Category Archives: Economics

Please, Not Another Fight That’s Debt

Just a few days after President Obama sent a letter asking for Congress to raise the nations debt ceiling, Standard and Poors (S&P) lowered the credit rating for several European nations. According to Politico, S&P’s rational was that they “concluded that the political agreements and combined $1 trillion in potential bailout funding reached at a December summit were not of ‘sufficient size and scope to fully address the eurozone’s financial problems’.” So one might ask, what does this have to do with America? Simple, not only can the troubles in Europe hurt the U.S., but this latest downgrade also proves that more government intervention/stimulus was needed to help the U.S. economy.

When S&P downgraded America’s credit the rational was not an economic one, it was because S&P was afraid that the current political climate in Washington was not suitable to adequately address the serious problem at hand. Now when they decide to downgrade Europe’s rating, their reasoning is almost the opposite. The small actions Europe took were not strong enough to spur growth, while across the pond conservatives were complaining Obama was doing too much.

Republicans have been arguing that the White House has irrationally increased the nation’s debt while millions of Americans are still looking for a job. The entire Recovery Act (including tax breaks, entitlement programs, and direct spending) was worth $787 billion. Now three years later, when most of the program has been implemented, the unemployment rate has gone down, less people are asking for government benefits, and investors feel much more confident in America’s future. We were lucky that an extra $787 billion infused into people’s wallets, enabling them to spend money on items they need while at the same time giving a much needed jolt to the economy.

As the campaign season is just starting to take shape, there is no doubt that Republicans will be saying the Recovery Act did nothing to help the economy. Some of the criticism is valid. The unemployment rate is still high and when it first passed, the Obama administration said at this point America would be out of the recession. Well, technically we’re out of the recession, but many families are still struggling.

But Republicans in Congress have been adamantly against raising the debt ceiling, which would cause the government to come to a halt and the economy to go into another tailspin. All the spending from that Recovery Act that has helped create millions of jobs since its implementation, and those that need help putting food on the table, will not be able to get the support they need.

The last time the debt ceiling had to be raised the stock market took wild swings and caused many business leaders to go into a panic. The increase only occurred when Democrats in the House decided they would vote for it and risk being branded as big spending liberals. But in the end, both sides looked bad which allowed reporters to tweet an insurmountable amount of “winning” jokes.

If we did not know it before, we know now that government does play an important role in the economy, and despite what Ron Paul says, that is the world we live in. If the Recovery Act was not implemented, if the debt ceiling was not raised last year, and if Republicans had their way on both these issues, Republicans worst fear of America becoming like Europe would actually be coming true.

The dirty secret about politics, is that no one likes politics. When serious decisions need to be made, the last thing people want to see is their elected official calling each others names and positioning themselves to win. It is not good for the country, it is not good for the economy, and it is certainly not good for members of Congress’ chances of being reelected. People should not have to do this, but this time it might be worth asking our elected officials please, not another fight that’s debt.

Advertisements

Leave a comment

Filed under Economics, Political Economy

Playing Politics Won’t Create Jobs

It is a fact that Americans do not like to pay taxes, never have and never will, which makes it easy for a politician to say that they are going to or actually did lower taxes in an election year. You speak to to the poor, middle, and rich in the country and no one thinks twice about it because it is what everyone wants to hear. I have argued in the past about why rich people should pay more taxes, but with President Obama and Mitt Romney (who I believe will be the GOP’s nominee for President) coming out with job plans, it is worth taking a look to see if further reductions in taxes would actually help create jobs.

The theory (put simply) is that by reducing taxes more people will spend money, which will grow the economy and thus create more jobs. At times it makes sense. Most American’s did not save a lot of money and tended to spend more than they earned. When spending is high businesses do well, owners are confident, and are willing to take more people on. But this scenario is not what we are currently dealing with.

According to data from the Bureau of Labor Statistics, the average Household Income has decreased to under 50 thousand dollars, which is very hard for a family of three or four to live on.

Household Income

When you have to pay for gas, food, and health insurance, it all adds up which takes up a big part of a families salary making it hard for them to spend money on items they don’t necessarily need. Of course the prices of the items they do need have risen in the past decade as well. Keep in mind that because these people are earning money the tax breaks are targeted toward them so they would spend more money. But history shows when taxes were lowered have not resulted in increased spending.

