The Hypocrisy of the Deficit Squawks

I think the entire congress needs to spend the rest of its summer in a remedial economics course. If the sky is falling from the future size of the deficit, then why are we getting calls from the same folks to extend the Bush tax cuts to the rich? (This includes taxing things like dividends.) Why are they being deliberately inconsistent? It’s VooDoo economics again. The supply side Zombies will just not die. What’s worse is that some democrats are joining them.

My question is which is it boys? You can’t have it both ways. Is the source of all evil deficit or tax increases on the very rich? If the 80s and the naughts proved anything to us,it’s that lowering the tax rates on the rich does lead to a increase in the deficit and it does not stimulate the economy or investment as much as good old fashion government spending. It mostly leads to speculative asset bubbles that burst in every one’s face. Why does the middle and working class get the “let them eat cake” while the rich “get to have their cake and eat it to?” Where’s the economic theory and the common sense in that?

Top Republicans called on Democrats in Congress and the White House to extend all the tax cuts that are set to expire at the end of this year.

Sen. Judd Gregg (N.H.), the top Republican on the Senate Budget Committee, joined House Minority Whip Eric Cantor (R-Va.) in pushing for the extension of a series of taxes set to expire at the end of this year, including a series of cuts for households making more than $250,000 per year.

“If you want to do something to stimulate the economy, you could make clear that tax rates aren’t going to go up at the end of the year,” Gregg said during an appearance on CNBC. “If this administration really wants to stimulate, say they’re going to continue those tax rates — all those tax rates.”

The tax cuts on income and dividends that Republican Congresses had approved during the administration of President George W. Bush are set to expire at the end of 2010.

Senator Jon Kyl had to twist himself into a illogical pretzel to justify the position. I’ve always been amazed by the Republican ability to hold completely contradictory positions without having complete brain failure. For example, they demand the government be smaller and get out of peoples lives while wanting to control the domestic arrangements of GLBTs and women seeking reproductive health. That’s another one of those issues where the contradictions are painful to watch. Thinking you can lower the deficit while not taxing the people with the incomes and assets just boggles the mind. Don’t forget, that prescription also includes approving every military toy and adventure that comes across their desk save helping veterans.

Here’s a description of Kyl’s appearance on Fox from Ezra Klein.

“[Y]ou should never raise taxes in order to cut taxes,” Jon Kyl said on Fox News Sunday. “Surely Congress has the authority, and it would be right to — if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that’s what Republicans object to. But you should never have to offset cost of a deliberate decision to reduce tax rates on Americans.”

What’s remarkable about Kyl’s position here is that it appears to be philosophical. “You should never have to offset cost of a deliberate decision to reduce tax rates on Americans,” he said. Never! This is much crazier than anything you hear from Democrats. Imagine if some Democrat — and a member of the Senate Democratic leadership, no less — said that as a matter of principle, spending should never be offset. He’d be laughed out of the room.

All of this comes about as the Democratic co-chair of Obama’s cat food commission calls the growth of the deficit a ‘cancer’. Why is it that congress seeks to balance the budget on the backs of those least able to pay for it and those who have benefited the least from the excessive spending?

Bowles said that unlike the current economic crisis, which was largely unforeseen before it hit in fall 2008, the coming fiscal calamity is staring the country in the face. “This one is as clear as a bell,” he said. “This debt is like a cancer.”

The commission leaders said that, at present, federal revenue is fully consumed by three programs: Social Security, Medicare and Medicaid. “The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it, veterans — the whole rest of the discretionary budget is being financed by China and other countries,” Simpson said.

“We can’t grow our way out of this,” Bowles said. “We could have decades of double-digit growth and not grow our way out of this enormous debt problem. We can’t tax our way out. . . . The reality is we’ve got to do exactly what you all do every day as governors. We’ve got to cut spending or increase revenues or do some combination of that.”

Bowles pointed to steps taken recently by the new coalition government in Britain, which also faces an acute budgetary problem, as a guide to what the commission might use in its recommendations. That would mean about three-quarters of the deficit reduction would be accomplished through spending cuts, and the remainder with additional revenue.

