THE ECONOMIC LEGACY OF FINANCING A WAR EXCLUSIVELY WITH DEBT

In the Spring of 1966, Temple University dedicated its new building for the “School of Business and Public Administration”. The dedication speaker was Walter Heller and his subject was “CAN THE US FIGHT THE WARS ON POVERTY AND IN VIETNAM AT HE SAME TIME?” Heller’s answer of yes had a caveat that was ignored by the press. He said that we would need adjustments to revenue in order to avoid economic adjustments when the Vietnam War ended. When it ended we were left with a period of high inflation, low economic growth, and high levels of unemployment. This is the very definition of Stagflation.

This morning, The Bureau of Labor Statistics announced that the inflation rate for January was an annualized 4.91% (the monthly rate was 0.4%). We, also, have had recent indications that the unemployment rate is rising. Combining this with Ben Benake’s prediction, also published this morning, that the country is facing a period of high inflation and low growth, we can see that we are well on the road to another period of Stagflation.

The current Stagflation is a direct result of the “Conservatives” (I call them Regressives) insistence on paying for the Iraq War exclusively with debt. Some how they believe, despite the evidence, that giving tax breaks to the most affluent of us brings about prosperity to all. Given the current economic situation, I can only conclude that support for making all of the Bush tax cuts permanent is based purely upon greed. Let the middle class and the poor pay so that the obscenely wealthy can become even more outlandishly opulent. What we need is a more equitable tax policy.

Tax policy usually relies on either of two principles: The “Ability to Pay Principle” or the “Benefit Principle”. Both of these forget the fact that paying taxes is painful. We would all like to pay as little as possible to the various levels of government. However, as long as we have to support our government we should make sure that when we pay taxes we are “equalizing the pain” to each of us. The problem with “Flat Taxes”, “Value Added Taxes”, and the various consumption taxes is that they tend to distribute the pain to the lowest economic levels in society. To see how this applies we need to look at the satisfaction people get from having income and/or wealth.

It is well known that as people obtain more and more of a good or service the satisfaction they get from the last unit of the good is lower than the satisfaction received from the immediately prior unit. In economics this is known as the Law of Diminishing Marginal Utility. This “law” applies to income and wealth as well as the consumption of goods and services. The more income or wealth you have, the less each additional dollar of income or wealth means to you in terms of your over all satisfaction.

Applying this to tax policy we can see that a 20% flat tax would cost $4,000 to a person with a taxable income of $20,000 per year and $20,000 to a person with a taxable income of $100,000 per year. In terms of the ability to enjoy the fruits of the economic system, the $4,000 to the low income individual is a much greater sacrifice than the $20,000 is to the high income individual. Equalizing the pain of paying taxes would require that the low-income person pays a lower tax rate or the higher income person faces a higher tax rate or some combination of lower and higher rates.

Progressive income taxation is not a “soak the rich” scheme. It is the only system that has the capability of equalizing the pain of supporting government.

RATIONING MEDICAL CARE

Every Monday night several of my friends and I have a “Boys Night Out.” It usually entails dinner and conversation over a wide range of topics. On a recent evening the subject moved to a discussion of the “US Health Care Crisis”. Several of the participants were also in the health care field. In fact, if we consider my own past employment in the Medical Insurance Industry to be in the field, only one person was not a current or past participant in the health care system.

When all of the discussion was done, it appeared that the main argument against a government plan was that it would lead to rationing. This is the same argument that President Bush has been using for the past seven years. The problem is that people fail to realize that we do have medical care rationing today. It is one of the fundamental principles of economics that the price mechanism serves as a method of rationing goods and services. Those who can afford the goods and services and are willing to pay for them get them.

Health Care, as a service, is subject to this same principle. However, the existence of health insurance changes the underlying rationing to those who can afford the service and those who have adequate health insurance. Those who cannot afford the service or, in this case, who don’t have adequate health insurance do are “Rationed Out” of the health care market.

So when the President and his cronies shout out their war cry: “DO YOU WANT YOUR HEALTH CARE RATIONED”? You can reply: “IT ALREADY IS!”

