, they couldn’t possibly get us out of it, went the GOPs argument against bailing out Main St. (that, and pretending to care about the deficit).

This was of course always utter bullshit; while some people undoubtably borrowed outside their means, predatory lending practices were primarily to blame. If a person could not afford a house, it was the bank’s job not to lend to them. Then of course there was financial deregulation, enabling bad practices by investment banks, and willful negligence by rating agencies, all of which paved the path for the housing crisis to crater our entire financial system and the overall economy.

That brief history lesson was intended to juxtapose that crisis to this one. Whereas back then one could plausibly argue (however weakly, and against all evidence to the contrary) that regular people were responsible for the crisis and therefore had to pay the price, lest they repeat their past mistakes (the “moral hazard” argument, an old GOP favorite), that is clearly not the case this time.

This time we have a deadly, infectious disease, not a mistake made by Americans, although the Trump administration has certainly botched the response thusfar. But I digress, there is plenty of time for the blame game later, now is the time for decisive action. The point is that regular Americans clearly did not cause this crisis, so where is the support they need–right now–that only the Federal government can provide?

The answer, as it all too often seems to be these days when one asks why common sense isn’t being reflected in public policy, is that it is stuck on Mitch McConnell’s desk. Or more precisely, it is being help up by GOP Congressman Louie Gohmert (before it gets stuck on McConnell’s desk).

Even if this is only ends up delaying an adequate response by a few days (an incredibly optimistic assumption), right now every moment is precious. Every day that passes without a meaningful response means more more dead Americans. It probably means additional weeks of restrictions on the backend of this thing. And it risks turning what will already be, in the best case scenario, a significant recession, into a full-fledged economic crisis similar to The Great Recession. In other words, the longer we wait the more expensive an adequate response will be.

Economists are quite clear on what needs to be done, summed up nicely by the IMF Managing Director Kristalina Georgieva’s call for massive, coordinated fiscal stimulus:

As the virus spreads, the case for a coordinated and synchronized global fiscal stimulus is becoming stronger by the hour,” Georgieva said.

Georgieva, in her blog, suggested that coordinated fiscal action on the scale of the 2008-2009 financial crisis may be necessary. She said that in 2009 alone, Group of 20 countries deployed about 2% of their GDP in stimulus, or about $900 billion in today’s money, “so there is a lot more work to do.

She said that governments should continue to prioritize health spending and provide support to the most affected people and businesses with policies such as paid sick leave and targeted tax relief.

Georgieva said all of the fiscal, monetary and regulatory actions would be “most effective when done cooperatively.” She added that IMF research shows that spending increases have a multiplier effect when countries act together.

So the proper course of action is a large government spending program, coordinated with other countries. Sounds like that’s right in Trump’s wheelhouse, what could possibly go wrong?!

Can Trump and the rest of the GOP rise to the occasion, and do what everyone knows is best even if it goes against their ideology? Of course they can, but unfortunately I’m not optimistic they will. I think whatever watered-down version of a Democratic proposal they eventually pass will be too little too late. In fact it’s already later than it should be; the virus has been in the country for almost 2 months, how do we not yet have a coherent, comprehensive response? How did we not have a plan in place for the worst case scenario?

So when we look at the House-passed relief bill, and wonder why it doesn’t mandate large companies provide paid sick leave (the companies that can most easily afford it), remember which party lobbied for that exemption.

When Mitch McConnell inevitably responds to Chuck Schumer’s request for a $750 billion stimulus package to address this public health emergency and economic crisis with a call for a “bipartisan solution”, lets be clear on what that means. It means that whatever response the Democrats come up with, in line with expert advice, will be delayed in order to make sure it reflects conservative ideology, to the detriment of public health and the economy (things that affect real Americans of all political stripes).

Don’t get me wrong, bipartisanship is a good thing in theory. However when one party is putting ideology over expert advice in a time of national emergency, delaying the decisive action required and therefore making an inherently bad situation worse, with little if any benefit to anyone, then bipartisanship has become an impediment to serving the public interest. It is a hollow plea, as the party calling for it no longer truly represents the interests of its constituents.

The fact of the matter is that if the GOP was so concerned, we’d have heard proposals and seen draft legislation from them by now. Instead all we’ve seen is ideologically driven counter-proposals, divorced from need, as if this is all some sort of game. Well that’s not all, we’ve also seen a President who is so tone deaf, whose priorities are so out of wack, and who is so clearly not up to the task that it’s scary. Don’t agree with me? Ask Wall St., or Main St., or anybody who hasn’t completely lost their mind drinking the Trump Cool-Aid these past few years.

So what can we do about it? At this point just practice good hygiene, try to get tested if you have symptoms, socially distance yourself, and don’t buy more stuff than you need. That and remember which party just gave a trillion dollar tax cut to the wealthy but will tell you we can’t afford to properly address this crisis. Remember which administration recently pushed relevant medical experts out of the government. Remember which party is delaying the response the American people need and deserve. Remember all these things, and hold them accountable during the 2020 election.

Note: While clearly very critical, this post is not meant to be a partisan attack. Rather it is a challenge, a throwing down of the gauntlet. It is a reminder of past mistakes, and a plea for the same party not to make them again when the stakes are arguably even higher. The answers are there for them, all they have to do is not stand in the way.

Please, GOP, prove me wrong. I want to be wrong. I want to look back on this blog a few days from now and feel like a reactionary, partisan fool for writing it. I just don’t think that will be the case or else I wouldn’t have written it in the first place. I take no pleasure in writing these words.

Update (4/13):

I maintain that the stimulus bill was well developed. There are a few holes in it–not enough funding for state and local gov’ts hit hardest by this, for testing and protective gear, or for hospital and other essential workers. These are issues the Democratic party is trying to address in the next bill, but the GOP has balked at, with Senate Finance Committee Chairman Chuck Grassley (R) calling them “things that right now do not need to be done”.

There is also a very large tax cut for wealth real estate developers tucked into it ($170 billion over the next decade)–talk about a “thing that right now did not need to be done…”

Still, this bill was an overall success. Maybe I’ve set the bar too low, but some “pork” in a bill this size, that was passed this quickly, seemed inevitable. It was still, in my mind, a rare example of swift, bipartisan cooperation.

There are, however, two major issues with it:

  1. It was developed too late, playing catch-up to a worst case scenario we should’ve been preparing for for weeks (in other words, it shouldn’t have had to have been developed so swiftly).
  2. It is being administered through government agencies that have either been starved of funds for decades (the IRS), or were never meant to operate at this scale (states unemployment insurance agencies, the Small Business Administration)

Both of these are really tied to the original sin of lack of planning and leadership by the Trump administration. The first issue is explicitly that–lack of planning. The second issue is related because, had we planned in advance, we could’ve hired the people needed to administer these programs.

With the exception of the IRS (which as been bled of funding for decades by a GOP that doesn’t want it to enforce tax laws on it’s wealthy donors), no one is suggesting the SBA or state’s unemployment insurance offices should always maintain emergency levels of staffing. But that’s exactly the point. When you fail to plan, not only are you playing catch-up in developing the plan, you are also playing catch-up in administering it too. Congress did it’s immediate job in passing a huge bill relatively quickly. But if that plan cannot actually be carried out in a timely matter, it will be much less effective than it otherwise could have been.

People living paycheck to paycheck cannot afford to wait. Neither can most small businesses.

Update (3/25):

Well I gotta give it to them, Senators came together and it seems like they will get a very workable bill passed. I said I wanted to sound like a partisan fool for writing this article, and now I am happy to say I do.

