Given the backdrop of this whole tax cut debate, I thought it might be important to explain some basic economic fundamentals. Now, admittedly, though I was not an economic major in college, I did earn my degree in History; in that realm, I am what is referred to as an “economic historian,” or someone who believes that most human actions throughout history have as their base catalyst an economic motive. In addition, I have taught economics in a public school as a non-partisan (as any good teacher should be). I guess what I am trying to say is that, while I may not be able to offer you the most thorough or complex understanding of our economic situation, I hope you’ll trust that I have the basics more or less nailed down (if not, call me on it and I’ll publish your essay on this blog). Anyway, onto the lesson!
First, for economic theory to work, one must assume that people make rational decisions if they have appropriate information; that is to say, if Bill can by 3 apples for $5, or 5 apples for $5, (assuming these apples are essentially the same in quality and size) he will choose the latter.
Adam Smith described wealth as, "the annual produce of the land and labour of the society." In this sense, “land” refers to all the physical resources a nation possesses, and “labor” refers to all of the physical, social, and mental ways in which human beings manipulate, or “improve,” natural resources to create goods and services. Smith also established the fact that human beings essentially function selfishly—that is, they seek to fulfill their own best interests, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages (Smith, The Wealth of Nations).” In doing so, Smith argues, people serve the public good whether they want to or not; this self-regulating effect is known as the “invisible hand.”
This idea was slightly modified by the concept of the “Nash equilibrium,” named for the late, brilliant mathematician John Nash. This concept, at its most basic, states that the best decision for an individual takes into account not only their self interest, but those interests around them, especially as it relates to the particular field of competition in which they are engaged.
OK, so now let’s re-examine the current debate. To more thoroughly illustrate the economic concepts in play, let’s use three hypothetical people as example. First, we have Johnny Laborman, who works at various jobs doing unskilled construction, and whose wife has been laid off from her job as a secretary in the public sector, but is collecting unemployment insurance. Let’s say their annual income after taxes is around $28,000. Next, we have Jackson McMiddle, who works as a warehouse manager, and whose wife still has a job, albeit low paying, as a legal secretary. Their net take per year is $56,000. Finally, we have G.D. Crassworth, who owns a decent sized construction company; his wife stays home and keeps herself in fantastic shape. Their annual salary is about 20 times Jackson’s, at $1,120,000 per year.
Now, let’s use the current compromise between Republicans and president Obama as a template (this has now been passed by the way), and see how our hypothetical’s fare. Suppose that, because of the payroll tax cut and some other provision of the bill, Johnny Laborman and his wife go from making $28,000 to $30,000, a year in 2011. OK, that’s good right? And if Johnny acts in his own selfish interests, we can probably expect him to spend that extra $2,000 on household items, such as a new television, computer, furniture, etc. After all, this is the most direct way that Johnny can improve his life in the short term; although, given their financial troubles related to finding consistent employment, there is a chance that he saves the money, which is not going to stimulate the economy. We’ll assume there’s about a 70% chance he spends the money.
As for McMiddle, say between he and his wife, they take in an extra $4000 a year. Now, given Mac’s self interest, there’s a very good chance that he will spend this money, or save it with the intention of spending it soon (either on a house or an upgrade in furniture), because he and his wife are both gainfully employed, and he has every reason to believe that this will continue.
Of course, Crassworth does much better than either of the other two. The salary that he pays himself from his construction company balloons by $80,000, so now he is making $1.2 million per year. What will he do with his extra money? Well, chances are, if he wanted to have something before, he was able to buy it, so it is unlikely he is now going to spend his money much differently. Sure, he might use that money to buy a yacht, or a new car, or some extremely expensive jewelry for his wife, but even then, chances are this will have little effect on the economy; most luxury items, such as yachts, cars, planes, etc. are manufactured in other countries, where companies can pay their high quality employees better salaries because they don’t have to worry about paying for health care.
In reality, the most likely thing G.D. is going to do is save his money, or use it to buy gold, or some other secure investment. Chances are he’s not going to buy more stock—if he’s smart, he knows that the global financial situation is far too unstable to invest in with confidence, and in all likelihood, he’s already owns a fair sized portfolio.
