Are Deficits Getting a Bad Rap from Republicans and Democrats? Part II

In Washington, Republicans adamantly argue that we have to scale back spending, especially for social programs, and Democrats say no, we need to spend and the real problem is that we don’t have enough revenue coming in.  Who is right?  According to a small but growing number of economists, neither, and both.

According to Dr. Kelton, the Republicans are wrong to insist we must balance the budget by shutting off Government spending for the reasons outlined in Part I, and Democrats are wrong to insist that we need to raise taxes in a major way to pay for our spending.  Both assume that deficits are the problem.

They are just coming at it from different directions. Where Republicans get it right (at least in theory) is that it is desirable to cut taxes, whether corporate or individual, and that jobs are the important thing we need to attend to. In 1981 Reagan cut taxes and actually raised revenue.  However, another tax cut in 1986 as well as the George W. Bush tax cuts neither raised revenue nor helped the economy grow.  Why didn’t their approach work?  I’d note that in 1981 a good chunk of the tax cut went to the middle and lower income groups—in ’86 and the “W” tax cut, most of it went to the wealthy on the theory that the crumbs that fall from our masters’ table were sufficient to boost economic growth. They weren’t.

This tells us that it is important to cut taxes in such a way that it will put more money into the pockets of those who most need it and will spend it, putting it back into the economy. The wealthy, history has taught us, typically use their windfalls to accumulate more assets, which raises asset prices, not productivity.  We get the same result when corporations use any windfall to buy back shares rather than invest in ways that create jobs. In neither case do such tax cuts help the country as a whole.

Democrats are therefore right in their insistence that the Government continue to spend on programs that create jobs and put more money into the pockets of ordinary citizens.  When those in the middle and lower rungs of the economic ladder struggle, our consumer-led economy struggles.

Kelton suggests that we should enhance retirement schemes, beef up our crumbling infrastructure, relieve the student debt burden, put together a federally funded jobs program (we have, Kelton says, institutionalized unemployment), and make other investments to secure our future.

But in Kelton’s view, like the Republicans, the Democrats are working from a faulty premise when it comes to why and how this should be paid for. It is wrong, she says, to insist on major tax hikes to pay for it all, since the Fed can create money and, presumably, intelligent policies aimed at boosting productivity and economic growth will also boost revenue.  To me, however, the implication is also that, given our rampant economic inequality, we do need to ask those who own at least 90% of the nation’s wealth, to contribute something more than their “fair share”(see Adam Smith!).

So the devil, as always, is in the details; current tax proposals are destructive and will not “pay for themselves,” as Mnuchin likes to believe.  (And the two trillion dollar math error in Trump’s budget underscores this.)

Dr. Kelton understands that this is not all cut and dried and recognizes that letting the deficit get too large, especially if we’re not spending to invest, can be counterproductive. Her fundamental point is that we need to seriously recalibrate what she would term our “Gold Standard thinking,” which sees the Government as constrained by finite monetary resources.

In short, we can disagree on the details, but in the end that disagreement “must go in the right direction,” not toward higher taxes and/or decreased spending, because, Dr. Kelton asserts, taken together this is a recipe for economic stagnation and recession.

I’ve tried to present Dr. Kelton’s ideas fairly and, I hope, accurately, but I’m not an economist, and I would be interested in getting comments.

Dr. Stephanie Kelton née Bell is an American economist and a professor of Economics at the University of Missouri–Kansas City. She is a leading proponent of Modern Monetary Theory.


Are Deficits Getting a Bad Rap From Republicans and Democrats? – Part 1

I recently heard a talk by a prominent economist, Dr. Stephanie Kelton, discussing the national debt and what to do about it.  The narrative we’ve all heard forever is that the deficits are BAD.  We’ve even got a “debt clock” that scares the bejeezus out of us.

Everyone agrees on this but, according to Kelton and like-minded economists, everyone is wrong. The standard argument is that if we ran our household finances like the Government we’d all be in bankruptcy court.   But there is no equivalency, Kelton says, because while households depend on a finite income flow, our fiat monetary system means that the Government can create pretty much whatever supply of money it needs, which means that the Government cannot be insolvent in terms of its own currency. The National Debt is, after all, the pool of Treasury bonds—most of them owned by ourselves and owed to ourselves.

