“Our practical choice is not between a tax-cut deficit and budgetary surplus. It is between two kinds of deficits: a chronic deficit of inertia, as the unwanted result of inadequate revenues and a restricted economy; or a temporary deficit of transition, resulting from a tax cut designed to boost the economy, increase tax revenues, and achieve . . . a budget surplus.” John F. Kennedy


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Nov 16 2012

Obama and the “Balanced Approach”

C.M. Phippen

Within days of his razor thin re-election, President Obama chose to inform us that he now has a mandate for his deficit reduction policies that include a “balanced approach.” In this case, balanced means he wants the wealthy to pay for the overspending of politicians in Washington; if the rich will just pay more, then the politicians will find the discipline to reduce their overspending by a tiny fraction.

Never mind that it wasn’t a “balanced approach” of irresponsibility that got us here – it was fully a result of Washington not living within its means. The increase in revenue from those taxpayers would amount to $82.3 billion annually, the equivalent of about eight days of spending.

According to a recent study by Ernst & Young, just allowing tax rates to go up on those making over $250,000 a year could cause a loss over the long-term of 700,000 jobs.

Are we really willing to exchange eight days of spending for 700,000 jobs in an economy that is barely making it? Does this make sense to anyone who’s not a community organizer?

Our economy needs to grow at about a 3 percent annual rate in order to just keep up with new workers entering the work force; under Obama we’ve experienced a GDP growth rate average of about 2 percent.

Even, while denying that these increased tax rates will have any real effect on economic prosperity, has admitted that the US economy would take a .25 percent hit in growth if these taxes increase. Even if that is the worst of the economic consequences from such a policy of anything but “equal protection under the law,” are we really willing to take a 1/4 percent hit year after year just to cover eight days of expenses during each of those years, especially when the record under this president has been growth below what is necessary just to keep the currently high rates of unemployment stable?

Interestingly enough, when looking at the exit polling done on election day, only 33 percent of voters said they think taxes should be raised to deal with the deficit. A full 63 percent of voters responded “No” to the question of whether or not taxes ought to be raised to help cut the budget deficit.

Of course, no surprise that many of the people who probably voted for Obama were completely unaware of his plans. That would be because he didn’t run on his plans. He ran on demonizing Mitt Romney for being successful and rich, as evidenced by his 85.5 percent of negative ads in this campaign; ads that were mainly aimed at Romney personally rather than being aimed at his actions and principles, by the way. Translation – nearly all of his sizeable war chest was spent demonizing the most successful guy in the room.

There’s no better time in America to be a loser – we love the guy whose every promised outcome was a flop and who, at every turn, had an excuse handy as to why he just couldn’t accomplish what he wanted and why it was everyone’s fault but his own. The reason the stimulus didn’t work, according to the Obama administration, was that the recession was much worse than they’d realized; turns out it wasn’t as bad as we thought – 4.7 percent decline rather than 5.7 percent.

He truly is the president of the participation trophy generation. I guess though, that if the successful aren’t responsible for building their own success, it follows that the losers aren’t responsible for their own failures.

Sep 14 2010

Unemployment and the Effect of More Benefits

C.M. Phippen

Robert Barro of Harvard University’s business school recently analyzed the impact of the unprecedented extension of unemployment benefits to 99 weeks. In his analysis, he concluded that had unemployment benefits not been extended so drastically, we would probably currently be seeing a rate of unemployment around 7%.

The original estimate by the administration was that unemployment wouldn’t exceed 8%, and they claim that was the high most economists expected even before the passage of the stimulus bill, back in Q4 2008. Seems as though the stimulus has been anything but, and Recovery Summer has been a major bust. The good news out recently is that consumer retail spending increased 0.4% in August, the largest increase in five months. Autos, electronics, and furniture were all down, but apparently back-to-school shopping saved the day and I don’t think the effect will continue into the coming months.

We are currently seeing historically high rates of long-term unemployment, at 46% of all unemployed. This is worsened by the fact that the longer one remains unemployed, the lower the chance of finding work. As discouragement kicks in, many simply give up and stop looking.

In his textbook published last year, Paul Krugman had this to say about generous and long-term benefits, “Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . . In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of ‘Eurosclerosis,’ the persistent high unemployment that affects a number of European countries.”

While US benefits are typically 33-50% of worker pay, when adjusted for payroll taxes, child care, transportation, and other expenses of working, it can be economically feasible for many to make the choice to wait a while longer to look for a job. In fact, Mother Jones recently published an article explaining that rates of long-term unemployment among college graduates are substantially lower than among the non-college educated. This is consistent with the idea that when lower income workers adjust their pay for expenses, which eat up a larger percentage of income than for most middle-and upper-class (generally college-educated), staying home a few more months just may make sense.

My husband was recently speaking with an older gentleman who works at a local convenience store. It was late at night, and without any other customers in the store they started talking about their lives. It turns out this man had recently moved from another state after his business of 15 years was destroyed by the recent economic downturn. He sold high-end home furnishings and when people stopped buying and furnishing homes (and started living within their means), his business came to a screeching halt. He lost everything, picked himself up, and moved to a place where he was able to find a job working nights in a convenience store. He’s there most nights, with a better attitude and demeanor than many workers in a whole lot of industries. He’s grateful for a job and for the self-respect that comes from working hard. As the economy turns around, he and people like him will move back up. What of those who don’t work for nearly two years? Many will be left behind permanently.

