Financial FAQs
Why the confusion over the federal budget deficit numbers? We should ask ourselves why there is such confusion over what in fact are two budget deficits -- two -- not one that budget deficit hawks say will run forever if we don't get our spending under control!
It's confusing because every politico and some economists are using the deficit debate -- how much spending to cut, vs. stimulus spending to create jobs -- to really disguise the fact that there are two deficits. One is the current deficit created by all the tax breaks, the wars, and lost tax revenues from the recession -- the lowest revenues as a percentage of GDP growth since World War II. (That tells us how severe was the Great Recession, the worst since the Great Depression.)
The second is a much longer term deficit that will happen if we don't get entitlement spending under control. But here's the thing. Unless we first take care of short term deficit #1, then long term deficit #2 will be harder to fix. That's because lost revenues -- whether from wars, tax breaks, or recessions -- are permanently lost. So to make up for those losses, we must create policies that expand economic growth as quickly as possible, period.
We can't reduce the actual deficit without stimulating growth, in other words. That is the misconception touted by Tea Partiers in particular. Newly elected Republican Senator Pat Toomey, one of the 12 debt ceiling 'Super Committee', is a very good example of the misconception.
He maintained in a recent Bloomberg Marketwatch interview that his twin goals were "deficit reduction and pro-growth policy". Yet he would only talk about deficit reduction without offering a single idea how to achieve it. Instead, he repeated the Tea Party mantra when asked this by Marketwatch: "Why not inject some stimulus like more spending, or tax cuts?"
"A: There's a huge difference between lower taxes and increased spending. Lower taxes generate growth through the supply side. It makes it less expensive to launch a venture, to expand a venture, to hire workers and so it's an incentive to increase production and ultimately it's production that's the source of wealth of a society. So my focus has always been on the supply side."
Toomey and fiscal conservatives in general have never offered one shred of evidence that supply-side policies reduce deficits. In fact, all the evidence disproves supply-side theories. The largest deficits were created by supply-side Presidents Reagan and GW Bush. That's because, as Warren Buffet said recently:
"Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends."
"I didn't refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone -- not even when capital gains rates were 39.9 percent in 1976-77 -- shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000."This from one of the richest men in the world. Also, Nobelist Paul Krugman said in a recent blog:
"If there was an alien invasion, or another war, we would spend what it took to win. And that spending could cure deficit #1 in 18 months."
"What the market was saying -- almost shouting -- was, "We're not worried about the deficit! We're worried about the weak economy!" For a weak economy means both low interest rates and a lack of business opportunities, which, in turn, means that government bonds become an attractive investment even at very low yields. If the downgrade of U.S. debt had any effect at all, it was to reinforce fears of austerity policies that will make the economy even weaker. "That's the sad truth. We know to spend to simulate production during wartime, but then forget that it boosts growth during peacetime as well. And the short term deficit is just that. Defense spending will fall as our wars wind down, tax revenues will increase as the economy continues to recover, and the Bush tax cuts will probably expire in 2012 -- if politicos are serious about deficit reduction. Hence the confusion with long term debt problems. They are mainly due to rising medical costs, as the social security fund is in surplus and should pay for itself until about 2040. So Medicate entitlements are where the real political deadlock sits -- private healthcare vs. universal health care for all. Which is more likely to bring down those medical costs? Is it really a surprise that the private, for profit health care system hasn't done the job? When an untruth is repeated enough, though, and there is little written about the truth, then the untruth will prevail.
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I don't like the argument that "all the evidence disproves supply-side theories". The economy is yin & yang; supply & demand. Pushing one side over the other creates unbalance and the harmony of the system is disrupted. That is what has been happening for the last 30 years and it is accelerating.
Everyone agrees that demand is too weak for current supply potential. We have accumulated far too much capital at the top and that has weakened demand to the point where we have not just excess capital but excess labor as well (high unemployment). The unfair aggregation must stop and the system must return to a balanced situation. It took 30 years to get here and it will take time to heal. But we have to start.
That still leaves weak demand today. Many economists feel the government wallet has been over used. $14 trillion is a lot of debt. Government spending can create horrible inefficiencies. Alien wars will create demand but won't do anything for society. Fortunately, government has abdicated many of its responsibilities for a long time and has some catching up to do. Infrastructure and education jump right out.