The $2 trillion package should help mitigate the worst economic damage of this crisis. It should help ease the humanitarian crisis that would otherwise hit a large swath of economically insecure American’s (the number of people this includes is troubling, and points to larger structural problems in our economy, but those are longer term issues that could not be addressed under the barrel of a gun). It should generally help businesses maintain employment levels, provide protection for people who are laid off, and put the economy in a good position to spring back once the health crisis is resolved.

Now IF only someone could get into POTUS’s ear and tell him not to restart the economy too soon (and to authorize wider use of the Defense Production Act), I’d say on a policy level we’ve addressed the economic crisis reasonably well (for now, we will still need to have a recovery plan in place for when the economy opens back up, something House Speaker Pelosi has started to address). We can and should ultimately discuss what we should’ve done in the weeks and months we saw this thing coming down the pike; I certainly do not absolve the Administration of it’s missteps and their grave results. But lets take a moment at least to acknowledge a win when we have one–the nation deserves that.

The numbers of cases and deaths will continue to rise as we move along the curve, that much is clear. Those cases already exist, and this lag is due to a shortage of tests (an example of a Trump admin failure), and due to the nature of this virus–a long incubation with many asymptomatic vectors spreading it around. That is not a good barometer of how effective this economic rescue plan is. Nor is how bad the economic numbers get in the short term. Rather, this is about how the economy ends up bouncing back.

Lets be clear, any handwringing here is contingent to getting the health crisis under control. If we restart the economy too soon then this stimulus money will have been needlessly squandered, and many people will needlessly die. But at least now we can refocus our efforts on the more important task at hand. The spotlight now turns from Congress back to Trump (gulp).

Update (3/23):

An almost $2 trillion stimulus bill is stalled in the Senate, where Democrats are arguing it fails to put enough conditions on loans, including restrictions on stock buybacks and requirements that companies maintain employment levels:

“At the heart of the impasse in the Senate is a $425 billion fund created by the bill that the Federal Reserve could leverage for loans to assist broad groups of distressed companies, and an additional $75 billion it would provide for industry-specific loans. Democrats have raised concerns that the funds do not have rules for transparency or enough guardrails to make sure companies do not use the funds to enrich themselves or take government money and lay off workers. They also argue the measure would give Mr. Mnuchin too much discretion to decide which companies receive the funds, calling the proposal a “slush fund” for the administration.

Democrats are also pushing for more jobless aid and money for states as part of the agreement. 

“Let’s be clear about what we are talking about here: We don’t think your bill works,” said Senator Chris Murphy, Democrat of Connecticut. “This is a policy disagreement, and I have an obligation as a representative of my state to stand up and say when I don’t think a $2 trillion bill is going to solve the problem.”

“This bill is going to affect this country and the lives of Americans — not just for the next few days, but in the next few months and years,” Mr. Schumer said Sunday evening, “so we have to make sure it is good.”

Sen Schumer is right, a bill this big will undoubtedly affect every policy debate in some way for at least the next decade. Every budgetary dispute will be viewed through the lens of what is shaping up to be the largest stimulus package in modern U.S. history (that and our weak tax code).

This needs to be done quickly. This needs to be done right. Lock em’ all in a room until they figure out a way to make that happen.

Update (3/20):

The Senate passed the House’s bill expanding paid sick leave, unemployment insurance, and testing. A good first step (well technically second).

The Trump admin’s new larger stimulus proposal seems to be more direct cash payment based than payroll tax cut based. While this is an improvement, it is still not the proper response.

We should be helping the most vulnerable people; both economically vulnerable people and those on the front lines fighting this thing. Any resources those on the front lines need must be provided. We should expand unemployment insurance and social safety net measures (for those working in the informal economy that wouldn’t be covered by unemployment insurance). Simply put if you keep your job you do not need $1,000, and if you lose it you need a hell of a lot more.

Small businesses will need help as well. A targeted payroll tax cut should help with this. Small restaurants, bars, and other small business owners should get direct aid (independently owned and franchises–not major corporations). Directly impacted industries dominated by large companies (airlines, cruises, hotels) should get preferential loans with the condition they maintain employment levels. Other than that large companies in other industries should get some loan assistance, but generally speaking have already claimed their “aid” through decades of tax avoidance and the recently passed GOP tax bill–they can largely weather this storm themselves.

With all the demands on the government right now, we need to be both swift and targeted in our response. Our leaders can deliver a package that checks both those boxes if they so choose, as long as they continue to put the good of the nation over partisan politics.

Update (3/18):

The Trump administration wants a stimulus package in the area of $850 billion to $1 trillion. This is a good thing, right? I was wrong, right?

Overall yes–that both parties and the White House are acknowledging that a large stimulus plan is needed to address this crisis is a good thing. But there are major caveats to that statement.

For one, the Senate still hasn’t passed the House’s smaller measure mandating paid sick leave and providing funding for poor kids who will stop getting school meals and other vulnerable groups, so lets hold off on congratulating anyone just yet.

But the larger issue here is that it’s not just the size of the stimulus bill that matters, but it’s substance as well. Back in 2009, Obama’s stimulus package was criticized for being too tax break heavy, as opposed to targeted government spending which has a higher “multiplier” effect (basically return on investment–how much each dollar of stimulus impacts the overall economy). Guess which party was pushing for more tax cuts and less spending back then?

Unfortunately, it seems like we are going down a similar route now to appease conservative ideology. Trump’s plan is very payroll tax cut heavy, an idea that economists and lawmakers of both parties are not very excited about. But because it was the stable genius’s original plan, and any stimulus package will require his signature, it may end up needing to feature it.

Look, I have no problem with a targeted payroll tax cut for small and medium sized businesses who really need it to keep from laying people off, but not a blanket one that helps big businesses that can already weather the storm with huge cash reserves. But as we saw from negotiations in the House, where the GOP insisted large employers be exempt from providing paid sick leave, there is little to suggest that a targeted cut is what is on the table.

Everything we do now has to be about protecting the most vulnerable–both people and businesses. Relief for people should come in the form of expanded unemployment insurance and social safety-net provisions (to help those who work in the informal economy), not in blanket payments to all Americans (which benefits the wealthy and those lucky enough not to lose their jobs). Any relief to large companies should come in the form of interest free loans (like the auto industry bailout), not further cutting their already ridiculously low tax bill.

While some GOP lawmakers probably just want to do what we know is right, many will probably fall in line with what the POTUS and their party’s broken economic ideology dictates. Unfortunately, the GOP really does seem to be intent on repeating it’s past mistakes.


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Economic Outlook: Magic Asterisks v. Cross-Country Analysis

imageunemploy

The Great Debate Continues–The Austerity v. Stimulus Referendum of 2014:

It has been over 6 years since the beginning of “The Great Recession”. As the stimulus vs. austerity debate rages on, it is worthwhile to evaluate the efficacy of these competing economic ideologies, as they are essentially up for referendum in the 2014 U.S. midterm elections.

It is almost impossible to find truly neutral economic analysis; there are experts and spin-doctors across the political spectrum, people whose jobs are to cherry-pick facts and provide anecdotes to vindicate their positions. I try my best to be objective, but I am sure that my progressive biases are evident to my readers.

One thing that cannot be faked, at least in modern democracies, is macroeconomic history (thanks to advances in data collection, government budgetary transparency / accountability and communications technologies). So what have the past 6 years taught us?

On one hand, the doctrine of “expansionary austerity” relies on “magic asterisks“–the math doesn’t add up. This is not just a liberal claim, it is backed up by the [absence of] economic growth in countries and states that have tried / been force-fed the bitter pill of “expansionary austerity”.