A NIGHTMARE OF THE FUTURE

As I look at the current activity in the two parties, I believe that all progressives, whether Democrat or Republican, need to have grave concern for the future of the republic. There is a real possibility that we can end up with a president who advocates turning the country into a “Theocracy”.

The scenario begins with the outcome of the Democratic Convention:

Either Hillary Clinton or Barak Obama will be the party’s nominee. The candidate with the greatest chance of winning a general election, John Edwards, has dropped out.

If Hillary is nominated, her chances of winning are slim because there are so many Americans who appear to have a visceral dislike for her. When asked, most people with that attitude that I have spoken to cannot express why they feel that way. They just do! Unfortunately, there appear to be an awful lot of them. There may be enough to kill Ms. Clinton’s chances if the Republicans nominate a semi-moderate candidate.

If Obama is nominated it would show that the country has grown-up in the last 50 years. Unfortunately, I am afraid it has not grown up enough to elect him. Although there are few Americans who would state outright that they would not vote for a Black Man, in the privacy of the voting booth there are many who are just not ready to pull that lever for a minority candidate. If the Republicans nominate a semi-moderate candidate the dislike of the current administration may not be sufficient to overcome the deep seeded prejudice of many Americans.

Moving the Republicans, it looks as if John McCain, a semi-moderate, will get the party’s nomination. However, the party’s right wing believes him to be too far to the left. In order to gain the support of the conservative core McCain will have to accept Huckabee as his Vice-Presidential running mate. McCain is 72 years old and has had some health problems. The presidency, for someone who doesn’t delegate everything al la Reagan, is a psychological and physical pressure cooker. As a result there is a good chance that McCain may not survive his first term. This would leave us with President Huckabee.

Huckabee has already expressed his desire to change the constitution so that it reflects the teaching of the Bible. A constitution that expresses a particular religious viewpoint is the definition of a theocracy and is no better than the Iranian constitution that place Sharia as the guiding principle for laws. His stance doesn’t take into account that there are many different translations of the bible and they do not necessarily agree with each other. In addition, there are many non-Christians in the USA. Are we going to ignore them? Also, the bible is contradictory in many of its laws. Making the bible a part of the constitution would require that a particular sectarian approach would need to be adopted and forced upon everyone else. When this happens, American will no longer be the beacon of liberty and diversity that is the standard that the world has looked to.

ONCE MORE INTO THE BREECH WITH AN INADEQUATE PLAN

President Bush appears to be unable to learn from the past and incapable of acting outside of his preconceived notions despite proof that he is wrong. His plan to fight recession meets the definition of insanity: “…The belief that performing the same act repeatedly will result in different outcomes.”

1. A major component of the president’s plan calls for incentives for business to invest. The problem with this is that business will only invest when there is a good business reason to do so e.g. there is a demand for the business’s product. In April of 2004 CFO.Com, hardly a liberal publication, printed an article which established that “Tax Breaks Don’t Boost Investment”. The research looked at 275 companies that had been given tax incentives to invest. The 25 companies with the largest tax breaks reduced their investment by an average of 22%. The other companies studied reduced their investment by an average of 13%. Given this data it is hard to see how the President’s plan will help boost the economy. It will only increase corporate after tax profits. In other words: rob the treasury to help the rich.

2. The second component of the President’s plan calls for a one shot tax rebate that he hopes people will put into the spending stream. However, given the record high levels of consumer debt combined with the record low savings rate and the loss of defined benefit pension plans this result is unlikely. People will probably use the rebate to lower their debt levels or add to the savings. Again, the benefit to the economy may be negligible to non-existent.

3. The best way to stimulate the economy would require putting money into the hands of those who will spend it. People spend when they internalize the fact that the money is really there. This means permanent tax cuts for the poor and middle class. The tax cuts can be offset by raising taxes on those who do not spend the bulk of their marginal income. The President, however, has proposed that expiring tax cuts to the very people who don’t spend should be made permanent. Again, he demonstrates his determination to implement plans based upon belief as opposed to fact. He reminds me of the legislature that decided because gravity was a law it could be repealed. Neither they nor he make any sense.

PENSION REFORM = WALL STREET WELFARE

Cloaked in language that makes it appear to be the savior of private pensions, the new pension reform law will actually accelerate the move away from traditional pension plans. In addition, it will increase brokerage profits, increase short-run top executive bonuses paid on the basis of stock prices, and increase the long-run risk faced by average Americans.

