Tag Archives: recession

Winning the Argument on Tax Cuts and Government Spending

By Marc Seltzer; originally published at care2.com on December 5, 2010.

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It’s a funny thing.  Only about two percent of Americans make up the wealthiest two percent of Americans.  How is it then that so many Americans are willing to stand with Republicans in their efforts to lower taxes on the top two percent?

What is it about slogans like “no more taxes,” and “government spending is out of control” that are so appealing to the other ninety-eight percent of Americans?  The 98% don’t really pay all that much in taxes, and they recoup a substantial amount of what they do pay through their use of social programs such as Social Security, Medicare, Veteran’s benefits, welfare, public education, transportation, environmental protection and unemployment insurance, etc.

Liberal commentators often skip over this question and jump into the fray accusing Republicans of greed, manipulation and deception.  Rachel Maddow recently expressed concern that Democrats would compromise on the Bush tax cuts.  She railed against the Republicans’ consistent refusal to compromise and extolled Vermont Senator Bernie Sanders for blasting Republicans for cutting taxes on the wealthy at the same time as they complain about debt and deficits.

SANDERS: “We are now faced with the issue of what we do with the Bush tax cuts of 2001 and 2003, and if you can believe it, we have people here, many of my Republican colleagues who tell us, oh, I am so concerned with debt and deficits, I am terribly concerned with a trillion dollar national debt, terribly concerned, but wait a minute, its very important that we give, over a ten year period, 700 billion in tax breaks to the top 2 percent.”

“We talk about a lot of things on the floor of the Senate, but somehow we forget to talk about the reality of who is winning in this economy and who is losing, and it is very clear to anyone who spends two minutes studying the issue, the people on top are doing extraordinarily well at the same time as the middle class is collapsing and poverty is increasing.”

This is true, so why don’t Americans vote 98-2 in support of taxes and government spending?  Why don’t Democrats have more traction when they argue for raising taxes on the wealthy and spending money on social programs?

Could it be that Americans don’t feel good about taxes and government spending because they really are naturally wary of big government?  Remember that the nation was born of the fundamental principles that power corrupts and authority must be held in check.  Yet the size and scope of government today dwarfs any monarchy or authority that the founding fathers could even have imagined.  The British Empire of old doesn’t hold a candle to present day Washington.

This isn’t to say that Social Security and Medicare shouldn’t be revered and safeguarded.  But costly foreign wars and catastrophic financial mismanagement have caused more than the usual doubt or despair over government.

Anyone who argues in the public arena that taxes must be collected and spending authorized would do well to respect the public’s healthy skepticism. To speak to this concern is to talk about good management practices and improved efficiency; more persons served and better services with lower costs.  This doesn’t have to hide the difficult decisions about balancing budgets and taking care of our fellow citizens.  But it’s not enough to say the rich can afford to pay, or that Republicans want to cut spending on social programs, and think that you’ve won the argument.

Americans know that the breakdown in good government is in part because government’s very size and financial power have turned it into an unwieldy, unaccountable beast.  How the public regains control is not yet known, but those working to preserve the social safety net, should avoid collisions with the public’s genuine desire for government reform.

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Check out my U.S. Supreme Court case law podcasts at supremepodcast.com.

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Questioning Conventional Wisdom — “Jobless Recovery”

By Marc Seltzer; originally published January 6, 2010

Don’t be too sure

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“Jobless Recovery”

No adjective characterizes political and media discussions of the recovery from the 2008 recession more than the word “jobless.”

Is it true?  Have the stars aligned to deny us a bright future?  Should we be worried?

LIBERAL EXPRESSIONS OF CONCERN

One way to evaluate what people are saying is to look at their motivation.  In this case, liberals and conservatives are both motivated to characterize the job prospects as worse than they likely are.  Many liberals, such as outspoken Nobel Laureate Economist Paul Krugman, want the government to take action in support of job creation so they focus on the high unemployment rate.  Ten percent is certainly higher than a more ideal 5 or 6 percent that would be a healthy level for the economy, if it were not in either an excessive boom or bust cycle.  But the current high unemployment reflects the depth of the recession, not a “jobless” recovery.

In 2009, the growth rate only turned positive in the third quarter.  Jobs are a lagging indicator and always follow the business turn-around and improvement in growth rate by many months.