The world by and large acknowledges this reality, which is why there is always a market for safe U.S. Government debt. This is not to say the deficit can’t be harmful if it is too big – it certainly can.  But Kelton says that it is arguably just as harmful, or even more harmful, if it is too small.


Because ours is a capitalist economy.  Productivity is essential to our economic well-being – we need to make enough to stuff to stave off inflation.  How to achieve that productivity?  Invest in fundamentals such as education and infrastructure.  Dr. Kelton argues that we need to balance the economy, not the budget, since we are no longer on the gold standard.  Again, money, for the Government, is not a finite resource.

When the Government cuts spending and reduces the deficit we can find ourselves facing the Paradox of Thrift and the Paradox of Deleveraging. That is, savings and paying down debts are great for the individual, but if everybody gets on that bandwagon it is harmful for the overall economy because we need to invest and make stuff.  Capitalism runs on spending, and both private and public spending create income, which creates sales, which creates jobs, which leads to more spending… a virtuous circle that benefits everyone.

If that ‘everyone’ spends less and the Government pays down too much debt via spending cuts we risk starving the private sector of the lubricant it needs to keep the economic wheels turning through investment and consumption.

Historically, says Dr. Kelton, when the Government deleverages, reducing the deficit, even to the point of running a surplus, it triggers recessions.   Want to understand why the recent economic recovery was tepid?  I would look at the Sequester and Congress’s refusal to deploy fiscal stimulus, leaving it all to the Fed.  The result was slow growth—except for stocks and bonds.

The obvious question then is, what policies will serve us best as an economy and as citizens? And that’s the subject of Part II.  Hint: Mostly, politicians and their constituents don’t get this right either, according to Kelton.

Dr.Stephanie Kelton née Bell is an American economist and a professor of Economics at the University of Missouri–Kansas City. She is a leading proponent of Modern Monetary Theory

Bringing the Money Home – For What?

One of Trump’s better ideas, at least ostensibly, is to give corporations with huge cash hordes overseas a “tax holiday” of sorts if they will repatriate that cash.  Estimates are that some $200 billion may return to our shores.  Depending on your political ideology, there are different ways of looking at this tax avoidance practice.  It’s perfectly legal, and on the one hand it’s a smart business decision to legally avoid paying taxes.  On the other hand, these are companies that have taken advantage of what this country has to offer to build their successful businesses – and for them to refuse to pay something back to this country to help pay for needed infrastructure, a decent public education system, e.g.,  seems patently unfair.  We know which view always wins out.

Much less justifiable – one might say egregious – is using tax havens abroad to avoid taxes on money earned here .  Congress has obligingly created a loophole that allows these big multinational companies to play by a different set of tax rules than smaller, domestic businesses, allowing them shelter some $90 billion of income in subsidiaries that are for the most part nothing more than a post office box in the Caymans.   A report by Citizens for Tax Justice says that 358 U.S. companies have set up some 7,622 ”subsidiaries” in tax havens in places like Bermuda and the infamous Cayman Islands.  That report is available here:

How much of this tax avoidance is illegal?  No one knows, because there is no accountability for this hidden cash.   Who ends up paying the price for this?  U.S. taxpayers – you and I – of course.  Doubly so if the Republicans use the deficit as a pretext for cutting back on the safety net.  A shame we just can’t raise enough cash for campaign contributions to make these politicians pay attention to us.

So Trump’s desire to repatriate some of this money, assuming a Republican Congress will allow it, seems like a pretty good deal.   The taxes (dropped to around 10%) might be used to pay for some needed investments here at home, and one could argue that the remaining 90%  could be used to invest in these companies themselves, perhaps creating good jobs.

Well, we’ve been here before, in 2004, so don’t get too excited.  Going by what happened back then, it’s estimated that $150 billon of that estimated $200 billion will go to buy back shares, and the rest to pay dividends and for mergers and acquisitions.  If you are a shareholder you will benefit, but there the trickle down stops.