To understand these issues we need to understand the contents of the bill and how pension funding is measured:

First, the bill will require company based defined benefit pension plans to be 100% funded in seven years as opposed to a 90% funding requirement. Although this sounds good there are two issues which make this a problem. The first issue is that full funding is based upon actuarial assumptions regarding inflation, interest rates and wage growth. These assumptions change and the level required to be fully funded changes based upon the market value of the assets in the plan. Some plans which were under-funded 2 years ago are fully funded today due to stock market growth. This means that some firms may never have to put a dime into the system. The second issue has to do with the fact that other firms are severely under-funded and, as a result of the funding requirement, will just give up the plans that they have.

Second, the bill expands the amount that may be placed into 401k and IRA retirement systems. The increase in funding to IRA’s and 401k’s, combined with the few firms increasing their defined benefit funding, will lead to increased short-term demand for stocks on Wall Street. This increased demand will drive up stock price regardless of company performances. The increased prices will benefit those who already own stock and will provide huge bonuses to corporate executives, the Bush constituency, whose incentive pay is based upon the valuation of their company’s stock. This increased demand will also lead to more transactions through brokerages and increased commissions to brokerage firms.

Third, defined benefit plans pay workers a pension based upon their earnings in the latter working years and the number of years of employment. This is a known amount and is not subject to fluctuations in the market. IRA’s and 401k’s allow either withdrawals or the purchase of annuities based upon the value in the plan at the time of retirement. IRA’s and 401k’s are invested in securities that are subject to the vagaries of the marketplace. If the market is down and interest rates are high, as we saw in the 1980’s, many people will find that they do not have enough money to retire. Cash balance plans, that many firms are using to substitute for defined benefit plans, are subject to the same market forces. The result is the shifting of risk from employers to workers.

The result of the supposed pension reform is a reverse Robin Hood effect of "taking" risk from the rich, who can afford it, and "giving" it to the poor who cannot survive it. Again the USA accelerates toward third world status.

Religious Fundamentalism and the Death of the American Economy

Once again President Bush is allowing his fundamentalist beliefs to cause irreparable harm to the American economy. This time it is his threat to veto legislation that would allow federal funding for expanded Stem Cell research. Does he believe that the US position will stop the research from taking place elsewhere in the world? The fact is that Europe and Asia are already deep into Stem Cell research. Stopping the research in the USA will only promote foreign companies to be the leaders in new, potentially life saving or life improving, products which may be developed.

If Mr. Bush’s narrow minded fundamentalism is carried to its ultimate conclusion, procedures and product developed overseas would not be permitted into the USA because it violates his religious principles to use products developed from Stem Cells. How many Americans will die young or live lives of agony because a narrowly defined fundamentalist religion is becoming the guiding light of all decisions? How can we let Mr. Bush guarantee the slow death our great pharmaceutical industry because he doesn’t believe in the most promising areas of research?

Mr. Bush needs to be reminded that religion’s opposition to “…lending at usury…,” meaning any type of interest, stymied European economic growth throughout the middle ages. Our President’s myopic view of the bible will exacerbate America’s, already beginning, decline to second or third world status.

Statistics Don’t Lie But they Can Deceive

Statistics Don’t Lie But they Can Deceive

By all of the traditional measures the American economy is in very good shape. Unemployment is down, GDP is growing at a rate above the long term average growth rate, and the number of jobs created is growing. Many economists believe that the poor showing for consumer confidence is merely reflecting that confidence may be a lagging indicator. However, anecdotal, and some statistical, data imply that the economic picture is less rosy than the traditional measures indicate.

Firstly, we need to look at job growth. The job growth numbers count the payrolls in one month and compare them to the payrolls in the following month. This might be good, but it ignores the question of whether the jobs are full-time or part-time. In fact there can be serious double counting in the system. For instance, I am an adjunct faculty member at several colleges. During the month of October I was added to the payrolls of four new colleges. I, therefore, accounted for five jobs in the system and four “NEW” jobs. How many people like me are out there carrying multiple jobs? In addition, how many of these new jobs were part-time?