Most Republicans in Congress are opposed to any tax increases, which has made the work of the commission far more difficult. Bowles and Simpson appealed for support to the governors, who have been forced by their states’ constitutions to balance their budgets with deep spending cuts and, in many cases, tax increases.

Americans faced similar budget issues after World War 2 and a lot of it was paid off by economic growth. However, growth seems elusive in the current environment. This is especially true because there has been no fundamental change in the systemic causes of the current financial crisis and deficit debacle. This policy choice we’re given now is ridiculous! Investment bankers who made bad bets get a blank check but we can’t extend unemployment insurance to the 2 million long term unemployed that just lost their benefits? Who is most likely to actually become a customer to businesses? Is it A, an unemployed person that needs to pay the rent and buy groceries or or B, Goldman Sachs that will take the cheap loan and game the market by arbitraging self-created paper?

Also, go back to the tax rates during that same booming period of post World War 2. Obviously, taxing the rich does not kill an economy. Here’s some examples of tax rates from the Eisenhower years.

The highest tax bracket on earned income today is 35%. During Ike’s administration, the highest tax bracket was 92% in 1953, and 91% thereafter [1]. Yes, taxes on the Rich were almost three times higher under the Republican Eisenhower compared to our current President, or compared to the Democratic administration of Bill Clinton!

Here’s the capital gains treatment for the Eisenhower period.

It is considered to be almost the gospel today that capital gains should be taxed at a far lower rate than earned income. Today the maximum capital gains tax rate is a whopping 15% on assets that have been held for at least a year since purchase. This is why the middle class, who are dependant on earned income, effectively pay taxes at a higher rate than do the wealthy.

In Ike’s day, capital gains were not treated differently from earned income, so the rich paid 91% tax on capital gains. From 91% to 15% – another reason why it’s good to be rich!

Note that in 1955, in the middle of Ike’s presidency, the typical (median) family paid less than 20% in all taxes [2]. By 2003, the total of all taxes paid by a typical family had more than doubled, to almost 40% of income.

So in Ike’s day, the rich paid a lot of taxes, the middle-class paid a little taxes, and somehow it all worked out.

Right now, there is a need for money to be given to the people who are mostly likely to spend it. State governments and poor to middle class people are the ones that come to mind. Banks are not lending out money. Businesses are sitting on money and not investing. They’ve got the lowest real interests rates possible now and they’re not expanding capital. Why would they if they have no customers walking through their doors?

Investors aren’t particularly happy with the market either. There appears to be a massive pay down of debt as a way of savings rather than money heading for the markets. Most of the market money is not coming from the individual investor. It’s coming from pension funds and such. That’s why Wall Street is so hungry for Social Security dollars. There’s very little new money coming into the market. They have nothing they can use to build new pyramid schemes asset bubbles. So where does stimulus come from if the government does not do it itself? It has to come from people that are most likely to be customers of business. Only the increase in customers will make a business expand its production. Either way, you have to get the money to the right people.

Here is a prelimary study out by Corsetti et al (May 2010) that empirically studies the impact of fiscal policy multipliers during financial crisis. (h/t to Paul Krugman) It basically reinforces the idea that fiscal stimulus in the right places is necessary to create a multiplying impact for federal dollars spent on sustaining the economy. Don’t try to read the analysis part, it’s extremely technical. Here’s the conclusion which is the part that policy makers need to understand. Corsetti is some one I follow a lot because of his work on exchange rates. There are some important findings for that. However, this last statement is germane to our conversation.

A second key finding relates to the marked increase in fiscal multipliers during times of financial crisis. On the one hand, this may be taken as evidence in support of fiscal stimulus during financial crises. On the other hand, our empirical results also suggest that many countries have historically cut back government spending during financial crises, presumably out of concern over debt sustainability. In this sense, a large conditional multiplier also provides a stark warning about the costs of financial turmoil, and an argument in favor of building up fiscal buffers in normal times so as to avoid fiscal retrenchment when it is most painful.

