ataxingmatter

Mark Thoma puts Holtz-Eakin on (figurative) hot seat

As most of the ataxingmatter readers know, I do not frequently applaud the economic punditry of those freshwater economists who think the way to deal with the problem of failed market fundamentalism policies is to double-down on those failed policies. 

I've noted that we tried that already.  We doubled down on  reaganomics policies of tax cuts/militarization/deregulation/& privatization throughout the Bush regime, and that got us into a witch's brew of problems. 

Because of that double-down mentality, where the neos told us war was good and greed was good and where we applied the laughable, made-up-out-of-whole-cloth "Laffer theory" that told us there was no evil that tax cuts (especially for the rich and big corporations) couldn't conquer, the Bush regime very ably turned a budget surplus into a staggering deficit and a financil crisis that would guarantee more deficits and debt before we were done with it. 

We ended up with failed (de)regulatory policies.  They allowed Big Banks and their big moneymakers to speculate their way into phantom billions of profits (all soaked up by the big jefes/big moneymakers).  But instead, we got a near-breakdown of the financial system, that forced all us ordinary taxpayers to subsidize the Big Banks' losses without getting recompense from the banksters' earlier oversized payouts. 

We ended up with failed tax (cut) policies.  They cut taxes on big multinational corporations and the ultra rich, based on the claim that those are the "job creators" that we should reward.  But instead  they only ended up siphoning off needed revenues from programs that could build infrastructure and support quality education and research.  They privatized education by providing lots of federal loan money to students that went to for-profit schools, only to learn that those schools tend to be traps that don't educate but just take money for the profit of the "education" business.  They quit funding the stuff we need, so they could subsidize those that didn't need it.  And they kept the subsidy up--for Big Oil, for wealthy decedents--even when the money was just piling on for those that already had lots of it.

That's what makes the current ultra-partisan Congress and the constant right-wing talk of deficits and debt as justification for stripping the safety net (while still conferring outsize gains on the ultra rich and Big Business) so disgusting.  The right still  refuses to pay attention to facts and justifies this oft-discredited, clearly wrong-headed market-fundamentalist and class-warfare orthodoxy as "plain as day" correct thinking. 

ASIDE:  This seems sort of like the GOP's plans for gaining the loyalty of our increasing diverse electorate by being careful to package their mostly white, Friedman-orthodox, oligarchy-favoring policies in the sheep's clothing of multicultural spokespersons who avoid the "tell" of who they really are and use words that talk about ordinary people as though the policies were actually aimed at benefitting them.  Meanwhile they double-down on their claims that redistribution upward is all about job creation, and condemn those who talk about preserving the safety net by NOT reducing benefits as "socialists" who don't understand the American way. 

The American way they seem to be harking to is the era of the corporate titans of malfeasance that Teddy Roosevelt warned us against, who grabbed the gains of the market place well in excess of their productivity merit and didn't give a damn about the rest of us. (Take Leland Stanford and the building of the great western railroads, subsidized by vast land grants and other programs from the federal government.  Stanford was quite willing to let the Chinamen he hired to use their explosive expertise to carve out railroad tunnels live in hunger because he withheld their pay and die because of inadequate safety , but meanwhile he lived a life of luxury supported by his corporate structure that sent all the money supported by the government subsidies his way and none of it theirs.)

Douglas Holtz-Eakin is a prime example of doubling down on failed policies by ignoring the facts of recent experience.  See Holtz-Eakin, We have to get US government spending under control, guardian.co.uk (Feb. 14, 2013).  Mark Thoma does a good job of putting him on the hot seat and telling it like it really is.  Read it at Holtz-Eakin Tries to Scare You. Don't Let Him, Economist's View (Feb. 14, 2013).  Here's an excerpt

Holtz-Eakin (in the Guardian essay): "Debt reduction produces jobs and better economic growth."

Mark Thoma (in the Economist's View take-down): "[R]eading that last line, he has learned nothing from the failure of the confidence fairy to appear.  Waiting to fix the debt--a problem driven mainly by health care cost escalation that won't become severe for many years--is not risky, but his advice certainly is."

***

Holtz-Eakin (in the Guardian essay): "Down with the orthodoxy.  It is time to get the deficit under control."

Mark Thoma (in the Economist's View take-down): "The notion that we are responding in the same way as in the 60s and 70s, and that we are faced [with] the same type of shock (that require[s] the same types of policies)--an oil price shock and other large supply-side distrubances from demography that we faced then--is wrong and he ought to know that."....."The 'pundit orthodoxy' he disses is from Paul Krugman.  Kind of funny, given how wrong Holtz-Eakin has been relative to Krugman ... but Krugman can speak for himself, and has, on how wrong the 'we're about to become Greece!!!' crowd has been.  There is, however, one thing he [Holtz-Eakin] is correct about.  Holtz-Eakin is right to say we shouldn't listen to some pundits, especially those like himself who have been so wrong about how events would unfold at every step along the way."

Holtz-Eakin does a lot more in the Guardian article that is just plain bad, such as claiming that the so-called  Affordable Care Act "entitlement" will contribute to the so-called "entitlement problem," which will contribute to the "serious" problem that the "deficit orthodoxy" won't acknowledge.  He then hammers on the right-wing orthodoxy's pet do-away-with-it-if-we-can projects--Social Security, Medicare, and Medicaid, suggesting that "serious debt reform" requires "serious entitlement reform."  

As I noted in another recent post, right-wingers like Holtz-Eakin love to talk about safety net programs as "entitlements", whereas they talk about entitlements for the rich and MNEs, such as the percentage depletion allowance, the preferential capital gains rate, and the various subsidies that have handed outsize profits to big banks as though they were rightfully merited acknowledgements of the good those institutions do the rest of us! The talk about these safety net programs, when entering into a right-winger's discussion of fiscal issues, is always lopsided.  It is always how we need to cut back on them, and never about how we need to consider if the programs are worthy, the funding currently provided needed or even currently inadequate, and, if the answer is yes, what means make sense, in a sustainable democracy to serve the people, to ensure the ongoing viability of the safety net.  Not reducing benefits but increasing revenues and decreasing rent-profit-taking. 

So  Holtz-Eakin fails to acknowledge that actually the Affordable Care Act is a first step in addressing otherwise mushrooming health care costs which occur because we treat health care as a ripe field for rent-seekers to make rentier profits rather than acknowledging (like other advanced countries) that health care is at least a quasi-public good that must be heavily regulated to ensure accessibility.  And like all the right-wingers pushing the hand-wringing worry over deficits for which their own policies are the primary cause, Holtz-Eakin suggests that the core of what we have to do is, quelle surpise, "spending cuts and deficit control", since "doing nothing or worse, increasing spending, is a profoundly anti-growth strategy."

This is the doubling-down on failed policy orthodoxy that Americans should reject out of hand.  Spending cuts and efforts at "deficit control" that focus on taking away health care and pension benefits from retirees and others dependent on the safety net are perfect prescriptions for disaster.  We aren't Greece.  But if the right-wingers like Holtz-Eakin get their way, we will be.

 

Related articles

The Inequality Gap

Noted for February 15, 2013

An Orthodoxy of One

Douglas Holtz-Eakin Stops Being an Economist

Are lower taxes on "savings" good for the economy? Heritage, CRS and the "Matthew Effect"

[Hat tips to Ann Murphy (for pointing out the Heritage release to the tax prof listserve) and to Calvin Johnson, Edward Kleinbard, and Martin McMahon for permitting me to build a post around their contributions to the interesting exchange on the listserve.  I hope they will forgive any error I may have made in those instances where I paraphrased rather than using direct quotes.]

The Heritage Foundation put out a press release just a few days ago contesting the results of a Congressional Research Service study about the benefits from lowering tax rates.  See Curtis Dubay, Congressional Research Service Wrongly Implies Lower Tax Rates Don't Strengthen Economy, Heritage Network "The Foundry" (Sept. 17, 2012).  The idea--clearly implied by the title of the release--is both to discredit the CRS, a long-admired non-partisan research organization funded by Congress, and to bolster the right's longstanding argument that tax cuts are almost always good for the economy.

The attempt to skewer the CRS focuses on the correlations the CRS report uses between top marginal income and capital gains rates and economic growth rates, from which the study concludes that lower rates do not in fact correlate with stronger economic growth.  (See extensive work in this area, looking at the correlation between rates, growth and party administrations, in Presimetrics, a book by one of my fellow Angry Bear bloggers.) 

 Heritage claims that the correlations "prove nothing" because of "the economy is more complicated".  To make any analysis, Heritage seems to be saying, you have to take the entire gamut of potentially influencial factors into account, and then you have to also be aware that no two eras are ever the same.  In short, Heritage seems to be arguing that there is no way to do an analysis, and therefore the rough correlations shown by the CRS study should be disregarded.  Even if that were true, it would amount to a pretty flimsy claim on the other side--i.e, it would amount merely to the claim that Heritage thinks the problem is so overwhelming that the conclusion that tax cuts have a harmful effect on the economy can't be considered completely substantiated.  A pretty flimsy excuse for a release with the title provided.

But Heritage goes further with its own statements. 

Of course, if you tax income, investment, and savings less you'll get more of them and the stronger growth that comes with the increase in these activities.  And if you raise tax rates on those most able to react, then the reactions will be that much more pronounced.  Upper-income taxpayers have the most capacity to adjust their behavior; by shifting the composition of their labor income to avoid tax, to shift the composition of their investments to avoid tax, or to shift away from work effort toward leisure.

It is vital that the public, the media, and, most importantly, policymakers don't fall for misleading analysis. ... the economy is in bad shape and will remain that way unless and until it gets better policy from Washington.  One of those policy improvements would be lower tax rates through tax reform.  Id.

Note that Heritage hasn't shown that the CRS conclusions are wrong, nor has it shown that the CRS methodology is so deficient that the conclusion isn't a useful, "rough justice" conclusion based on the emprical data that exists, even though it does not (and cannot) consider the entire universe of factors at play in the economy and even though no study can compare a tax year with such tax cuts to the same tax year without such tax cuts.  As Edward Kleinbard, Professor at USC's Gould School, notes, "The alternative to the 'weak' correlation that [Heritage] criticizes is no correlation at all. Why is that useful?" (quoted from an email exchange with permission). 

Calvin Johnson, the Andrews & Kurth Centennial Professor of Law at the University of Texas, notes that there are really only four reactions to cutting taxes on capital income (the main way generally proposed for reducing taxes on savings): 

1) reductions in savings as people hit their targeted fund levels for things like retirement, purchases, emergencies sooner;

2) increases in borrowings to fund investments that benefit from the cut taxes on investment income;

3) moving capital from other investments to the tax-advantaged forms of investment; and

4) saving more because of the tax incentive.