Secondly, the reduction in unemployment can be distorted by aspects of the measurement system itself. Most people do not know that a person is considered to be employed if he received one hour’s pay in a two week period. That means if your aunt Mildred paid you $20 to move furniture to her attic, you are employed. The other problem with the measurement system is that it excludes discouraged workers. A discouraged worker is a person who wants to work but has gotten so discouraged by not finding any that they have not “actively” sought work in the last four weeks. These workers are not even counted as a part of the work force. Let alone the unemployed.

Thirdly, GDP measures the output of final goods and services in the economy and a growing GDP leads to growing disposable income. Looking at the numbers things look good. On the other hand disposable income says nothing about the distribution of that income. Median family income, however, gives us a better picture regarding distribution. Median family income is the income level where half of the families in the country earn more than this number and half earn less. Unfortunately, median family income has been decreasing over the last two years. A growing disposable income and a lowering median family income indicates that the people at the top are getting better off and those in the middle and lower income levels are become worse off.

It is no wonder that consumer confidence is poor. The average person is losing out in this supposed growth economy. The goal of an economy is to deliver prosperity to the members of that economy. I believe that the new age of integrated world economies requires that we develop new economic statistics which measure national prosperity.
Former Secretary of the Treasury Robert Rubin has, along these lines, proposed a new economic measure which I believe he called The Median Prosperity Index.

Under Educated Secretary of Education

Margaret Spellings has recently made a statement which proves that she is, as is usual for the Bush administration, unqualified for the job she holds (Secretary of Education). She asked, why do college tuition costs outstrip inflation?

The answer is simple economics. The inflation rate reflects both the cost of goods and services which are subject to productivity improvements and those that are not. The two offset each other in a way that keeps the rate of inflation lower than it would have been in the absence of productivity improvements. Educational delivery. although new methods have been developed, has proven resistant to productivity improvements. When schools use large lecture hall classes taught by senior faculty, aided by recitation sections taught by graduate students, parents and students complain. When courses are taught via TV or the internet there are also complaints.

All of this leads to costs that outstrip the rate of inflation. The same holds true in the public schools where parents want smaller class sizes, more counselors and increased extra curricular activities.

If MS. Spellings does not understand these simple facts of Educational Economics, perhaps, she should give up administration and become a teacher of something that does not require economic understanding.

Hypothesis vs. Theory

Once again, we are faced with people trying to foist an Hypothesis upon us claiming that it is a Theory. An hypothesis is an unsupported statement of what you believe to be an explanation of a phenomenon. It does not yet have supporting evidence in favor of it. After significant research and evidence an hypothesis can become a theory. In order to reach this stage there has to be significant evidence that the original hypothesis can explain and often predict. In the absence of this proponderence of evidence an hypothesis never becomes an accepted scientific theory. The fact that a theory does not appear to explain every phenomenon does not invalidate it.

It is clear that Intelligent Design does not have the body of evidence to honor it with the title Theory. It is an hypothesis. Evolution, on the other hand, has developed a strong body of evidence which supports its basic tenant. It is, therefore, an accepted scientific theory.

If we were to give credence to every unproven hypothesis we would still believe in the sunspot theory of economic cycles and, like Lysenko, that acquired traits can be passed down through the generations.

We should ask ourselves if we would want our scientists trained in a country that rejects scientific evidence in favor of “Intelligent Design.” Let us put ID where it belongs: In the philosophical and religeous realm. Let us keep it out of science.

Godless? Christian? What?

I've always had a problem when people say that we need to put G'd into our public life. Given the diversity of our population, are we talking about the G'd of the Hebrew Bible, the G'd of the Christian Testament, The G'd of the Koran, or the Multifaceted Hindu G'd? The fact is that any of the holy writings can be used to justify almost anything we want. All we need is to pick and choose.
When some claim that the US is a Christian nation, again, we have to ask: what kind of Christian? There are old line churches such as the Episcopal or Presbyterian churches, the new line fundamentalist churches, and of course the oldest churches: the Roman Catholic and Greek Orthodox. They all interpret Jesus' teaching in a different way.
It appears that those who want religion in government are really saying that they want their religion in government. Just look what is happening at the Air Force Academy. Do we really want the USA to be as narrow minded and prejudiced as those academy bigots?