What about the claim that Crassworth would us the money to hire new employees? Well, he might, but in that case, why would he pay himself a salary, get taxed on it, and then turn around and use that money to hire somebody to work for his company, where it will get taxed again. If he wanted to hire someone, he’d keep the money in the company, where it won’t get taxed more than is necessary.
So, it is likely that most of the $80,000 won’t end up finding its way back into the economy, especially in the short term. This as opposed to our lower and middle class examples, who will likely spend almost all of their tax break in the fiscal year.
Still, what this demonstrates is that cutting taxes is an indirect method of stimulus at its very best. And, unfortunately, acting in their own best interest, McMiddle and Laborman may end up buying products that are manufactured abroad, simply because it is with these products that they get the best bang for their buck.
The other problem is that people in the middle class face other demands for their money that are less economically productive. (1—see footnote)
Getting back to our hypothetical’s, this is why progressives are opposed to cutting taxes for the rich: ultimately, it doesn’t stimulate the economy—if it did, given that we’ve had these cuts for 8 years now, one would think that our economy would be in much better shape than it is. Now, cutting taxes on the poor and middle class is probably a good idea, but what if it was coupled with direct stimulus—what if we took the $700 billion in tax cuts that Obama and the Republican’s want to borrow from China to give to people that make over $250,000 a year, and instead, used it to improve our roads and transportation systems, streamline our electric grid, and supplement state budget shortfalls. Well, let’s run through the effect on our boys.
Laborman, our poor hypothetical, would immediately benefit because he would likely be able to secure a long term, high paying job in construction. Additionally, there is a much greater likelihood that his wife, who has administrative office skills, but no job, will have a much easier time finding work, which in turn will save our government from having to pay her unemployment insurance. With the new employment, suppose he and his wife go from netting $28,000 a year, to $35,000 a year—an extra $5,000 a year as compared to what they would earn through tax cuts alone. Again, because they are poor and have been doing without, we can reasonably expect that they’re going to spend much of that money, which in turn will create more demand for goods and services and provide opportunities for job creation in the private sector.
Because of the multiplying effect of the commerce created by a vast array of infrastructure spending and the resulting job creation, Johnny McMiddle’s business increases dramatically, and he is promoted to oversee an expansion of the warehouse business, hiring new employees to work in his place, and advancing to a new position with a higher salary. His wife’s job doesn’t pay any higher, but still, with his advance, Johnny and his wife now net $70,000 a year. At this point, they are safely in the middle class, and have enough money to spend on all kinds of things, including buying a new home.
This is great news for Crassworth. His construction business, which had been slowing down to a crawl with the bad economy, is now bidding to build numerous projects, and because people are finally buying houses again, he is planning to build a medium sized, suburban housing division close to a decommissioned high school that is now being renovated and rebuilt.
With all the extra business, Crassworth is paying himself slightly more than he used to make, netting about 1.5 million a year (300K more than he’d make with a tax cut). The best part for him, however, is that his business holdings have increased dramatically, and his future is not only secure, but because it is in a business, he can hand it over to his children without worrying about paying an inheritance tax. The best part for his community is that he has created hundreds of jobs, and demand for a tremendously varied list of materials, fueling job creation for all kinds of artisans and manufacturing companies.
As a result of all of this economic activity, society has improved in a dramatic way, because wealth has been created. You’ll notice, that while wealth does not tend to trickle down from rich to poor, it does tend to flow upward once the lower and middle class have job security, upward mobility, and money to spend.
Of course, if one wanted to argue that I created hypothetical situations of my own accord and manufactured the results, I can’t argue with that—I did. However, in no way did I ever suggest that the characters I created act in an irrational way—I simply supposed that they act rationally and in their own selfish, best interests, as Smith suggests is the template for a high functioning, capitalist society.
The great irony is that Republicans like to joke about Obama’s slogan of hope, and they like to crow about freedom. But what are we left to do after we’ve granted these massive tax cuts to the rich—hope, pray, beg that somehow they end up trickling down, that somehow this action creates jobs? Because logic tells us that cutting income taxes on the richest two percent won’t do either—as we’ve seen in the last ten years, it simply fuels our ballooning deficit.
