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Why go half away?

Obama Administration is floating the idea of a payroll tax holiday in the press.  But get this - it will be for employers only and apply only to NEW hires.  This does very little to address the huge jobs hole we have now.  Our current economic situation requires a bold response and it seems, with this idea, Obama Administration will fail to deliver again.

Payroll tax - aka - FICA Tax or the Federal Insurance Contribution Tax - is a tax that is assessed against our gross paycheck amounts.  The current rate is 15.30% - 7.65% paid by employer and 7.65% paid by worker.  The tax collected goes into the Social Security Trust Fund and Medicare Trust Fund.

Obama Administration is floating this idea of payroll tax (temporary) holiday as a way to stimulate the economy (but don’t mention the word ‘stimulus’ - the Administration doesn’t like the word now).  Early indications are that this payroll tax holiday will only apply to employers tax obligation and apply only to new workers.  If this is the case, this will be another weak policy proposal.

Businesses are not hiring because there is no current demand for product and services and they don’t have confidence that there will be future demand for product and services.  Giving a payroll tax to employers for new hires only does very little to address this problem.  We need policies to address the lack of demand issue that businesses face. 

A correct payroll tax holiday would be for both the employer and CURRENT workers and new workers.  This would provide huge stimulus to economy.  This type of payroll tax holiday is putting cash in people’s pockets immediately - every pay period - and businesses get a tax savings every pay period that could be invested in new workers or equipment. 

Many people, including Prof. Jaime Galbraith and Warren Mosler, have been proposing a FULL payroll tax holiday for a while now.  Obama Administration should be open to listening to people who have been warning since 2009 that its stimulus policy was not strong enough.  It would do everyone some good if they listened. 

Now, there are those who are worried that this could hurt Social Security Trust Fund.  I can’t speak for the Obama Administration’s potential proposal but Galbraith’s and Mosler’s proposal would require the Treasury Department to credit the Trust Fund in the amount of payroll tax lost by holiday.  This is something that Treasury Department is use to doing.

Good luck. 

An Answer to Prof. Krugman’s (Rhetorical) Question

Today, Professor Krugman in his NY Times blog, asked the question why do people who denied the existence of housing bubble and are now saying that fiscal stimulus doesn’t or can’t work command such attention?  I have an answer.

This is exactly what Prof. Krugman said:

The question is, why do such people command such attention? As I’ve pointed out before, the same people who denied the existence of a housing bubble also told investors that budget deficits would send interest rates soaring; in other words, anyone who believed these people in the past, and acted on that belief, has lost a lot of money.

Yes they have lost a lot money. They have lost trillions including money managers who manage retirement savings of millions of working families.  Why?

Prof. Krugman maintains a certain level of professional decorum and diplomacy which I do not share with the professor.  Those who denied the existence of a housing bubble and are now saying fiscal stimulus can’t and don’t work (despite real evidence to contrary) share an adherence to defunct neo-liberal economic theories .  Neo-liberalism and corresponding economic theories come in many forms the most popular are monetarism and “Trickle Down Economics” that Repuglican Party espouses. 

Some the more common points of neo-liberal economic theories include the following:

1) Government spending is bad.  But tax cuts for wealthy are great.  They advocate the elimination of government programs such as medicare, social security and education spending but of course most are fine with corporate subsidies and tax breaks and loopholes.  They talk about stuff like ‘crowding out’ where government spending leads to crowding out of private investment.  However, despite the nice sounding theories and the sound bites (based on flawed theory) that Repuglican Party recite, there is NO empirical evidence to support the point that government spending is bad or ineffective.

2) ‘Free markets’ are great and all powerful.  Don’t interfere with markets.  This flawed notion ignores that fact that markets are created by people and people participate in markets.  So markets will have flaws and at times, like humans, very irrational.  One only has to look at are current global financial crisis to figure that out.