A Change in direction

When I started this BLOG I had intended to keep all of my comments in the economic realm. However, as I survey the political landscape and the social changes that are being proposed for the USA, I believe that I must speak out in the name of reason. As a result, I wrote the "Ask the Framers" piece. From time to time, I will also be writing other pieces which have nothing to do with economics, but everything to do with social justice. Please bear with me and if you agree or disagree, post your comments so that I can respond.

Ask the Framers

On a recent trip to Washington, my wife and I were fortunate enough to stop at the Jefferson Memorial. While reading the writings etched into the walls I realized that the answer to the arguments regarding the strict construction of the constitution based upon the intent of the framers was written by the framers. We only need to read what they said and wrote. For example: When the strict construction people say that the constitution needs to be interpreted according to the 18th century standards that existed when it was written, we can reply with Jefferson’s statement “…laws and institutions must go hand in hand with the progress of the human mind. …institutions must advance to keep pace with the times… [or] …we might as well require…civilized society to remain ever under the regimen of their barbarous ancestors.” When the it is pointed out that the constitution does not use the phrase separation of “church and state” and school prayer should be allowed, we only need to look to Jefferson for guidance. He wrote: “No man shall be compelled to frequent or support any religious worship…” We progressives can go back to the basics by framing our own moral arguments using the words and intent of the framers of the constitution.

We Own The Government

Conservatives have, in the minds of many Americans, been able to draw a line between the people and the government. They use phrases such as “It’s your money not the government’s”, “Ownership”, and “Do you want bureaucrats making your decisions” to draw a distinction between government and the citizenry. In foreign policy they tout democracy while at the same time using language that implies we don’t have it at home.

Progressives need to build on Lincoln’s “Government of the people by the people, and for the people…” comments to restore the American people’s faith in our system. We own social security, we own the congress we elect, we own the rules and regulations that enable us to breathe clean air and drink potable water.

Economic regulation is not designed to stifle growth but rather is used to ensure that we have the benefits that competition can bring. Regulations are not designed to ensnare but are written to stop those with economic power from using it to unfair advantage.
We are the government and our ownership society means we own the government

Free Trade Is Not Free

The problem with "Free Trade" and how it is devastating to so many developed and undeveloped economies is not the fact that it exists. The problem is that true free trade does not exist. The third world countries that are importing lower priced food from the first world are not suffering from free trade. They are suffering from the subsidies that the developed world's governments give to their farmers. The job losses to lower wage countries suffered workers in the USA and EU are to some extent the result of fixed exchange rates by China, South Korea, and India. Some have estimated that the Chinese currency is undervalued by as much as 40%. If properly valued, the cost of Chinese goods would be higher and maybe EU and USA companies could keep more jobs at home. Fixed exchange rates and subsidies are neither free nor supporting the gains to all that are obtained from comparative advantage.

Social Security and the Politics of Greed

The Social Security debate is bringing to light the Right Wing’s true colors; the colors that decorate the flag of the politics of greed. Just look at the President’s arguments every time he addresses groups of senior, and near senior, citizens. He looks at the crowd with bewilderment and says “What are you complaining about? This won’t have any effect on you!” He just doesn’t get it! He and his cohorts cannot understand anyone who looks out for anyone but themselves.

Greed permeates everything they do and everything they say. Tax cuts for the rich, refusal to look at elimination of the income cap on the Social Security payroll tax, elimination of the estate tax, and almost every other program they propose is based upon the concept that greed is good. To many Americans it is only in the Social Security debate that this is becoming obvious.

As progressives, we need to emphasize that greed and the market system do not go hand in hand. That is why Adam Smith used the term “Enlightened Self Interest” rather than greed. Smith, the holy god of the right wing, understood that greed led to self destruction of the system. He understood that “Enlightened Self Interest” meant that there was something more than pure greed involved with looking out for oneself. We need to look out for our fellow human beings, as well as looking out for ourselves.

Just as they pick and choose sections of the religious bible that support their arguments for repression of free thought, they select the portions of Smith that imply “…greed is good…” We need to use the same sources to show how the politics of greed is neither capitalist nor religious. It is, in fact, a method for creating autocracy with a spurious religious foundation.