Category Archives: Political Economy

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.

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Filed under Economics, Political Economy

Triangulation On Taxes

Time is running out on playing politics and real decisions are going to have to be made. As the President and Speaker play golf, the rest of Congress needs to decide how to raise the debt ceiling without completely leaving the poor and working families in the dust, and both sides know more revenue is going to have to come from somewhere.

Before going into the first of four meeting this week to discuss the debt ceiling, Majority Leader Eric Cantor said “We have hit the point at which we are at some really tough stuff. Big numbers, everything as I have said before is on the table except tax increases.”

As negotiations continue, Republicans are asking for over one trillion dollars in cuts that won’t include Medicare or Social Security. So that means other programs that involve grants for research, food stamps, public housing, and infrastructure, are potentially on the chopping block. The GOP is serious about the cuts, but they’re not evil beings who want to see people suffer.

In this time of economic ups and downs, taxes need to be raised in order to keep the programs running that are helping people stay afloat, and Republicans know this. Even though their most conservative supporters don’t want them to raise taxes on anyone, the party that was built by Abraham Lincoln does not want to be become the party who turned its back to the poor.

A New York Times article on Monday discussed lowering the tax rate for multinational corporations who hold assets abroad, where they will bring the money back and invest it. The amount of money is worth billions, some by single companies, and is sitting in accounts around the world where they are barely touched. Republicans have always been in favor of lowering corporate tax rates, but many Democrats have argued these companies do not pay any taxes even under the current rules.

However, this proposal seems to be gaining momentum as Senator Chuck Schumer is negotiating a deal, with both sides, for lowering the rates into a jobs package being put together in the Senate that focuses on infrastructure. According to the article on CNN “While the repatriation holiday alone is a non-starter for most Democrats, pairing it with an infrastructure program could marshal labor support. It’s an approach backed by former Service Employees International Union president Andy Stern, who’s emerged as the most vocal proponent of the tax holiday on the left.”

But while corporate tax rates might be lowered, a part of the deal will be to close the loopholes corporations currently use to avoid paying them in the first place. But no matter how you cut it, say it, or write it, closing loopholes is a tax increase.

Once the deal is cut, Eric Cantor will be talking about how cutting spending and lowering the overall corporate rate will create jobs. But cutting spending has nothing to do with creating jobs, in fact, it could make the entire situation worse. Right now states want to hire people to strengthen their infrastructure but they need the money to do it. But banks aren’t lending, and since the GOP refuses to spend any money, states are stuck.

On the second point, if the overall tax rate is lowered, the IRS wouldn’t be collecting as much as they would now if they enforced the rules already on the books. But if the deal passes they would be collecting more money because the rules will be easier to enforce, and presumably there will be more money to collect. But politicians could be taking a huge gamble. There is no guarantee these corporations will bring back the money, or European governments won’t lower their taxes even further so those corporations keep their money where it is.

And don’t forget, most of Europe’s taxes are collected through a Value Added Tax System (VAT) which allows them to collect money before these large corporations accountants and lawyers figure out how to hide it.

Democrats will declare this a victory too. Many liberal economists are trying to figure out ways for the government to put more money in people’s pockets. One idea has been to lower the amount being taken away out of people’s paychecks for Social Security and Medicare. So yes, economists do consider tax reductions a stimulus. But the only stimulus that takes place is through the money that people spend when they receive their cut, which right now isn’t much. In this climate they are more likely to save it or spend it on necessities like rent, healthcare, and food (like that last one did), which only had a small and short impact on the overall economy.

The Tax Code is a complex monstrosity that should be put into a shredder and thrown into a furnace. But let us digress, and come to the realization that even if this plan does come together, there is no way to determine how many jobs will be created or how much it will reduce the deficit. It is a possibility for a short term solution, that requires long term thinking, and no one can say how much good it will really do. In the end it is just another example of how current economic models and the advice given to politicians are defunct.

 

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Filed under Budget, Congress, debt, debt ceiling, Democrats, Economics, Eric Cantor, Political Economy, Politics, taxes, VAT

Living In The Present And Working For The Future

Sometimes it gets easy to blame the media when polls show the American people contradicting themselves on questions. But this time only the politicians have themselves to blame. The WSJ/NBC poll found 61 percent of American’s believed the budget should be cut, while only 31 percent said they believed the President and Congress should boost the economy even if it means an increase in budget deficits.