And really, what freedom does a person have if they can’t find a job? Not much. All we can ask of any individual is that they work for a living and contribute to society by spending their money in whatever way seems best to them. But without a job, we can’t even ask them to do that, and that is the true tragedy of all of this: Obama and the Republicans can talk until the apocalypse about how this is going to stimulate the economy, but that simply doesn’t make it so. And it is a tragedy that there is a clear answer to our economic troubles, a clear course of action to take, and yet our government is running in the opposite direction—and doing so in defiance of logic, reason, and historical evidence.
We are not acting rationally, or in our selfish, or collective best interests. I don’t think Adam Smith or John Nash would be very happy at all.
(1) Take insurance for example. At its most basic, insurance that is run for profit is counter productive, because the intent of insurance is to replace value that is lost via accident or catastrophe. The fact that insurance companies skim millions off of top of that pool may create some jobs, but in essence it is only a redistribution of wealth to those who happen to have enough money to provide it, i.e. the wealthy; moreover, if the insurance company is profitable, then the complete value of the capital that was damaged is never fully replaced, meaning that as a net result, the nation loses wealth. Remember, money is only a representation of wealth, a symbol, because wealth can only be created by “the annual produce of land and labour of the society.” Money enables us to trade our goods and services more directly and efficiently, but it is only a token—this is why a country cannot simply print more money indefinitely to cure its financial problems.
Friday, December 17, 2010
Tuesday, December 7, 2010
Caving...or, proof that I was right
The Republicans won again against President Obama, despite the fact that their politicking was completely transparent, and tremendously corrupt.
Last week, the House passed a bill to extend the Bush era tax cuts on every dollar made under $250,000 per family. On Saturday, the Senate brought the bill to the floor, where Republican opposition stopped it from moving forward. An alternative version was then brought to the floor by New York Senator Chuck Schumer-D that would extend the tax cuts up to $1 million. Still this was too low for Republicans, who are on record now as willing to stick lower and middle class Americans with a tax hike if they can’t get tax cuts for their rich donors.
Nevertheless, Obama just cut a deal with Republicans to extend the tax cuts for two more years, in exchange for a 13 month extension of unemployment insurance, a small payroll tax cut, and a few other tax initiatives aimed at student aid. Worse, for no apparent concession at all, he also agreed to cut the estate tax, which only effects the richest 1% of all Americans.
WHY? Well, who knows? The fact is that we are talking about personal income and estate tax cuts for people that already have a ton of money; not business or corporate taxes, or payroll taxes, or any kind of tax cut that would be directly linked to job creation. The idea that this kind of tax cut is actually going to stimulate the economy in any measurable way is absurd—it’s simply another way in which the rich will avoid having to pay their fair share for the administration of government services, they of all of us, benefit from the most.
Progressives everywhere are sitting now with their faces in their palms asking over and over, “why, why, why? We had those corrupt bastards right where we wanted them! Why?” I mean, why not just let the tax cuts expire, and then pin down the Republicans continually for their malfeasance and their crass political maneuvering? Think about it: every time they complained about the economy, or tried to say that Democrats didn’t do anything for ordinary Americans, Dem’s could turn around and say, “We tried, but the Republicans thought it was more important to stall government to get tax cuts for their ultra wealthy. We voted on extending middle class tax cuts, but the Republicans wouldn’t pass the bill! Republicans refuse to help the middle class—they refuse to help the unemployed—they are more concerned in representing the interests of the rich and powerful than helping the ordinary Americans hit hardest by these economic times.”
Now it is much harder to say that, because Obama gave in to Republican demands, thereby agreeing, albeit passively, with their agenda.
Oh, and one other thing—the hypocrisy of the Republican Party stinks to the high heavens. Just last month, before the election, weren’t they complaining about the deficit? Weren’t they crowing about irresponsible, out of control spending, and government pork projects? Well, that is exactly what this agreement is: its not paid for by anything but deficit spending, it is the very height of irresponsible tax policy, and what the Republicans wanted in exchange for the passage of middle class tax cuts and the extension of unemployment insurance is a pork project for their constituents, the super rich.
Last week, the House passed a bill to extend the Bush era tax cuts on every dollar made under $250,000 per family. On Saturday, the Senate brought the bill to the floor, where Republican opposition stopped it from moving forward. An alternative version was then brought to the floor by New York Senator Chuck Schumer-D that would extend the tax cuts up to $1 million. Still this was too low for Republicans, who are on record now as willing to stick lower and middle class Americans with a tax hike if they can’t get tax cuts for their rich donors.