Heritage, Johnson says, wants to claim that item 4 is the typical response, but the evidence suggests it is mostly the first three.  And because of that, the economy goes "in the wrong direction"--"the private reaction is close to zero or negative" and "the deficit is dissavings dollar for dollar", so that "the overall impact is strongly negative."  Calvin Johnson (paraphrased and quoted from an email exchange with permission) .  Johnson has been writing about needed reforms to the tax system for some time, including comments on overly generous incentives for savings, through the "Shelf Project", a series of articles in Tax Notes that discuss potential ways that Congress could adjust the federal income tax laws to create a simpler, fairer and more efficient tax system and still raise the much-needed revenues for infrastruture and other programs.

There is pretty good evidence that Johnson's first item--targeted savings for precautionary needs and for targeted purchases and retirement--covers the main reason that people save.  The Federal Reserve underwrites a triennial survey of consumer finances.  The most recent study is reported in Bricker, et al, Changes in U.S. Family Finances from 2007- to 2010: Evidence from the Survey of Consumer Finances, Federal Reserve Bulletin Vol. 98, No. 2 (June 2012). 

The study shows that saving for "liquidity" (emergency expenditures, illness, etc.) ranked first in 2010,at 35.2% and saving for retirement ranked second, at 30.1%.  Saving for specific targeted purchases, homes, and education amounted to another 17.1 %.   In contrast, saving for investment was a piddling 1.2% and saving for "no particular reason" (which may be the kind of savings we would expect from high income families with more money to spend than they can easily spend) garnered only 1.4%.   Id. at 16 (Table 3).

Note, too, that Heritage only offers in substitute to the CRS's study the same tired and untrue economic theory it has always relied on (like the infamous Laffer-curve, a theory that essentially speculates about the great benefit from lower taxes based on "free market" assumptions).  Heritage is left with merely asserting a claim that "lower tax rates" in and of themselves will lead to a better economy.

Martin McMahon, the Stephen C. O'Connell Professor of Law at the University of Florida, notes that this is "poor theoretical economics at best."   Ed Kleinbard adds that these types of theoretical arguments are "like a biologist studying the mating rituals of butterflies along a highway median--likely as not, the new dance you observe is just a downdraft from a passing tractor-trailer."  (quoted with permission).

McMahon goes on to say:

[The Heritage release] incorporates only the substitution effect, and ignores the income effect.  It is based largely on what I refer to as an 'attractive nuisance' in tax policy analysis.  That [attractive nuisance] is a model of a commodity tax on which the purchaser is indifferent between apples and oranges until a tax is levied on one and the preferences shift because prices shifted.  The proponent then trades 'apples and oranges' in the model for 'consumption and savings' and 'leisure and work' [to reach] the conclusions that are reflected in the paragraph above [i.e., the first quoted paragraph from the Heritage release]. ... But in the translation, the income effect is ignored as are exogenous constraints on substituting consumption for savings and leisure for labor.  The data bears out the CBO and has for decades.

Heritage's real gripe is that the real world does not behave the way the model that it prefers to believe is true [says it should].  (quoted from email exchange with permission) 

Marty McMahon has also been writing about this topic for some time.  A good place to start your reading is "The Matthew Effect and Federal Taxation,  45 Boston College L. Rev. 993 (2004) (available on SSRN, here), for which the abstract notes:

This article first examines in detail the increasing concentration of income and wealth in the top one percent, and particularly within much narrower cohorts near the top of the top one percent, that has occurred over the past twenty-five years. It demonstrates the strong Matthew effect in incomes in the United States over that period. The super-rich are pulling away from everyone by so much and at a rate so fast that the fact that incomes of many households at the bottom and in the middle have stagnated, or even fallen in constant dollars, has been obscured by ever increasing per capita income.

The article then examines changing effective federal tax rates over the last two decades of the twentieth century. By the close of the twentieth century the tax system was not raising revenue as fairly and was doing less to mitigate inequality than it had in the middle of that century. Tax legislation in the twenty-first century continued this trend by providing tax cuts very disproportionately in favor of those at the top of the income pyramid with very small tax cuts going to everyone else.

The article then demonstrates that economic theory does not support the argument that the tax cuts were necessary to spur incentives to save and invest and to work, and that the empirical evidence of the effect of tax cuts on savings and investment clearly contradicts the claims made by supporters of the tax cuts. It examines the rapidly growing body of economic literature supporting the thesis that economic inequality impedes economic growth rather than fostering it, and concludes that because the tax cuts increase inequality, they probably impede economic growth.

This is worth repeating:  tax cuts to spur savings (such as preferential rates for capital gains and other tax programs that reward investment) don't really work.  They tend to increase inequality.  Inequality tends to impede economic growth.  So tax cuts to foster savings tends to do more harm than good. 

In fact, in a review of the research literature and empirical studies regarding taxes and savings (see id. at 1080-89, in particular 1084-89 on savings), McMahon shows that "an increased yield to capital might actually decrease household savings.  Over the long term, the United States personal savings rate has varied inversely with the yield to capital."  Id. at  1086 (emphasis added).  And even investment increases from tax cuts only help the US economy if they are invested domestically--a proposition that is highly uncertain given today's international financial markets; otherwise "the benefits of increased wealth ... would inure only to savers, the owners of capital" and not to U.S. workers.  Id. at 1087.

 

The Supreme Court's corporate monsters--if money buys them "free speech" rights, can it help them avoid giving others human rights?

The Supreme Court decided in Citizens United that corporations could intevene to influence elections--giving money and aide to their selected candidates.  This was an inordinate broadening of corporate "personhood", claimed to be necessary under the warped First Amendment precedents of the Supreme Court that count "money" as speech and thus consider that  limitations on money spent to influence elections as a limitation on speech.

Yet most economists and tax professors argue against the corporate tax--which has been in place longer than the individual income tax--on the grounds that taxes distort and that the claimed "double taxation" of corporate income distorts the allocation of capital.   See, e.g., Tax Foundation, 2004 paper on integrating corporate and personal income taxes; seminal 1985 integration piece from NBER.  Much of the argument boils down to an a prior assumption that "only people can pay taxes."  

(Of course, we used to think that only people could engage in campaign speech or bribe politicians for quid pro quo policies or otherwise influence the course of society.  We were naive.) 

As a result of this "received wisdom" about economics and corporate taxes--mostly based on the mathematically correct but practically challenged Chicago School approach to understanding economic systems (by assuming away most of the real world, including life, death, and everything in between)-- corporate lobbyists and their allies in Congress have been pushing for decades to eliminate corporate taxation through integration of the corporate and individual tax schemes or at a minimum to drastically reduce the liability of corporations for federal income taxes. 

Every presidential candidate has one scheme or another to reduce corporate taxes, with even Obama falling prey to the continuing influence of the Wall Street facilitators like Timothy Geithner in the Treasury and Larry Summers.  See Citizens for Tax Justice, President's Framework Fails to Raise Revenue (pointing out that there is no reason not to fix the loopholes in corporate tax to help address the deficit without having to lower corporate rates, and noting that although Obama at least called for making his rate reduction framework for so-called corporate tax reform revenue neutral, his plan fails to raise about a trillion dollars to make up for the corporate taxes that it gives up).  As CTJ notes, many organizations have called for the opposite--to raise revenues from corporations that have been paying very little in taxes, especially since the 2003 Bush "reforms" that granted most of the items on corporations' wish list for tax cuts.

Last year, 250 organizations, including organizations from every state in the U.S., joined us in urging Congress to enact a corporate tax reform that raises revenue. These organizations believe that it’s outrageous that Congress is debating cuts in public services like Medicare and Medicaid to address an alleged budget crisis and yet no attempt will be made to raise more revenue from profitable corporations.  Id.

Nonetheless, most candidates call for making the corporate income tax territorial and thus making it even more lucrative for US multinationals to move more of their corporate businesses (and jobs) abroad.  Most call for reducing the rates on corporations to a historically unprecedentedly low level--making it even more likely that the US trade deficit and corresponding budget deficit will continue to grow, even at a time when these self-nominated fiscal "conservatives" are claiming that the current deficit requires monumental sacrifices from ordinary people in the way of reduced medical care and old age security (the effort to cut back drastically on the benefits payable under  Medicare and Social Security).  Most treat the owners of corporate equity as though they were some kind of revered engine of growth, when in fact they are usually merely rich people who are interested in reaping as high a profit as possible from sales of corporate shares but very little interested in entrepreneurship, and as likely to engage in quick trades (the profits of which go into their pockets and not into the working capital of the corproations) as to hold long-term based on analysis of corporate business fundamentals.  Most don't accompany their form of integration with eliminating the category distinction between capital gains and ordinary income. 

Most  "corporate reform" plans call for continuing most of the absurd provisions that have larded the pockets of corporate management over the last few decades, such as

• accelerated depreciation and expensing (including all the depletion allowances for the heavily subsidized oil and gas extractive industry, even while it complains about the petty little incentives put in place in recent years for environmentally sound energy generation--accelerated expensing creates "phantom" deductions that reduce taxable income well below economic profits), and
• the  "research & development" credit, which was first enacted as a stimulus that was to be in place for a very short period of time but has been extended in fits--even retroactively for several years--as corporations demand making every single "stimulus" tax break they get permanent. 

(As readers of this blog know, I see little merit in the R&D credit.  Corporations can already deduct way too much "phantom" expenses--excess interest expense that allows them to operate with too much leverage, facilitating equity firm buyouts by leveraging up the purchased entity to pay off the equity strippers.  Further, as with so many of the GOP's favorite programs of tax subsidies for multinationals and the upper crust, it hasn't bothered to conduct studies to see if the R&D credit indeed results in more research done in this country.  Clearly, a retroactively enacted credit does NOT incentivize research.  Probably the times it's been enacted without being retroactive haven't either--it takes extensive labs and equipment to do research, and such labs and equipment have to be purchased far ahead of when they pay off.  Most of the R&D that the credit supports is likely to be of the "tweak-a-patent" variety that seeks merely to find a way to extend a monopoly profit from a particular profit--something the patent law should frown upon.)

So the drumbeat for lower corporate taxes--at a time when corporations are paying less as a proportion of GDP than they did in the time of our most sustained economic growth--continues unabated from the right joined by only slightly less enthousiastic accompaniment at the White House and think tanks like the Tax Policy Institute.

Meanwhile, the Supreme Court, having anointed corporations with a kind of personhood that lets them intervene in elections even though they have no vote, has taken for consideration a case that challenges the rights of individuals to hold corporations accountable as people are held accountable for human rights violations.  The case is Kiobel v Royal Dutch Petroleum (2d Cir. 2010), in which Nigerian plaintiffs seek to hold Royal Dutch/Shell liable for violating the Alien Tort Statute (“ATS”), 28 U.S.C. § 1350, which upholds international norms of human rights. The Second Circuit held that US courts cannot entertain such suits, holding that jurisdiction under the Alien Tort Statute against corporations requires an international norm approving sanctioning corporations for torts and that requires more than the mere fact that most countries treat corporations under their domestic law as capable of committing torts.   The court in the Second Circuit opinion makes a point much like economists tend to make about taxes--essentially implying that "only people commit heinous acts". 