Having always being against increased spending and raising taxes, Republicans have had it easy. It’s always a lot easier to say “read my lips, no new taxes!” or “government isn’t the solution, it’s the problem” than “I am going to raise taxes, just not yours” or “sometimes government regulation is needed, and sometimes it’s not”. Campaigns are sometimes won if the voters do not understand what you plan to do in office or what you did while in office. If they don’t agree with you that’s one thing, but if they don’t understand what you’re about that’s a whole different problem.

Economists and policy wonks alike have made arguments (Robert Reich, Fareed Zakaria, and, not that I’m on their level, but yours truly) that the problem with the economy right now isn’t the supply of things, it’s the demand for them. No matter what income bracket American’s are in the majority of their money goes toward housing, followed either by insurance or healthcare, and then food. Things like Ipads, movies, music, days at the beach, are all luxuries many American’s can’t afford or are squeezing out of their pockets. But when the economy was moving in the 1990’s these were areas that did really well.

Even though most people were not earning more money, they were confident in the future which allowed them to spend money on extra outings or stuff that allowed them to have fun with their families and friends. But now the cost of gasoline is so high in some areas that driving to work is costing families most of their weekly budgets.

What both parties do a bad job of explaining is that economies are cyclical and money has to come from somewhere. Even in times when the economy was strong, families did not earn enough to pay for health insurance on their own. So the government had to step in and create policies that made sure families were secure in the long run so they could live in the present.

When the last round of tax breaks were passed, the “extra” money people thought they had was spent on necessities like food. None of the areas that would have a bigger effect on the economy like infrastructure or food stamps were even part of the bill. That being said, the biggest items economists claimed would have a simulative effect wasn’t even an increase of 2 percent, and in some cases it wasn’t even 1. These were also short bursts of growth, it wasn’t anything that would have secured families in the long run so their kids can go to college, eat, or get to work.

But when we see video’s of the President saying government is wasting our money, of course no one is going to believe that the government can do anything right. Whether he is right or wrong, it gives the Republican’s the ammunition they need to say there is no reason for you to be taxed. President Obama also likes to remind people we are coming out of what was almost Great Depression 2.0. Well, when FDR cut stimulus funds during the middle of his depression, the American economy went into another free fall. Plus with interest rates as low as they are, and Bernanke not hinting to raise them any time soon, more money into the economy won’t do any harm. In fact, all signs point to gains.

There is also no proof that raising taxes will hurt the economy either. In fact, it was after George H. W. Bush raised taxes the economy really started to move. It shows one thing has nothing to do with the other. But if policy makers are serious about making sure America stays number one, raising taxes on the rich to secure social programs and create a stimulus is a must.

I don’t think anyone is willing to bet right now they will be making enough money to retire in the future. No one ever has, which is why pensions and Social Security were created in the first place. The federal government needs to spend more money in exchange for short term debt. If they don’t more scenes, like the ones taking place Minnesota, will be more frequent around the country. More stimulus now means more people will be working, families can buy what they need, and more revenue can be raised in order to take care of the families in the future.

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Filed under America, Budget, Congress, Economics, economy, Families, Political Economy, Politics, President Obama, taxes

It’s Families Stupid

In Nate Silver’s recent post “What Do Economic Models Really Tell Us About Elections?” he argues that it’s not much. All in all I agree with his conclusions, but for different reasons. He takes a look at GDP growth and the margin of victory/loss in a presidential election, and shows when you take away inflation, 43 percent of incumbents win reelection. He admits these numbers don’t go into why, but that’s where I come in.

The fact is GDP doesn’t measure what voters really care about and can miss a lot of important aspects to a families quality of life. Pollster’s never ask how many people know how much the economy grew in the last quarter. Instead they ask how they feel it is going, and since the majority of voters aren’t economists, the only reference they can refer to is themselves. So they think about if they are able to pay the bills, put food on the table, and have healthcare for the members of their family. The reason why Nate’s formulas are so off is because GDP, like most macro data, doesn’t cover these things. Even basic data like average incomes still don’t tell you the whole story. Take a look at the average income for individuals:

Whether incomes have gone up or down, it hasn’t lead to a President, or his party, keeping the White House. This was the case in 1976, 1992, and 2000. While there wasn’t much change between 2004 and 2008,  there was a drop in 2009 because of the Great Recession, and we all know who won that year.

