Obsessing on Economic Reality

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“My wife once told me that the thing to remember about your own obsession,” a friend recently told me, “is that it’s not the same as other people’s obsessions.”  (My obsession especially, he tactfully declined to add.)  Of course no one, myself included, wants to think or talk about economics all the time — good grief!  The thing about my current obsession with economics, however, is that we are in a crisis, and it deeply affects all of us.  And crucially, if we Americans as a group are to act politically in our own self-interest, everyone needs to understand matters that so far only some of us understand, or are only now learning about.

The problem is, too few people understand enough about economics to make sense of the current state of the American economy and the predicament it’s in, or even who’s doing what to whom.  Thus, far too many people fail to see the depressive effects of the ultra-right Republican economic agenda, and many people who are trying to reveal economic realities on TV lack the opportunity to provide the full explanations the American people need to hear, and to understand.

The Need for Reasoned Analysis

Some great economists like Paul Krugman and Robert Reich are making sound arguments, especially in their blogs, but they rarely explain why they are right, and their messages need to appear in more venues and more frequently.  The Reaganomics ideological argument that reducing taxes for rich people increases jobs and stimulates the economy is dead wrong, both in theory and in historical experience, but where are the reasoned analyses showing that?  Such analyses must be published and broadcast widely, for more than the relatively few people who surf the blogs need to be exposed to them.

Just look where we are:  The federal government is running out of the legal ability to pay its bills.  So far, the Republican and Tea Party members of Congress refuse to raise the debt limit, unless they have their way in the budget negotiations, namely: massive spending cuts to programs that benefit people (like Medicare, Medicaid, and Social Security) but no tax increases for the wealthy or corporations.

President Obama, to his credit, has so far refused to submit to this blackmail.  According to CBS News (7/14/11), he told Republican negotiators he has reached his “limit” after negotiations broke down last Wednesday, reportedly saying: “This may bring my presidency down, but I will not yield on this.”

What is the impasse that provokes the specter of such serious consequences?  Obama won’t accept a deal that doesn’t include revenue increases.  Republicans, on the other hand, say they will not accept any revenue increases.  Every time you turn on TV news, you see someone like John Boehner insisting that raising more federal revenue would be a tragic mistake.  This morning (7/17) on CNN News, Rudy Giuliani warned against “taxing away jobs.”  Given the current state of ignorance about economics in this country and the prevalence of this sort of misinformation, and with the future of the economy and Obama’s presidency at risk, the situation could not be more serious.

One crucial fact I have yet to hear explained, of which Obama is undoubtedly aware, is that under the current tax structure and without additional tax revenue, the debt/deficit problem will be doomed to continue indefinitely.  The debt will continue to grow and the deficit problems will become increasingly intractable, even with a full capitulation to the current Republican demands.  The Republican budget cut proposals weaken the economy further and reduce future tax revenues.   In other words, the Republican plans are not actually plans for debt reduction or balanced budgets – they are plans to reduce government’s role in society while America’s wealth continues to float to the top.

Wealthy people no doubt have an intense desire to hold on to the large tax decreases they have received over the past 30 years – and avoiding taxes is a high corporate priority – but with tax revenues from everybody else bottoming out in a tanking economy, the budget conundrum cannot be fixed unless wealthy people and corporations pay higher taxes.

But where are the thorough, comprehensive, objective analyses of the taxation and budget issues we all need to see?  Where are they on network news programs, or in the mainstream newspapers, or even in the blogosphere? And where are the basic studies identifying economically sensible levels of taxation for the rich and corporations?

Making Progress with Ed Schultz

Ed Schultz has done a lot recently with this topic on MSNBC.  His show has many (though not enough) viewers, but sometimes I leave his show in frustration after his guests have raised more questions than they have answered.  Regular commentators like Ron Christie aggressively promote lowering taxes and cutting “entitlement” spending as a matter of ideological faith.  I have not seen them pressed to justify their positions, however, as they appear time after time unchallenged.

Here is a recent (July 13) Ed Show segment that I found discouraging.   The segment includes a clip of Michele Bachmann arguing, unchallenged, that Obama is “holding the full faith and credit of the United States hostage” so that “he can continue his spending spree.”  Is Obama really a big spending “liberal”? Weren’t the “conservatives” who ran up $12.2 trillion of federal debt over three decades the actual big spenders?   And isn’t Obama himself being held hostage, in his defense of the American people, by those who refuse to raise the debt limit?  For rants like Michele Bachmann’s to gain any traction with Americans, frankly, requires widespread ignorance of basic economic history and reality.

The segment ends with an exchange between Judson Phillips, founder of the Tea Party, and Leo Gerard, President of the United Steelworkers.  Against Gerard’s argument that the Bush tax cuts have reduced employment, Phillips argued that you simply do not raise taxes on the wealthy:  “Who provides the jobs?” he interrupted, as the two began a brief, pointed talk-over.

Let’s answer Phillips’ question: “Employers provide the jobs.”  But so what?  Is he suggesting that employers should never pay any taxes?  If Mr. Phillips were to concede that employers should pay some taxes, then how does the mere fact that they are employers bear on whether the taxes they are paying today would be too high if they were increased?  What is the proper level of taxation for employers, and why?

We might ask:  “Who does the work, who makes the products, and who provides the services?”  The answer would be: “Employees do the work.”  Again, so what?  How does the fact that employees provide the work product even begin to explain what the proper level of taxation on their incomes should be?