On the other hand, robust, cross-country analyses of post-Great Recession economic policies, carried out by the IMF, have [slowly] acknowledged the damage caused by austerity / benefits of stimulus spending (and this is the IMF here, not exactly a pro-poor institution).

The Case For Austerity–Magic asterisks:

At the state level, Republican governors — and Gov. Sam Brownback of Kansas, in particular — have been going all in on tax cuts despite troubled budgets, with confident assertions that growth will solve all problems. It’s not happening, and in Kansas a rebellion by moderates may deliver the state to Democrats. But the true believers show no sign of wavering.

the nature of the budget debate means that Republican leaders need to believe in the ways of magic. For years people like Mr. Ryan have posed as champions of fiscal discipline even while advocating huge tax cuts for wealthy individuals and corporations. They have also called for savage cuts in aid to the poor, but these have never been big enough to offset the revenue loss. So how can they make things add up?

Well, for years they have relied on magic asterisks — claims that they will make up for lost revenue by closing loopholes and slashing spending, details to follow. But this dodge has been losing effectiveness as the years go by and the specifics keep not coming…

The Case For Stimulus–IMF Cross Country Analysis:

The International Monetary Fund, showing heightened concern over a slowing world economy, said on Tuesday that cash-rich countries like Germany needed to step up large public investments to help keep the flagging global recovery on track.

Its estimate for United States growth in 2015, 3.1 percent, outpaces all major industrialized countries and exceeds as well a number of emerging markets, which in theory are supposed to grow at a substantially more rapid clip.

The fund unveiled this week a paper arguing that large-scale infrastructure investments, if properly undertaken, could bring relatively quick growth benefits — a message that seemed to be directed at deficit-obsessed eurozone governments, including Germany.

“Infrastructure investment, even if debt-financed, may well be justified,” Olivier Blanchard, the fund’s senior economist, said at the news conference on Tuesday.

Mr. Blanchard pointed out that with interest rates at modern-day lows — Germany can borrow money for 10 years at below 1 percent — taking on extra debt to stimulate the economy need not be seen as profligacy.

He offered up a brief economic primer to underscore his point. “It is an irony of macroeconomics,” he said with a small smile, “that for countries with too much debt, sometimes the solution is to create more debt.”

Mr. Blanchard, who oversees economic research at the I.M.F., was behind the fund’s public recognition two years ago that heavy-handed austerity policies in Europe had a larger-than-expected impact on economic growth.

Now, it seems, the global watchdog seems to be going one step further by urging eurozone officials to relax their rigid austerity measures.

What Does “American Exceptionalism” Mean to You?:

In America, those who oppose stimulus spending–fiscal conservatives–also tend to believe in “American Exceptionalism”. What happens in other countries is not relevant to America; “we’re special”, they claim.

These same opponents of stimulus spending may also argue (with negative connotation) that “the U.S. is turning into Europe”. However,  as you can see from the graphs at the top of the post, the U.S. has far lower spending and unemployment rates than other wealthy economies.

The great irony, which I am sure is lost on those who worry about the “eurofication” of America, is that it was in large part our ability to pursue policies that they would consider “European” (the ARRA, QE), that enabled the U.S. to lead the global economic recovery.

I too believe in “American Exceptionalism”. To me, however, this exceptionalism is more about the extra-territorial obligations that come with being the world’s strongest economy, military, and reserve currency, than an heir of hubris which precludes considering the experiences of other countries when drafting policy. But that’s just my opinion.

Debt Sustainability, MMT, and Context Sensitive Macroeconomics:

The issue of debt sustainability, however, is far less subjective. America’s relatively high growth rates, and historically low interest rates (thanks to central bank independence and a sterling history of honoring our debts), make stimulus spending both feasible and fiscally responsible.

I am not fully sold on the merits of Modern Monetary Theory (MMT), it seems too radical to me. I am, however, a proponent of context sensitive macroeconomics; expansionary fiscal policy (stimulus spending) is appropriate now, but may not always be. However, the temporal nature of democratic politics makes offering future deficit reductions in exchange for stimulus spending, impracticable (which is unfortunate, as this approach is just what the doctor ordered). 

Government spending need not take the form of “paying people to dig holes and then refill them”, a picture anti-government proponents love to paint. There are glaring infrastructure weaknesses that pose serious problems from both public safety and economic perspectives.

Furthermore, in the current context, government spending would not “crowd out” private investment. In fact, if properly enacted, stimulus spending should increase private spending. Governments around the world are increasingly embracing public private partnerships (PPP)–leveraging public money to raise private funds when it serves both sectors interests (such as infrastructure spending, job training, etc).

Corporate cash hording, despite very low interest rates, suggests that private companies are able and would be willing to spend more if either a) the government contributes funding (PPP), or b) aggregate demand increased (which in the short run can be catalyzed either by increasing government spending, or by putting more money in the hands of those with the highest marginal propensity to consume–poorer people).

Of course, there are limits to what stimulus spending can achieve. The “multiplier” effect of a stimulus program depends on the necessity, targetability, efficiency, and accountability of its components. Beyond government spending, major policy changes, such as tax reform and minimum wage increases, are also desperately needed.

Liberal economic policies in the U.S. cannot fix the world’s problems, but they can increase American growth, set our economy up for higher future growth rates, and rekindle “The American Dream”. The U.S can lead both by action and example, serving as a model for other countries to emulate as best they can.


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Economic Outlook: Europe (Finally) Gets It’s Stimulus Program

Youth Unemployment Europe October 2013

After EU Parliamentary elections in late May, many people were concerned (or jubilant, depending on the circles you run in) about gains by anti-EU “Euroskeptic” parties. These parties did not gain enough seats to dictate policy, but they did gain a platform to push their agenda in future policy decisions.

For every action, their is a reaction. It seems that gains from anti-EU parties have refocused pro-European forces, forcing them to adopt more “people-friendly” policies to counter the depression level unemployment rates (which have hit young people particularly hard).

As any development economist will tell you, youth unemployment presents many unique problems, both individual (high depression rates, future income losses “wage scaring”) and societal (increases in criminal / anti social behavior, drags on economic growth).

Systematic under-investment in young people is short sighted economically and causes untold human suffering. Such under-investment, while always reprehensible, is not surprising in the worlds least developed countries (LDCs), but this is Europe we’re talking about here.

Europe’s leaders have responded with pragmatic policies in recent months (finally, it only took 5+ years!). In Early June, the European Central Bank took the unprecedented step of introducing negative interest rates for keeping deposits in the ECB, a policy likely to not be popular with people who have wealth to invest, but which nonetheless should help spark short-term economic growth.

In arguably more meaningful news, last week the European Parliament announced a “Public-Private” stimulus program:

Jean-Claude Juncker won a wide endorsement from the European Parliament on Tuesday to be the next head of the executive European Commission after setting out a “grand coalition” investment programme to help revive Europe’s economy.

Belying his reputation as a grey back-room fixer, Juncker spoke with passion of his ambition to “reindustrialise” Europe and put the European Union’s 25 million unemployed, many of them young, back into work.

He promised a 300-billion-euro ($409-billion) public-private investment programme over the next three years, combining existing and perhaps augmented resources from the EU budget and the European Investment Bank with private sector funds, to build energy, transport and broadband networks and industry clusters.

“We need a reindustrialisation of Europe,” the 59-year-old former Luxembourg prime minister said. He won support from the Socialists and Liberals as well as his own centre-right bloc, the largest in the EU legislature.

Juncker acknowledged many Europeans had lost confidence in the EU and said only economic results and full employment, not endless debate over EU institutions, would restore their trust.