3) De-regulation - reduce government regulation of everything that could diminish profits, including protecting the environment and safety on the job.  This flawed point totally ignores the total cost of NOT regulating an industry.  Most recent examples (and there are many) of de-regulations damaging effects include: Global financial crisis, mine accident in West Virginia that killed 29 miners, and oil spill in Gulf of Mexico that killed 11 rig workers and caused environmental (possibly long-term) and economic damage to the Gulf region.

4) Privatization - sell public assets or turn over government functions to private investors.  We see this now with Repuglican Party’s push to private Social Security.  Idea is that private sector can do thing cheaper and more efficient than government.  Guess what - not always the case.  Just take a look at the global financial crisis caused by the private sector - Wall Street.  And what about Halliburton’s and its subsidiaries’ performances in Iraq - that should be criminal. 

It boils down to this - this flawed neo-liberal economics that these imbeciles espouse favors top incomes, executives, big shareholders and the oligarchy.  That is why these imbeciles command attention.  Traditional (corporate owned) media doesn’t want people to know that the dominant economic consensus in Washington - a neo-liberal economic consensus - is flawed.  The money train would come to an end.  At least I would hope so. 

Good luck. 

 

Is Economy Slipping into Downward Spiral, Again?

With the effects of the 2009 economic stimulus wearing off and the private sector (households and businesses) not fully healed, it looks like we are slipping back into a recession. It doesn’t have to be this way. 

Last Friday, the Commerce Department revised its estimate for 2010 2nd quarter real GDP to 1.6% increase (first release of 2nd quarter GDP was 2.4%).  Real GDP for 1st quarter GDP was 3.7% increase. Here is a graphical representation of it:

Source: NYTimes.com

According to the Commerce Department the reason for revision:

The deceleration in real GDP in the second quarter primarily reflected a sharp acceleration in imports and a sharp deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending.

Our economy is made up of households, businesses, state and local governments and federal governments.  And what is happening:

1) Households - are still loaded with debt and are paying that debt off or can’t spend because someone is unemployed.

2) Businesses - are hording cash and NOT hiring or investing because there is very low demand for product and services.  Why very low demand?  Look at #1 right above.

3) State and local governments - since they are seriously revenue constrained (most can’t deficit spend) they are both cutting spending and raising taxes.  Not a good thing in a recession. It will be interesting to see if up turn in 2nd quarter spending will continue.

4) Federal government - well, well.  Federal government is the only entity listed here that can deficit spend without risk of insolvency.  Federal government is the only entity that can break this downward spiral. As the graph above shows even the weak 2009 stimulus did something positive.

In order to break out of this downward spiral we need a more effective stimulus.  A more effective stimulus means one that targets FULL EMPLOYMENT with more job creation programs such as a direct jobs program and a Job Guarantee and investments in green technology, infrastructure, education and health care.  Federal government is the only entity that is in position to do something to prevent this downward spiral.

Good luck. 

 

Drawing a Line in the Sand

I campaigned for, contributed money to and voted for Barack Obama.  Yes, I believed in his message of change.  I wasn’t naive - I had no reason NOT to believe what he was saying.  But something happened after that glorious day on November 4, 2008.

On November 4, 2008, I was an attorney/poll watcher for the Obama campaign in Milwaukee, Wisconsin.  Turnout was great.  I witnessed the most incredible sight - an older African-American woman (I didn’t ask her age) needed directions to the polling place.  I obliged but during our very brief encounter she shared with me that nothing - not even her aching body - was going to stop her from voting in that historic election.  Later that evening, when it had became clear that Barack Obama was going to win, I admit, I broke down and cried tears of joy.  Boy, a lot has changed from that glorious day.  Sadly, not for the better.