From the beginning, however, the principle of individual liability for violations of international law has been limited to natural persons—not “juridical” persons such as corporations—because the moral responsibility for a crime so heinous and unbounded as to rise to the level of an “international crime” has rested solely with the individual men and women who have perpetrated it.  Second Circuit in Riobel.

 

 

While people are the "deciders" of corporate decisions, nonetheless the corporate form permits corporations to engage in conduct that individuals alone cannot engage in--from amassing huge resources to carrying out massive enterprises that pollute and steal human dignity.  To ignore that reality of corporate wrongdoing, especially in an age that has anointed corporate personhood with rights that seem furthest from ones that corporate entities should be permitted to enjoy, would be folly. 

For further discussion of the implications of the case, see Peter Weiss, Should corporations have more leeway to kill than people do?, New York Times (Feb. 24, 2012).

Suffice it to say that this case raises the specter of full-blown corporatism overtaking the entire U.S. economic and social system.  If the Supreme Court accompanies its "personhood for free speech/election intervention rights" with "not people so can't be touched for human rights violations", there will be even fewer ways to hold multinationals accountable, and they will forge even stronger relationships with autocratic dictators who treat their citizens like slaves and their environments like garbage pits.   Meanwhile corporations will continue to intervene in our elections at will (usually the will of their ultra-wealthy managerial class), using the extraordinary power of the resources at their command.  

We will all be the worse for any decision that would allow multinationals to expand their quasi-sovereign rights without saddling them with a strong obligation to comply with international norms respecting human rights.  Rights without obligations are invitations to corruption.

Ross Douthat Excuses the Manager/Owner Class

As the Occupy WallStreet movement has revealed, the United States is a country with growing disparity between an "overclass" of elite rich who have garnered most of the gains of productivity and the vast majority of the rest, who teeter on the verge of poverty if there is an illness, a death, a job loss or any of the other normal human catastrophes that beset us.

Many of those on the right--particularly economists who follow the Chicago School "unfettered markets" theory of the way capitalism works--suggest that there's nothing that can or should be done about these problems other than relying on the unfettering of the market system that created them to resolve them.

For example, take Ross Douthat's opinion piece in the New York Times on Sunday, Can the Working Class Be Saved? (Feb. 12, 2012).  He starts with Charles Murray's conclusion (in a book reviewed earlier in the Times)  that the working class has lost its way because it no longer values fidelity, piety, industry, thrift, and personal responsibility. 

These are of course the typical right-wing approaches to explaining the problems of much of the poor, near-poor and middle class in America today.  The right sees it as their fault for not being responsible (select cheaper doctors for health care, or die), not being faithful (if women would stay married to the bums that abuse them, they'd have more financial support), or not being faithful enough (turning away from church leads to teenage sex leads to pregnancies leads to abortions--and it's all bad in the eyes of the pious right that wants to impose its views on the rest of us).

But Douthat doesn't like Murray's answer--he considers it a too radical libertarian policy proposal that is "impractical" and "divorced from political reality."  Murrary would scrap all the individualized programs that result in too much government intervention in daily lives, and instead provide  a guaranteed minimum income to all Americans.  Murray's answer has much to appeal in it--direct aid probably costs less overall, since it goes directly to the people who need it instead of to all the middlemen.  Of course, the minimum is likely too low, and it probably doesn't provide enough to ensure that those in the bottom tiers of the income distribution have a fair chance at college and improving their lives.  It probably won't work to remove government from the picture entirely--after all, the reason we need to work together in the form of government is that we cannot as individuals do so many of the things that we need to do as a community.  For example, we need state support for public education at all levels to increase, so that there are public goods available to meet the needs of everyone.

But Douthat doesn't like the left's response to Murray's arguments about the American working class either.   He says that that liberals acknowledge "the social breakdown [Murray] described may be real enough, ... , but [claim that] it’s an inevitable consequence of an economic system that Republicans have rigged to benefit the rich." 

 He treats the assertion of untruth of that statement as though it proves itself.  But of course it doesn't.  In any system, there will tend to be power elites who gradually move the system more and more to favor themselves.  If they can co-opt the underclass to serving their needs and voting against interest, they will.  That is pretty much what has happened in the US under reaganomics--tax cuts, deregulation, militarization, privatization--those policies have ultimately all greatly benefited the rich and sometimes helped but often hurt the not-rich.   That has left us with the problem of the top 1%--called attention to by the Occupy Wall Street movement--garnering productivity gains for themselves and leaving the rest of Americans in dire straits.

In particular, the privatization/deregulation combination have permitted employers to have the upper hand in their treatment of workers and supported the gradual weakening of worker unions, which offered them their best means of combatting neo-feudal workplace policies.  Once private sector worker unions were weakened, the right began its effort to decimate public sector worker bargaining rights, an effort that is accelerating today.  Much of it is achieved by using a divide and conquer strategy--tell private workers that public workers are getting overpaid on their tax dollars, even when it is either untrue (most public workers are underpaid compared to private workers) or only partly true (some public workers make more than private workers, but in those cases it is the private workers who are underpaid, as their employee rights and their share of productivity gains have diminished over the last decades, while the managers' shares of productivity gains have increased like an expanding black hole).

What is Douthat's explanation for the problem?

It was globalization, not Republicans, that killed the private-sector union and reduced the returns to blue-collar work. It’s arithmetic, not plutocracy, that’s standing between the left and its dream of a much more activist government.

That, my folks, is post hoc rationalization, at best.  Globalization as we have experienced it is indeed a part of the problem.  But Milt Friedman's adulation of unfettered markets, the brute capitalism that the right has promoted for decades, is the driving impulse of globalization as we have experienced it.  The US gave up its own environmental sovereignty in trade agreements with other countries.  The US failed to protect its workers and industries--by , for example, exacting an "exit toll" when its own corporations moved jobs outside the country.  The US policy approach to globalization was determined by the "unfettered market" approach of the Chicago School--what Naomi Klein referred to in her insightful book as "The Shock Doctrine" (which is a good description of what Grecians are undergoing now in order to satisfy Morgan Stanley, Goldman Sachs and the other big multinational banks who hold a good deal of Greece's debt).  And the US's failure to provide adequate stimulus at the worker level--through job programs and even job guarantees--is a big part of the reason that the financialization of the economy had such drastic results for ordinary Americans.  See, e.g., Pavlina Tcherneva, why the job guarantee is superior, Naked Capitalism (Feb. 12, 2012).

As to the second part of Douthat's assertion--that "it's arithmetic and not plutocracy" that is the problem?  Again, that answer overlooks the way other nations have controlled health care costs  with single provider systems where hospitals and Big Pharma lose their market-making power, and doctors are subject to a more rational pricing system.  Health care is the primary driver of the expected increase in government benefit payouts (other than the "temporary" increase from the baby boom wave). 

So a combination of governmental actions could change the numbers in Douthat's "arithmetic"--utilization of the savings from transitioning from engagement in multiple wars to a more defensive, anti-war approach; re-regulation, anti-trust actions and a narrower scope for corporate consolidations and reorgs (to prevent the need for more bailouts); beefening of our unionization rules to protect workers against the current lopsided power of employers (e.g., a card check rule and requiring employers to permit a union meeting with workers for every employer meeting that addresses unionization issues); health care reform through a public option/single payer or even single payer/single provider solution (to prevent the continuing rentier profits from health services that are exploding health care costs in the US compared to other developed nations); and adjustments to the tax system to ensure a more appropriate "ability to pay" measure than the rough brackets and systems we have now.

The tax system, in other words, cannot redress that problem in and of itself, but it can certainly be a major contributor to a remedy. 

For example, we have a relatively flat bracket system, that doesn't make a distinction between $400,000 of income and $300 million of income.  A finer-tuned bracket structure that responds to today's income levels rather than those of the 1950s would have more rate brackets and a higher top rate for those hedge and equity fund managers and CEOs who earn multiple millions, even hundreds of millions a year (some earning in half a day more than their average workers make in an entire year). 

Furthermore, although the estate tax is our only method for a "last chance" to extract some tax from the financial assets mostly held by the very rich ( and mostly passed on, unsold, to their heirs in a windfall of unearned benefits and stepped up tax basis), the current estate tax is pitiful against the mighty estates it should be taxing based on ability to pay.  The current estate rules include a too-large exemption--$10 million for a couple--that lets many large estates off the hook for any tax whatsoever.  Worse, the current estate tax rules has a flat rate that is too low--those with a family farm worth $20 million pay the same rate on the amount above the exemption as those with estates worth billions (albeit with provisions for paying that amount over up to 14 years).  Even worse, Congress hasn't acted to eliminate the many gimmicks that sophisticated tax advisers use to work around the pitiful estate tax provisions that are still included in our Code (e.g., the complete exclusion of life insurance proceeds rather than just the investment return, gimmicky trusts and phony partnership valuations to get around the estate exemption amounts, among others).

Douthat's prescription is the following:

1. lower the payroll tax burden (by paying for Social Security in "other ways" and structuring benefits so as not to create a disincentive to work--he doesn't provide specifics, but one suspects that he means privatization of Social Security)
2. build family friendly policy into planning (either through the left's favored european style family leave requirements or the right's favored method of child tax credits)
3. control immigration (favor highly skilled immigrants, disfavor low-skilled immigrants)
4. reduce incarceration rates (with "swift certain punishment" and "larger police forces")

Note that there's no mention of increasing taxes on the rich or of using the windfall from the end of the Iraq and Afghanistan wars to support work programs like the WPA that helped end the Great Depression.  While these are topics that should be discussed, there are as many questions raised by this list as are answered.  Surely we have to reduce incarceration--but swifter punishment implies loss of due process (quicker death penalty executions is a common plea from the radical right), while more police is not the answer to things like the methamphetamine criminal gangs (modernizing our drug laws to treat most drugs as legal would be a great first step, since it is the criminalization of drugs that makes the criminality  of drug lords  so profitable, as we learned during Prohibition).  Surely we should be more aware of our immigration policies' impact on US families and workers.  But immigrants actually create new jobs--the mouths have to be fed, the families have to be housed, etc.  It is not so clear that shutting the door protects US jobs but may in fact close them down.  Family friendly policy is a good idea--which is why legalization of same-sex marriage and repeal of DOMA needs to happen, so that all the different kinds of US families can have similar protections and similar assurances of long-term security, that will help them be steadier and more responsible workers and parents.  Lowering the payroll tax burden for the poor and near-poor makes sense, but increasing it for those who are better off makes sense too. 

Inequality, Taxes, and Corporatism viewed thru the lens of Nick Reding's "Methland"

[editorial note: back from a great break in Colorado with children and grandchildren, so postings will resume normal routine. edited in afternoon to add cite to Angry Bear post by Mike Kimel.]