The Consumer Price Index looks at how much prices have risen or fallen on a quarterly basis. The chart below shows the percent change in the past decade, and you can see they have fallen sharply. A large part of this is because American’s stopped spending as much money, especially when there was a disaster such as in 2001 and the financial crisis of 2008. But levels still have not returned to where they were before the crisis and there is no reason to believe they will any time soon.

Percent in CPI Change

 

President Bush reduced taxes in 2003 and Obama extended those cuts in 2009 when they were set to expire. Any economist would be hard pressed to argue that those cuts had a great stimulative effect on the economy. While I’m probably beating a dead horse saying this, President Ronald Reagan did raise taxes as a compromise with Democrats when they reformed the system. For the reasons stated earlier it would not be a good idea to raise taxes on everyone right now, but it would be a good idea to raise taxes on those who have earned millions. The money could be used to either reduce the deficit or create jobs for infrastructure projects that need to be completed.

But instead of advocating for policies that would have a strong impact on the economy Obama and Romney are taking the easy route. Both are in favor of passing the trade agreements Obama recently signed into law with South Korea, Colombia, and Panama; Obama looks to be in favor of creating a oil pipeline with Canada while Romney’s job plan proposes more domestic drilling; and both jobs plans seeks to reduce taxes on small businesses and corporations.

While thousands of teachers are being let go around the country, and with states running out of unemployment benefits, it is not hard to see why American’s are doubtful of the country’s future. Obama has called for a millionaire’s tax before and Congressional Democrats have tried to push it through the Senate even though it has no chance of passing the House. But it was left out of Obama’s job plan and Romney has said he will not raise taxes on the wealthy. Both of them are putting out popular ideas that are not controversial in a time when the country needs bold action. The stimulus was bold, health care reform was bold, but neither went far enough to help the millions of Americans that need it.

The lack of action by political leaders has cumulated in the protests that started in New York and are starting to spread around the country. In 2008 people voted for change but have not felt or seen the effects of the programs Obama has put in place, mainly because there is still so much more to do. But playing it safe during an election year while the economy is still tittering will not create jobs or help the economy, which both candidates say they want to do.

Leave a comment

Filed under Economics, Jobs

Don’t Politicize The Fed

If all you were focusing on was Congress’ reaction to the Federal Reserve’s actions since the financial crisis, you might ask yourself “why is everyone worried about partisanship?” Heavy players on the left and right have wanted the Fed to be more transparent, open up its books, and do more to fix the economy. While Republican Presidential Candidate Ron Paul has advocated for getting rid of the agency altogether, Congressman Barney Frank, ranking member of the Financial Services Committee, recently introduced legislation that would make the agency succumb to political friction.

It is the Fed’s job to keep an eye on the economy and make sure employment is high. That meant giving hundreds of billions of dollars to banks so they were able to keep lending money, and then giving them even more money when the entire financial system collapsed. All the bad loans banks made were, and still are, on the books of the Fed. That means (since the Fed runs on taxpayer money) American’s own all the bad bets banks made and now have to figure out a way to pay it back.

But if the economy does get going again the Fed would be able to pay those bets back. They have held interest rates at zero which is supposed to increase lending, and they found a way to give them more money with a policy called quantitative easing (QE), which they used not once but twice. While people disagree QE’s effectiveness most agree it helped to a certain extent because it gave banks more wiggle room. But banks are still afraid to lend and businesses are afraid to spend. But is this the Fed’s fault? Many analysts blame this economic quagmire on Congress because businesses leaders are unable to predict what will happen in the long or short term.

But Congress’ hands are tied as well. With every spending bill being seen as some sort of brinkmanship it has become increasingly harder to get any type of legislation passed. So instead of Congress doing something, Frank believes the Fed should have the power to do more. His legislation will have the Governors, which make up the Fed’s board, an elected position. This would replace the current system of the President nominating the Governors and the Senate having to approve them. In theory, this would make them accountable to the people and if the economy did not get better to their satisfaction they could elect new Governors. It would give them more influence because they can say the power of “the people” is behind them.

Frank is one of the leading voices in Congress when it comes to banking, but it seems he forgot that the Fed was not supposed to be made part of the political arena. Some things go beyond politics and the economy is definitely one of them. Those deciding how much the banks should have to keep in their reserve funds and what interest rates should be have an enormous effect on the types of economies we will be living in. These decisions are big enough to worry about, especially in these times that being reelected should be the last thing people making them should be thinking about. Besides, where else are we going to hear someone say it is American consumer’s fault the economy is still not getting better?