TEAM OBAMA

Disturbing signs started to emerge shortly after November 4.  Rumors and later confirmation that now President-elect Obama was choosing Rahm Emanuel for his Chief of Staff.  I rationalized this appointment - maybe its good to have a ‘veteran’ of congress and White House for the huge battles ahead.  But the disturbing signs continued with the appointment of Larry Summers as his chief economic adviser and Tim Geithner as Treasury Secretary (what a fiasco that was - remember the tax issue). 

Now his brain trust regarding economic and political issues consisted of Clinton retreads.  Emanuel, Summers and Geithner were part of an administration and philosophy that contributed to the financial crisis and the Great Recession.  I rationalized some more - Obama was not going to be like Clinton.

WALL STREET BAILOUT

Obama Administration, despite its tough rhetoric, decided not to hold Wall Street and financial oligarchy accountable for its actions that contributed to the financial crisis. It did not attach any ‘strings’ to the $700 billion+ bailout (passed under Bush) nor did it push for transparency on how Wall Street firms used the money.  Its response to the mortgage crisis with its alphabet soup of new programs has been weak to down right cruel to homeowners.  I continued to rationalize.

2009 ECONOMIC STIMULUS

Obama Administration decided to first compromise with itself and then compromise further to get votes in congress for its 2009 economic stimulus.  The result was a weak and poorly structured stimulus.  A New Yorker Magazine article later reported on the internal debate of Obama’s economic team regarding the stimulus.  The article reported that Christina Romer, another chief economic adviser, was advocating a much bigger stimulus but she was voted down by Summers and Emanuel.  I thought - if they knew they had one shot at the stimulus why not go big - heck, Obama had most of the country behind him.  I became nervous but rationalized some more.

HEALTH CARE REFORM

After spending months cutting backroom deals with Big Pharma and its wishy washy support for the public option, I knew the Clinton retreads were winning the internal battles in the White House and there was NOT going to be any change.  In the end what we got was a mandate (which Candidate Obama campaigned against) to an inferior product - health insurance policy - with NO public option (remember when Candidate Obama said public option was needed “to keep insurance companies honest”).  Sure, insurance companies will be required to cover people with pre-existing conditions but at what cost?  There was no cap on insurance premium increases.

FINANCIAL REGULATORY REFORM

Let me say upfront that I don’t believe President Obama provided the necessary leadership, at least publicly, on financial regulatory reform.  This lack of leadership provided pro-Wall Street Democrats and Repuglicans an opportunity to weaken the final bill.  Obama Administration did offer a comprehensive proposal regarding financial regulatory reform but was this for show and how much did it really fight for it?  Sure it proposed the Volcker Rule but again, how hard did it fight for its passage?  The only redeeming provision of financial regulatory reform was the creation of the Consumer Financial Protection Bureau.  Financial regulatory reform failed to address the problems that caused the financial crisis including preserving ‘too big to fail’ financial conglomerates.

CATFOOD COMMISSION

President Obama decided, after Democratic Congressional leadership rejected the idea, to create the ‘bipartisan’ National Commission on Fiscal Responsibility and Reform.  This commission was “charged with identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run”.  To date, it appears from its public statements and public hearing (at least the ones that are public) that it’s focusing on cutting Social Security - hence the name “Catfood Commision” because of the commission’s intent on cutting Social Security and forcing Social Security recipients to eat catfood.  Early indications are that the Catfood Commission will propose increasing the full retirement age to 70.  This is clearly a benefit cut.

There is nothing wrong with Social Security - it is NOT broken.  And it definitely did not contribute to the budget deficit nor will it be a problem in the future.  But the Obama Administration and Democrats are weak and feel compelled to do ‘something’ about the deficit so they pick Social Security.  The deficit will still be with us for many generations, regardless of any proposed cuts to Social Security, and that is not necessarily a bad thing.

LINE IN THE SAND

I am just one person but this one person is taking a stand:

If the Obama Administration proposes any cuts to Social Security, I will work hard to make sure that Barack Obama is a one-term president

At some point we have to draw a line in the sand and say no more!

Good luck. 