…his emphasis on public investment, reaffirmation of a target of raising industry to 20 percent of EU economic output and call for a minimum wage in each EU country, were designed to appeal to the left.

In a speech delivered in French, German and English, Juncker sought to reassure Germany and other north European fiscal hawks that the 28-nation bloc’s strict rules on budget deficits and debt reduction would be maintained.

Juncker said euro zone countries should get financial incentives if they make ambitious structural economic reforms, funded by the creation of a separate budget for the 18 countries in the currency area.

He also vowed to protect public services in Europe from what he called “the whims of the age” – an apparent reference to privatisation and restrictions on state aid.

Europe’s stimulus act will not be a panacea. By all accounts, EU countries (with the exception of Germany) have recovered much more slowly from The Great Recession than the U.S. Unemployment remains too high, and is especially troubling in certain countries and demographics.

Compounding the problem, this stimulus budget is too small to adequately address the problems facing the EU. The American Reinvestment and Recovery Act (ARRA) was less effective than imagined largely because it wasn’t big enough, and it’s funds came in at almost twice as much as its European Counterpart ($831 billion vs. $490 billion).

However, only 2/3 of the ARRA was in the form of spending, while the remainder took the form of tax breaks (which, in the context in which it was passed, had a much lower “fiscal multiplier” than direct spending). The European program seems to be more spending focused, meaning dollar for dollar (or euro for euro) this smaller stimulus plan may go further in addressing the social and economic problems facing the EU. The EU plan also leverages public funds to stimulate private investment–Europe’s leaders are doing what they can given budgetary constraints barring a larger stimulus program.

Combined with the ECB’s negative interest rates, EU leadership is proving it has moved past “bleeding the patient” and is taking a more proactive approach to economic recovery. I know it is hard to get excited about European leadership learning lessons after 5+ years of policy failure, but better incomplete and late than never, right?

While generally well received, this program has its notable detractors, headed by “Euroskeptics”, fiscal hawks, and Britain. Britain and other non-Euro EU countries must make their own decisions about their future in the EU based on what they believe is in their country’s best interests. As French President Hollande said last year, “I can understand that others don’t want to join (the single currency). But they cannot stop the euro zone from advancing.”

Sometimes you have to cut off the limb to save the patient. For the euro zone to survive, closer fiscal, taxation, and regulatory integration are needed. If Britain or any other country cannot accept this reality, they must seriously questions their future position within the EU (which, it seems, Britain will do with a membership referendum next year).

Leaving the EU need not be marked with retaliatory economic barriers or deteriorating political relationships; it could be done in a way that largely preserves existing interdependence while opening avenues for greater policy flexibility. As no country has ever left the EU, the punitive impacts of such a move are undecided. Like any breakup, it could be ugly and painful, or it could be clean and leave the possibility of “remaining friends”. 

 


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Economic Outlook: Shortsighted Austerity

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In the aftermath of the global economic crisis, more than 70 per cent of the world population is without proper social protections, the United Nations labour agency today reported, urging governments to scale up investment in child and family benefits, pensions and other public expenditures.

“The global community agreed in 1948 that social security and health care for children, working age people who face unemployment or injury and older persons are a universal human right,” said Sandra Polaski, Deputy Director-General of the International Labour Organization (ILO).

“And yet in 2014 the promise of universal social protection remains unfilled for the large majority of the world’s population.”

As many as 122 governments are contracting public expenditures in 2014, of which 82 are developing countries, according to the findings of the World Social Protection Report 2014/15: Building economic recovery, inclusive development and social justice.

“The case for social protection is even more compelling in these times of economic uncertainty, low growth and increased inequality,” Ms. Polaski added, noting that it is also an issue that the international community should embrace prominently in the development agenda following the Millennium Development Goals deadline in 2015.

At the beginning of the 2008-2009 economic crisis, at least 48 high- and middle-income countries put in place stimulus packages totalling $2.4 trillion that devoted roughly a quarter to social protection measures.

But from 2010 onwards, many governments reversed course and embarked prematurely on fiscal consolidation, despite the urgent need to continue supporting vulnerable populations and stabilizing consumption.

In the European Union, cuts in social protection have already contributed to increases in poverty which now affect 123 million people or 24 per cent of the population, many of whom are children, women, older persons and persons with disabilities, the ILO reported.

The report also shows that about 39 per cent of the world population lacks any affiliation to a health system or scheme. The number reaches more than 90 per cent in low-income countries.

The report also highlights the cases of Thailand and South Africa, which have achieved universal health coverage in just a few years, showing that it can be done.

“It is now a matter of political will to make it a reality. Modern society can afford to provide social protection,” Ms. Polaski stated.

Macroeconomic Implications:

The Macroeconomic implications of premature austerity are fairly straightforward. Keynesian national income accounting tells us that insufficient private demand can be compensated for with increased public spending (Y = C + I + G + M-X). For the world as a whole, net exports (X-M) are, by definition, 0. Therefore, when global private demand (consumption, “C”) goes down, it can be compensated for by only be increasing stimulus spending (or cutting taxes, but the economic multiplier of tax cuts is lower than for stimulus spending, especially in a liquidity trap when even near zero interest rates are insufficient to stimulate private demand to full employment levels).

If C and G are both insufficiently low, we get dangerously close to deflation–something almost every modernized economy is aggressively trying to avoid at the moment. High levels of debt and deflation causes a vicious economic cycle, where government spending cuts results in a higher level of “real” debt (even though the gross number associated with debt is reduced, the real value of that debt–what it can buy–goes up). This is one of the things that made the Great Depression so painful for so many people; as the programs that would have helped them were cut, the countries fiscal position worsened, leading to further cuts.

Microeconomic Implications:

It is the effect on people, on human development, that we truly care about here at Normative Narratives. In the context of high unemployment, one could see how cutting welfare programs, government jobs, etc. could be particularly painful on already vulnerable groups. I would need to conduct more in depth analysis of specific cuts in specific countries to speak on exactly how these cuts have negatively impacted people. The report highlights high unemployment and lack of access to healthcare as specific impacts of premature austerity movements.

One human rights violation opens the way for others, often resulting in [extreme] poverty. For example, without access to safe drinking water or sanitation services, people become sick. Lack of access to healthcare can cause a person to lose their job. Lack of access to a quality job means a person is reliant on personal savings (which poor people tend not to have) and welfare programs (which, remember, are being cut). A shock or crisis that may result in a minor inconvenience for someone whose human rights are fulfilled can be catastrophic for those less fortunate. In Europe, the combination of high unemployment and austerity is resulting in a “lost generation” of potential, and that’s Europe! In places with extreme poverty, weak financial institutions, and unresponsive governance, the human costs of premature austerity are naturally greater.

While I think a basic income guarantee is probably fiscally unsustainable (and in a country like the U.S., politically impossible), I do strongly believe in government job guarantee programs. Anyone who is willing to work hard to make their community / city / state / country a better place should be able to make an honest living doing so (just as anybody who is willing to defend U.S. national security can get a job in the military). Of course this would require greater levels of taxation and public spending, not less.

The combination of corporate income tax minimization (from “inversion“, off-shore tax dodging, and government subsidies / tax breaks / and other loopholes in tax codes) and companies forgoing workers for capital is unsustainable–companies are reaping record after tax profits while people suffer without having their basic rights fulfilled. As a result, tax reform and guaranteed public employment must figure more prominently in future political economy debates and policies.


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Economic Outlook: Obama’s Shift Sights From “Grand Compromise” to Grand Vision

Original Article:

President Obama’s forthcoming budget plan will not include a proposal to trim cost-of-living increases in Social Security checks, the gesture of bipartisanship he made to Republicans last year in a failed strategy to reach a “grand compromise” on reducing projected federal debt.

