Its the Deficit, Stupid!

It is unfortunate that the republicans have degenerated into their current level of denial of reality. They are doing the opposite of what the democrats did during the 1930s: taking from the poor to give to the rich. This is based on the junk science, and long-sense discredited, theory of Supply-Side Reaganomics. Supply-side doesn't work. If tax cuts helped the economy, the economy would have grown more than the 1% it actually did last quarter. If tax cuts helped the economy, and tax increases hurt it, Clinton's tax increases should have crippled the economy in the 1990s.

Why is supply-side wrong? Supply-side does not argue that taxes should be reduced across the board. It says that taxes should be cut where the supply of capital in the economy is: in other words, at the top. This is the key here. Capital is not spread in a uniform fashion across the economy. It is concentrated at the very top. Supply-side says that you cut taxes at the top, because this is where most of the capital is. This would release the maximum amount of capital, which would "trickle down" throughout the economy. This is why supply-side is bogus. Focusing tax cuts at the top doesn't affect the economy because there is no trickling down effect. This phenomenon does not exist.

The center of gravity in an economy is based on demand for goods, not supply of capital. You could call this Demand-Side economics. Countries in South America have a very rich upper class with a lot of capital. But there is stagnation because the rest of their economy is too poor to demand the goods that this capital could create. This is why there is no growth in these countries.

Raising taxes can hurt the economy. But Clinton did it and the economy was not hurt. Why? Clinton did not raise taxes across the board, but only on the top. You do this for two reasons. For one, the most tax revenues are raised where the most capital is located: large corporations and rich individuals (the same place supply-side says you cut taxes). Clinton's tax increases didn't hurt the economy, because they were focused on the top, which could absorb them. Clinton's tax increases didn't cripple this segment of the economy, as they were not large enough to. Likewise, Bush's tax cuts have not helped this segment of the economy for the exact same reason. Had Clinton raised taxes on the middle, he would not have raised much revenue, but would have crippled the source of demand. Demand in an economy is located at the middle and the bottom, as this is where most people are.

Cutting taxes on the middle does not have much of an impact on the economy. The amount of capital this releases is minimal. The argument only works due to its emotional qualities. What does have an impact, however, are policies that stimulate demand amongst the middle class. These are policies such as increased Corporate Average Fuel Economy (CAFÉ) standards to increase fuel efficiency in cars and thus allow people to spend less on gas. Any policy must have a multiplier effect. The size of the government and government taxing, spending, and tax cutting, is too small relative to the economy to have an extraordinary effect in and of itself.  

But the real way you stimulate demand amongst the middle class is you bring down the federal deficit. I believe that democrats will have to raise taxes when they return to power. This would lower the deficit, bring back surpluses, start paying down the national debt, and have effects that would resonate throughout the economy for a long time thereafter. I advocate this concept of "Demand-Side Economics." The federal government is running $400 billion yearly deficits. These are mostly due to the $2 trillion in tax cuts Bush has passed. The republicans are risking insolvency of the government, and literally, world financial chaos.

Clinton increased taxes, which raised revenues, which lowered the debt. Bush cut taxes, which lowered revenues, which increased the debt. The most ridiculous concept supply-siders believe, is that cutting taxes increases federal revenues. One must think that to believe this you must deny reality. Supply-siders point to the increase in federal revenues during the Reagan administration, and the current increases in federal revenues. But this is a logical fallacy. Two conditions that coexist do not necessarily cause each other. Yes federal tax revenues increased in the 1980s, and are increasing now. However, they also increased in the 1990s, 1970s, 1960s, 1950s, and every decade before then in which there were substantial income tax revenues. Tax revenues always increase during every decade, usually by the same proportion, because the income tax taxes income, or GDP to be more precise. GDP always increases, almost every year. When GDP is not increasing, by definition, you are in a recession.