I also have to wonder what makes Frank think that people would want to run for these positions. While there are supposed to be 7 Governors on the board, the President has not been able to find 2 others who want the job. That’s either because the confirmation by the Senate would be too much for them, or they are asking themselves why they would want to get involved in trying to solve this mess? It should not come as a surprise that most of Obama’s economic team left after just two years. This is not a fun situation to be dealing with, no matter where you are sitting.

2 Comments

Filed under Ben Bernanke, Economics

Why Isn’t Obama Doing Anything About Mortgages?

The last time whitehouse.gov posted anything about home mortgages was on August 3rd of this year. President Obama also did not even touch the housing issues that continue to plague the economy in the jobs plan he gave to Congress. As the employment rate continues to hover around 9 percent, it has forced many banks to foreclose on homes to families they lent money to. At the same time banks are not lending any money out so new homes can’t be built, or for businesses for them to hire. But then again, there aren’t a lot of people asking for money either. But that is no excuse for Obama not to take on the housing problem. In fact, it would be good for him politically as well.

Whatever you think about Obama’s jobs plan, there is nothing in there that will actually create jobs in the short term. In the plan that he said Congress should pass now, the tax breaks that act as incentives for businesses do not take effect until 2012. We of course need more jobs in this country so families can be supported, and banks are not going to get their money back if no one has a job. It’s a cyclical problem which is not going to go away anytime soon if no one has any guts to spend money. Even though the basic functions of the economy are fine, no one is demanding anything that will get it moving again.

If Obama did propose a plan to help families pay their mortgages it might actually have a bigger affect than the tax based one he proposed. Housing is a large part of the economy because it affects so many other areas. Building a house of course creates jobs for the contractors and the suppliers they buy from. But it is also great for areas because businesses are more likely to open a store where they know people will live. Schools can also be built, along with fire houses and police stations.

One of the heaviest hit states in the country is Florida and its 27 electoral votes. There have been so many written and televised pieces on how bad the situation is I can’t help but think politicians are afraid to talk about it. Not in any of the Republican debates that recently took place (two of which were in Florida) was the housing crisis mentioned. If any candidate next year is serious about fixing the economy, they have to propose a plan on housing.

A part of it is that anything they seriously put forward won’t help families in the short term and there’s no real way to promote it like it will. But that should not stop them from trying to enact policies that might solve the problem.

Senators Menendez and Enzi proposed legislation that would allow foreign banks to lend people money specifically to build houses. The problem is that Europe is having the same problems, if not worse, that the U.S. is having. While it is a nice thought, there is no reason why other banks would want to invest in the housing market. One idea that might help is to raise interest rates on new home mortgages. If banks know they will make more money if they are able to find people who want a mortgage, they will want to find those people themselves instead of waiting for them to come to them.

There are also a lot of houses and apartment complexes around the country that need a lot of work. By renovating them for new families, the prices for them will go up in the long term and people will be getting jobs to work on them. The renovations could also include making the houses more energy efficient. After Hurricane Katrina a lot of the houses that have been built in the area will save the families living in them thousands of dollars a year.

You could also make it easier for investors to build new houses or renovate them. By giving them tax incentives for a limited amount of time, say a year, to put money into projects that will spur the housing market they might bite. There are plenty of families that need a home to live in right now and the new developments/projects will help grow the area and jobs they take place in.

These are just a few ideas that might help. But implementing them will take time and Americans do not always have a lot of patience. But with things as bad as they are right now, people are willing to listen. That includes the thousands of people without a home right now in Florida. They are looking for someone who they believe understands what they are going through and at least has an idea on how to help them.

2 Comments

Filed under Economics, Housing, Jobs

Obama Going Big On Taxes

President Obama unveiled his tax reform plan in a speech today in the Rose Garden. It was a populist message that called for raising taxes on the wealthy, and reminded everyone of his jobs plan he sent to Congress last week. Obama said the plan has “two dollars in cuts for every dollar in revenues” and that he would not have had to propose these cuts if the Republicans did not walk away from the debt ceiling talks.