White House officials said on Thursday that since Republicans in Congress have shown no willingness to meet the president’s offer on social programs by closing loopholes for corporations and wealthy Americans, the proposed budget for the 2015 fiscal year will not assume a path to an agreement that no longer appears to exist.

The budget plan, which will be out in early March, a month late, will abide by the overall spending guidelines agreed to by Republicans and Democrats late last year. But included in those spending limits will be a $56 billion proposal to increase spending on some of Mr. Obama’s key initiatives, officials said.

Mr. Earnest said that would include spending on manufacturing “hubs” that the president has promoted over the last year; additional government programs aimed at helping people develop new skills; and funding for early childhood education programs like preschool.

“This initiative that the president will propose will be fully paid for,” Mr. Earnest said. White House officials declined to describe the revenue increases, but said they would include closing corporate loopholes, a move the president has supported in the past.

Mr. Buck criticized the $56 billion proposal as another effort by the president to spend more taxpayer money than the government can afford.

“The one and only idea the president has to offer is even more job-destroying tax hikes, and that nonstarter won’t do anything to save the entitlement programs that are critical to so many Americans,” Mr. Buck said. “With three years left in office, it seems the president is already throwing in the towel.”

Administration officials said Thursday that the budget would include proposals to make good on the president’s campaign promise to eliminate provisions of the tax code that allow corporations to shift profits overseas to evade their obligations.

Democrats say such provisions are loopholes, and Mr. Obama’s calls to end them are a perennially popular line with voters of both parties and among independents. Democrats and Republicans agree there is virtually no chance again this year of a bipartisan overhaul of the corporate tax code, despite claims by both parties to be in favor of such change.

The proposed changes to the overseas tax provisions would raise additional revenues of several billion dollars a year.

President Obama’s proposal also includes some $300 billion in infrastructure spending, to be paid for by closing certain tax loopholes.

When those on the political right talk about “fiscal responsibility”, they focus solely on cutting social programs. They buy into the notion (or perhaps have been bought into the notion via lobbying / campaign finance) that closing any tax loopholes will cause unemployment to soar.  And people believe them, Why is that? Because regular people experience over-taxation and over-regulation in their daily lives. They do not realize that the very wealth people, and the corporations they control, do not play by the same rules.

Sensationalism is good for two things: 1) distracting people from the real issues and; 2) paralyzing your opponents into inaction. Remember when high levels of U.S. sovereign debt was supposed to cause soaring interest rates? When QE easing was supposed to cause runaway inflation? Every once in a while, you have to call someones bluff to keep them honest; the time is past due for politicians to collectively call the bluff of corporate interests.

One look at the historic tax revenue tables (p 34-35) tells the story; for decades households have paid a relatively steady portion of income tax revenues (between 40-50%) while corporate contributions have been wildly volatile (from upwards of 30% in the years following WWII, to single digit percentage contributions many years starting in the 80s). In 2009, households contributed 43.5% of U.S. income tax revenue; corporations contributed 6.6%.

The U.S. has one of the highest corporate tax rates in the world, at 35%. We also have one of the most complex and loophole ridden tax codes in the world. Corporations find themselves largely off the hook, while households continue to contribute their share towards making the government work. The results are obvious; even during times of economic growth, we see widening inequality accompanied by record corporate profits.

In fairly remarkable news, a proposal to be released tomorrow by Representative David Camp (R), Chairman of the Ways and Means Committee, appears to be the a genuine attempt at tax reform. Despite not yet being released, it has already run into criticism from both political parties:

Mr. McConnell, the Senate minority leader, said efforts to pass the proposal — which is expected to call for a cut in the top corporate income rate to 25 percent from 35 percent, and a reduction of the seven individual tax brackets to two — would prove insurmountable against Democratic demands that any tax overhaul include $1 trillion in new revenue.

“The majority leader and the president have said they want $1 trillion in new revenue for the federal government as a condition for doing comprehensive tax reform, which we know we ought to do,” Mr. McConnell said Tuesday. “So I have no hope for that happening this year.”

Senator Harry Reid of Nevada, the majority leader, agreed with Mr. McConnell’s assessment that a tax overhaul will be difficult to push through Congress this year, but he blamed Republicans for the impasse.

“The truth is, we should have tackled tax reform years ago,” Mr. Reid said Tuesday. “It will be extremely difficult — with the obstruction that we get here from the Republicans on virtually everything — to do something that should have been done years ago.”

But he praised Mr. Camp for “coming forward with a piece of legislation.”

“Slam Dunk” Tax Code Revisions:

The Biblical phrase, “from each according to their ability, to each according to their need” (Marx took it from the Bible) is a pretty solid baseline for tax policy. When looking to fiscal reform, it is irresponsible (not to mention un-Christian, not that I am a religious man but many in this country purport christian values) to deprive societies most vulnerable of the bare minimum to lead dignified lives. This is not charity; young people need a minimum investment in order for them to become productive citizens. Those who are not lucky enough to be born into wealth are no less deserving of such opportunities. It is essentially what economists call “consumption smoothing” ; In law enforcement, it is know as “I’m the guy you pay later“.

(I am not all opposed to some sort of work-for-welfare program for older welfare recipients, so long as it is not subsidizing an unlivable minimum wage. If anything, the welfare-work should be on the multitude of public works projects needed on American infrastructure; public money for public works, not private profit.)

Two specific tax loopholes violate this general theory: offshore banking and corporate welfare:

There is a general consensus for closing a major loophole is offshore tax evasion / minimization. While tackling such an issues is a difficult task, we even have the requisite international support needed for tackling this  global issue. The only people who are opposed to closing such a loophole it seems are (surprise, surprise) Republican lawmakers. The U.S. government has already taken steps towards holding past violators, such as Credit Suisse, accountable. This is one half of the problem, the other half is taking all possible steps to prevent future tax fraud through laws like FATCA.

Another area worth exploring is the winding down of corporate welfare programs.

Obama has spent too much time learning his lessons. He came into power with a Democratic super-majority and squandered the opportunity in the pursuit of a Golden Age of political compromise and pragmatism. This goal has, beyond any shadow of a doubt, failed miserably over the past 5 years.

It seems Obama has finally learned his lesson. With an eye on regaining a Democratic super-majority in the 2014 midterm elections, He has shifted from his plan for a “Grand Compromise”, to laying out a grand vision for the role of the American government. Until that point (and depending on the outcome of the elections, perhaps past that point) he will use executive actions to push whatever reforms he can.

By clearly laying out his vision, Obama intends to let Americans decide what role they think the Federal government should play.

Disclaimer: It should not have to be this way. America should not need one party to have a super-majority to enact common sense policy reforms. Indeed, in the long run it is counter-productive to not have meaningful deliberation on major issues.

I would also like to commend David Camp’s effort of putting a tax reform proposal on the table (assuming that after 3 years, it carefully considers which loopholes to cut and which to keep). Although it is clearly not progressive enough, it offers a starting point for the tax code reform initiative. Furthermore, its mere existence cuts through the general malaise that has come to define our political system. The next step will be a bipartisan proposal (Mr. Camp’s proposal did not have any input from Democrats)

This, ladies and gentlemen, is what governance should look like; I for one do not care which side of the political isle it comes from.


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Transparency Report: Republicans Oppose U.S. Law Targeting Offshore Tax Dodgers

Original Article:

At its winter meeting in Washington, the RNC approved by voice vote a resolution in favor of abolishing the 2010 Foreign Account Tax Compliance Act (FATCA), set to take effect in July, marking the party’s first explicit attack on the law.