If you raise taxes on the top, and leave them unchanged on everyone else, you would lower the deficit, start paying off the national debt, and decrease the amount the government has to pay in interest on the debt. Lowering the deficit lowers inflation, which lowers interest rates, which lowers the cost of borrowing, which stimulates the economy. An increase of the national debt requires extra federal borrowing, and thus more competition for capital to finance the debt on the global market. More US debt bonds issued, especially in foreign markets, does several things. For one, since US debt bonds are just about the safest investments on the planet, the rate on the bonds creates a floor on interest rates throughout world markets. It is about the lowest return one can get due to it being just about the safest. An increased supply of US debt bonds requires higher interest rates to attract investors to the increased number of bonds issued. This has the effect of driving interest rates up, across the board. It doesn't just drive up the Federal Funds Rate, but corporate, municipal and nonprofit bonds must also pay higher rates to compete with the federal rates on the bond markets. Corporate et. al. bonds, are, by their very nature, more risky than US government bonds, and thus must pay higher interest rates than federal bonds must. This causes a systemic increase in the cost of borrowing that affects the entire economy, from the top to the bottom. Higher costs of borrowing do exactly what supply-siders say tax increases will due: it takes money out from free circulation in the economy. Taxation is not the only "tax" on the economy. Only, unlike with tax increases, the amount taken out of the economy due to this higher cost of borrowing is enormous. It isn't the government that takes money out of the economy. It is the economy itself that restricts the free flow of its own capital. Thus you have again, this multiplier effect. In the end, all of this increases the price that taxpayers must pay to carry all of this debt, as higher interest rates mean that more interest must be paid. In addition, an increase in the cost of borrowing has the tendency to cause inflation. If a company has to pay more to borrow money, either from the bank or in financing their own debt instruments on the bond markets, it must charge more for its products. When this is happening throughout the economy, the effect is the potential for wide-ranging inflation. And when inflation starts creeping up, the Federal Reserve Bank (as it is doing right now) starts increasing the Federal Funds Rate to contain the inflation. This also causes the cost of borrowing to increase, as this Federal Funds Rate is the lending interest rate for banks. Finally, the deficit is also tied to the value of the dollar, which is tied to high oil prices. Increased national debt makes dollars more risky, which drives down the value of those dollars. Oil is traded in dollars, and a decrease in the value of the dollar means it takes more dollars to buy a barrel of oil. This decrease in the value of the dollar also acts as a tax, as imported goods increase in cost, a sort of inflation you could say.

Supply-side doesn't work due to a law of proportionality. Bush's tax cuts, the largest in all of history, have amounted to more or less $2 trillion over a period of time (10 years or so) in which the combined GDP would add up to $100 trillion or more. The tax cuts are massive, but do not pump a relatively large enough amount of capital into the economy. Demand-Side deficit reduction involves a little centralized government work, which causes the economy to free up more of its own money back into free circulation. The effect of a little federal investment multiplies many-fold throughout the economy. This is why Bush's $2 trillion tax cuts have little to show for other than a 1% increase in GDP last quarter, and why Clinton passed the largest tax increase in history, and the result was the largest economic expansion of the 20th century.

There's more...

Beware the Ides of March

War across the entire Middle East will boil over by March 15th, if you don't stop it. Yes, you.

You, me, everybody.  It's crunch time.  There are enough pressure points to force the White House to act now to take America into a wider war.  They can't afford to wait for the summer or fall.  The mad men and women in the White House wholeheartedly believe that they have no choice but to launch a regional war in the Middle East by the middle of March, by bombing Iran.  They must, to save their mission to establish the American Empire.

If you have other plans for America than endless war, you need to help derail any attack on Iran in the coming six weeks, because the game's afoot.  It's got the green light.  Bush is going smiting again if we don't all stand up and say no.

There's more...

George Bush saying that "America is addicted to oil . . ."

. . . is about like Pablo Escobar telling John Belushi he has a cocaine problem.

There's more...

Addicted to Rhetoric: Bush's State of the Union

Senate Candidate Calls President Out for Empty Rhetoric

Cincinnati, OH - Paul Hackett, Iraq War veteran and Democratic candidate for Senate in Ohio, responded this evening to President Bush's State of the Union address.

ADDICTED TO OIL?

The President said America is addicted to oil and far too energy dependent.

Paul Hackett said, "A former oil executive telling us we are addicted to oil is like a tobacco company executive complaining that their employees take too many smoke breaks. Exxon made almost $11 billion last quarter, while Americans are paying surging prices to fill their gas tanks and heat their homes. The President should stop blaming Americans and put pressure on his cronies in the oil industry to develop and sell the technology we need to become less energy dependent on foreign AND domestic oil."

HEALTH CARE

The President wants to change the healthcare industry in America.

