Fixating on Tax Cuts; Ignoring Real Problems

A Nation in Need of Stimulus
By DEAN BAKER

In the Bush years the Democratic leadership made the battle over the Bush tax cuts the holy grail of American politics. People were thrown out of the party if they ever referred to the tax cuts without an adjective like "costly," "reckless" or "irresponsible."

To be sure, the tax cuts were a bad use of public money. As we know, they disproportionately went to the wealthy. This money could have been much better used rebuilding infrastructure, promoting renewable energy and conservation, or even as tax cuts oriented more towards middle-class and moderate-income families.

However, the tax cuts were not the economic disaster portrayed in the Democrats' attacks. The deficits were not especially large in the Bush years. And, the economy needed deficit spending to get out of the recession caused by the collapse of the stock market bubble. Furthermore, the trade deficit caused by the over-valued dollar inherited from the Clinton Administration, necessitated some alternative source of demand, like a budget deficit, to bring the economy anywhere near full employment.

Unfortunately, the political elites' fixation on the tax cuts and the deficits led them to ignore the economy's real problems.

The housing bubble grew to ever larger proportions, eventually reaching a point where its collapse would lead to the sort of recession that we are now experiencing.

At this point, the way out of the downturn is fairly simple to explain, even if the path might not be politically possible. In the long-run we have to replace the consumption and construction demand generated by the bubble with increased net exports (i.e. fewer imports and more exports). However, this is a long and difficult process involving the decline in the dollar against other currencies. It will also depend in part on the restoration of growth in our trading partners, a prospect that looks rather bleak as many of them are now overcome with austerity fever.

The short-run alternative is increased demand from the government -- yes, large deficits. In spite of the Bowles-Simpson clown show, for the foreseeable future the deficit is our friend. We need to get money into the economy to sustain demand and employment.

For this reason, extending the tax cuts to the richest 2 percent for another two years is not especially harmful. It will hand money to people who will spend at least some it, thereby creating demand and generating jobs.

Of course we would be much better off if the $50 billion going to the rich each year instead went to other purposes, such as preventing cutbacks by state and local governments or rebuilding infrastructure, but if the question is whether the economy will do better with the tax cuts or a smaller deficit in 2011 and 2012, the answer is that we will unambiguously do better with the tax cuts to the rich.

There are huge dangers here but they are political not economic. The deficit hawks will whine about this will add to the national debt and create a huge interest burden.

The answer to this claim is that any resulting debt burden will be a political decision by the government. There is no reason that the Federal Reserve Board cannot simply buy and hold the debt issued to finance these tax cuts as well as the deficit more generally in these years of high unemployment.

There is no reason for concern about inflation, which would actually be good for the economy right now in any case. Japan's central bank is holding an amount of debt that is roughly equal to Japan's GDP ($15 trillion in the U.S.) and the country is still experiencing deflation. When the economy recovers and inflation does become a concern the Fed can simply raise reserve requirements to ensure that reserves created by buying debt do not become a problem. If the Fed refuses to go this route then it will be the result of a political decision on its part to put stress on the budget, not an outcome dictated by economic necessity.

The same logic applies to the repeal of the tax cuts on the wealthy at some future date. The government will need this revenue at some point. However, it is ridiculous to think that we can never take back these tax cuts. After all President Clinton raised taxes on the wealthy in 1993 and still managed to coast to re-election 3 years later.

So, progressives should not be happy about giving more money to the richest people in the country, but it is not the end of the world either. The key focus should be on getting the stimulus needed to boost the economy. It is outrageous that 25 million people are unemployed or underemployed because of the incompetence of the people who design economic policy.

Deceptive Economic Statistics

While Economists Lied, the Economy Died
By PAUL CRAIG ROBERTS

On August 17, Bloomberg reported a US government release that industrial production rose twice as much as forecast, climbing 1 percent. Bloomberg interpreted this to mean that “increased business investment is propelling the gains in manufacturing, which accounts for 11 percent of the world’s largest economy.”

The stock market rose.

Let’s look at this through the lens of statistician John Williams of shadowstats.com.

Williams reports that “the primary driver of a 1.0% monthly gain in seasonally-adjusted July industrial production” was “warped seasonal factors” caused by “the irregular patterns in U.S. auto production in the last two years.” Industrial production “shrank by 1.0% before seasonal adjustments.”

If the government and Bloomberg had announced that industrial production fell by 1.0% in July, would the stock market have risen 104 points on August 17?

Notice that Bloomberg reports that manufacturing accounts for 11 percent of the US economy. I remember when manufacturing accounted for 18% of the US economy. The decline of 39% is due to jobs offshoring.

Think about that. Wall Street and shareholders and executives of transnational corporations have made billions by moving 39% of US manufacturing offshore to boost the GDP and employment of foreign countries, such as China, while impoverishing their former American work force. Congress and the economics profession have cheered this on as “the New Economy.”

Bought-and-paid-for-economists told us that “the new economy” would make us all rich, and so did the financial press. We were well rid, they claimed, of the “old” industries and manufactures, the departure of which destroyed the tax base of so many American cities and states and the livelihood of millions of Americans.

The bought-and-paid-for-economists got all the media forums for a decade. While they lied, the US economy died.

Now, back to statistical deception. On August 17 the census Bureau reported a small gain in July 2010 residential construction housing starts. More hope orchestrated. In fact, the “gain,” as John Williams reports, was due to a large downward revision” in June’s reporting. The reported July “gain” would “have been a contraction” without the downward revision in June’s “gain.”

So, the overestimate of June housing not only made June look good, but also the downward correction of the June number makes July look good, because starts rose above the corrected June number. The same manipulation is likely to happen again next month.

If the government will lie to you about Iraqi weapons of mass production, Iranian nukes, and 9/11, why won’t they lie to you about the economy?

We now have an all-time high of Americans on food stamps, 40.8 million people, about 14% of the population. By next year the government estimates that food stamp dependency will rise to 43 million Americans. So last week Congress cut food stamp benefits. Let them eat cake.

Wherever one looks--food stamps, home foreclosures, bankrupted states, mounting joblessness, the message to long-suffering Americans from “their government” is the same: go eat cake, while we fight wars for Israel that enrich the military/security complex and while we bail out banksters whose annual incomes are in the tens of millions of dollars and up.

It is impossible to get any truth out of the US government about anything. If private companies used US government accounting, the executives would be prosecuted, convicted, and incarcerated.

“Our government” is committed to fighting wars to enrich the military/security complex and Israel’s territorial expansion at the expense of cuts in Social Security and Medicare.

All most members of Congress, especially Republicans, want to do is to pay for the pointless wars by cutting Social Security and Medicare.

When they worry about the deficit, it is usually Social Security and Medicare--so-called “entitlements” that are in the crosshairs.

You don’t have to be smart to see that Wall Street’s and the government’s response to the amazing US budget deficit is not to stop the senseless wars and bailouts of mega-millionaires, but to cut “entitlements.”

I will end this column on unemployment. “Our government” tells us that the unemployment rate is just under 10 percent, a figure that would have wrecked any post-Great Depression administration. But, again, “our government” is lying. The reported unemployment rate is just below 10% because the US government no longer counts Americans who have been unemployed for longer than one year. Once the unemployed hit one year and one day, they are dropped from the unemployment roles and no longer counted as unemployed.

Compare this fact with the number you read from the financial press. Right now, if measured according to the methodology of 1980, the US unemployment rate is about 22%. Thus, the reported rate of unemployment hides more than half of the unemployed.

And Secretary Treasury Tim Geithner welcomed us in the August 2 NewYork Times to “the recovery.”

Utterly amazing.