FATCA will require most foreign banks and investment funds to report to the U.S. Internal Revenue Service information about U.S. customers’ accounts worth $50,000 or more. The law was enacted after a scandal involving Americans hiding assets in Swiss bank accounts to dodge U.S. taxes.

Critics have blasted the law as an unfair government overreach and invasion of financial privacy.

“The Republican National Committee … urges the U.S. Congress to repeal FATCA,” said the measure, staking out a campaign position ahead of 2014’s mid-term elections.

Tax watchdog groups that support FATCA slammed the Republican vote. “It is mind-boggling that a major political party would even consider endorsing a resolution to facilitate tax evasion,” said Heather Lowe, director of government affairs at anti-graft watchdog group Global Financial Integrity.

“Repealing the law would cripple the U.S. and global efforts to fight offshore tax evasion,” she said in a statement.

The Center for Freedom and Prosperity, a group that advocates for lower taxes and financial privacy, praised the RNC vote. “The GOP’s adoption of FATCA repeal to its platform is a major victory for taxpayer privacy rights,” said the center’s Director of Government Affairs Brian Garst.

Repeal is unlikely and the issue was not expected to resonate with average U.S. voters, said lobbyists on both ends of the political spectrum. But they said Republican opposition to the law could help the party raise campaign funds.

It is certainly mind-boggling that a major political party would endorse such a view. And even if a repeal is unlikely, this issue should “resonate with the average U.S. voter”. In an era of constant budget-battling and debt-ceiling standoffs (the next one is right around the corner), where stimulus spending is unthinkable and welfare programs are constantly coming under attack (even though both are extremely important during an economic recovery), it is important for Americans to understand the main drivers of U.S. government debt. Once you understand these main drivers, it is obvious why this G.O.P. position on FATCA is unconscionable.

A quick simplified lesson: There are two sides to government debt, receipts (tax revenue) and outlays (spending). While there are certain drivers of long-term spending which must be reformed (social security, and medicaid, and defense spending specifically), these long term issues have little to do with economic recovery fiscal policies (government stimulus spending and “automatic stabilizers“).

A few historic graphs from the White House Office of Management and Budget (full tables from 1938-2012 can be downloaded: reciepts_endpenditure_historyreciepts_by_source) tell the story of U.S. government debt.

RECEIPTS, OUTLAYS, SURPLUS/DEFICIT(–)% GDP | PERCENTAGE COMPOSITION——————————————————————|  OF RECEIPTS BY SOURCE
Year GDP (in billions of dollars) Total Individual Income Taxes Corporation Income Taxes
Receipts Outlays Surplus or Deficit (-)
1992 6,242.0 17.5 22.1 -4.7 43.6 9.2
1993 6,587.3 17.5 21.4 -3.9 44.2 10.2
1994 6,976.6 18.0 21.0 -2.9 43.1 11.2
1995 7,341.1 18.4 20.6 -2.2 43.7 11.6
1996 7,718.3 18.8 20.2 -1.4 45.2 11.8
1997 8,211.7 19.2 19.5 -0.3 46.7 11.5
1998 8,663.0 19.9 19.1 0.8 48.1 11.0
1999 9,208.4 19.8 18.5 1.4 48.1 10.1
2000 9,821.0 20.6 18.2 2.4 49.6 10.2
2001 10,225.3 19.5 18.2 1.3 49.9 7.6
2002 10,543.9 17.6 19.1 -1.5 46.3 8.0
2003 10,980.2 16.2 19.7 -3.4 44.5 7.4
2004 11,676.0 16.1 19.6 -3.5 43.0 10.1
2005 12,428.6 17.3 19.9 -2.6 43.1 12.9
2006 13,206.5 18.2 20.1 -1.9 43.4 14.7
2007 13,861.4 18.5 19.7 -1.2 45.3 14.4
2008 14,334.4 17.6 20.8 -3.2 45.4 12.1
2009 13,960.7 15.1 25.2 -10.1 43.5 6.6
2010 14,348.4 15.1 24.1 -9.0 41.5 8.9
2011 14,929.4 15.4 24.1 -8.7 47.4 7.9
2012 15,547.4 15.8 22.8 -7.0 46.2 9.9
2013 estimate 16,202.7 16.7 22.7 -6.0 45.5 10.6

Government expenditures will go down when we experience full economic recovery (and not just a recovery for the top 1%)–that’s why welfare programs are known as “automatic stabilizers”. What will not automatically change are tax receipts, which are at their lowest levels since 1950. The American public has been paying a fairly constant portion of total federal taxes over the past 6 decades through income taxes–between 40-50%. Corporate taxes have fluctuated wildly; between 1940 and 1967 they made up 20-30% of federal tax revenue, since 1980 they have hovered around 10%.

The American public continues to pay its fair share, while corporations get a pass (and actually get huge bailouts and subsidies). America, in reality, has a regressive tax system. This low effective corporate tax rate stems largely from tax loopholes; a difficult problem to address rooted in corporate lobbying (money buys influence buys loopholes). Overcoming this problem will take an overhaul of the government tax code and a change in the current lobbying system, neither of which is an easy task.

Much less contentious should be targeting offshore cash holdings. While loopholes at least (allegedly) contribute to job creation, offshore tax evasion is a crime which robs the U.S. of vital tax revenues with no benefit to society. But even this “slam-dunk” reform is being challenged by the G.O.P.

Privacy Narrative:

I thought it was interesting that the Center for Freedom and Prosperity, a conservative think-tank, used the privacy narrative to justify the G.O.P. stance on FACTA. This reminded me how Matt Taibbi, in his book “Griftopia”, explains how the wealthy sell financial sector deregulation to the lay-man.

According to Taibbi, financial regulation is equated to local / state level government regulation–the average person, who experiences government overreach in their day-to-day lives, feels for the “poor banker trying to earn a buck”. Of course this equation is false; however, many people do not know enough about our political system to understand this fallacy, especially when their favorite news outlets are driving this false narrative home.

It seems that something similar is being attempted with this privacy narrative. One of the main issues of the day is NSA “spying”. Perhaps conservatives are trying to latch onto this privacy narrative to drum up popular support for repealing FACTA. I think this is a tougher sell, although financial deregulation sounded like an impossible sell until pundits begin selling it. It is therefore important to expose this fallacy to the general public before the narrative hits the newsroom.

Next time you hear an argument about “fiscal responsibility”, remember the G.O.P is the party of offshore tax evasion. Social spending programs and the tax code need to be overhauled; these issues will take time to remedy and must be addressed with care, they cannot be attached to short term issues like economic recovery or the debt ceiling.

Enabling offshore tax evasion by repealing FACTA benefits nobody except those who engage in offshore tax evasion–this should not be a contentious issue. Those who engage in such activities do not deserve our understanding or support, regardless of your stance on NSA surveillance.


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Economic Outlook: The G20, Austerity v. Stimulus, Growth and the Right to Development

Original article:

“The Group of 20 nations pledged on Saturday to put growth before austerity, seeking to revive a global economy that “remains too weak” and adjusting stimulus policies with care so that recovery is not derailed by volatile financial markets.”

“Finance ministers and central bankers signed off on a communiqué that acknowledged the benefits of expansive policies in the United States and Japan but highlighted the recession in the euro zone and a slowdown in emerging markets.”

“Officials backed an action plan to boost jobs and growth, while rebalancing global demand and debt, that will be readied for a G20 leaders summit hosted by President Vladimir Putin in September.