This is something that most economists that have a real feel for Keynes have being saying for years. Keynes didn’t recommend endlessly running budget deficits. He believed they were necessary during times of crisis. He recommended balanced budgets and surpluses during good times which is exactly what Bill Clinton’s administration did. He handed a surplus to Dubya Bush who immediately threw it away. A similar situation happened down here in Louisiana. The first year of the Jindal administration, Jindal was handed a surplus and a big rainy day fund. Rather than sitting on it, Jindal wanted to eliminate income taxes. This kind of behavior leads to future deficit problems.

Where are these deficit squawks when the government is running surpluses and in a good situation? Well, they generally throw caution to the wind and spend like crazy or rebate like crazy. You can’t do this and then turn around and complain about high deficits and demand tax cuts to the folks with wherewithal a few years later during recessions without sounding contradictory, crazy, and callous. But that’s the way with these Supply Side Zombies, they entice the middle class with the idea that they pay too much in taxes when the real motive is to stuff the pockets of the Bonus and the political donor class.

This financial crisis and the resulting deficit problems were not caused by the poor and working class. They are as much victims since they did not participate in the lavish incomes and tax cuts that came from the last asset bubbles fueled by low interest rates and low capital gains taxes. Why then, ask us to bear the burden of this sudden onset of restraint?

Where have all the Consumers Gone?

We talk about this often. As a matter of fact, it was just yesterday we were talking about the failure of Reaganomics or so called “Trickle Down” economics. (More aptly called VooDoo economics by the first President George Bush.)

kc, on July 7, 2010 at 10:37 pm Said: Edit Comment

thanks–would it be accurate to say that trickle down doesn’t work well because the rich already have consumer goods so they could save it.??


Well, supposedly the residual goes into investments which go to create well paying jobs which the rest of us get. However, that link is weak link. Especially with so many corporations moving their capital investments out of the country or having major operations elsewhere. In order for it to create jobs, the money has to stay put in the community and there’s no guarantee it will. Also, a lot of profits these days are just arbitrage profits that create no value. If you don’t direct the dollars to long term investment the money can go anywhere.

Robert Reich has a great blog post up today that gives you some perspective on what happens to our consumption driven society when only the few rich people get the income gains. The income doesn’t go to driving the economy, it goes to driving asset bubbles and in the two cases he talks about, that leads to some pretty bad economics results. Reich says that “We’re in a Recession Because the Rich Are Raking in an Absurd Portion of Wealth: Our economy can’t thrive when the richest 1% get an ever larger share of the nation’s income and wealth, and everyone else’s share shrinks.”

The end of the Hoover years and the end of the Dubya years brought as big increases in income inequality. What was the result?

Each of America’s two biggest economic crashes occurred in the year immediately following these twin peaks—in 1929 and 2008. This is no mere coincidence. When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don’t have enough purchasing power to buy what the economy is capable of producing. America’s median wage, adjusted for inflation, has barely budged for decades. Between 2000 and 2007 it actually dropped. Under these circumstances the only way the middle class can boost its purchasing power is to borrow, as it did with gusto. As housing prices rose, Americans turned their homes into ATMs. But such borrowing has its limits. When the debt bubble finally burst, vast numbers of people couldn’t pay their bills, and banks couldn’t collect.

You can’t have an economic machine driven by consumption and then turn the switch over to people who have so much money that all they do is speculate. It just doesn’t work. If you want long term real investment, then you have to ensure that the investment dollars are going to things of real value. A good example of something of real value is a factory that employs people that have to pay for houses, groceries, clothing and transportation. Every dollar of a well earned wage trickles outward to a community. Putting all your investment eggs into derivatives does nothing to support long term growth. Taking all the income from productivity coming from the people that work and giving it to people that just simply want to drop a few dimes in a stock that might go up like a BP oil gusher does not create customers for businesses. Customers are what businesses need to grow. No amount of tax cuts or cheap credit will expand a business that doesn’t see customers coming in the door. Also, there’s a real good chance a lot of these people–and the corporations in which they invest–offshore their wealth anyway so there’s no guarantee that it stimulates our economy. Although, if you check it out, you’ll see that the richest countries in the world are those small countries that are depositories and shelters of offshore funds. These are the little countries that banking and no taxes built like The Grand Caymans, Guernsey, Bermuda, etc.