Paul Hackett said, "The last time this President `fixed' healthcare, senior citizens were left with a confusing Medicare prescription drug plan. Here in Ohio only 11 percent of our seniors that need drug benefits have actually signed up. That is no way to `fix' healthcare."

The President said "we must confront the rising cost of care, strengthen the doctor-patient relationship, and help people afford the insurance coverage they need."

Paul Hackett said, "How? The 1.3 million Ohioans without insurance would like to know. The hard working men and women of Ohio wanted to hear specific plans to help them, not more meaningless political rhetoric. I believe every single American should have access to the same healthcare offered to members of Congress."

JOBS & THE ECONOMY

The President said that he would strengthen our economy "by strengthening our economic leadership in the world."

Paul Hackett said, "Well, the 347,000 unemployed Ohioans would disagree with him. You strengthen the economy here in Ohio by keeping plants open, keeping jobs in Ohio instead of sending them to China and Mexico and giving people a living wage, healthcare and educational opportunities so they can provide for their families and improve their lives."

IRAQ & THE WAR ON TERROR

The President said, "If we were to leave these vicious attackers alone, they would not leave us alone."

Paul Hackett said, "One question for the President: Where is Osama bin Laden? And why did you direct American forces to stand down when he was trapped at Tora Bora?"

The President said "to defeat the terrorists is to defeat their dark vision of hatred and fear by offering the hopeful alternative of political freedom and peaceful change."

Paul Hackett said, "Well, Mr. President, you surely don't do that at the business end of an M-16. At this point, we have accomplished all we can militarily and are doing little to win the hearts and minds of the Iraqi people, and THAT is how you bring about true political freedom and peaceful change. Our armed forces are painting schools in Iraq - a terrible misuse of American military power. We need to let the military set a timetable to bring our troops home safely."

REPUBLICAN CULTURE OF CORRUPTION

The President's lack of attention to the culture of corruption on Capitol Hill and in his White House.

Paul Hackett said, "President Bush recycled ideas from State of the Unions past and threw in some empty political rhetoric. He helped spread the crisis of confidence Americans have in their government by ignoring rampant corruption and cronyism on Capitol Hill and the White House. It is unfortunate that the President did not take head on the Republican culture of corruption with a true plan for reform."

Visit our new Hackett for Senate bloghttp://www.hackettforohio.com/blog

There's more...

Just what the Gulf of Mexico needs: another oil well

Oil from BP's blown-out Deepwater Horizon well continues to gush into the Gulf of Mexico and will do so until August at the earliest. In response, the Obama administration extended a moratorium on deepwater drilling for six months

last week. However, the president also "quietly allowed a three-week-old ban on drilling in shallow water to expire" last week (hat tip Open Left). As a result,

 

 

Federal regulators approved Wednesday the first new Gulf of Mexico oil well since President Barack Obama lifted a brief ban on drilling in shallow water, even while deepwater projects remain frozen after the massive BP spill.

 

The Minerals Management Service granted a new drilling permit sought by Bandon Oil and Gas for a site about 50 miles off the coast of Louisiana and 115 feet below the ocean's surface. It's south of Rockefeller State Wildlife Refuge and Game Preserve, far to the west of the Deepwater Horizon oil rig that triggered the BP spill.

 

Chris Bowers put it mildly when he described the Obama administration's action here as "difficult to fathom." The president is giving a speech on the economy today and will talk about investing in alternative energy, but like all my parenting books say, actions speak louder than words. The greatest environmental disaster in U.S. history is unfolding in the Gulf of Mexico, and BP doesn't know how to stop it, but it's business as usual at the Minerals Management Service. Nor is today's permit approval an isolated case:

 

In the days since President Obama announced a moratorium on permits for drilling new offshore oil wells and a halt to a controversial type of environmental waiver that was given to the Deepwater Horizon rig, at least seven new permits for various types of drilling and five environmental waivers have been granted, according to records.

 

The records also indicate that since the April 20 explosion on the rig, federal regulators have granted at least 19 environmental waivers for gulf drilling projects and at least 17 drilling permits, most of which were for types of work like that on the Deepwater Horizon shortly before it exploded, pouring a ceaseless current of oil into the Gulf of Mexico.

 

Words fail me, so you'll have to share your thoughts in this thread.

There's more...

Diaries

Advertise Blogads