 “Sources at the meeting said Germany was less assertive than previously over commitments to reduce borrowing to follow on from a deal struck in Toronto in 2010, with the improving U.S. economy adding weight to Washington’s call to focus on growth.

With youth unemployment rates approaching 60 percent in euro zone strugglers Greece and Spain, the growth versus austerity debate has shifted – reflected in the fact that G20 finance and labor ministers held a joint session on Friday.”

“The G20 accounts for 90 percent of the world economy and two-thirds of its population – many living in the large emerging economies at greatest risk of a reversal of capital inflows that have been one of the side effects of the Fed stimulus.

One thing we would like to emphasize is the importance of coordination,’ said Indonesian Finance Minister Chatib Basri, cautioning that scaling back policies of quantitative easing elsewhere “immediately affects” emerging markets.”

“The International Monetary Fund warned that turbulence on global markets could deepen, while growth could be lower than expected due to stagnation in the euro zone and slowdown risks in the developing world.

‘Global economic conditions remain challenging, growth is too weak, unemployment is too high and the recovery is too fragile,’ Managing Director Christine Lagarde told reporters. ‘So more work is needed to improve this situation.'”

Yesterday I discussed the coordinating role groups such as the G20 play in today’s globalized economy. That post focused specifically on coordinating efforts to curb corporate tax-evasion. Today’s article emphasizes that fiscal and monetary policies must also be coordinated in order to achieve sustainable human development on a global scale.

Fiscal stimulus efforts must be coordinated; if they are not, the benefits of an individual countries stimulus programs will not be fully realized. Consider a hypothetical jobs program in the U.S. If this program is enacted unilaterally, then depressed demand in export markets (ex E.U.) will cause increased production capacity in the U.S. to lead not to greater trade but surplus goods and lower prices–employment gains will not be sustained by the private sector and will likely be reversed once stimulus money runs out. However, if fiscal stimulus programs were coordinated, and both the U.S. and the E.U. increased productive capacity and income, then a basis for trade and self-sustaining growth could emerge, making fiscal stimulus a short-term “shot in the arm” (as it is intended to be) instead of a permanent program (which is not sustainable for governments and often leads to uncompetitive industries).

Monetary policy must also be coordinated. Quantitative Easing by the U.S. Federal Reserve and the Bank of Japan have injected cheap money into the global economy. Seeking higher returns, this cheap money is often channeled towards emerging markets (such as the “BRICS”). One fear is that once QE policies wind down, emerging markets will experience “capital flight” as higher returns become available in more stable markets. In order to temper this inevitable effect of monetary tightening, both monetary policy coordination and “forward guidance” are needed from major central banks. Bernanke recently reasserted that the Fed will continue bond-buying until U.S. unemployment drops to 6.5% or inflation rises to 2.5%. However, this forward guidance is slightly muddled by ideological differences within the Fed, and amplified by Bernanke’s presumed exit as chairman of the Fed early in 2014. Coordinated monetary policy can provide the clarity needed to assuage markets. In a surprise move a few weeks ago, ECB head Mario Draghi “promised rates will remain ‘at present or lower levels for an extended period of time.’” Indications that the ECB and BoJ are committed to providing liquidity to global markets will make the Feds (eventual and inevitable) retreat from QE less damaging to global markets.   

This G20 meeting has ushered in much welcome news, “in contrast to an ill-tempered G20 meeting in February colored by talk of currency wars.”

About a month ago, I discussed the impacts of austerity programs on states human rights obligations. This post focused a study Spanish austerity and healthcare. The G20 is more concerned with global issues (although Spain and Greece are still a poster children for youth unemployment and the social deterioration that austerity can cause during a recession, and are therefore common examples for pro-stimulus / anti-austerity proponents).

People often consider human rights as positive or negative rights; either the government has to directly provide a good / service or prevent another party from violating human rights. Another aspect of human rights is creating an enabling environment for sustainable human development. “The right to development, which embodies the human rights principles of equality, non-discrimination, participation, transparency and accountability as well as international cooperation, can guide our responses to a series of contemporary issues and challenges. The right to development is not about charity, but enablement and empowerment. High Commissioner for Human Rights Navi Pillay has called on governments and all concerned…to move beyond political debate and focus on practical steps to implement the Declaration. ‘States have the duty to cooperate with each other in ensuring development and eliminating obstacles to development,’ according to the Declaration (full text here).”

One essential element of the right to development is the international recognized “right to work”. Article 23 of the Universal Declaration of Human Rights states, “Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.” This right is a particularly important aspect of the right to development, as work income provides a means of self-determination and the ability reduce dependence on welfare programs as people attempt to realize their personal goals and aspirations.

Sometimes people do not work because they are lazy, or suffer from physical or mental conditions which impede their ability to find or maintain work. However, when unemployment rates are above 20%, and youth unemployment is above 50%, this can hardly be attributed to laziness (unless you think the world’s lazy people are all collaborating and putting themselves through years of misery in order to remain lazy, but that argument is absurd hard to sell). Such high unemployment levels are due in large part to government inaction / inability to pass stimulus programs, and the negative effects of austerity programs in the face of inadequate private sector demand / personal consumption (this is not stipulation or a normative stance, but rather what textbook economics tells us).

Such high levels of unemployment represent a failure of states to uphold the universal human “right to work”, which undermines the internationally recognized “right to development”.  For years now, economic policy has been dominated by politics and vested interests. It is heartening to see national labor and finance ministers finally coming together to “eliminate obstacles to development”. More concrete programs will probably hopefully be hammered out when heads of state come together in Moscow in September for the G20 leaders summit.

I hope this is not “too little too late”, and that the years since the Great Recession took hold have not lead to “lost generations” of young people who are doomed to a lifetime of anti-social, unproductive, and sometimes criminal behavior (as some people have argued). While there will inevitably be some lifetime dependents resulting from the Great Recession (as there always are from traumatic experiences, be they economic downturns, natural disasters or violent conflicts), I am optimistic that as a whole young adults and the unemployed in general are eager to get back to work once the global policy coherence needed to create those jobs is established. G20 meetings this past week represent a meaningful step in that direction.


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Economic Outlook: (Hopefully Learning) Lessons From Japan

Japanese economic policy, named “Abeconomics” after Japan’s Prime Minister Shinzo Abe, offers a natural experiment from which the U.S. can draw lessons. There is a much more obvious natural experiment for the U.S., which is U.S. economic policy, but those against “Quantitative Easing” are never short on reasons for why QE hasn’t debased the dollar / led to soaring interest rates on U.S. bonds (but soon will ahhtheskyisfallingmoralhazard!!!!!). Perhaps Japan’s experience, which is further removed from the U.S., can allow us to be more objective in our analysis.

The basis for expansionary monetary policy is due to “liquidity trap” macroeconomics. When the Fed cut’s interest rates near zero, non-traditional means of using monetary policy are the only policy choice left to stimulate aggregate demand and reduce unemployment (as far as monetary policy goes, fiscal policy is another story to be addressed shortly).

Both the U.S. and Japan have greatly increased the supply of money in attempt to revive the economy. QE in the U.S. has basically quadrupled the Feds holdings since 2008, while Abeconomics has doubled Bank of Japan’s (BoJs) holdings. In the U.S., the dollar has remained strong despite QE. In Japan, the Yen has slid in value (and this is a desired result, to increase export competitiveness):

“Normally a weakening exchange rate might be taken as a sign of decline. The yen has fallen nearly 14 percent against the dollar this year, and no currency has fallen more except the Venezuelan bolívar.

In Japan’s case, it is a sign that the policies put in place by Mr. Abe and Haruhiko Kuroda, chairman of the Bank of Japan, are starting to work. A weaker yen makes Japanese exports more competitive around the world.”