Award-Winning Historian Looks at Racism, Diversity in America

I asked my wife, Lee, to do a guest blog for Observation Point.  Here is what she wrote:
Just saw the news that Ibram X. Kendi won the National Book Award for Stamped from the Beginning: The Definitive History of Racist Ideas in America.  When I was working on an article for the Christian Science Monitor about diversity programs on US campuses  I interviewed him.  It was for print.  Print has column-inch limitations and, in the end, the sidebar on him fell out.  His perspective, however, has stuck with me.

One historian’s view on diversity

When student protests erupted on campuses last fall, their demands sounded very familiar to Ibram X. Kendi, author of “The Black Campus Movement: Black Students and the Racial Reconstitution of Higher Education, 1965-1972.”  Students in Missouri and elsewhere, he says, “were still fighting for certain things that had not been instituted.”

He is referring to institutions and policies that strive to promote a diverse population and foster an atmosphere where differences do not divide, but enrich.   We asked him what he believes are important characteristics of a diverse and inclusive campus.

“Most people, when they judge the diversity of a campus,” Mr. Kendi says, “they first and foremost look at the student population.”  To him, that is like judging the diversity of a business by looking at its consumer pool.  “No,” he says, “you look at the actual staff.”  Students today continue to demand this, all too often finding adults of color only in diversity offices or departments that specialize in race or ethnic studies.  In his view, faculty and staff are important or two reasons: they provide minorities with role models and adults who share some of their experiences, and they can help shape policy on campus.

Researching “Stamped From the Beginning,” his new book on the history of racism in the US, Kendi has come to believe that educating racism away may well work but takes far too long.  “What I found in my research is that racist ideas have been used to explain recent disparities. . . So you see a paucity of black faculty,” he says, “and racist ideas proliferate that say that black faculty are not qualified.  Or the same thing with students.”

Change the reality on the ground through admissions policies, recruitment efforts, and programs geared to helping minorities thrive, however, and racist ideas have less and less purchase.  “You get rid of the disparities,” he says, “then you get rid of the ideas.”

The Zombies are Coming! Again!

There are certain ‘zombie’ ideas that, no matter how many times you put them down, keep shuffling back to wreak havoc.  One of them is ‘let’s reduce the size of [government][a department] by, um – oh!  I know! — instituting a hiring freeze.’  So, for example,  the Republicans, who hate the IRS for exposing right wing tax scams involving 503 (c) organizations, keep cutting its budget year after year and freezing all new hires, while at the same time decrying budget shortfalls and urging the IRS to improve customer service.

Puzzled?  Of course you are, because it’s loony.  So what happens when you freeze hiring?  The low paid folks, the secretaries, clerks, mailroom people move on to other jobs while the highly paid remain ensconced at their desks until the inevitable day when things start grinding to a halt.  I’ve seen it several times over the years.  Eventually it is quietly dropped and the politicians hope no one will notice.

But all that is a minor annoyance compared to the false promise of another gee-whiz idea: the corporate tax holiday aimed at repatriating the trillions companies have stashed overseas.  That’s the zombie Trump is digging up now, thinking that all that money will now be taxed, although at a drastically lower rate, and can be used for infrastructure projects and, better, to induce companies to invest in the country that made them rich in the first place.  To that end, Trump has reportedly talked to Apple’s Tim Cook to make a deal.  Sound reasonable?  Remember that insanity has been defined, tongue in cheek, as doing the same thing over and over expecting the results to be different.

In this case, tax breaks aimed to bring all that moola home was tried under the ’04 American Jobs Creation Act.  And bring much of it home it did, to the tune of over $360 billion. The fly in that ointment is that companies, mostly big pharma and tech, didn’t use it to create jobs, build factories or increase research and capital expenditures.  Nope.  What they did was buy back stock to goose their earnings per share (great for execs holding options) and increase dividends to the shareholders.