Nevertheless, Obama just cut a deal with Republicans to extend the tax cuts for two more years, in exchange for a 13 month extension of unemployment insurance, a small payroll tax cut, and a few other tax initiatives aimed at student aid. Worse, for no apparent concession at all, he also agreed to cut the estate tax, which only effects the richest 1% of all Americans.
WHY? Well, who knows? The fact is that we are talking about personal income and estate tax cuts for people that already have a ton of money; not business or corporate taxes, or payroll taxes, or any kind of tax cut that would be directly linked to job creation. The idea that this kind of tax cut is actually going to stimulate the economy in any measurable way is absurd—it’s simply another way in which the rich will avoid having to pay their fair share for the administration of government services, they of all of us, benefit from the most.
Progressives everywhere are sitting now with their faces in their palms asking over and over, “why, why, why? We had those corrupt bastards right where we wanted them! Why?” I mean, why not just let the tax cuts expire, and then pin down the Republicans continually for their malfeasance and their crass political maneuvering? Think about it: every time they complained about the economy, or tried to say that Democrats didn’t do anything for ordinary Americans, Dem’s could turn around and say, “We tried, but the Republicans thought it was more important to stall government to get tax cuts for their ultra wealthy. We voted on extending middle class tax cuts, but the Republicans wouldn’t pass the bill! Republicans refuse to help the middle class—they refuse to help the unemployed—they are more concerned in representing the interests of the rich and powerful than helping the ordinary Americans hit hardest by these economic times.”
Now it is much harder to say that, because Obama gave in to Republican demands, thereby agreeing, albeit passively, with their agenda.
Oh, and one other thing—the hypocrisy of the Republican Party stinks to the high heavens. Just last month, before the election, weren’t they complaining about the deficit? Weren’t they crowing about irresponsible, out of control spending, and government pork projects? Well, that is exactly what this agreement is: its not paid for by anything but deficit spending, it is the very height of irresponsible tax policy, and what the Republicans wanted in exchange for the passage of middle class tax cuts and the extension of unemployment insurance is a pork project for their constituents, the super rich.
Friday, December 3, 2010
Next
So, for some strange reason this week, Barack Obama decided to freeze the pay of all federal workers for the next two years. He did it, of course, under the guise of fiscal responsibility, but it leaves one begging the question: is this man a Democrat—is he a liberal?
I hate asking that question, because I voted for the man in 2008. I too, was wrapped up in the hope and change of that time—I believed that our country was finally ready to move forward on every front: our economy, education, foreign policy, energy, etc. Sure, I knew there would be setbacks on the way, I knew that Republicans would try to block legislation, and that people in the media and on the right would continue to say moronic things like “tax cuts create jobs,” which of course, is completely ridiculous, especially when they are talking about income tax cuts for the richest 2% of people in our country. But, overall, I really believed that Obama would fight for the middle class; that he would, as a great orator, embarrass the Republicans when they bandied their plutocrat policies about Washington, and reject them outright. I believed that he would stick by the progressive principles he ran and won on. I had hope, but apparently that was naïve.
Because this man has caved, capitulated, and compromised at every possible turn. He first took up economic stimulus—a laudable goal—but ended up signing a bill that was far too small to impact the economy, and much of which was tied up in tax cuts that were so miniscule that many idiots on the right were actually convinced that Obama had raised their taxes (fostered by broad based lying by the right wing media outlets, and a tacit refusal by the rest of the media to challenge or repudiate the malfeasance that has crept, nested, and laid eggs in the fourth estate).
Next, he turned to health care reform, where he almost immediately ruled out a public option, held private meetings with the insurance companies that went on to spend hundreds of millions of dollars to lobby against him and slander the Democratic party. The end result was that industry insiders and Republicans were given months of air time to lie about the health care bill (that actually contained a lot of positive reforms), while the media looked the other direction. And the one person who had the bull horn in his hands, who could’ve called out the lies, who could’ve stood up for what was right, was Barack Obama, and he was silent.