Anyway, Robert Reich does a very good job pointing to how we let our government leaders recreate the environment of the 1920s and how by only a little finesse and a lot of liquidity by the Fed stopped us from going over the edge into another period where unemployment was 25% instead of 10%. What I worry about is that the current leaders seem to be recreating the second dip of the Great Depression also. Remember, the two BIG recessions since World War 2 happened when you’ve had people who sincerely believe in the Trickle Down hypothesis. It frightens me that we have a President who admires Ronald Reagan and has continued Dubya Bush Policies. (Here’s another great link to Brad DeLong’s Blog who has similar worries. The piece is called “These are NOT the Ones We have been waiting for”. No kidding!) If we do have a double-dip, it will be because of all this austerity nonsense. We really don’t need any more lessons from Voodoo Economics. We’ve had enough to traumatize several generations and put a lot of people into unemployment hiatus.

The Faces of Unemployment

Our economy is no longer producing jobs at a level that can sustain what we’ve considered a ‘normal’ rate of unemployment of around 5%. Our leaders seem incapable of understanding the dynamics of job creation and think that subsidizing businesses and lowering taxes any way they can on any form of business is going to create the trickle down effect. This was a disproved hypothesis decades ago. They mistake monopoly creation for being pro-free market. This has created some very persistent long term unemployment. It will also create a bigger federal deficit because these folks may not return to the job market and peak wages. This means lower tax revenues in the future. Some may also opt for social security at 62 putting them on the expense side of the deficit quicker than previous generations.

There is increasing attention in the press to the faces of unemployment and two such profiles are out there today. The WSJ journal looks at the face of 50 somethings who have been unemployed or underemployed for nearly two years now. These folks are usually at the peak of the income earning years but instead have been dumped out to pasture unceremoniously early with no real safety nets. They are years away from being eligible for the retirement benefits and medicare their elder boomer brothers and sisters can collect. The 50-something generation–well educated and trained–is now the lost wages generation.

Extending unemployment benefits isn’t free, of course, and has the potential to keep unemployed workers out of jobs for longer. But it could also be preventing a “lost generation,” economists say. That generation is the crop of 50-somethings who might have worked for another decade. Their outlook isn’t bright.

Once older workers are laid off they take the longest to find new jobs. For workers 65 and up, it takes a median of 45.1 weeks to find a new gig. For those 55 to 64, 38.7 weeks. It takes a slightly shorter 30.4 weeks for those who are 45 to 54-years old.

Unemployment checks have the added benefit of helping these people feel like they’re still a part of the labor force. When the checks run out, and with few glimmers of hope in their job searches, they’re more likely to drop out of the labor force and turn to a program like disability.

And unlike a relatively short-term fling with jobless benefits, their attachment to disability is more likely to be permanent.

Facing equally dismal job prospects are the so-called Millennials. These are twenty-somethings that cannot find jobs that meet their credentials. The NYT profiled this group of jobless that can’t even get their feet on the bottom rung of corporate ladders these days. A more detailed look at the future prospects of this generation shows that they may not be better off than their grandparents or parents. EVER. This is from Catherine Rampell; also of the NYT.

There are a few forces behind these trends. One is that generally speaking, it’s harder to make it in today’s job market than it was a few decades ago if you don’t have at least a high school degree, since the expectations for what educational credentials workers should possess have risen. This is in part because the economy is less dependent on lower-skilled, manual-labor-intensive industries like manufacturing, and more reliant on industries that require formally credentialed education and training, like health care. Thus, in general, the earnings potential for the most educated has risen, and that for the least educated has fallen.

Economist Mark Thoma points to two interesting articles on the state of the jobs market. One is buy FED watcher Tim Duy called ” Why is the American Jobs Machine broken?”