The net result for the economy?  It cost the Treasury $3.3 billion in lost revenue, and the fifteen biggest benefactors of our largess, according to the Wall Street Journal, actually cut just under 21,000 jobs and eased up on spending for research and development over the next six years.  Memo to Mr. Trump:  if this failed policy is passed, again, Apple will bring back some of its overseas money but will not build the big domestic plant that you hanker after.  And neither will anyone else.

President Obama, working with Ways and Means in Congress, had a better plan.  Tax overseas income and use the money for infrastructure projects as part of an effort to transition the U.S. tax code to a new international tax system.  Bottom Line: We don’t need ill-considered political fixes that sound good but simply reproduce the failed efforts of the past.

Sources: Wall St. Journal, Heritage Foundation, Center for Budget and Policy Priorities.

The Tax Bait and Switch is On

We know from often bitter experience that politicians on the make often stray from the truth, and everyone who has been paying the slightest lick of attention understands that the overwhelming majority of statements issuing from The Donald range, according to Politifact, range from sort of untrue to “Pants on Fire” lies.  Like most of us, however, Trumpistas aren’t particularly concerned with the finer points of truth as long as the Salesman tells them what they want to hear and throws out promises by the peck.

Taxes — how much we pay — are the bedrock for any Republican candidate, even those who pose as Outsiders.  The core belief is, as we all know, that if you cut taxes for the wealthiest Americans they will rush out to create jobs and hire even the unhireable.  The effects of their labor will seep through the entire economy and all will be well.  A huge chunk of the electorate believe this, notwithstanding the fact that this rosy scenario has never come to pass.  W passed enormous tax cuts and by the time he left office we were on the brink of another Great Depression, with an exploding deficit. Oops.

Enter Trump and the latest tax con.  Get out the trumpets, roll the drums!  The Middle Class will get tax relief, he says.  Well, sure, they will pocket some change from a 2% tax cut.  Not said:  Some 8 million families will wind up paying more.  If you are a single parent, or if you are married with three or more children, you will likely be handing over even more of your hard-earned money to the tax man .  But never fear: the wealthiest — the fabled 1% — will be treated to a 13% tax break.  Let’s not begrudge them their good fortune (shared conspicuously by the Trump family), but let’s not hold on to the illusion that Trump The Populist and his newly minted supporters in the Republican Congress are doing the middle classes some huge favor.  Bait and Switch, a hallowed principle, is a salesman’s staple.




‘Not My President?’I wish, but…

My college granddaughter is in town with some Kenyon friends for Thanksgiving, and in a couple of days  they will be out at the start of the Thanksgiving parade, protesting.   The goal is to remind Trump that he has no mandate and should treat all Americans with respect, and to protest the Dakota pipeline.

I support them , of course, but it got me thinking about other anti-Trump protests I’ve seen.   What exactly are they protesting?  Like it or not (not!), Donald Trump will be our president in January, and even though he lost the popular vote by well over a million, he “won” fair and square given our antiquated, anachronistic system.  “Not my President” signs are unhelpful and downright harmful.  We need him to be our President as well.  We have seen too many instances where Republicans regard any Democratic President as somehow illegitimate even if they won overwhelmingly. Ask President Obama. For the sake of the country, we have to consider the winner of an election as legitimate, however repugnant.

So let’s vigorously protest the system that gives us Presidents who haven’t earned a majority of the votes cast and work to change it.  Let’s also hold the new President’s feet to the fire as best we can and insist that he recognize that he is in fact the President of all Americans and that he must act in the national interest, not his own, even though that may go against his grain.  We can protest, yes, absolutely—but we also need to ensure that we send representatives to Congress who will serve as our conduit to convey that message.  That means voting, not sulking in the corner because a candidate isn’t somehow “pure.”  It is disgraceful that fewer than half of eligible voters actually performed that important duty.  Protest that!

All that said, do I think Trump will in fact be good for the country?  Not at all.  He’s a corrupt, mendacious sociopath and, as Paul Krugman and others have asserted, he will usher in an era of corruption not seen in our lifetimes.  But we’re stuck with him, so let’s all do what we can to retain some moral sense and sanity.  It’s going to be a rough ride.