In this short two year span, Obama has been too quick to compromise, he failed to lead on issues as a president should, and he has not used his bully pulpit to explain what is right and what is wrong to the American people. While Republicans hold up “Don’t Ask—Don’t Tell” legislation from reversing years of ugly discrimination against gay Americans, Obama should be screaming from the top of his lungs that “Republicans hate gay people,” and that “their position puts American lives in danger,” every day. When Republicans hold up the extension of unemployment benefits, Obama should lay out publicly the fact that unemployment insurance is the best possible type of economic stimulus there is, because for every dollar we pay out, it generates at about a dollar and three quarters of economic activity. He should then conclude, publicly, that it is clear that Republicans must want the U.S. economy to fail. And when Republicans take their other absurdly foolish positions, on things like refusing to enact the START treaty with Russia (designed to secure loose nuclear weapons and reduce stockpiles), voting against extending tax cuts for middle class Americans (we actually spend our money, which does create jobs)—because the bill didn’t include tax cuts for millionaires and billionaires (which Republicans did in lockstep in the House yesterday), and just lying all the time about everything from Obama’s trip to India to the healthcare reform bill, Obama should be shouting them down at every single turn.
Would he be attacked? Absolutely. But the right wing is already throwing every lying effort they can muster to defeat the man, so what is there to lose? Nothing, and yet ironically, Obama seems content to continue paying ransom to captors who refuse to let him go.
Ultimately, I think Democrats have to run a more progressive candidate against him in the primaries in 2012. The stakes are too high to do otherwise, and those who believe in moderation and compromise refuse to acknowledge the simple fact that our political climate doesn’t allow for that anymore, because the Republican party has proven time and again that they represent only the interests of the super rich and transnational corporations. They refuse to work in a collegial way with Democrats or anyone, for that matter, who wants to represent the interests of 98% of the American people. Moreover, they are extremely focused on manipulating public opinion, which they are successful doing because they have direct cooperation from much of the media (which is an oligarchy of 5 companies), and the rest of the media refuses to call them on it. We have to, at the very least, run a candidate that will tell the truth: that the Republican party is wholly corrupt, that it is supported by a media oligarchy, and that without drastic changes to our country’s governance, the middle class in this country is going to disappear, and the U.S. will cease to be a democracy.
The good news is that it is not all doom and gloom. There are progressive politicians out there that are fighting for the interests of the middle and lower class. House Democrats have proven that throughout their reign with Nancy Pelosi as their Speaker, consistently passing excellent reforms and legislation without any cooperation from the Republicans. Unfortunately, because our Senate is a non-functioning body, many of these bills have ceased to become law, as is likely to happen with yesterday’s action, where House Democrats extended tax cuts for the middle and lower classes. However, forcing Republicans to cast votes against 98% of the American people is exactly the kind of thing Democrats should be doing.
Ultimately, all we can do is run progressive candidates that: 1) are willing to stand up to the Republicans, call them on their incessant lying, and expose their malfeasance and corruption; 2) push for and pass effective legislation aimed at forming a robust middle class, and 3) fight for a United States in which every person has access to an effective education, affordable, high-quality health care, and a job that pays a living wage. Barack Obama is unwilling to stand up to the Republicans, does not seem to give a damn about the middle class (wage freezes for federal employees), and has done nothing significant to change the way we educate our populace, deliver health care (until 2014), or build our economy. And even if he can’t accomplish goals 2 and 3, because of Republican opposition, he simply doesn’t penalize them for it by saying anything to the American people.
I’m done with this guy. Next!
I hate asking that question, because I voted for the man in 2008. I too, was wrapped up in the hope and change of that time—I believed that our country was finally ready to move forward on every front: our economy, education, foreign policy, energy, etc. Sure, I knew there would be setbacks on the way, I knew that Republicans would try to block legislation, and that people in the media and on the right would continue to say moronic things like “tax cuts create jobs,” which of course, is completely ridiculous, especially when they are talking about income tax cuts for the richest 2% of people in our country. But, overall, I really believed that Obama would fight for the middle class; that he would, as a great orator, embarrass the Republicans when they bandied their plutocrat policies about Washington, and reject them outright. I believed that he would stick by the progressive principles he ran and won on. I had hope, but apparently that was naïve.