Only one word describes the American labor market outcome of the last decade – abysmal. Not only is job growth well below trend, but the quality of jobs is in question. The jobs deficit is even more striking considering the supposed gains in productivity over the past 15 years. Job growth should not stagnate. Resources – including labor – released via higher productivity are supposed to be channeled into expanding sectors. Moreover, productivity growth is supposed to yield improved economic outcomes via higher real wages. Yet as spencer famously shows, labor’s share of output has been steadily decreasing since the early 1980s. This downward trend was interrupted by gains evident during the tech bubble of the mid-1990s. Apparently, only during that brief, shining moment of generational technological change did the productivity story work as we believe it should, at least since the early 1980’s.

The other relevant site is Yves  at Naked Capitalism who discusses a piece by Andy Grove–the former CEO of Intel– at Bloomberg. There’s a follow up link and discussion piece of that article by Rajiv Sethi. Sethi is another economist who blogs. There are quite a few of us out there these days, I guess because we’re all just panicked about what’s been going on the last 10 years and discussing it in a research article with other economists does not get anything real done in the way of public policy. Yves is definitely a modern day Cassandra with well rounded academic credentials as well as practitioner’s viewpoint to all things financial and economic. If any one deserves to be syndicated, it’s Yves. Every one is discussing the impact of all those old manufacturing jobs that have now gone elsewhere and left those folks without high school diplomas with no future. There’s really nothing out there comparable to what used to be good union jobs and blue collar jobs. Sethi, a microeconomist and Grove, an entrepreneur in an industry that thrives on innovation effectively argue that this loss of manufacturing industry will eventually impact our ability to innovate which is really been the prime driver of the U.S. economy since its inception as a mishmash of colonies.

The Grove article is amazing and the discussion of it by the three economists and their readers is fascinating. It’s going to take some time to wallow through it all, but I highly recommend it. Grove believes that the myth of America to continually birth start ups is just that; a myth. It’s a myth birthed by and of course, followed like a religion (an equally implausible myth) by pro-Business politicians. I’m going to use the generic nomer ‘politicians now’, because it’s obviously it’s just not a Republican mental defect any more.

Here’s Groves hypothesis and it’s an earth-shattering and hopefully myth-shattering one. I have no idea why we tell ourselves these stories and believe in them to the point of blinding ourselves to reality and hope. But, there it is. The Groves article is a response to an article by Thomas Friedman. You can read that too if you’re into the new Horatio Alger story of the Reagan fairy tales.

The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.

Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

Scaling used to work well in Silicon Valley. Entrepreneurs came up with an invention. Investors gave them money to build their business. If the founders and their investors were lucky, the company grew and had an initial public offering, which brought in money that financed further growth.

Sethi, a practicing microeconomist, takes it back to a need for change in incentives; one of the major points in the Grove article. It’s also something I discussed in my last economics thread, Simple Truths. Sethi doesn’t want to embrace protectionist policy–nor does Yves– but he and Grove and Yves and then back to Thoma say that we need our policy makers to change the incentives. I agree with these greater minds.

Grove recognizes, of course, that companies will not unilaterally change course unless they face a different set of incentives, and that this will require a vigorous industrial policy:

The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars — fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability — and stability — we may have taken for granted… Unemployment is corrosive. If what I’m suggesting sounds protectionist, so be it… If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.

Update (7/4). In an email (posted with permission) Yves adds:

On the one hand, you are right, any move towards protectionism (or even permitted-within-WTO pushback against mercantilist trade partners) could very quickly get ugly. But the flip side is I wonder if we have a level of global integration that is inherently unstable (both for Rodrik trilemma reasons, international economic integration with insufficient government oversight creates political problems, plus the Reinhart/Rogoff finding that high levels of international capital flows are associated with financial crises). If so, we may have a short run (messiness of reconfiguration) v. long term (costs of really big financial crises) tradeoff.