But hey, the campaign slogans for those politicians who’ve potentially handicapped millions of jobless Americans will be great, won’t they?

Jul 27 2010

Jobs and Tax Cuts

C.M. Phippen

As earnings reports come out, several companies are beating expectations, not only in bottom-line profits but also in sales. While corporations have had to cut back and trim down in order to pull back on expenditures, many are finally starting to experience some real growth.

Why, then, are they still not hiring? Last week I wrote about the fact that the political environment seems to be less than reassuring for business expansion and hiring. A comment was made by a reader that corporate tax rates are lower now than they were under Ronald Reagan, and I can only assume he was alluding to his belief that the current rates ought to then be good enough to do the trick.

The solution, though, seems to be all about the trajectory, and confidence in the political class going forward. Sir Martin Sowell, Chief Executive Officer of WPP, when asked by Larry Kudlow yesterday how the US can become a “re-emerging” market (in other words, attractive to investors as are the BRIC nations currently), his response was that the US must deal with our upcoming tax increases set for 2011 and our deficit, looking not at increasing taxes, but rather “looking at government spending.”

In a paper written by Christina and David Romer in 2008, they come to the conclusion that “a tax increase of 1% of GDP reduces output over the next three years by nearly 3%.” Christina Romer is the chief economic advisor to President Obama.

Why then, would this Congress allow the Bush tax cuts to expire at the end of this year, and why would the administration not support across-the-board tax cuts? According to Larry Kudlow, when Bill Clinton decreased the capital gains tax rate from 28% to 20%, revenue increased by $80 billion, and when George W. Bush reduced the rate even further, to 15%, revenues went up $85 billion. Couple that with the fact that Obama’s own chief economic advisor recently came to the conclusion that “tax increases have a large negative effect on investment.”

Timothy Geithner has recently stated that the White House would like to see tax rates for the top 2-3% of Americans increase in order to demonstrate to the world our commitment to dealing with our trillion dollar deficit. Heaven forbid we actually cut spending and allow private business expansion through reductions in taxes not only for corporations, but also for top earners. This encourages investors to invest, which thus encourages businesses to expand and ultimately hire more workers.

Is that really so difficult?

Dec 9 2009

Just Another Spending Program?

by Ian Stermer

Obama has just announced a plan to use the $200,000,000,000 in soon-to-be-returned TARP funds to stimulate the economy, specifically jobs. Let me first state I applaud the idea of creating jobs as a path to improving the economy. The current “jobless recovery” leaves as many people homeless, food-less, health care-less, and in need of aid as no recovery would. The last stimulus bill didn’t help, so something new must be tried.

Obama’s plan sounds nice, as long as you don’t think about it much. Use funds due to be paid back to us, rather than go further in debt. In that respect, it is good. Going further in debt is bad. The problem lies in the fact that we are already in debt. With debt comes interest that must be paid. The longer we hold a debt, the more we have to pay in interest. Interest is a huge problem. In Fiscal Year 2009, the government spent $383,000,000,000 on interest payments. Compare that with $53,000,000,000 on education, or $73,000,000,000 for the Department of Transportation.

The TARP bill was set up as a revolving loan program, where repayments were to be funneled back into the program until its end in December 2009 (although expected to be extended until October 2010, at least). At the end of the program, repayments were to be used to pay down the deficit. Unlike the Stimulus Bill, which was a spending bill, TARP was to be a loan. Any questions about repayment should be quelled by Obama’s confidence-inspiring statement “most of the money going to the banks will probably end up being paid back with interest.” My troubled heart is now at rest.

Some justifications could exist for diverting the money; there are times that it is wiser to invest in a new venture rather than to pay down a debt. For example, after college I opted to buy a CD at 5% interest rather than pay down the principle on my 0.5% interest rate student loan. The question here is does Obama’s plan offer more reward than the alternative?

The answer to that lies in how the money would be spent. Obama has laid out three areas to target with the funds: helping small businesses to add staff and grow; updating transportation infrastructure like highways and bridges; and refitting homes to be energy-efficient.

Small business growth is a no-brainer. We want that. Small businesses make up just over half of all US jobs. In the last 15 years, 64% of all new jobs have been in small businesses.

Infrastructure is nice, but it is questionable how much impact it would have long term. It provides short-term jobs to out of work construction workers. While helping these people temporarily, it is unlikely that the increased spending from this sector will do much to solve the big picture.

Likewise, refitting homes could give more construction workers jobs, and the money saved on heating and cooling bills could go to other expenses that would help the economy, but to what degree is debatable.

Wherever it is spent, though, it will be spent; not loaned, not expecting a return. Worse still, Congress seems excited to spend, but doesn’t really know what to do yet. According to Rep. Steny Hoyer of Maryland, the No. 2 Democrat in the House, “100 billion, 150 billion, 75 billion — those are all figures that are being talked about.” Remember the Department of Education budget was only $53 billion.

So this new job creation program will differ from the stimulus package in that it will encourage construction and small businesses. It seems that was the focus of the last Stimulus bill. If that one didn’t create jobs, what does this one promise to do differently?