Because this man has caved, capitulated, and compromised at every possible turn. He first took up economic stimulus—a laudable goal—but ended up signing a bill that was far too small to impact the economy, and much of which was tied up in tax cuts that were so miniscule that many idiots on the right were actually convinced that Obama had raised their taxes (fostered by broad based lying by the right wing media outlets, and a tacit refusal by the rest of the media to challenge or repudiate the malfeasance that has crept, nested, and laid eggs in the fourth estate).
Next, he turned to health care reform, where he almost immediately ruled out a public option, held private meetings with the insurance companies that went on to spend hundreds of millions of dollars to lobby against him and slander the Democratic party. The end result was that industry insiders and Republicans were given months of air time to lie about the health care bill (that actually contained a lot of positive reforms), while the media looked the other direction. And the one person who had the bull horn in his hands, who could’ve called out the lies, who could’ve stood up for what was right, was Barack Obama, and he was silent.
In this short two year span, Obama has been too quick to compromise, he failed to lead on issues as a president should, and he has not used his bully pulpit to explain what is right and what is wrong to the American people. While Republicans hold up “Don’t Ask—Don’t Tell” legislation from reversing years of ugly discrimination against gay Americans, Obama should be screaming from the top of his lungs that “Republicans hate gay people,” and that “their position puts American lives in danger,” every day. When Republicans hold up the extension of unemployment benefits, Obama should lay out publicly the fact that unemployment insurance is the best possible type of economic stimulus there is, because for every dollar we pay out, it generates at about a dollar and three quarters of economic activity. He should then conclude, publicly, that it is clear that Republicans must want the U.S. economy to fail. And when Republicans take their other absurdly foolish positions, on things like refusing to enact the START treaty with Russia (designed to secure loose nuclear weapons and reduce stockpiles), voting against extending tax cuts for middle class Americans (we actually spend our money, which does create jobs)—because the bill didn’t include tax cuts for millionaires and billionaires (which Republicans did in lockstep in the House yesterday), and just lying all the time about everything from Obama’s trip to India to the healthcare reform bill, Obama should be shouting them down at every single turn.
Would he be attacked? Absolutely. But the right wing is already throwing every lying effort they can muster to defeat the man, so what is there to lose? Nothing, and yet ironically, Obama seems content to continue paying ransom to captors who refuse to let him go.
Ultimately, I think Democrats have to run a more progressive candidate against him in the primaries in 2012. The stakes are too high to do otherwise, and those who believe in moderation and compromise refuse to acknowledge the simple fact that our political climate doesn’t allow for that anymore, because the Republican party has proven time and again that they represent only the interests of the super rich and transnational corporations. They refuse to work in a collegial way with Democrats or anyone, for that matter, who wants to represent the interests of 98% of the American people. Moreover, they are extremely focused on manipulating public opinion, which they are successful doing because they have direct cooperation from much of the media (which is an oligarchy of 5 companies), and the rest of the media refuses to call them on it. We have to, at the very least, run a candidate that will tell the truth: that the Republican party is wholly corrupt, that it is supported by a media oligarchy, and that without drastic changes to our country’s governance, the middle class in this country is going to disappear, and the U.S. will cease to be a democracy.
The good news is that it is not all doom and gloom. There are progressive politicians out there that are fighting for the interests of the middle and lower class. House Democrats have proven that throughout their reign with Nancy Pelosi as their Speaker, consistently passing excellent reforms and legislation without any cooperation from the Republicans. Unfortunately, because our Senate is a non-functioning body, many of these bills have ceased to become law, as is likely to happen with yesterday’s action, where House Democrats extended tax cuts for the middle and lower classes. However, forcing Republicans to cast votes against 98% of the American people is exactly the kind of thing Democrats should be doing.
Ultimately, all we can do is run progressive candidates that: 1) are willing to stand up to the Republicans, call them on their incessant lying, and expose their malfeasance and corruption; 2) push for and pass effective legislation aimed at forming a robust middle class, and 3) fight for a United States in which every person has access to an effective education, affordable, high-quality health care, and a job that pays a living wage. Barack Obama is unwilling to stand up to the Republicans, does not seem to give a damn about the middle class (wage freezes for federal employees), and has done nothing significant to change the way we educate our populace, deliver health care (until 2014), or build our economy. And even if he can’t accomplish goals 2 and 3, because of Republican opposition, he simply doesn’t penalize them for it by saying anything to the American people.
I’m done with this guy. Next!
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