So why do we give businesses incredible subsidies for doing these activities? Yes, it helps them. But, it does not help the U.S. economy or the American worker or for that matter, the American Taxpayer. Why not give businesses some subsidies if they keep the jobs here and some taxes if they take the jobs elsewhere? This is basically an industrial policy. It’s not a trade policy so it’s not a cry to revive something like Smoot Hawley. No sane economist would suggest setting off a trade war. However, changing the incentives to businesses that bail out on the US to achieve higher profits is something that people with policy responsibility need to take examine. At the very least, we need to stop giving them Federal business. After all, we should be pro-economic growth and development which has no bias towards any particular economic agent. It’s time to quit looking at everything that’s ‘pro-business’ as being good for the U.S. Economy because it is not. That includes putting the criminals in charge of crime scenes something that the Obama administration seems to specialize in.

Simple Truths

One of the useful things about theories and laws–in the sense of scientific method–is that they provide some very simple insight into the way things are. They are not based on wishful thinking or faith. Hypotheses grow up to be theories only with rigorous testing by many many great minds who consistently recreate similar truths in similar circumstances.

Once the theory becomes established, it can be used for many purposes and insights. In economics, we use these things for predictions and policy insights. We know that a given outcome will–with extremely high probability–recur given the same circumstances. There are laws of demand and supply. There are theories on elasticities of supply and demand given prices or income. We have a fairly good catalog of theories that we teach and we make doctoral students reprove over and over again so they too, can establish that insight and make predictions.

Established theories are basically things that are ‘no brainers’ in any field. One such set of theories in economics deals with taxes and subsidies. You tax something, you see less of that thing because it adds cost and dampens both supply and demand for the taxed thing. You subsidize it, you get more demand and more supply because it lowers the cost. As a matter of theory, when you really subsidize something, you generally end up warping the incentives for production and consumption of that good so badly that not only does that market become pretty dysfunctional, but it tends to spread to other markets because it transfers scarce resources–better put to other uses– from some markets to the subsidized market.

In some cases, we purposely warp a market with taxes for policy purposes. This is the case with so-called sin taxes. There is a reason that cigarettes are taxed to the point that the pricing point of a pack of cigarettes approaches the cost of a CD of music or a ticket to a movie. That’s because the government wants to discourage entry to the market to teen smokers. Prices (after tax) of cigarettes typically rival things teens do. These include going to movies or buying music. It forces the teen who might become a smoker into a choice and hopefully, a good one that includes not smoking. In this case, the disincentive is the policy choice. We often subsidize things too like public transportation or public education. This is because we’d see less of them and less public benefit if they were priced to the market or priced to the cost of producing the good. When you study microeconomics which is the study of individual choices within individual markets, you study externalities.

Generally speaking, a good policy will subsidize a good or service with positive externalities and tax a good or service with bad externalities. We usually call these “spill over” costs or benefits because the cost or the benefit of the activity spills over to the public. If a business can’t realize the benefit in terms of profit, the business won’t provide the service or good. If the business can pass the cost of an activity or service on to the public, it will.

Subsidies should only go to places where there are positive spillovers. Taxes should be applied to places where there are negative spillovers. It is not considered a good idea for taxpayers to subsidize harmful activities in economic theory. We have finally lowered our subsidies to the tobacco industry because it’s good policy. The taxpayer shouldn’t be incentivizing a public health issue that they will have to pay for on both ends. First, in the subsidy to the business, and second to the costs of tremendous health problems created by the users. People who benefit neither from growing tobacco, making cigarettes or smoking, shouldn’t be asked to pay all the spill over costs that come from that activity.

This is why subsidies to Oil Companies baffle many of us.

There’s a really good article today in the NYT on the billions of dollars provided by the U.S. Taxpayer to Oil Companies. My students will be reading this shortly, believe me, because it’s a great example of really bad public policy. Among the things that the article mentions is that the drilling rig, The Deepwater Horizon, “was flying the flag of the Marshall Islands. Registering there allowed the rig’s owner to significantly reduce its American taxes”. Transocean basically shopped corporate ownership to several countries to avoid tax liability. But wait, it gets worse.

At the same time, BP was reaping sizable tax benefits from leasing the rig. According to a letter sent in June to the Senate Finance Committee, the company used a tax break for the oil industry to write off 70 percent of the rent for Deepwater Horizon — a deduction of more than $225,000 a day since the lease began.