While pollsters try and figure out what’s on people’s minds, economists need to try and start doing the same thing. A Washington think tank called the Economic Policy Institute came out with a report titled The Rising Instability of American Family Incomes, 1969-2004. The authors point out that “Part of the reason why family economic instability—sometimes called “income volatility”—has not been extensively examined is that aggregate economic statistics have been relatively stable and favorable. Neither the 1991 nor the 2001 recessions were particularly deep, and inflation and unemployment have remained historically low. Yet.. these broadly stable and favorable aggregate indicators mask many signs of declining economic security among American families.”

The report came out in May of 2008, before the Great Recession, but some of the findings might surprise you. It turns out 15 percent of American’s saw their salaries decrease between 1969 and 2004, causing serious strain within the family. Right at the turn of the century, levels of family income were extremely violent, where over half of American families saw their earnings drop.

Just because incomes were rising and unemployment was low, didn’t mean all families were living the high life. Health care costs soared way over inflation, so even if there were two breadwinners per household, there was still a good chance they couldn’t afford health insurance. Not to mention most people received coverage through their job. And future problems are becoming apparent. As the price of food has gone up, it will eventually start affecting a large amount of families.

The unemployment numbers that came out last week weren’t good. And yes those and other macro indicators can show politicians where the state of the overall economy is right now. But if politicians want to actually do something about it, they need to look at the root causes of high unemployment, why food prices are rising, and figure out why the cost of health care has been rising. But they can’t do this without getting the right information. If a politicians job is to get reelected, they will start demanding the information that will show them how to help their constituents, and economists will start figuring out ways to calculate it.

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Filed under Economics, Election, Families, Political Economy, Politics, Public Policy, Think Tank, Unemployment

Taxes: Political vs. Reality

It’s not every day the Working Families Party and the Manhattan Institute agree on a issue. But in the case of capping property taxes here in New York, they found a common cause.

Last week Governor Cuomo and Republican’s in the Senate agreed to cap property taxes by 2 percent for parts of Long Island, Westchester, and most of upstate New York (you’re welcome Westchester, I won’t bundle you in with the suburbs of Albany, Syracuse, or Buffalo). There was no choice but to lower property taxes. Being that they were already one of the highest in the nation and many families were already tightening their belts as much as they could. But the problem was that the revenue was not made up from anywhere else.

Instead of raising taxes on the wealthy or corporations, New York’s legislature cut programs for education, the homeless, and safety. These cuts have had a disproportionate affect on the bigger counties and cities. While 93 percent of counties were able to pass education budgets, New York City’s Council is now debating the ways it can stop experienced teachers from being fired. Neither Syracuse, Buffalo, or Albany, figured out how to pass their budgets either.

One of the reasons for the bad employment data that came out today was because state governments cut their budgets. But raising taxes is never a popular move, especially in bad economic times. One of the problems with tax policy is that it’s so complicated. The federal code is longer than War and Peace, and it makes it hard in this thirty seconds or less media to explain the effects this compromise will have on the state.

But the fact remains people are willing to pay for the programs that benefit their families like public education and safety. Cuomo got the political victory for getting his agenda passed, but the reality is most New Yorker’s are facing the reality of those cuts.

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Filed under Long Island, Mayor Bloomberg, New York, Political Economy, Politics, property taxes, Public Policy, tax caps, taxes, Westchester

Egypt’s Capability

Friday morning I was completely off the grid. I had a appointment downtown, went on the subway to get back to my place so I wasn’t checking my cell phone, Twitter, or Facebook. It was just the like the 90’s but better because Destiny’s Child wasn’t playing in the background. When I got back to my apartment I checked to see what was going on in the world and saw a peaceful revolution coming to a peaceful end, and a new beginning for the people of Egypt. There are no words that can describe what was being shown on television, but the word that can’t be used enough is incredible.