The Congressional Research Service recently released a new report on U.S. income inequality.  See Hungerford, Changes in the Income Distribution Among Tax Filers 1996 to 2006: The Role of Labor Income, Capital Income, and Tax Policy, CRS (Dec. 29, 2011) (Download Hungerford. Changes in the Distribution of Income Among Tax Filers Between 1996 and 2006. Role of Labor Capital and Tax. 122911).   The CRS report is a sobering document, especially in light of the growing unrest as ordinary people realize how their opportunities are limited by the increased control of resources at the top (e.g., Occupy Wall Street, the "99% vs. 1%, etc.).   For example, see the New York Times article today on inequality and the fact that U.S. mobility trails that of Europe and Canada.  The article is based on a number of different studies such as that of Marcus Jantti and colleagues, American Exceptionalism in a New Light, and suggests that inequality has lingering impacts, especially on the poor and the ability of the poor to move out of the bottom.   See Jason DeParle, Harder for Americans to Rise from Lower Rungs, New York Times, Jan. 4, 2012 (in print edition, Jan. 5, at A1).  The article discusses the considerable evidence that there is limited access today to what we have called the "American Dream":  stickiness exists especially for the poor and the affluent, as the poor generally lack opportunities to get out, and the affluent generally have all the advantages they need to stay affluent.  See especially the graphic accompanying the article, Comparing Economic Mobility.  Id. at A12.  The causes of America's mobility problem are multiple--poverty; a thin safety net (threatened even more now by the right-wing's determined attack on earned benefits like Social Security and Medicare under cover of their purported concern about deficit reduction); the disadvantages of single motherhood; high incarceration rates, especially for black males; a long history of racial stratification that still impacts daily life; the pay tilt towards educated workers (usually made up of children of the affluent); the decline in unionization compared to other affluent countries; and the magnitude of the gap between the rich and the vast majority of Americans.  Even conservatives, who tend to think that mobility is overrated as a policy goal, may conclude that "stagnation at the bottom [is] alarming and warn[] that it will worsen."  Id. at A12 (citing conservative journalist Reihan Salam of the National Review and Daily Post).

Meanwhile, not surprisingly, the right-wing in this country continues to pursue exactly those policies that have so contributed to the decline of mobility, the stagnation of incomes for the lower income population, and the loss of employee power in the workplace.  See, e.g., the plan of the Republican majority in Indiana  to enact so-called "right to work" legislation that allows non-union members to freeload off unions by getting the bargained for rights and wages without paying dues to make that bargaining possible.

What those interested in tax policy should pay especial attention to is the role of tax changes over the last 40 years in augmenting the inequality gap.  Tax is not the sole culprit, but it is a contributor and something that Congress can easily do something about, if it can summon the political will to act.  From the report summary:

Inflation-adjusted average after-tax income grew by 25% between 1996 and 2006 (the last year for which individual income tax data is publicly available). This average increase, however, obscures a great deal of variation. The poorest 20% of tax filers experienced a 6% reduction in income while the top 0.1% of tax filers saw their income almost double. Tax filers in the middle of the income distribution experienced about a 10% increase in income. Also during this period, the proportion of income from capital increased for the top 0.1% from 64% to 70%.

Income inequality, as measured by the Gini coefficient, increased between 1996 and 2006; this is true for both before-tax and after-tax income. Before-tax income inequality increased from 0.532 to 0.582 between 1996 and 2006—a 9% increase. After-tax income inequality increased by 11% between 1996 and 2006. Total taxes (the individual income tax, the payroll tax, and the corporate income tax) reduced income inequality in both 1996 and 2006. In 1996, taxes reduced income inequality by 5%. In 2006, however, taxes reduced income inequality by less than 4%. Taxes were more progressive and had a greater equalizing effect in 1996 than in 2006.

Three potential causes of the increase in after-tax income inequality between 1996 and 2006 are changes in labor income (wages and salaries), changes in capital income (capital gains, dividends, and business income), and changes in taxes. To evaluate these potential reasons for increasing income inequality, a technique to decompose income inequality by income source is used. While earnings inequality increased between 1996 and 2006, this was not the major source of increasing income inequality over this period. Capital gains and dividends were a larger share of total income in 2006 than in 1996 (especially for high-income taxpayers) and were more unequally distributed in 2006 than in 1996. Changes in capital gains and dividends were the largest contributor to the increase in the overall income inequality. Taxes were less progressive in 2006 than in 1996, and consequently, tax policy also contributed to the increase in income inequality between 1996 and 2006.

 

The members of Congress who pass such preferences (the GOP in particular, but certainly various members of the Democratic party such as Max Baucus fall into the same group) spin such preference for the rich (a group which includes most members of Congress) as supporting job creation.  Their spin suggests that anytime anyone invests in corporate stock, they are acting as entrepreneurs and increasing the possibility of jobs for the rest of us. 

The spin is mostly just that.  Most of the capital gains from sales of corporate stock have nothing to do with having invested in a company directly in ways that provide more capital to the company and lead to creationof jobs.  Most of such gains are from secondary market sales--sales of stock from one rich person to another.  Secondary market sales have absolutely nothing to do with job creation or entrepreneurship: they have everything to do with acquiring more money with taxes that are at extremely low preferential rates. 

Similarly, getting dividends from a corporate enterprise has nothing to do with job creation--they just make the corporate stock holder richer at a preferential tax rate (under the 'temporary'[ provision enacted in 2003 and extended several times since).   Many 'freshwater' economists and many tax professionals argue for "integrating" the corporate tax and the tax on dividends or outright elimination of the corporate tax, claiming that  the dividend tax represents a 'double' (and therefore wrong) taxation of corporate profits.  That logic has led to an increasingly rich variety of corporate loopholes built by Congress into the Code--from the various expensing and bonus depreciation provisions (letting corporations reduce their taxable income compared to their actual business profits by claiming a deduction for capital expenditures) to various preference gimmicks, such as the "domestic manufacturing deduction" that provided a significant reduction in the corporate tax rate to all kinds of industries, including many processes that few would consider to qualify for "manufacturing." 

 But the double taxation claim is merely that--a claim based on the way the theor treats corporate entities.  Economists been unable to prove empirically that shareholders actually bear the burden of the corporate tax.  But even if they do, there are other reasons having to do with institutional power and the sustainability of democracy for supporting a corporate tax.  If you start out thinking that "only people pay taxes", you would likely conclude that "corporations can't pay taxes; therefore, the corporate tax is 'really' being paid by the owners of the corporation."  Of course, we used to say that only people can vote, so only people should be allowed to spend money on campaign speech.  Now the Supreme Court--which has treated corporations as "persons" under the Constitution since the nineteenth century--has decided that corporations have free speech rights that are broad enough to allow them to use their vast resources to influence who gets elected.  Thus, corporatism has paved the way for corporations to buy elections and then lobby for the laws and regulations that suit them, while arguing that corporations shouldn't pay any taxes to support the government that grants them various subsidies through the election/lobbying/regulation (deregulation) process.  It has supported the US movement towards "free trade" agreements, such as NAFTA, that have been difficult for the poor in countries with whom we trade, for environmental protections in the U.S., and  for locally owned businesses and local workers in the U.S.

If you avoid the corporatist agenda and start out with the assumption that corporations pay tax (because we have treated such entities as taxpayers under the Code), then you can recognize that corporate tax policy can be set to permit reasonable profits and to disincentivize unreasonable--i.e., societally undesirable--behavior.  An example would be the problem of corporate consolidation in a globalized economy, which provides inordinate power to multinational entities (I have called them quasi-sovereigns) and significantly reduces the power of ordinary employees. 

To understand something about the problem of corporate consolidation (as if the 2007-08 financial crisis caused by "too big to fail" financial institutions shouldn't have been enought), read the book Methland: The Death and Life of an American Small Town, by Nick Reding (Bloomsbury 2009).  In trying to understand the causes of the meth explosion in U.S. rural towns, it details the devastating effect of corporate consolidation on rural workers and economies--Big Agriculture and Big Pharma essentially bought out the vertical processes (for Ag, from seed to table, with a few firms like Cargill, Tyson, and ADM controlling huge swaths of the American food system).  In the process of gaining control, they consolidated many small, local producers, shut out unions, sought-out illegal immigrant labor to avoid wage and benefits laws, and dropped wages--in one case, wages for workers in an Iowa meat processing plant dropped overnight from around $18 an hour to less than $6 an hour, with a simultaneous cut off of benefits. See Methland, at 69 (noting the decline in wages when Cargill took over the formerly locally owned Iowa Ham plant in 1987). 

"[T]he evolution of the meth epidemic had occurred in lockstep with three separate economic trends that had contributed to the dissolution of small-town United States.  ...  And the things that spurred this simultaneous rise and fall: the development of Big Pharmaceuticals, Big Agriculture, and the modern Meican drug-trafficking business."  Id. at 109.

***

"By 1999 ... Cargill-Ecxel [an agribusiness plant in Ottumwa Iowa] placed newspaper advertisements in the poork, industrial border towns of Jarez and Tijuana offering two free months' rent to workers who could make it to Ottumwa from Mexico.  For Cargill and the rest of the packing conglomerates, employing illegals would appear to have been the best of all possible situations, for the simple reason that these employees, lacking legal identification, didn't technically exist, and therefore had no rights.  Nor were they apt to argue with the harsh conditions of an industry that continues today to have the highest rate of employee injury in the United States.  A failed 2001 federal criminal case brought against a Tyson plant in Shelbyville, Tennessee made clear that corporations would essentially not be held liable for employing or recruiting illegal immigrants to work in the plants.  Despite the fact that two Shelbyville managers were caught on tape by federal investigators asking human traffickers for five hundred undocumented workers over four months, Tyson's defense team successfullyh maintained that it's too difficult for Tyson employees to determine who's who among legal and illegal employees.  The ruling institutionalized the notion that employers of immigrants are not beholden to offering the same rights to workers that other companies must, for the simple reason that they don't know--and don't need to know--who works for them."  Id. at 153.

***

"Consider what used to happen in Oelwein, Iowa before the large scale consolidation in the 1980s and 1990s of almost every niche of the food-production chain.  Corn farmers...would have bought seed from the local seed company.  Once harvested, that corn would go to a grain elevator, also locally owned.  It would be shipped to a small feedlot in order to fatten cattle raised in Nebraska, Wyoming, Florida or Arizona; or perhaps it would go to a dairy in northern Missouri, a chicken farm in Indiana, or a pork outfit in Kansas.  The variables were infinite and the market was dynamic.  The barge, truck or railroad car that carried the grain was likely independently owned, too, as would have been the pigs, cows, and chickens it fed.  At each stae, the price would have to be 'discovered' as multiple potential customers vied to handle the product, with competition keeping the price 'true'... in the context of the marketplace.  Eventually, the Oelwsin corn used to feed sows in Topeka might return to Oelwein in the form of hocks to be disassembled, packaged, and shipped at the Iowa Ham plant... From there, a whole new market ... would take over in order to distribute the food and sell it at the retail level, perhaps at the grocery once owned by the Leo family (which today is an IGA).  James and Donna Lein would have been the essential building blocks in a vibrant system in which the variables contributed at all stages to what's called the 'social capital' of rural communities.