With federal officials now considering a new tax on petroleum production to pay for the cleanup, the industry is fighting the measure, warning that it will lead to job losses and higher gasoline prices, as well as an increased dependence on foreign oil.

But an examination of the American tax code indicates that oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process.

According to the most recent study by the Congressional Budget Office, released in 2005, capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry.

And for many small and midsize oil companies, the tax on capital investments is so low that it is more than eliminated by var-ious credits. These companies’ returns on those investments are often higher after taxes than before.

“The flow of revenues to oil companies is like the gusher at the bottom of the Gulf of Mexico: heavy and constant,” said Senator Robert Menendez, Democrat of New Jersey, who has worked alongside the Obama administration on a bill that would cut $20 billion in oil industry tax breaks over the next decade. “There is no reason for these corporations to shortchange the American taxpayer.”

Yes, that’s right. President Obama with his green agenda is working on a bill that CUTS $20 billlion in more tax breaks to this industry. But don’t get me started on their ethanol subsidies, it’s the same damned deal. Take food away from being used as food and use it as an additive to fossil fuels. This, too, is bad policy. (To read more on that you may want to check out this link at The Oregonian.)

THIS is what passes as “free market” capitalism these days. Tax payers pay in their tax bills for these horrendous subsidies, then they take it at the pumps too. (In the case of ethanol subsidies, we’ll also take it at the grocery store.) Republicans are much worse. They have no idea that what they are doing is not capitalism. It’s basically encouraging monopolies and monopoly profits as well as distorting resource markets.

Ethanol subsidies, oil drilling incentives, government insurance and loan guarantees for nuclear energy, natural gas subsidies: These proposals tend to have as many or more Republican advocates as Democratic advocates. Even worse, self-described free-market conservatives often rally for energy subsidies and claim it’s not a deviation from their principles.

Today, at the liberal environmentalist website Grist, blogger Dave Roberts takes to task Newt Gingrich. Roberts, with whom I often spar on the Interwebs, has a great (and depressing) argument and analysis of Gingrich’s defense of current energy subsidies and proposal for even more energy subsidies. This is the heart of the argument:

Gingrich and his acolyte defend these subsidies. Why? Says Gingrich, “a low-cost energy regime is essential to our country.”… Fossil-fuel subsidies don’t reduce costs, they shift costs. The burden is moved from energy companies to the public. The result is what we have today: energy that looks cheap because most of its costs are hidden from view.

Even during times of obscene profits (which are pretty much guaranteed by subsidies in a good where the market demand isn’t very sensitive to price changes), we still subsidize these business. Here’s the link to The Grist which basically outs Ginrich as being anything but a capitalist. This is more like the old mercantilism of the past where the king and queen choose a particular company to be blessed with a monopoly and give them some start up funds to go and rape a colony of its natural resources. Think East India Tea Company and the colonies here pre-Revolution. For years, our tax funds have gone to big oil, big finance, and big defense contractors. Lincoln warned of it. Eisenhower warned about it. Teddy Roosevelt and Sherman did something about.

So, here we are again with companies that feed at the public trough while behaving in a way that has nothing to do with public interest. This is no surprise to any economist. We know that the only things corporations are about are maximizing profits and minimizing costs any way they can. They’ll do it by abusing any resource they can, IF we let them get away with it. That’s why there is still slavery, pollution, strip mining, blood diamonds, and for all intents and purposes, wars in places that sit on oceans of oil.

Politicians are all about maximizing their chances of getting re-elected. If they can’t do that, then they maximize their wealth and their after politics career possibilities. This is where we come in. They will continue to do whatever they want to as long as our vote is no longer a check and balance on those behaviors. We have a responsibility to throw the bums out that do this to us.

So, carrots and sticks are important to economic theory and political theory. We know this. The problem is what are going to do about it?