But at the same time we should look at our welfare situations. Defense contractors are huge employers and drive great technology breakthroughs. But we don't want endless humvees. We need to shrink government is some areas while getting it back into the job of governing.
The Social Security fund 'surplus' has been transformed into government debt - the money has been treated like current tax revenue except that the government has promised to pay itself back someday. This is like having a 'New Roof Fund' jar in your kitchen cupboard that you put $100 into from each paycheck and then you replace the $100 with an IOU to yourself every week to buy groceries; how much is in your 'fund' when the time comes to pay for the new roof?
America's key problem is plain: We have a federal government that has reached beyond the constitutional limits on its power and is spending more than the nation can afford. The solution is also plain: Push the federal government as much as practically possible back toward its constitutional limits, thus reducing its size and cost.
People act as if the money coming from the government or your taxes does not have an effect on the economy. As I have said before, public employees and government contractor employees pay taxes adding to increased revenue supporting all private industry and our fellow citizens. When you cut and fail to raise taxes you lower the income the private industry can use to increase salaries and hire other people. The idea that you can cut your way out of a recession is sheer stupidity.
After all we now have $14TrillioÂn soon to be $17trillioÂn (short term deficit #1) "keynesian spending", are they not essentially the same thing?
I say yes, they are.
Reagan and Bush both had higher Gov. revenues after taxes were cut, That is more evidence than Keynesians can produce.
But my arguement is flawed as is yours, "The largest deficits were created by supply-side Presidents Reagan and GW Bush".......Because they SPENT to much, ie; more than they took in.
To try to claim that ONLY one factor, the tax rate, is responsible for various outcomes is disingeneous.
There are to many other factors in play, in a dynamic economy, to make that claim.
The tea party does not understand economics at all. They are operating on Hoover's economics in 1929-1933---no keynesian, they do not believe in it.
They still think it was the tariff problem that caused the Great Depression.
"The Smoot-Hawley Tariff Act caused the Great Depression" as a number one right wing talk-radio show hosts, politicians have lamented in recent weeks.
In recent years, the Smoot-Hawley Tariff Act has been the de facto "Economic Bogeyman" for the Free Trade and Globalist crowd. In the wake of the worldwide economic failure, the Free Trade advocates are looking for cover in the wake of huge national trade deficits, growing wordlwide unemployment, and a collapsing world banking system.
As for Pat Toomey he is like a character from the Looney Tunes.
That's all folks.
To get the economy moving, we must put 'DEAD CAPITAL' (like the $2 Trillion held in cash by corporations) back to work. The best way to due this is to persuade corporations (using a carrot and stick approach) to pay out 90% of their earnings as DIVIDENDS. If just Google, Exxon Mobil, Apple, Microsoft and Berkshire Hathaway adopted this approach, it would add $100 Billion a year of cash to the economy. If the entire business community did this, it would probably dwarf the $600 Billion Federal Reserve stimulus of QE2.
Real Estate Investment Trusts pay no corporate tax on earnings if they pay out at least 90% of their earnings as DIVIDENDS, which are taxed as ordinary income. Let's expand this approach to cover all U. S. businesses. A zero corporate tax rate would also persuade corporations to repatriate their foreign earnings to the United States. Finally, (just for example), paying out 90% of earnings as DIVIDENDS would raise Warren Buffett's tax bill from $7 Million to $700 Million.
We paid into special funds, time to be paid back.
It's not a privilege.
Overall, you're correct. Healthcare costs are the biggest long-term problem faced by the US.
Despite American Exceptionalism, the US is one of the last advanced countries to address this issue.
Here's a graphic of the problem and the results for other countries that have had political leadership with adequate political courage, foresight and work ethic to deal with the issue.
http://www.cepr.net/index.php/publications/reports/taming-the-deficit/
Washington is a corrupted corporatist kleptocracy for plutocrats.
The current lazy, crazy, do-nothing Congress and Administration are not posessed of adequate sense or political courage to address known problems.
They knew well the second order effects of supply-side economics - and proceeded with the Bush tax cuts anyway.
http://www.j-bradford-delong.net/movable_type/2003_archives/001370.html
Semper Fi.