Beginning with the precedent set in 1987 with the IBP takeover of Hormel in Ottumwa--and the subsequent takeover of Iowa Ham by Gillette--a few companies would come to control most of the U.S. food business. ... Price discovery no longer happens; the value chain is controlled by a limited number of entities.  Seed is not sold; it's biogenetically engineered by companies like Monsanto, which entered into a joint venture with Cargill in 1998.  Cargill--not the farmer--owns the corn this is grown [under contract]....  In the Illinois and Ohio river valleys, Cargill owns 50 % of the grain elevators and other storage facilities.  Along with Tyson, Swift and the National Beef Packing Company, Cargill owns 83.5% of the beef packing inustry [and so on for turkey production, flour milling, ethanol production, animal feed plants, and soybean crushing]. Id. at 169-160.

***

Once competition has been annihilated ... the surviving companies, like Cargill, begin to effect political decisions through their enormous lobbying capabilities.  The government no longer governs unimpeded: it does so in tandem with the major companies. Id. at 161 (citing Douglas Constance, a rural sociologist at Sam Houston State University, Huntsville Texas).

This loss of local ownership through massive consolidation of business enterprises was a change orchestrated from the top of the U.S. government under Reagan's policies of privatization, deregulation, tax cuts (and loosening of tax and antitrust mechanisms that had worked against consolidation), and militarization.  It is a change continued today through the more and more flexible tax regulations and Code provisions governing tax-free reorganizations.  These policy approaches supporting consolidation of enterprises both vertically and horizontally favor the development of powerful corporations that can influence governmenbt in their favor while demanding subsidies (bonus depreciation, expensing, and other tax loopholes that have steadily reduced corporate taxes well below 25% for most of those that pay them at all, even while the rates remained statutorily at 35%.  Looking at the way corporate consolidation has harmed rural America should lead us to ask whether reversing the policies favoring such consolidation--such as making tax-free reorganizations much more difficult, pursuing anti-trust violations under new theories that look to the problems inherent in quasi-sovereign corporate entities, charging corporate and other businesses an expatriation fee equal to the increase in value of business assets while in the United States--may not be worth considering as one step in remedying both the "too big to fail" and "quasi-sovereign" problems while also providing resources to address the thin safety net and falling wages of the bottom of the income distribution.

For more ideas on inequality and its relation to a dynamic, growing economy and more stable society, see Mike Kimel's post on Angry Bear, The Pelzman Effect: Why Economic Growth Has Slowed in the US over Time.

crony capitalism and casino capitalism--bad flavors for right or left, per Kristof and Stiglitz

The Occupy Wall Street focus on "we are the 99 percent" juxtaposed with the CBO's recent report on the growing inequality in America (see here) come at a time when the American right is pushing hard for policies, like Perry's so-called "Flat Tax" and Cain's so-called "FairTax", that will exacerbate that inequality in a winner-take-all economic system that rewards the speculators and fat cats to the detriment of ordinary society.  Hopefully those first two items will cause ordinary folk to think twice before supporting that exacerbating trend on the right.  The right likes to disguise them as 'folksy' 'down-home' populism.  They aren't.  They are wolves disguised in sheep's clothing.

In Crony Capitalism Comes Home, New York Times (Oct. 26, 2011), Nicholas Kristof notes the "alarmist view" of Occupy Wall Street rampant among the media and the elitist critics of the movement--one that sees the protesters as "half-naked Communists aiming to bring down the American economic system" or "a 'mob' trying to overthow capitalism."  He rightly responds that it is instead a movement that "highlights the need to restore basic capitalist principles like accountability."

[I]n recent years, some financiers have chosen to live in a government-backed featherbed. Their platform seems to be socialism for tycoons and capitalism for the rest of us.

***

The American critique of the Asian crisis was correct. The countries involved were nominally capitalist but needed major reforms to create accountability and competitive markets.  Something similar is true today of the United States.

***

Capitalism is so successful an economic system partly because of an internal discipline that allows for loss and even bankruptcy. It’s the possibility of failure that creates the opportunity for triumph. Yet many of America’s major banks are too big to fail, so they can privatize profits while socializing risk.

***

[Mohamed El-Erian, chief executive of Pimco] told me that the economic system needs to move toward “inclusive capitalism” and embrace broad-based job creation while curbing excessive inequality.  “You cannot be a good house in a rapidly deteriorating neighborhood,” he told me. “The credibility and the fair functioning of the neighborhood matter a great deal. Without that, the integrity of the capitalist system will weaken further.”

Kristof and El-Erian are correct. 

The movement in the US over the last few decades has made crony capitalism possible by pretending that abstract economic theories about "free markets" developed by Milt Friedman and his Chicago boys and based on unreal assumptions about human behavior should not only be consulted for setting fiscal policy but are the "God's Truth" bible from which such policies should be derived.  This has led to the capture of the markets by big money.  Swarms of lobbyists for Big Oil/ Insurance/ Banks/ Pharma draft the laws that apply to their industries then work with the agencies to draft favorable interpretations into the regulations and then use powerful firms funded by business coalitions like the U.S. Chamber of Commerce, National Association of Manufacturers or supported by "business-funded so-called 'think tanks' to exploit the courts (packed by the right in the four decades since Reagan) to push industry favorable policies no matter the 'externalities'  for people's lives, the environment, other priorities, and individual freedoms.

Crony capitalism doesn't hold capitalists accountable for what they do.  We put minimal if any restraints (tax law, anti-trust law, patent  law) on business monopolization and business consolidation and business ability to use the power of money to influence the work of legislators, executives and courts.  We allow private equity funds that buy, fire, and sell at great profits to themselves but at great cost to communities, not just in jobs lost, but also in abandoned buildings left to be handled at the taxpayers' expense and polluted waterways, ground and air left to be cleaned (if at all) at taxpayers' expense.  Wal-Mart moves from one address to another across the street and a short hop down the road, because it gets a new tax rebate from the county over the line and leaves behind the community that gave it a tax rebate for the first store, without ever providing the financial benefits the rebate was intended to buy and leaving behind the pollution, waste and destruction of an empty shell megabuilding (real life anecdote from Champaign, Illinois).

Crony capitalism results in excessive inequality (witness the way the managers and owners have accrued all the productivity gains of the last decade) and excessive inequality furthers crony capitalism.

[Lawrence Katz, a Harvard economist, says that] excessive inequality can have two perverse consequences: first, the very wealthy lobby for favors, contracts and bailouts that distort markets; and, second, growing inequality undermines the ability of the poorest to invest in their own education.  "These factors mean that high inequality can generate further high inequality and eventually poor economic growth."

This is very similar to what Joseph Stiglitz has been telling us for some time.  In his 2010 book, Freefall, Stiglitz recognized that America's economic crisis stemmed in part from unfounded faith in Econ 101.  :

Modern economics, with its faith in free markets and globalisation, had promised prosperity for all. The much-touted New Economy – the amazing innovations that marked the latter half of the 20th century, including deregulation and financial engineering – was supposed to enable better risk management, bringing with it the end of the business cycle. If the combination of the New Economy and modern economics had not eliminated economic fluctuations, at least it was taming them. Or so we were told.

The Great Recession – clearly the worst downturn since the Great Depression 75 years earlier – has shattered these illusions.  (This and the following excerpts are from the extract of his book, Why we have to change capitalism, The Telegraph)

Saying that does not make anyone "against capitalism".  It just means that we must open our eyes to understand the potential that unfettered capitalism has for highly negative destruction.  As Stiglitz says, "markets lie at the heart of every successful economy but ... [they] do not work well on their own."  We have to let government work to correct the imbalances that otherwise result from unfettered capitalism--especially the kinds of imbalances that start to grow when casino capitalism is let loose by socializiation of losses and privatization of gains resulting in enormous inequality within the society.

Economies need a balance between the role of markets and the role of government – with important contributions by non-market and non-governmental institutions. In the last 25 years, America lost that balance, and it pushed its unbalanced perspective on countries around the world.  The current crisis has uncovered fundamental flaws in the capitalist system, or at least the peculiar version of capitalism that emerged in the latter part of the 20th century in the US.

***

[A] closer look at the US economy suggests that there are some deeper problems [than just the ones resulting from our current financial crisis and recession]: a society where even those in the middle have seen incomes stagnate for a decade, a society marked by increasing inequality; a country where, though there are dramatic exceptions, the statistical chances of a poor American making it to the top are lower than in "Old Europe."

Stiglitz concludes, as many of us have, that this crisis should be taken as an opportunity to ask what kind of society we would like to have and to make the changes necessary to ensure that we are on the right path.

We have gone far down an alternative path – creating a society in which materialism dominates moral commitment, in which the rapid growth that we have achieved is not sustainable environmentally or socially, in which we do not act together as a community to address our common needs, partly because rugged individualism and market fundamentalism have eroded any sense of community and have led to rampant exploitation of unwary and unprotected individuals and to an increasing social divide.

***

The model of rugged individualism combined with market fundamentalism has altered not just how individuals think of themselves and their preferences but how they relate to each other. In a world of rugged individualism, there is little need for community and no need for trust. Government is a hindrance; it is the problem, not the solution.

But if externalities and market failures are pervasive, there is a need for collective action, and voluntary arrangements will typically not suffice.

The government plays an important role in restraining the "dark angels" of capitalism and allowing the "good angels" to operate for the benefit of society.  Without government as an enforcer of accountability and trust, some version of crony capitalism and its brute-force harm to those who lose out in the struggle for wealthy is inevitable.  

This crisis has exposed fissures in our society, between Wall Street and Main Street, between America's rich and the rest of our society. While the top has been doing very well over the last three decades, incomes of most Americans have stagnated or fallen.

We need to keep this in mind, as we deal with the myriad proposals coming from the right to continue the trend of unfettered markets, crony capitalism and winner-take-all policies.  Deregulation for Big Banks/Oil/Pharma et al will not create jobs, tax cuts for the wealthy will not unleash broad-based growth, and larger inflows of lobbyists [see, e.g., Eggen & Farnam, Lobbyists playing key role in 2012 fundraising, Wash. Post (Oct. 27, 2011)] into even our political decisionmaking processes made possible by the Citizens United case will not provide ever more "free speech" for everyone.  These are excesses of brute-force capitalism exercised in a plutarchy, not evidence of a sustainable democracy. 