Economic Fairy Tales and other Bed time stories

One of the things that grew out of the Reagan years was a set of myths. Primary among them were economic myths. The first one was that the country was overtaxed. The second was that there was no particular useful role for government. The third was a revival of our country’s Puritan ethos. None of these were particularly helpful and all of them were put to death–in short order–during the Clinton years by theory and empirics. Well, they were put to death by every one but those that rely on faith and ideology rather than theory and data. I see a revival of these myths in the signs of tea partiers. The tea party folks realize we’re losing our way of life. The problem is they are so angry they are looking to Reagan Fairy tales for answers. Republicans and Blue dawgs are playing those fears like magical harps. Fairy tales calm children’s fears, but they do not solve real problems.

A really good example of a stupid hypothesis in Reagan’s VooDoo economics that was soundly put to death by empirics was the Laffer curve.(That was the basis of the argument that we’re overtaxed.) However, I do know some one that has to rely on old articles to bring this ‘view point’ into his classroom. No matter how many ways I insist that it’s not our job to bring failed hypotheses to students he still keeps clapping for this very dead Tinkerbell. He wants to believe he’s over taxed no matter what the data says and I haven’t seen him for awhile but I have no doubt he’s participating in whatever passes for a tea party up in his rural part of Washington.

Paul Krugman’s hair is on fire about the Austerity Myth today. He’s not the only one. Here’s something from The Economist with the same urgency on the international scale called the Austerity Alarm. These articles seem even more prescient given the news about unemployment today. The U.S. economy is not creating jobs. It’s still losing them in large numbers. The economy lost 125,000  jobs last month. The previous dips in the unemployment rate seem to have come from part time Census worker jobs. This one comes from people giving up so they’re not counted. I warned 1 1/2 years ago that the Porkulus bill was not concentrating spending on the right things and too full of useless tax cuts. Surprise! Surprise! Job creation remains elusive. Mortgage rates are at record lows and without bribes to first time buyers, the housing market–perhaps the most central element of the American Dream Fairy tale–looks like a lost market. So, the best our leaders can do in response to all of this is reheat policies that failed during the Hoover Administration.

As Krugman points out, the U.S. and nearly all the world’s economies remain in a deep recession, so why are all the leaders talking about austerity programs and acting like the big issue is that some imaginary set of investors will treat them like Greece if they act responsibly? Why are they repeating the policies that made the Great Depression worse to begin with and then the policies that turned the recovery of the mid thirties into a double dip depression?

Krugman suggests that it’s the power of the village that keeps churning out the myth. It’s not the village economists that embrace this fairy tale. It is our village idiots and unfortunately, they seem to be in charge of economic policy these days. This is not to deny that the U.S. has long term budget problems. Demographics are presenting serious problems to both Social Security and Medicare. Both need to be revamped to meet future commitments. Revamping, however, does not mean tearing down all the buildings in the village to stop one fire from spreading.

So the next time you hear serious-sounding people explaining the need for fiscal austerity, try to parse their argument. Almost surely, you’ll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy, on the belief that invisible vigilantes will punish us if we’re bad and the confidence fairy will reward us if we’re good. And real-world policy — policy that will blight the lives of millions of working families — is being built on that foundation.

So Krugman is a liberal and of course, the argument against him is that all we liberals believe is that the our big daddy government will get us out of trouble. So, why is the same argument coming from The Economist whose subtitle to their op-ed piece reads “Both sides in the row over stimulus v austerity exaggerate, but the austerity lobby is the more dangerous”. They are hardly a bastion of liberal thinkers and they call the austerity hawkers dangerous.

The austerity fad is also distorting politicians’ priorities. Many European governments, for instance, are fixated on cutting their deficits, when they should also be trying harder to shake up their labour and product markets. A new analysis by the IMF suggests that fiscal austerity coupled with structural reforms would yield far higher growth than austerity alone. In America the new deficit-focused climate is preventing politicians from passing a temporary (and sensible) fiscal stimulus package without inducing them to tackle the sources of the country’s huge medium-term deficit by, for instance, reforming social security. The result probably won’t be another Hooveresque Depression. But it could be a recovery that is weaker and slower than it should have been.

Read the rest of this entry »