The U.S. probably benefit from a slightly weaker dollar, making exports more competitive which could help revive U.S. manufacturing and renewable energy industries (among others). I believe the USD role as primary international reserve currency (60% of international holdings) are keeping the dollar strong despite QE. Foreign holders do not want to see the value of their reserves go down, so the dollar continues to be the safe-haven for investments despite unprecedented monetary stimulus.

How effective have these policies been? U.S. unemployment has dropped to 7.5%, although underemployment and people dropping out of the labor market may be producing a rate that doesn’t capture the stagnation in the job market in the U.S. Japanese unemployment sits at 4.1%, a rate that for the U.S. would currently constitute an economic pipe-dream.

Japan certainly has its issues, but it is not letting doomsayers dictate its economic policy. Despite much higher gross government debt to GDP (Japan has roughly 235% debt to GDP ratio, while the U.S. is at about 107%) Japan is pursuing fiscal stimulus. Abeconomics includes a 2-2.5% of GDP stimulus plan for Japan. Compare that with the fiscal contraction in the U.S.

So the U.S. and Japanese economic policies give us a natural experiment. Both are advanced countries with highly skilled labor forces and strong financial markets. Both are pursuing monetary expansion. One of the countries, despite a much higher debt-to-GDP ratio, is also pursuing fiscal stimulus, while the other is pursuing fiscal contraction. Granted Japan went through years if not decades of stagnant growth before flipping the script to “Abeconomics”. The U.S. is “only” 5 years removed from the Great Recession. Do we really need to wait decades before we pursue policy that we know will stimulate the economy and reduce unemployment / the output gap?

As Keynes said, “In the long run, we’re all dead”. It is not enough to say give it time and things will get better. Peoples skills and confidence in their abilities are deteriorating in the U.S.. The output gap is large and growing, and spending on safety-net policies will not decrease until unemployment goes down (hence “automatic stabilizers”). Hopefully Japan’s successes will inspire confidence in fiscal stimulus; if a country with twice as high of a debt-to-GDP ratio (and an unemployment rate almost half as low) can benefit from fiscal stimulus, surely the U.S. can as well.


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Economic Outlook: Fiscal Policy, Monetary Policy, and the Zero Bound

Paul Krugman does a nice job of explaining why unprecedented monetary expansion (“quantitative easing”) has not really moved the needle in terms of reducing unemployment and increasing aggregate demand.

It would be prudent to remind the reader that there has been very little counterfactual analysis of the Feds policies since the Great Recession began (that I am aware of). The situation would almost certainly be worse, higher unemployment and deflation, had the Fed failed to act in the way it is. If you would like to read further on the downward spiral of debt, austerity and deflation in a depressed economy, Irving Fischer wrote on the subject following the Great Depression in a way that is both easy to understand and still as relevant today (perhaps even more-so given how much less politically charged expansionary monetary policy is post-gold standard).

A liquidity trap is a situation when slashing interest rates on government bonds to near zero percent is insufficient to provide enough credit to allow the economy to produce at full productive capacity. Investors would rather invest in safe government assets with almost no yield then invest in private markets.

I believe a liquidity trap is in itself justification for expansionary fiscal policy. It is basically investors saying to the government, “here, we don’t want to invest our money, so do it for us and just promise to pay us back in the future, don’t even worry about the interest”. But fiscal policy, which originates in the House of Representatives, is politically charged (especially when a government is already highly indebted, then every spending program comes under close scrutiny).

Monetary policy, on the other hand, is much more politically isolated. It originates within the Federal Reserve, which is staffed with economists who understand economics better than politicians. The Fed began by cutting rates, hoping to stimulate aggregate demand.

Once this conventional monetary policy failed, unconventional means were taken; the Fed is buying assets on a large scale, expanding the monetary base. The Fed has pledged to continue to pursue expansionary monetary policy by buying assets on a monthly basis until either the unemployment rate falls below a certain level (I believe 6.5%) or inflation rises above a certain level (I believe 2%).

The Fed made this announcement to try to change people’s expectations. Since you cannot cut nominal interest rates below zero percent (the “Zero Lower Bound”), the Fed hopes to stimulate demand by making people think that in the future inflation will be higher than it is now. If money is worth less in the future, then people will want to spend it now while it is worth more. More spending stimulates the economy and reduces unemployment.

So why has this policy been ineffective? Well, as I said before, I am not so sure it has been—certainly the situation would be worse right now, not only for America but for the rest of the world which overwhelmingly relies on dollars for international transactions.

But as to why expansionary fiscal policy would be unquestionably more effective, Professor Krugman hits the nail on the head:

“I’m not claiming that there is nothing the central bank can do; but as I’ve tried to explain before, monetary policy can, for the most part, gain traction under current circumstances only by changing expectations about future actions (and changing them a lot). Meanwhile, fiscal policy has a direct, current effect on the economy, which easily trumps attempts to move the economy by changing the Fed’s messaging.

Sorry, guys, but as a practical matter the Fed – while it should be doing more – can’t make up for contractionary fiscal policy in the face of a depressed economy.”

Think of beginners national income accounting, where aggregate demand (Y) = C (consumption) + I (investment) + G (government spending).

Fiscal policy can stimulate AD directly by increasing either G, C, or I depending on how the program is designed.  Monetary Policy, on the other hand, has a much less direct effect. It tries to incentivize people to act a certain way (increase C or I), but people do not always act “rationally” in the economic sense. Sometimes people are so risk averse that even reducing the yield on an investment does not reduce the demand for this investment (particularly in times of economic uncertainty, when I would argue investors tend to become more risk averse).

Also, there is inherently less scrutiny in exactly how monetary policy works. While it is true that some portion of fiscal expansion may be used inefficiently, it is much more tractable than monetary policy.

Monetary policy stimulates AD, but it can also feed into financial bubbles. By providing low interest loans to banks, the Fed is making a leap of faith that the money will be spent wisely. The money should be going to helping people restructure underwater mortgages, or generally providing low cost financing, freeing money for people to spend and stimulate demand. And to a certain extent it is does, but it can just as easily be spent in other less egalitarian ways. If this money goes to Wall St.  investments, the gains will be realized almost entirely by the wealthy.

Evidence exists that this is happening—unemployment remains stuck while financial markets have reached record highs. Securitization, which became taboo after the financial crisis hit, has began to become common practice again. Without meaningful financial reform, the Feds policies could be fueling the next asset bubble.

The Fed has maintained it is keeping a close watch on how its money is being spent, and given the suffering caused by the Great Recession I’m sure it is, but there is only so much it can do. The Fed cannot possibly micromanage how all of its “cheap money” is being spent. The Fed could try to only lend to more people-friendly institutions, such as “credit unions”, or establish mechanisms to lend directly to people and small businesses, but up until this point has either has not or cannot do so (either due to its mandate or due to insufficient manpower for such oversight).

So expansionary monetary policy has kept the recovery from not being worse than it is (or not being a recovery at all), but it has predictably fallen short of its intended goal. It needs to be complimented by expansionary fiscal policy. That’s not to say that there are no inefficient programs that can be made to more efficient–there almost assuredly are. The stimulus-advocate policymaker should have concrete examples of how resources can be used more effectively, if he has any hopes of convincing his austerity minded counterpart of coming to an agreement. Policy, like markets, requires both competition and coordination to be made as efficient as possible.

The Fed should not reverse course now, but should ensure proper oversight for its policies. The Federal government, on the other hand, seems to be slowly moving from austerity to stimulus. Will common sense and text-book macroeconomics prevail, or will business as usual continue? Only time will tell.

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