The answer is what might be called "mitigated capitalism"--an economy that can benefit from the incentive power of capitalism, but that limits and restrains its excesses through reasonable social welfare programs and safety nets for those that are left behind in one way or another, strong emphasis on providing public education and other systems that allow individuals to take advantage of opportunities to advance themselves, and strong enforcement of laws that protect the public commons (natural resources, air, water, land, and the public square) for the public.  The progressive income tax--a system that taxes every person on their income from whatever source (capital or labor)--and the estate tax--a system that redresses the inability of the tax system to capture the appreciation of capital resources during a person's lifetime--are key ingredients of the tax answer to preventing crony/brute-force capitalism's sway.

Jon Huntsman's Tax Reform Proposals

The Republican Party seems to have a litmust test for 'good' Republican nominees for party office:

• first, tax cuts:  Republican candidates must have no plan to increase taxes, even if that means that the wealthy pay too little and the poor too much;
• second, deregulation.  Republican candidates must have no plan to have the government regulate the activities of the market (that will not regulate itself) in ways that favor the long-term wellbeing of ordinary Americans; and
• third, militarization:  Republican candidates must have no plan to reign in the exorbitant military/defense/homeland security spending that has been a large part of the reason for our buildup of significant deficits; and
• fourth, privatization:  Republican candidates must not resist privatization of every possible public asset and activity.

Readers will recognize the four-pronged stool of the Reagan administration and the right's agenda since--deregulation, militarization, privatization, and tax cuts.  We've been operating more or less under that agenda most of the time since 1980.  We have not created a sustainable economy that benefits everyone.  Instead, we have created a highly unequal society in which those at the top gain incredibly and those in the middle are squeezed down towards the bottom, while interminable wars get waged and environmental degradation continues at rapid pace.  Ordinary Americans lose out in this 'brute capitalism' endeavor which gives most of the rewards to those already holding most of the wealth and furthers a "corporatist" society in which everything caters to business while ordinary people's needs go unanswered.

Jon Huntsman's so-called "American Jobs Plan" fits the mold. 

On taxes, Huntsman wants to

1) eliminate deductions and lower rates to 8%/14% /23%. 

2)  Eliminate the AMT

3) Eliminate taxes on capital gains and dividends

4) Reduce the corporate tax rate to 25% from the statutory rate of 35%

5) shift from a worldwid system to a territorial one

6) enact a tax repatriation holiday

That scheme represents class warfare on the poor and middle class, for whom a tax bill of 8 or 14% of income, respectively, could be devastating.   You really can't simplify the tax code for the 70% of people who take the standard deduction except by removing provisions that may benefit them if they qualify (medical deductions, etc.).   Eliminating the AMT is extraordinarily costly, and doesn't "penalize ... small businesses" as the Huntsman plan argues.  Meanwhile, the wealthy--who own most of the financial assets (stocks and bonds) and get most of the capital gains and dividend income that Huntsman wants to make tax free, benefit extraordinarily.  Our tax code already favors investment income heavily--we should move in the opposite direction and tax investment income no differently from labor income.  Otherwise, we create an enormous privilege for those who already own capital and have investment income, while disadvantaging those who must earn a living from labor and now become the ones required to carry on their backs the entire federal government enterprise. 

 Huntsman's argument for zero taxation to capitalists' investment gains is on one hand the same old hat of "let's favor capital over labor" based on the failed market theories of the Chicago school that taxing capital gains deters investment.  But that's absurd on its face.  The wealthy who own most of the financial assets do not stop investing in those financial assets because of taxation--if so, they would switch from financial assets to operating assets and stimulate the economy.  Regretably, taxation doesn't have that much of an effect.  They continue right on investing in capital assets. 

Further, Huntsman makes a 'double tax' argument that shows how little he understands about the existing arguments about taxation of capital gains.  He says "[b]ecause dollars invested had to first be earned, they have already been subject to an income tax [and] taxing these same dollars again when capital gains are realized serves to deter productive and much needed investment in our economy." 

But it is not the "same dollars" that are taxed when capital GAINS are realized--tax basis protects the after-tax dollars invested and the amount taxed is the GAIN over that amount that has accrued to the investment.  The 'double taxation argument has a little more heft when made about dividends paid by corporations, but again much of that is based on the starting point.  Once we decide that corporations are persons that are taxpayers, then it is not proper to say that dividend taxation represents 'double' taxation.  Corporations are taxable entities and pay tax on their income.  They may then pay amounts out of that to shareholders who are also taxable entities and the shareholders will pay taxes as well (unless they are corporations, which generally get a 70-80 or 100% dividends received deduction).  But that is not really any different from the fact that I as a professor pay tax on my income and may pay amounts out of that to workers in my household who are also taxable entities and the workers will pay taxes as well.  The only reason it seems that the capital investment is different is because the Code has created a category of capital versus ordinary assets and distinguishes the rate on them.  And because one of the taxpayers in the corporate situation is an artificial entity--but one that we recognize as a 'person' under the Constitution entitled to even free speech rights. 

Furthermore, Investment gains and income earned through non-corporate entities of course have been subject to NO tax at all, since noncorporate entities are not subject to corporate taxation, and the gains beyond the after tax investment would be allowed to escape with zero taxation in Huntsman's scheme.

Huntsman's argument for reducing the corporate tax rate is equally nonfactual.  He states that "The United States cannot compete while burdened with the second-highest corporate tax rate in the developed world."  This is bunk--the statutory rate is not the actual rate paid by corporations.  Most corporations pay no tax, and those that do pay tax already pay a rate of 25% or lower.  So IFF it is really important to help US multinationals compete with other US multinationals and other country multinationals (which is itself a doubtful proposition) and IFF a 25% tax rate makes corporations competitive, the our corporations are already sitting pretty.  The US is in fact a tax haven for corporations, according to the OECD's analysis of developed countries  US corporations pay a very small share of taxes these days-the corporate tax take has shrunk from about 40% of GDP to less than 3%. 

The switch to a territorial system is another element that favors the corporatist agenda, as is the repatriation holiday.  See earlier postings.  Corporations have plenty of money that they can invest in the US right now; Repatriation isn't likely to increase investments but rather to amount to a windfall.  Repatriation didn't do anything to increase jobs in 2004 and it won't again.  Repatriation led the companies that repatriated profits in 2004 to keep even more profits outside the US (expecting a second 'one-time-only repatriation').  There is simply no good reason to do another repatriation tax holiday.

Huntsman then goes on to propose deregulation.  Note that he wants to

• eliminate Dodd-Frank.  We had a near Depression because we eliminated Glass-Steagal, and Huntsman wants to go back to the "banker take all the gains/society take all the losses" mindset of financial speculation that nonregulation of derivatives led us to. 
• undo the baby step towards health care reform.  Sure, we should have enacted Medicare for all, a single-payer system like every other advanced country in the world already has. But deregulating health care got us into the mess we are in--it certainly won't cure the mess.
• "dramatically reign in the EPA".  IN a country where corporate will has destroyed wetlands, denuded forests, and bulldozed mountaintops into creeks, Huntsman wants to let the corporate giants operate with no agency to protect the environment.  He particularly objects to protecting the ozone layer--that 'little' issue of whether we even exist as a planet that supports life or not...
• "curb" independent agencies like the NLRB.  Huntsman says the NLRB "destroys jobs"--in other words, we are supposed to be willing to have sweatshop conditions in order to have any jobs at all in the corporatist culture, rather than having jobs and protecting workers.
• "streamline the FDA". that favors Big Pharma and the investors, who want to be able to foist new drugs on patients without the painstaking clinical trials currently required

Huntsman thinks privatizing Fannie and Freddie will stabilize the housing market.  Allowing modification of mortgage loans in bankruptcy would go much further to doing that.   And "privatization" of Fannie and Freddie would have to be handled correctly to avoid a windfall from the existing public guarantee.  Better to simply wind them down and let them go out of business.  If anybody wants to run a Fannie equivalent, let them start it up themselves from scratch.

 

Friday Animation: Obama vs GOP on Debt Ceiling

So here's an animated cartoon that at least gets the gist of the story right--the GOP tea-partiers in Congress are trying to hold the US economy hostage with the debt ceiling decision.  The minority party says that if the country doesn't do what it wants, it will not support a debt ceiling increase.

http://www.nma.tv/obama-faces-gop-debt-ceiling/

 

What does the GOP want?  Let's consider the list.

1. No tax increases, even for the wealthiest Americans who are getting more than ever but paying less in taxes. 

This is a class warfare position.  The House GOP argues that increasing taxes on private equity and hedge fund managers, for example, would harm the economy because the tea partiers treat these elite classes as the only true entrepreneurs.  The people who are being protected are the carried interest elite who get their compensation as mostly capital gains and often deferred, through a gambit of treating a profits interest in a partnership as though it were an investment of their own money even though it is not after tax dollars;  the wealthy families who own most of the financial assets of the country; the wealthy families whose estate taxes have been reduced to a dribble by the Bush tax cuts and the new temporary estate tax 'compromise' enacted under the same type of economic terrorism; and the corporate managers who benefit from the many corporate loopholes so that most corporations pay almost no taxes and those that do pay taxes well below the statutory corporate rate.

This is class warfare because the US is a tax haven for the wealthy who can often 'monetize' their financial assets to provide money to live on without actually selling them, thus paying no taxes and passing the assets to their heirs with almost no taxes then either under the new estate tax.  Meanwhile the middle class pays substantial income and payroll taxes and sales taxes.

The wealthy can well afford to pay more in taxes.  The wealthy should pay more in taxes, because taxes represent one of the few ways that we can help reduce the huge inequality that has boomed under the four decades of reaganomics.  Vast inequality of income such as we have in this country today creates social strife and balkanizes the population because the 'haves and have-mores' don't give a damn about the have-lesses.

2. Substantial spending reductions--even in programs that actually bring money into the Treasury by holding tax cheats and securities cheats accountable.

   Consider, for example, the House-passed bill's REDUCTION of funding for SEC enforcement.  Note that the SEC enforcement office isn't paid for by tax dollars.  It is paid for out of penalties, fines, assessments, etc.  But the budget sets the limit on the amount of money that can be collected.  So the GOP House just voted a $135 million subsidy to the big banks that are guilty of getting us into this mess in the first place.  See the article today in the New York Times.

Enforcement at Treasury is a great investment for taxpayer dollars.  With adequate tax enforcement, we have a fairer system that is less able to be gamed by the wealthy and sophisticated, meaning that ordinary taxpayers are not as likely to bear the burden of their own taxes AND the tax cheats' unpaid tax burden.  But the GOP isn't interested in funding the IRS at all.  Remember that this House GOP is dominated by government haters who think private companies can do everything better than government.  That's absurd, of course.  It has never been the situation in our history, since we have always involved government in various ways in making the kinds of systemic infrastructure that supports business.  We have learned over time that private actors charged with self-regulation do not regulate--they rip off.  That is apparently the kind of universe that the House GOP tea partiers want.

3. Spending cuts that are set without regard to programming needs but in terms of an arbitrary figure as a percentage of GDP.