When the first round of protests started on January 25th, it seemed to catch many people by surprise. Either people at the CIA don’t have Facebook or Twitter accounts, or their efforts were focused on something else. But with all the countries in the middle east, why even worry about Egypt? With Mubarak in charge the country had been stable for 30 years, a peace treaty with Israel that it wasn’t breaking, and it’s GDP was growing at a higher rate than any other nations in Africa, and 25th in the world. So, what do Egyptians have anything to worry about?

The reasons for Egypt’s revolt are complex, there are so many directions a writer can take in describing the events that lead up to January 25th. But what they all have in common is the Egyptians wanted to be free and have a democratic government working for them. I have written in the past about standard economic models and how they are inadequate assessments. The reason: they don’t assess what people need or care about. Economists should look at what happened in Egypt and realize if the measurements they use do not change, the whole practice is in danger of becoming obsolete.

Before the recession in 2008 Egypt’s GDP grew 7.2%, in 2009 it still grew another 4.6% (when most economies shrunk), and in 2010 it contued upward at 5.3%. Part of the growth was drilled from the oil in the country’s vast dessert in the west, but its leading industry is in textiles, which grew at 5.5% just last year. But despite this improvement in production, it did not lead to people’s lives being improved. Unemployment was still at 9.7% and over 14 million people were living below the poverty line.

Nobel laureate Amartya Sen developed the Capabilities Theory, an alternative to standard economic models. Instead of focusing on GDP as the primary factor in development, he argues economists should focus on social programs such as education and health care, which enable people to live their lives to the fullest extent possible. An important part of this theory is strong democratic governance where people can make their grievances known and work to expand their freedom. The theory calls for redistributive policies to be enacted through social programs, similar to Social Security and Medicaid, which give people the resources and skills they need.

If economists are going to solve this problem, they have to understand what’s important to Egyptians, and people living around the world. There have been tons of stories written about the importance of bread, and all the people who have gone hungry (and I make no apologies for saying mine is the best) because they are not able to afford it. What’s also important to the Egyptians is their health. When Mubarak first came into power in the 1980’s he expanded health care by building hospitals and providing beds across the country. But despite the fact all Egyptians are eligible for health insurance, the government was refusing to pay for it (sound familiar?). The Ministry of Health owes $270 million dollars to health care providers across the country. But because they don’t have the money, hospitals have had to delay or refuse people treatment because they can’t afford to take them in.

Much of the talk has been about the smart, young people, who organized the protests through Facebook and Twitter. While this is true, the facts don’t speak well for Egypt’s education system. In the past, Egypt did have a good education system. But in recent years, as the population grew, more students were attending schools but were not receiving a good education. These children became disenfranchised only to drop out. Most of them tried to get the few jobs that were available, or went to a life in crime. This can lead to future economic stagnation because young Egyptians won’t know how, or have the will, to start or run a business. More schools needed to be built and more teachers needed to be hired, both of which would have reduced the unemployment rate and brought brighter prospects for Egypt’s future and the people who started the revolution.

The Carnegie Endowment for International Peace released a study on how hard it was to start a business in Egypt. This only empowered the rich and leaving behind the rest. While money was being given to the growing industries like textiles, this only enabled the rich and the businesses they own. Money wasn’t being spent on other areas where the majority of the people needed it. Overall investment by the government was only 18% of GDP. This is despite the fact Egypt’s purchasing power grew by $25 billion each year between 2008-2010.

The Capabilities Theory allows economists to focus on the areas of an economy that is most important to people, and their welling being. Providing for areas such as education, health care, housing, and food, provides security and stability allowing people to live their lives and pursue the areas they choose. Egyptians wanted access to better education and health care, among other things, and because they were being ruled instead of governed, they had to take to the streets in order to attain these freedoms.

February 11th 2011 is a day that my generation will ask itself “where were you?” when Egyptians took their country back? Now that it is in their hands, Egyptians will be able to elect officials that can enact policies which will help those desperately in need, and build a better stronger country for future generations.

 

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Filed under Amartya Sen, Capabilities Theory, Economics, Egypt, Mubarak, Political Economy, Politics