To see such very important questions addressed so superficially and trivialized by the guests on major news programs is discouraging.  Whatever explanation lies behind Leo Gerard’s assertion that the Bush tax reductions reduced jobs and depressed economic activity, we did not hear it.  If trickle-down Reaganomics is wrong, why is it wrong?  We won’t get the answers we need watching most of such news interviews.  I’d like to see a one-hour documentary for TV and the internet, entitled something like:  “Wealth, Jobs, and Taxation – How the Economy Works.”  If it’s out there, let’s find it and figure out how to make it broadly available to Americans.

When I Googled “How the Economy Works,” I found this real gem, a five-part lecture series on U-Tube, How the Economy Works by Roger Farmer, which I highly recommend. [1]  It doesn’t directly address the taxation and budget issues we are talking about, but Farmer does a terrific job of tracing the evolution of economic thought from Adam Smith on down, and is especially good on the differences between classical and Keynesian theory.  Farmer aptly points out that although economics is a science, it’s not an experimental science in the traditional sense, and economic theory proceeds incrementally with new observations about how things work in new circumstances, such as the confluence of unemployment and inflation (stagflation) appearing in the 1970s.

Interestingly, Farmer’s recounting of this history does not include thinking about wealth and income inequality, but he points out that the last recession of 2008 has raised new questions for economics: Why, for example, has monetary policy run out of steam?  And, he suggests, in the area of wealth stability new ideas are needed.

My next few posts

It’s time to start answering the underlying economic questions in a more definitive, systematic way, recognizing as we do that economic theory has some catching up to do.  In my next post, I will address the topic of taxation, beginning with this excellent segment from a recent edition of The Ed Show in which Schultz presents some good analysis of his own and follows up with an insightful interview of David K. Johnson of Syracuse University.  My objective will be to explain what Schultz and Johnson are saying, and why I think they are correct.

In this segment, Schultz argues: “No one ever does a study of where we would be if we went back to the old tax rates.”  That’s a great suggestion, but unfortunately studies of that nature would be difficult, because we cannot live the last 30 years all over again.  Much else besides tax rates has changed, including the abandonment of enforcing anti-trust laws, leading to powerful and highly profitable monopolies and oligopolies, in a more rigid financially based global economy.

I must point out, however, that I have done the next best thing in this blog: I have computed the difference between the wealth held by the top 1% at today’s inequality level (percentage of total wealth) and the lower amount of wealth the top 1% would have held today at the inequality level existing in 1980, which had resulted from several decades of higher tax rates.  I have found that roughly $10 trillion of wealth moved from the bottom 99% to the top 1% with this change in wealth inequality, as a result of lower taxes on the rich.  That’s $10 trillion that did not trickle back down over the last 30 years.  [2]  I think it is crucial that everyone become aware of the consequences of rising inequality of wealth and incomes, because that change and its causes are driving all of the current economic woes of the bottom 99%.

“No one,” Schultz went on to say, “is having the thorough conversation with America right now about where we are with the finances and what we have to do to fix it.”  Well, let’s do it.  My objective in my next few posts will be to answer that call.  I will follow my discussion of tax issues with further discussions of debt and spending issues.

Everything in my undergraduate major and graduate level training in economics, and in my legal career dealing with economic and financial issues, compels me to do this work.  In my long career as an administrative law judge, I approached each issue as a pursuit for truth, and my objective was to be as thorough in my analyses and as well-reasoned in my conclusions as possible.  I felt I needed a persuasive explanation of why the losing parties lost.  This, in my opinion, is the nature of fruitful, objective analysis.

We must insist that whatever conclusions we reach are based on facts and reason, not on ideology or fantasy.  That is my real obsession:  Ideology will not do.  That is how I have approached Reaganomics and all of economic theory, and how I intend to approach every issue I address on this blog.

We must remember that we live in a real world.  Economics consists of phenomena that can be scientifically investigated.  As Farmer’s lectures reveal, it can be complicated and messy, but some basic concepts are clean, and easy to understand.   And it is no small matter that we all need a higher level of understanding to keep from shooting ourselves in the foot on election day.

I am only one person.  Dozens of economic experts, including well-known economists like Paul Krugman and Robert Reich, need to step up now and do this work too.    There is a national epidemic of Reaganomics today, and that’s the only perspective I’ve been hearing in the mainstream news.  That must be countered analytically, not just by denial.  The future is at stake for everyone in the bottom 99%.  How tragic it is that an idea so fundamentally wrong as “taxing away jobs” is leading the American people to willingly submit to, or even support, their own demise.

“We’re in a genuine crisis,” Bob Fertik of Democrats.com wrote in a recent call to arms, “and there’s no time to hesitate and no excuse to stay quiet. Stand up and speak out now!”  Especially you economists: Add your voice to the discussion.

JMH – 7/17/11

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[1] “How the Economy Works”, Roger Farmer, Pepperdine University School of Public Policy.

[2] I have also made a preliminary rough estimate of an optimal top income tax rate, one that could, together with other measures, prevent the continual rising of wealth to the top 1%, the associated impoverishment of the bottom 99%, and the elimination of the American “middle class.”  The top tax rate, for incomes over $1 million (including both ordinary income and capital gains), should be restored to 60%.  It’s important to recognize that the Bush tax cut – reducing the rate from 40% to 35% — was one of the last nails in the coffin of the American middle class.   Substantial wealth will continue to transfer to the top at the 40% rate.          

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