What's even worse than the fact that the Republicans are (i) playing economic terrorism with the debt ceiling, (ii) refusing to consider any revenue increases -- after themselves being responsible for the revenue shortfalls that began in 2001 with the passage of Bush's 2001 $1.3 trillion tax cut package and continued with each additional tax cut especially the 2003 package and the 2004 corporate wish-list package,  and (iii) insisting on ridiculous spending cuts that don't even save taxpayer money? 

How about the idea of deciding how much you are going to borrow and/or tax based on a phony notion of how well the economy is doing, and without thinking about what the essentials are that you need to cover?  That is what the tea partiers are up to when they say that spending or borrowing should be no more than some arbitrary percentage of GDP.

The right-wing as a group tends to like absolutes--they treat government as the problem, not the way that democracies give people a voice in the solution to problems that they cannot resolve by themselves; they want all wealthy people's income to be tax free--that is what zero capital gains taxation means, of course; they want all corporations to be able to shift resources wherever without any repercussions, speculate at will, and then be rescued by the federal government if they get into trouble (that is what the GOP really means by 'free market'--freedom of those that have to rape and exploit for profit, with the knowledge that ultimately there will be a soft landing provided by the very system that they have defiled); they want the entire nation to adhere to the set of moral rules that they have adopted for themselves, in their fundamentalist mixture of constitutional revisionism, seizing of the government for promulgation of their evangelical brand of christianity, and their dogmatic refusal to look at economic reality because of their clinging to a utopian, 'free market' notion that allowing brute capitalism to operate without protections for ordinary people enhances rather than destroys individual liberty.

So these absolute-thinking ostriches who disregard the failures of the Friedman 'free market' ideology want to impose an austerity program on the poor and the elderly and those in the middle class who dare to support unions and think that they are entitled to the pension benefits that they have already earned (especially those that they bargained for and took lesser wages in order to secure).

The austerity program they are interested in is one that will have short-term benefits for the elite class the GOP represents in this class warfare.  They want to cut Social Security, so that there will not be a demand to have the wealthy contribute more to the program .  They want to cut Medicare, so that they can push all Americans into privately run health insurance--the system that we already have and one that has failed utterly to provide decent health care to all or reasonably priced health care to anyone.  They want to cut Medicaid, so they can shove aside the poor and vulnerable and blame their inability to afford health care on their 'irresponsibility'.

4.  A continuation of the misinformation and propaganda campaign that has misled the American public about debt, deficits, monetary systems, spending and taxes. 

You'll note that the rhetoric advanced by the right often compares the US government to a family.  It suggests that borrowing to make ends meet is irresponsible, and therefore the only solution is to quit 'cold turkey'--to have the US cut spending drastically, no matter the consequences.

That is a false analogy and a false cure.

It is a false analogy because the US government is a sovereign that has its own monetary system.  Families and local governments and states cannot adjust the supply of money to suit the economic needs.  Families can only earn more to have more.  States, of course, can tax more, but the tea partiers--aided by the Koch Brothers and all of the well-funded propaganda tanks on the right like the Cato Institute, the Heritage Foundation, the American Enterprise institute, Grover Norquist's ill-named "americans for tax reform', etc.--have been able to mislead most Americans into thinking that taxes kill jobs or that Americans are terribly overtaxed and there are few politicians with the decency and courage to vote for the tax increases they know is necessary. 

Folks, the US is a tax haven.  We pay way too little in taxes.  That's why our bridges are falling, our highways are full of potholes, our health care is inferior to, yet more expensive than, most of the developed world's, and our infrastructure basically is stagnating like the middle class itself.  We should be building super-fast trains to connect the country and connect within cities.  We should be creating a stellar publicly provided, free, wireless communcation network.  We should be spending more money on schools, to ensure that our children enter their adulthood prepared for a better life.  Instead, we are letting roads crumble.  Instead, we are privatizing our schools in order to let profit-makers make profits off of teaching the best students while breaking unions and thus making even higher profits, and while leaving the poorest students in the public schools. Instead, we are continuing with a patchwork health care system that doesn't put the public in the center by recognizing that access to decent health care throughout life is an inalienable human right that government should foster.

It is a false cure, because the 'free market' ideology pushed by Hayek and Friedman and the rest of the Chicago (and Austrian) school is based on false assumptions about society.  The version of free market economics that the tea party GOPers are espousing is one that is so radically unrepresentative of the way real economies work that those tea party advocates like Michele Bachmann can actually say (apparently with a straight face) that they don't think it would matter much if the debt ceiling isn't raised and the US defaults on its debts.

That's Economic Terrorism, GOP style (meaning served with a large dose of corporatism and elitism). 

  

They're Bamboozling Us: Chang's "23 Things They Don't Tell You About Capitalism"

The national discussion on budgetary matters and proper expenditures of the federal government is enormously distorted.  The right repeats 'free market' mantras as though they are the answer to all problems, but doesn't acknowledge the very failures of that free market system that landed us in the Great Recession and kept us there out of the right's insistence on tax cuts as a major part of the pitiful economic stimulus package put together in the early days of the Obama administration and refusal to allow tax increases that are required to fund important programs that every American cares about.

We are being bamboozled to believe that we "have to" cut Social Security and Medicare and other aid packages, that we 'have to' cut public employees' benefit packages, and on and on.  Brute capitalism is taking over, as corporations are treated as though they were living people with speech rights (tomfoolery that results, under the right-wing activism of Scalia, Roberts, Alito and Thomas, from the foolish original Supreme Court decision equating spending money to support political speech as equivalent to engaging in speech).

None of this is true.  So it is worth reading a book by Ha-Joon Chang, "23 Things They Don't Tell You About Capitalism (Bloomsbury Press 2010).  Chang's introduction is a good riff on the problems with Friedmania (free market economic theory) and worth excerpting here.

The global economy lies in tatters.  While fiscal and monetary stimulus of unprecedented scale has prevented the financial meltdown of 2008 from turning into a total collapse..., the 2008 global crash still remains the second-largest economic crisis in history, after the Great Depression... [A] sustained recovery is by no means certain. In the absence of financial reofrms, loose monetary and fiscal policies have led to new financial bubbles, while the real economy is starved of money....Some of those who lost their jobs and houses during the crisis may never join the economic mainstream again. 

This catastrophe has ultimately been created by the free-market ideology that has ruled the world since the 1980s.  We have been told that, if left alone, markets will produce the most efficient and just outcome.  Efficient, because individuals know best how to utilize the resources they command, and just, because the competitive market process ensures that individuals are rewarded according to their productivity.  We have been told that business should be given maximum freedom. ...If we let them do what they want, wealth creation will be maximized, benefiting the rest of society as well.  We were told that government intervention in the markets would only reduce their efficiency.....[G]overnment cannot improve on market outcomes, as they have neither the necessary information nor the incentives.... In sume, we were told to put all our trust in the market and get out of its way.

Following this advice, most countries have introduced free-market policies....privatization, ...deregulation...,,  liberalization of international trade and investment, and reduction in income taxes and welfare payments. ...

The result of these policies has been the polar opposite of what was promised. ... Prior to [the financial meltdown], and unbeknown to most people, free-market policies had resulted in slower growth, rising inequality and heightened instability in most countries.  IN rich countires, these problems were masked by huge credit expansion; thus the fact that US wages had remained stagnant and working hours increased since the 1970s was conveniently fogged over by the heady brew of credit-fueeled consumer boom.  The problems ... were even more serious for the developing world.  Living standards in Sub-Saharan Africa have stagnated for the last three decades, while Latin America has seen its per capital growth rate fall by two-thirds during the period. ...

Thus, what we were told by the free-marketeers--or, as they are often called, neo-liberal economists--was at best only partially true and at worst plain wrong. ...[T]he 'truths' peddled by free-market ideologues are based on lazy assumtions and blinkered visions, if not necessarily self-serving notions. ...

This book is not an anti-capitalist manifesto.  Being critical of free-market ideology is not the same as being against capitalism. .... There are ways in which capitalism should, and can, be made better. ...

[This book does not] go into many of the technical details that even a basic introductory book on economics would be compelled to explain. However, the neglect of technical details is not because I believe them to be beyond my readers.  95 percent of economics is common sense made complicated....

[This book does question'] many received economic theories and empirical facts that those [advanced economics] books take for granted.  ...[T]his is a lot easier than it sounds, once you stop assuming that what most experts believe must be right.

Here is the start of the list of the "23 Things".  I'll expand in later postings.)  Readers will doubtless see some similarity to my own thoughts in various efforts to de-bunk reaganomics and the free market storyline.

1. There is no such thing as a free market.  

The gist here, as Chang notes, is  that all markets have rules that restrict, in one way or another, freedom of choice and those rules are politically defined.   Government is always involved in establishing market boundaries. 

One example is child labor.  Not too long ago, free marketers argued that "labor ought to be free'  to be exploited--children need to work, and factory owners want to hire them, so there is no problem.  Today, we know that the right of children not to have to work is more important than the right of factory owners to hire whoever they find to be the most profitable. 

A corollary is that the free market view that prices automatically take in information and reflect what things are worth is a farce--all prices are ultimately politically determined, whether they be wages for labor, prices for commodities, and all other prices.  People aren't paid 'what they are worth':  CEOs don't get paid 400 times their average workers because they are 400 times as important to the productivity of the company.  

Bush's intervention with the $700 billion TARP program was not, as Bush claimed, just a workaday market process but rather a clear demonstration that what is necessary state intervention consistent with capitalism is a matter of opinion--there are no scientific boundaries and thus an attempt to change the way the market currently functions (what parts are free and what parts are subject to more state control) is as legitimate as an attempt to defend it.  Ending slavery, for example, was state intervention to set boundaries for the market process that didn't exist before, just as finding the Illinois governor guilty of trying to sell Obama's Senate seat sets boundaries for things that we consider beyond the market process.

2. Companies should not be run in the interest of their owners. 

In fact, Chang notes that this makes for "an unholy alliance between the professional managers and the shareholders" that in our recent history, illustrated in the case of GE, "was all financed by squeezing the other stakeholders in the company" with jobs ruthlessly cut, workers fired and re-hired as non-unionized labor with lower wages and fewer bvenefits, and wage increases suppressed (by relocating our outsourcing or the threat to do so).  Shareholders nowadays are short-term profittakers who buy and sell shares with no stake in the long-term viability of the industry, but only about getting more money out of it.  Other stakeholders (community, workers, suppliers) are excluded from the calculation.  The ultimate result of this approach is "immediate income redistribution through profits."  That is, income inequality soars; corporations enjoy a boom (until they bust); while the vast majority of workers "share in the (apparent) prosperity only through borrowing at unprecedented rates." 