Overall there are a lot of good ideas in the plan, most notably raising taxes on the rich along with closing corporate loopholes in order to help pay down the deficit. The spending cuts are from the military draw downs in Iraq and Afghanistan and areas to Medicare and Medicaid that will take place in 2017. It is meant to cover the $447 billion jobs plan and reduces the countries debt by $3 trillion over ten years.

This is a very populist proposal that will rally his base and has no chance of passing Congress. It helps Obama with liberals because he is raising taxes on the wealthy and not raising the age when people are eligible for Medicare or Medicaid. Nancy Pelosi and other Democratic members of Congress have already praised the proposal mainly because of its emphasis on taxes and that it does not make changes to Social Security.

We have already seen early signs these ideas are putting Republicans on the offensive. GOP elected officials and pundits have already said these ideas are “dead on arrival” because they have already been voted down. Some of the new revenue comes from tax increases from the Bush tax cuts that were meant to expire at the end of the year, making it harder for Obama to take credit for “changing” the tax code. Those are also cuts Republicans have staunchly defended in the past.

Republicans have been calling these ideas “class warfare” because Obama is targeting the rich. It is true that these ideas have been proposed before, particularly in the intense debt ceiling debate, where everyone wound up looking bad. To say this is class warfare though is a hit below the belt. If it is good policy to cut benefits to the poor like food stamps and other unemployment benefits, why is that not class warfare too? Most Americans have common sense and realize it simply is not right to put all the burden of fixing the economy on one group.

That is why there is a chance Obama can reach Independents and Moderates with his new proposals. Most Americans already believe increasing taxes on millionaires is a good idea. In a poll conducted recently by Zogby, they found 46 percent of American’s agreed with the statement “Modernize the nation’s infrastructure and help pay for it by ending the Bush tax cuts for households earning more than $250,000 and closing tax loopholes for large corporations.” That includes 48 percent of Independents (the poll release does not say how many people said they could not decide). It is not a majority but it is strong a start.

One thing to keep in mind with deficit reduction though is that these spending cuts could hurt job creation in the short term. Many economists have been sounding the alarm because many states have been cutting spending, which has lead to less construction projects and not as many new jobs for teachers and other areas in the public sector. You also lose revenue for those social programs everyone wants to save, and when it comes to the state sales tax; if people do not have a job and are spending less money, you lose revenue their too. That is why, while I am glad Obama is talking like his old self again, I know in the back of my mind the policy recommendations he is putting out there could be stronger.

The jobs plan, and today’s deficit reduction plan, are good steps in the right direction to getting this economy going again. It focuses on big and important changes that need to take place. It starts honing in on areas that effect every day Americans who are struggling to find a job and pay the rent. It also helps the middle class by securing a stronger future for their children by investing in education and other programs now that will create jobs for them later on. And of course, they will not be solely responsible for paying back the debt.

Leave a comment

Filed under Economics, Obama, taxes

Remember Jobs?

It’s been two weeks since Congress extended the countries debt ceiling, and out of the 435 members in the House, there have only been six bills introduced that have something to do with creating jobs. Three of which have been introduced by New York Democrat Representative Paul Tonko. It would be really easy for me to go through each bill and say why they are good or bad. But apparently the President is going to put out his own job plan in early September, and at the end of the day that’s what will be the base for future job creation policies.

In an interview with Chuck Todd, White House Press Secretary Jay Carney said that the President’s plan is a two step approach that is linked with the deficit commission that will start its work when Congress comes back. While looking for cuts in the budget, Obama is going to give recommendations that will no doubt be included when members introduce job bills when they get back to Washington. One of the policies is to extend the payroll tax cut for small businesses, and other ideas that are “totally consistent” from the negotiations that took place with John Boehner which included new revenues.

I wouldn’t be surprised if we saw more funds or tax incentives to build or repair roads across the country, research for clean energy initiatives (Obama has already called for a carbon tax), or incentives for banks to give businesses money that would create job training programs. It would be surprising if he calls for reforms to Social Security again being this close to the election and the Democrats left in Congress have no appetite for it.

Politically, this move has more advantages than disadvantages for the President. If Republicans are still willing to say no to anything Obama wants, the President can dub them the Do Nothing Congress in 2012. The flip side is if they do pass some of the ideas he proposes, he can say that he signed a bipartisan piece of legislation into law that will create jobs.

