I rarely find it appropriate to rant and criticize the views of others with any bitterness. But with mid-term elections fueling public discussion on every issue, my level of frustration is higher than usual.
First of all, although most people would likely agree that the media serves as a forum for self-serving business interests and politicians, public opinion is still heavily influenced by the views of various pundits who seem credible. These individuals often carry professional titles, such as “senior economist at XYZ Capital Group”, which obscures the fact that they are often just some clown with an opinion. These business and political figures, who faithfully adhere to their superstitious, fairy-tale ideologies, drown out any worthwhile discussion that takes place. So at the end of the day, the voting public elects leaders that complement the insight they gained from these spineless ideologues. And the downward spiral gains more momentum.
The debate over economic policy, for the most part narrowly focused on tax cuts, needs clarification. Let’s just look at a few of the popular ideas out there.
1. Tax cuts lead to higher after-tax profits for businesses which will then be available for investment and hiring, encouraging growth and reducing unemployment.
While greater profits obviously provide more capital for investment, the decision of whether to invest or not is only minimally influenced by taxes. Taxes may alter where and how businesses invest, but that is different from deciding whether or not it is appropriate to invest in the first place. A business will not build a factory or increase inventories and staff without there being demand for their products and services.
Another aspect that is often ignored is that these tax cuts are financed by taking on further debt, ultimately pushing interest rates higher throughout the economy, making future investments more expensive for business and consumers. The end result hampers investment by making credit more costly. Those who worship tax cuts often in the same breath will attack big government borrowing, willfully ignoring the blatant hypocrisy. The cost from 2010 to 2020 for extending the Bush tax cuts is shown here. (Data: Joint Committee on Taxation, Treasury Dept.)
- The bill for extending all the Bush tax cuts except the estate and gift tax reductions through 2020: $3.5 trillion.*
- Income tax cut for families earning less than $250,000 a year: $1,184 billion
- Income tax cut for families earning $250,000 a year or more: $700 billion
2. Fiscal stimulus is ineffective and inferior to tax cuts.
So the problem is a lack of demand in the economy. All in all, economic activity remains slow as the outlook remains negative and risk-adverse businesses and consumers just seek to not get burned. Corporations cannot make investments without a degree of certainty and an expectation of adequate returns as they are accountable to shareholders. The only institution that can confront this degree of uncertainty and create demand is the federal government.
Although, pundits will then compare the success of these ventures by various metrics, such as the contribution to GDP. But when we determine the value of these initiatives in terms of GDP, we are missing the point. This approach ignores the primary purpose of fiscal stimulus, which should be to restore confidence in the economy through job creation to boost demand, education and training programs to spur innovation, and infrastructure to encourage commerce and create opportunities. What we must realize is that if it were possible to realize immediate success and returns, there would be no need for the federal government to act in the first place because there would not be the lack of confidence and uncertainty discouraging activity.
Now some argue that fiscal stimulus is ineffective, which as discussed, is difficult to measure. But those who suggest that tax cuts are superior to stimulus must face the data and analysis that contradicts this view. “In short, CBO found extending the tax cuts for high-income households to be the worst of all options under discussion for preserving or creating jobs and boosting economic growth while the economy is weak.”
Developing A Real Solution:
A solution would be to let the Bush tax cuts expire for the top 2% in order to make clear our commitment to fiscal responsibility. In addition, offer targeted tax incentives for businesses. Also, conduct massive fiscal stimulus in order to provide a foundation for recovery. Finally, creating a sound, transparent regulatory system is necessary for a strong economic recovery. Yet these suggestion are merely a pipe dream as Congress appears determined to fail.
The current record deficits are a consequence of the economic downturn rather than increased federal spending. The loss of revenue and recession-related spending comprise 75.7% of the increased deficit since the start of the recession. Which would seem to indicate that in order to correct the deficit problem, we must address the economic recovery in order to recover revenues and discontinue emergency spending programs.
While in the long-term federal budget deficits absolutely must be addressed, it is foolish to suggest that deficits must be addressed immediately. The bond market has continued to signal its approval for federal borrowing for at least the near future.
“The U.S. Treasury is able to borrow for 10 years at an interest rate of just 2.9 percent, vs. 10.2 percent for comparable Greek bonds. Foreign investors, who held 57 percent of U.S. Treasuries at last count, are tolerating minuscule returns because they’re confident the U.S. won’t default or try to lighten its debt via inflation. The bond vigilantes who terrorized the Clinton Administration into good fiscal behavior have become enablers.” (BusinessWeek)
So by pursuing forceful and meaningful fiscal stimulus, generating large short-term deficits, the U.S. will be able to get back on its feet and then address the deficit. On the other hand, ignoring fiscal stimulus, deciding instead to finance tax cuts with borrowed money and control the deficit via spending cuts will fail miserably.
The real problem being that as these deficits persist in a stagnant US economy, the bond market will eventually lose confidence in the ability of the U.S. to meet its obligations. Then, things will get ugly.
“…until the bond enablers wake up one day and decide that the U.S. has dug itself into a hole it can’t get out of. On July 27, the CBO warned of a nightmare scenario in which “investors would lose confidence abruptly and interest rates on government debt would rise sharply.” It added: “The exact point at which such a crisis might occur for the U.S. is unknown.”" (BusinessWeek)
The Bottom Line:
It is no coincidence that political and business elite benefit enormously from the perpetuation of these terribly misguided views, not just financially, but also in a much more significant way. The real significance of supply-side thinking derives from the way it influences public opinion. It furthers the notion that wealth is the measure of success in American culture. The message embedded in this logic is that the rich are the ones who contribute the most to society by creating jobs and providing the foundation of our economy. Since the wealthy have the most to offer, we provide them with tax cuts so that they are able to use their wisdom and expertise to lead our economy and country.
The enormous income inequality in the US has largely gone by unnoticed. The American obsession with wealth makes it possible for this disturbing trend in inequality to be passed off as a harmless coincidence.
This confidence we have in our wealthy elite is a bad joke. As the supply-side economic policies of the 1980′s were popularized, it is not difficult to recognize an emerging trend. The rich have benefited enormously while driving the nation into the ground.
The bottom line is that there is a deficit in leadership in the US. Republicans cling to a playbook built upon exploiting public fear and anxiety in an effort to keep things the way they are. A way that benefits some at the expense of others. Democrats, on occasion, provide solutions only to have them crushed by special interests and their own corruption. As long as special interests formulate public policy and money floods the political system, the US will continue to fall apart.