Accompanying this boom for corporations and bust for workers is a decline in the economy--"investment as a share of US national output" fell from 20.5% in the 1980s to 18.7% during the Bush years.  The growth rate of per capital income fell from 2.6% in the 1960s to 1.6% during the Bush years.  This is all because "the easiest way for a company to maximize profit is to reduce expenditure, as increasing revenues is more difficult--by cutting the wage bill through job cuts and by reducing capital expenditures by minimizing investment."

3. Most people in rich countries are paid more than they should be. 

The wage gaps between rich and poor countries aren't due to rich country individual excellence.  "Productivity is in great part due to the system, rather than the individuals themselves."

4. The washing machine has changed the world more than the internet has. 

The problematic fascination with the IT revoluation "has made some rich countries--especially the US and Britain--wrongly conclude that making things is so 'yesterday' that they should try to live on ideas.  ...[This belief in a 'post-industrial society' has led those countries to unduly neglect their manufacturing sector, with adverse consequences for their economies."  Worse still, the belief in the post-industrial era has cause many countries to deregulate, especially regarding cross-border flows of capital, labor and goods, to their detriment.  It is politics, not technology, that determines the degree of globalization--and failure to recognize this can lead to making bad policies.

5. Assume the worst about people and you get the worst. 

A nice little gem here is the discussion of "working to rule"--when employees cannot strike but slow productivity by doing only what they are required to do.  Working to rule tends to reduce output by 30-50%.  So that means that "productive processes rely heavily on the workers' goodwill to do extra things that are not required by their contracts or exercise initiatives and take shortcuts in order to expedite things. ... The bottom line is that companies, and thus our economy, would grind to a half it people acted in a totally selfish way, as they are assumed to do in free-market economics."

6. Greater macroeconomic stability has not made the world economy more stable.

 "The free-market policy package, often known as the neo-liberal policy package, emphasizes lower inflation, greater capital mobility and greater job insecurity (euphemistically called greater labor market flexibility), essentially because it is mainly geared towards the interest of the holders of financial assets."

"Inflation has become the bogeyman that has been used to justify policies that have mainly benefited the holders of financial assets, at the cost of long-term stability, economic growth, and human happiness."

 

We're being bamboozled--debt ceiling, cuts to ordinary folks' programs, and the corporatist state continues apace

I almost can't stand watching or reading the news these days and have delayed posting on this blog because it seems there is a need to repeat the same suggestions over and over again.  Don't cave to the right.  Don't cut important social welfare programs that have enabled this country since the 1930s to treat its elderly and vulnerable populations with respect.  Quit trying to strip unions of power--they are one of the important ways that ordinary people can emplower themselves to demand a share of the prooductivity profits their labor has produced.  Quit repeating the garbage free market mantras suggesting that the wealthy investors and managers are entrepreneurs (they're not generally) and that allowing such gross accumulation of wealth as our current CEO pay of 3-400 times the salary of average workers (earning in a half day what a worker earns in a year) is somehow necessary to a good  economy in a democratic political system.  Allowing the owners and managers to continue to reward themselves with grossly oversized compensation and profits packages so that they can maintain their 20,000 square feet marble palaces with kitchens that only a caterer needs (and that the denizens of the house hardly ever use on their own) is just one of the excesses of the brute capitalism that the 'tea partiers' and other right-wing economic policy gurus are supporting.

This free market, brute capitalism where workers are expendable and the entire economy is forced to support the accumulation of wealth at the top is what we have in fact pushed on (and sometimes assisted in imposing on) developing nations in the past .  Think Argentina--where the Chicago Boys oversaw the decimation of the economy and the imposition of austere conditions on the majority so that the economy could be 'remade' to suit the owners of capital (including foreign investors and multinationals). Think Brazil, where in the 1960s we helped their military coup against a leftish president in order to support the ability of US multinationals to continue exploiting Brazilian resources. 

But now the right is so invigorated, through its ability to bamboozle the American people and elect a majority of economic extremists in the House who either don't understand history well enough to know that they are speaking gibberish, or don't care.  They are determined to undermine the meagre social welfare system of Social Security, Medicare and Medicaid, with constant untruths about 'bankruptcy' and similarly misleading statement on almost every issue.  Presidential candidates who make up facts are toasted by the purportedly 'leftleaning' mainstream media (this assertion itself a made-up fact used to continue to bamboozle the people).

The most outrageous spectacle of all is the pontificating dogmatic right in the House and Senate, threatening to cause a U.S. default on the debt ceiling issue in order to pursue their ideological dream of a 'pure' economy.  Their economic model is a disgraced one --the free market, corporatist model that ensures that the small, wealthy investor class is doing well and that Big Business gets what it wants but doesn't give a damn for ordinary folks, whatever verbiage about caring for workers, and ordinary people with mortgage difficulty, etc. they spout.

Truth is, folks, you don't get an economy working well for ordinary people when you (i) make pledges NEVER to increase taxes, (ii) reject cuts in the grossly overlarge military expenditures this country makes in order to secure the world's resources for its multinational enterprises (that then lobby for close to zero taxation on their obscene profits from that secured wealth), or (iii) try to solve all perceived fiscal problems by taking it out of the hide of ordinary folk, thus  stifling the real economy (the one where workers work in businesses that serve local people and that work generates profits that are shared with workers and owners in a way that leads to expansion of the local economy based on the broad-based workers' participation in it) and at the same time bringing the kind of class warfare that the Friedman school has long waged on Latin America and other Third World countries right here to America.  The result of those kinds of policies is concentration of income, wealth, and influence at the top, with ordinary folks in the middle class struggling just to stay even.

The idea that you cannot tax natural resource extractive industries more (by taking away the tax expenditures subsidies that literally hand them outsize profits on a silver platter) when they are making windfall profits is absurd.  The idea that you cannot reimpose a decent estate tax on the estates of the wealthiest 2% in the country, to assist with meeting the heartfelt needs of the struggling middle and lower classes, is pathetic.  The suggestion that you cannot increase taxes on financial transactions and increase capital requirements in banks to stifle the too-rapid innovation and liquidity within the financial institutions that underlies the crisis we just went through (and the worse one we will suffer within the decade if we don't enact even stronger reforms than already in Dodd-Frank) reflects the dogmatic fixation on service to the wealthy investors and financiers that permeates the right-wing in Congress.

Folks. we can't let them do this.  Congress is supposed to serve the people, and this 'tea party'/right-wing extremism that was reflected in Newt Gingrich's 'contract on America' and John Boehner's contract with the investor class is the worst of class warfare.

There was a time when the neo-imperialists and corporatists didn't dare do the same thing in America that they were  pushing for, and secreting doing in Third world countries.  Exploiting the environment without a care for the pollution that ordinary people suffer in their daily lives.  (Think of the Banana Republic attitudes of United Fruit  and  the Latin American oil enterprises conducted by US multinationals.)  Supporting militaristic regimes with a right wing flavor and a taste for torture and imprisonment of radical left thinkers. (Think Chile, Argentina, Nicaragua, Guatemala, etc.)  Labeling governing concepts that pay a lot of attention to the needs of ordinary people as 'subversive' and 'socialist' in order to bring up myths of communistic monsters that hide under the bed and eat the economy.  (Think Cuba and Brazil, especially, and Chile, and now Venezuela.)  All these tactics exist to keep ordinary people in their place as workers who get a pittance of their productivity profits and are "flexible" (meaning can be fired upon short notice by private equity firms flipping companies for their own (preferentially taxed) profits) while the military can control the resources and make good deals (for US multinationals and the military leaders, not for the people of the exploited country).  Read Chomsky's "Year 501" for a (somewhat rambling) account of the neo-liberal corporatist agenda in Latin America.

But now those same ultra corporatist, class-warfare policies are being implemented right here, in the open, with brazen disregard for our historical social contract, for the plight of the poorest and most vulnerable amonst us, all in the name of keeping the 'investor class" and Big Business (generally one and the same, since the investor class is mostly the owners and managers of Big Business) happy.

They paper it over with talk, as Joe Lieberman does in calling for cuts to Medicare, for 'bipartisanship"  or they claim the US is living beyond its budget because it doesn't pay its bills.  But of course they don't really care about that, since the budget put forward by the Republican House majority carved a multi-trillion dollar hole.  IN other words, they don't pay attention to their own rhetoric.  They just want to use the (absurd in itself) requirement in the US that we have a debt ceiling extension vote as an opportunity to blackmail the American people to get concessions on their favored targets--the programs that ameliorate, somewhat, the brute capitalism of the American economic system after forty years of reaganism, friedmania, and the rest of the Chicago School garbage that has been treated as "God's truth" so long by politicians that they don't even realize, perhaps, that they are letting a bunch of mathematicians who like to escape the real world into made-up formulas decide the policies for the nation.

Big Business has had its enablers in place for four decades--Grover Norquist, the Koch brothers and their 'tea party' followers, the various propaganda tanks like the American Enterprise Institute, the Cato Institute, the Heritage Foundation, and the rest  that have spent millions to brainwash Americans into thinking that the failed 'free market' ideas of Milt Friedman and Alan Greenspan and Wall Street are the only way to go.  It has a majority on the Supreme Court willing to be extraordinarily activist in overturning precedents on class action lawsuits (a way for ordinary people to empower themselves against Big Business) and free speech (a way for corporations and their owners/managers to control the political debate through the use of their overwhelming dollar power).  And that right-wing majority is serving its masters well, while Big Business's minions in Congress continue to roll over to make sure that the right-wing panacea of deregulation, militarization, tax cuts, and privatization contines apace. 

The US debt burden is high, but we are not Greece or Ireland or even Portugal.  We have a strong economy.  We have our own monetary system, unlike the Euro nations that are facing much higher debt burdens and can't individually control their monetary flows.  Austerity measures like the IMF has imposed on Latin America to satisfy foreign investors (not the natives of those countries) and like the Euro world is now imposing on its own members are not needed here (and probably are the wrong answer there as well).  Those measures are driven again by the failed corporatist economic model that assumes that the entire world should be run to satisfy the wishes of financial institutions, big money investors and the big multinational corporations that they own and manage. 

The world should be run to satisfy the needs of ordinary people.  Banks should be stripped of the power to create a world-wide crisis with their haystacks of derivatives that catch flame much too easily.  Big Business should make do with lower profits, paying their workers more and their managers (and owners) less and paying their fair share of taxes.  Hedge fund managers should pay tax on their "carried interest" compensation like ordinary people, and private equity firms should be subject to much more red tape that makes it much harder to buy companies and take them private in order to fire their workers.   In fact, consolidation and mergers among big businesses should be made much more difficult through new limitations on the tax-free restructuring provisions. Unionization should be strengthened, in order to give ordinary Americans something with which to have leverage over the hierarchical authorities that undermine economic growth by concentrating everything on the investor class.

Let's start a letter and call-in campaign to every Republican legislator in the coutnry, telling them that we are sick and tired of being treated as lambs led to the slaughter in order to place endless platters on the tables of the rich.  Tax policy should be based on what works, not on ideological dogma that has been the underlying cause of catastrophes and crises worldwide.