After he comes back from Martha’s Vineyard Obama will be recharged and have the energy necessary to push his ideas. He won’t win any political points by standing on the sidelines working the phones. He needs to play hardball with Republicans, and remind the American people they have done absolutely nothing to create jobs since they have taken control of the House.

Of course that’s easier said than done. In the interview, Carney told Todd that the policies the President will be calling for are “things in a normal universe should have bipartisan support.” But as we’ve seen Washington is nowhere close to the Milky Way galaxy. These are the most partisan times in our nations history and it’s disgusting. That’s not Obama’s fault, but while he positioned himself as the adult in the room he lost control of what was going on.

This is a safe win win move for Obama, and look for anything he proposes to be promoted as a big idea. But if the policies he proposes are passed and are substantial, it could be even bigger for the American people.

Leave a comment

Filed under Economics, Jobs, Obama

Jobs and Taxes; Helping to Pay for the Future

Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.

Benjamin Franklin

It’s not a news alert that American’s have never liked to pay taxes. We started a war over them, and have never voted for a politician who says he/she will raise them. But in light of the recent debt debate and angst to lower the national debt, it’s important to remember raising taxes on millionaires and corporations could help protect social programs, and create jobs.

In March, the New York Times reported that major companies in the United States paid absolutely nothing in taxes for their record profits in 2010. It wasn’t long after that 60 Minutes took a trip to Eastern Europe discovering American corporations hiding their money where it can’t be taxed. This should have been a moment for the Obama administration and his allies in Congress to call for a major tax reform. Despite vast new financial instruments and companies easily being able to conduct business worldwide, tax reform hasn’t taken place since 1986.

If you took a look at the stock market these past couple of days, you quickly realize the debt ceiling debate was only a artificially problem created by Congress. While today’s employment numbers weren’t the worst we have seen, it still wasn’t good enough. There’s no doubt more revenue is needed, and with corporations still reporting strong profits at the same time American’s are struggling, it is time to seriously look at ways that can bring in more money.

Most taxes collected in this country come from sales taxes or people’s pay checks. But with people out of the job and not spending money we’re not able to use those revenues to pay for the things that we need like roads and teachers.

The balance act being conducted is trying to figure out a way for American corporations to bring the money back to the states and invest it. One idea being floated around is a tax holiday where there will be a set amount of time where corporations can bring back the money from abroad without being taxed. The trick is to figure out a way to make sure the money that is brought back is used to hire people. Versions of this scheme have been endorsed by Obama’s former Chief of Staff Rham Emanuel and former President Bill Clinton, but so far haven’t been endorsed by the President Obama.

Instead, Obama has sought to increase taxes on hedge fund managers, millionaires, and “corporate jet owners.” He has also called for closing certain tax loopholes that can bring in an additional two billion dollars.

Corporations argue that they have to send their profits abroad because their stock holders want to see a profit. Cisco has had to pay back some of those holders because they lost confidence in the company. But corporations should want to pay taxes. If done right it could become a lot cheaper to pay for a employee’s medical bills which would lower their long term costs.

On the political front, there is always some disconnection between people wanting or liking items in a bill and but then still not wanting to pay taxes. We saw in the polls regarding the healthcare debate, that while people liked what was in the bill they still didn’t like what was in the overall package. One of the main reasons a major overhaul of the tax system is needed is so Social Security and Medicare, programs that no one wants to see go away, stay solvent. Price controls for Medicare is only half the battle, it’s never going to be free and new ways need to be implemented to make sure money is going into the system that would keep overall costs low for the majority of Americans.

Certain members of Congress argue they want to reduce the deficit so it won’t burden their children or grandchildren, but paying for items we need now rather than later will be cheaper and create a better economy for them. The reason why we need more revenue is so more money can be flowing through the economy which will help create jobs. With the economy continuing to fluster what is really needed is another, more specific, stimulus package. But unfortunately it’s not politically possible. Americans don’t want their bridges falling or schools lacking the supplies it needs to teach their children. People are needed to fill these positions and the taxes collected from them will help stabilize our social programs. Thus the world keeps turning.

Benjamin Franklin, businessman, inventor, and founding father, was right when he said the only thing certain was death and taxes. It is part of the way the world works that help create jobs that supports families and their livelihoods. Deficits are a long term problem but it will be better to raise revenues now to pay for the future.

1 Comment

Filed under Economics, Jobs