 

Taxes and Federal Debt Don’t Fund JACK

Yeah, I said it.  Below is information that you won’t learn from mainstream economics either because they fail to understand our Modern Monetary System or they intentionally want to keep us in the dark about it.  BTW, there is only ONE person currently in congress or a candidate for congress that understands that taxes and federal debt don’t fund JACK.  More on that below.

Our modern monetary economy is based on a fiat currency system where the federal government has a monopoly over the issuance of the dollar.  It can issue checks or electronically credit bank accounts without fear of running out money or bytes of information - IT CREATES ‘IT’ (last IT being US Dollar).  It creates it out of thin air or bytes of information.  There is NO intrinsic value to the dollar.  The one thing supporting the dollar is the requirement that taxes and other financial transaction with federal government must be done with U.S. dollars (and not gold or chickens). 

A sovereign country that issues its own currency - like the U.S. - is NEVER constrained by revenue.  Why?  Because IT CREATES ‘IT’.  There are other constraints on government spending such as inflation or supply of real resources to purchase. 

Consider this - when was the last time you heard the federal government say: “we are running out of money for war in Afghanistan we better stop.”  Or how about the Wall Street bail out - do you think that someone Treasury Department ever stopped to check if there was enough tax revenue to cover the trillions of dollars that went to Wall Street.

The President issues a budget for the upcoming fiscal year which reflects his/her budget priorities (including tax plan) to congress.  The House Appropriations Committee and Senate Budget Committee review it, discuss it, amend it and eventually approve it.  Full congress votes on it and sends it back to President for his/her signature or veto.  That’s it. It is NEVER revisited again.  This is very different from state and local governments who are currently struggling to fund their budgets with shrinking revenues and as a result are forced to amend their budgets during the budget year.  Why the difference?  You got it - federal government CREATES ‘IT’.

You, I, most state and local governments and, yes, businesses cannot spend without having revenue/income to support it.  Federal government is NOT like us.  Warren Mosler, independent candidate for U.S. Senate for Connecticut, explains it this way (from his book “Seven Deadly Innocent Frauds of Economic Policy”):

Your team kicks a field goal and on the scoreboard, the score changes from, say, 7 points to 10 points. Does anyone wonder where the stadium got those three points? Of course not! Or you knock down 5 pins at the bowling alley and your score goes from 10 to 15. Do you worry about where the bowling alley got those points? Do you think all bowling alleys and football stadiums should have a reserve of points’ in a “lock box” to make sure you can get the points you have scored? Of course not! And if the bowling alley discovers you “foot faulted” and lowers your back down by 5 points, does the bowling alley now have more score to give out? Of course not!

We all know how data entry works, but somehow this has gotten turned upside down and backwards by our politicians, media, and, most all, the prominent mainstream economists. Just keep this in mind as a starting point: The federal government doesn’t ever “have” or “not have” any dollars. It’s just like the stadium, which doesn’t “have” or “not have” a hoard of points to give out. When it comes to the dollar, our government, working through its Federal agencies, the Federal Reserve Bank and the U.S. Treasury Department, is the score keeper. (And it also makes the rules!)

You now have the operational answer to the question: “How are we going to pay for it?” And the answer is: the same way government pays for anything, it changes the numbers in our bank accounts.

If federal government CREATES ‘IT’ or is just a score keeper the bottom line is the same - federal government doesn’t need taxes or even federal debt to fund JACK. 

So why does it tax or issue debt?  First, taxes, again from Warren Mosler:

Taxes create an ongoing need in the economy to get dollars, and therefore an ongoing need for people to sell their goods and services and labor to get dollars. With tax liabilities in place, the government can buy things with its otherwise-worthless dollars, because someone needs the dollars to pay taxes.

U.S. dollar is a tax-driven currency.  The need to pay taxes and conduct other transaction with the federal government creates the demand for dollars. The effect of taxes in our modern monetary system is NOT to fund government spending but to extract money or aggregate demand from our economy - yes, to slow the economy down.  A problem arises when government spending doesn’t match the level of taxation (or the extraction of money/aggregate demand from economy) this in effect can cause a drag on the economy and possibly a recession.

As for federal debt, the reason why government issues it is not very obvious - but again, federal debt doesn’t fund JACK.  Government spending is not constrained by revenue or the need for debt financing.  Current budget deficit is about $1.3 trillion and the amount of federal debt outstanding is close to $13 trillion.  There is something more going on then funding spending or deficit but what? 

There are two possible explanations for this: one is technical and other is ideological.  Hold on tight (from Prof. Bill Mitchell):

In a technical sense, when there are deficits bank reserves are growing and banks will try to get rid of these reserves by lending them on the overnight interbank market. The competition for funds drives the interest rate down to whatever support rate the central bank pays on overnight reserves. The problem is that the banks cannot eliminate the system-wide reserve surplus created by the deficits. If the system is left alone the central bank will lose control of its target interest rate.

As noted above there are two things the government can do to retain control over its monetary policy stance. It can offer an interest-bearing asset in place of the reserves – that is, sell the banks government bonds (that is, “borrow”) or it can pay the target interest rate on overnight reserves. The second option is currently being used in the US for example.

The technical reason for issuance of federal debt is to manage short-term interest rates.  As for the ideological reason:

...governments borrow much more than is needed to fulfill the liquidity management function of the central bank. So then we have to understand the ideological nature of government borrow and its intrinsic lack of utility other than to provide corporate welfare to lazy bond investors.

The overwhelming sentiment of the business community and the conservative nature of our political system (and its participants) leads to a largely anti-government swell of opinion which is continually reinforced by the media – the “debt-deficit hysterics”. The neo-liberal expression of this over the last three decades has overwhelmingly imposed massive political restrictions on the ability of the government to use its fiscal policy powers under a fiat monetary system to ensure we have full employment.

We now accept very high unemployment and underemployment rates as a more or less permanent feature of our economic lives because of the political constraints imposed on government.

So while there was a major shift in history after the collapse of Bretton Woods, the logic that applied in the fixed exchange rate-convertibility days is still being imposed despite the economic fact that it does not apply in the fiat currency era.

As a result, governments imposes voluntary constraints on themselves for political reasons? The neo-liberal macroeconomic reasoning that you read about in the newspapers is really the sort of reasoning that prevailed in the days prior to fiat currency. The shift in history renders most of the textbook economics outdated and wrong, in terms of how they depict the operations of the fiat monetary system.

Professor Mitchell offers up two ideological reasons to issue federal debt: 1) it’s basically a corporate subsidy to Wall Street and 2) the dominant economic consensus or theories (which are very conservative or neo-liberal) are based on a monetary system that doesn’t exist today.  With fiat currency system the federal government doesn’t have to issue debt - it doesn’t fund JACK.

Professor Mitchell is on to something with the dominant pro-Wall Street and neo-liberal economic consensus.  The reason why we won’t learn about how our modern monetary system really works in mainstream economic classes or hear in traditional media about it is because there is a LOT at stake - both in terms of careers and money.  What better reasons to keep us in the dark!

Further reading:

**Seven Deadly Innocent Frauds
**Elephants Everywhere

As mentioned above, there is only ONE person currently in congress or a candidate for congress that truly understands our modern monetary economy.  Warren Mosler is that one person who can bring this understanding to Washington.  He has a plan to address our current economic situation and he is running as an independent.  As we know all to well, Senate campaigns are very expensive and any little bit helps.  I encourage you to check out his website (and even ask him a question via email).  If you agree with what he has to say, want someone in Washington who understands our Modern Monetary Economy and can spare several bucks - please contribute.  If contributions are not your thing but want to volunteer - here is the link for that.

Thanks and Good Luck.

 

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