Thus, the 2009 recovery is not “jobless” because unemployment has not yet come down.  Every recession involves the loss of jobs and every recovery involves the improvement in business conditions and higher growth rate long before jobs return.

Professor Krugman is worried about a weak recovery and thus wants to see additional stimulus aimed at creating jobs.  He is particularly concerned that the slow return of jobs creates great suffering and harms employment prospects for the long-term unemployed.  His proposals could help alleviate high unemployment and move the economy more quickly towards full employment, but they do not indicate that this is a jobless recovery whereas other recoveries were not.  Rather they reflect the fact that the severity of the recession led to millions of layoffs and that it will take time for millions of workers to be rehired into the labor market.

HOW ABOUT THOSE REPUBLICANS?

On the other side of the isle, the Republicans are constantly saying that the Obama administration actions such as stimulus spending and health care reform are bad for the economy and that we are headed for a jobless recovery.  However, it serves the Republican political goals if the Obama administration can be described as failing to lead an economy out of recession.  Millions of people are unemployed and many who are employed face job insecurity.  The Republicans exploit this to political advantage by claiming that current policies are wrong and pointing to a “jobless” recovery as evidence of failure.  The Republicans will continue to have every incentive to claim that Democratic policies are causing a jobless recovery until the 2010 elections.

But that doesn’t make it so.  Remember that it is far quicker to lay off employees than it is to rehire them.  Layoffs can be done by thousands on a single day, while rehiring takes substantial human resource department efforts, paperwork and staffing in itself.  Unless employees were simply furloughed, a thousand employees laid off in a single afternoon could take months to rehire in ordinary conditions.  For this reason, and because the recession of 2007-2008 involved a spectacular financial crisis with fast and deep layoffs, reaching a peak 750,000 a month in January of 2009, unemployment may only decrease by 750,000 to two million new jobs a year in coming years.  Remember, we lost more than seven million jobs.

Nonetheless, six to eighteen months after the growth rate becomes strong, we should expect to see substantial gains in employment.  It will be correct to say during the recovery that jobs are not created as fast as they were lost, but that is a hardly the standard for a “jobless” recovery.  The real key is the growth rate.  It reached more than 2% in the third quarter of 2008.  Six months from now it should be higher still.   The activity is reflected in increased hours and temp job hires for now, but inevitably job creation will follow.

The real question is whether innovative action in the public and private sector can increase the speed of job creation without distorting the marketplace and creating waste.  Nations such as Germany subsidized jobs during the crisis to limit layoffs.  Many nations, including ours, supported public and private sectors with stimulus spending, preventing layoffs from getting worse than they did.  Now, the question is whether means will be found to efficiently return to higher employment more quickly than in other deep recessions.

May 6, 2010 UPDATE:  Recent jobs data finally confirming predictions:  Denver Post

Recession Rant

Photo: caveman92223; licensed creative commons

By Marc Seltzer; originally published July 12, 2009, at politicsunlocked.com

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As I watch news coverage of the ongoing economic crisis and responsive stimulus legislation, I am constantly reminded of Abbott and Costello’s “Who’s on First” routine, where the comics discuss names of their team’s baseball players:

Abbott:  Well, let’s see, we have on the bags, Who’s on first, What’s on second, I Don’t Know is on third…

Costello: That’s what I want to find out.

Abbott: I say Who’s on first, What’s on second, I Don’t Know’s on third.

Costello: Are you the manager?

Abbott: Yes.

Costello: You gonna be the coach too?

Abbott: Yes.

Costello: And you don’t know the fellows’ names?

Abbott: Well I should.

In October 2008, when the sky was falling, and several of the biggest entities in the financial system collapsed, economists and journalists couldn’t bring themselves to say the “R” word.

We were deep in a Recession, as it turned out.  This recession started nearly a full year earlier, in December 2007.  But the National Bureau of Economic Research(NBER), which makes the call based on economic statistics over a period of months, allowed us to endure the near collapse of the financial system without an official proclamation.

Costello: Well then who’s on first?

Abbott: Yes.

Costello: I mean the fellow’s name.

Abbott: Who.

Costello: The guy on first.

Abbott: Who.

Costello: The first baseman.

Abbott: Who.

While economists and journalists did focus on the credit crisis, conveying the dire nature of what they were seeing, and making suggestions that we might be heading toward the unthinkable – a Great Depression Sequel – we still couldn’t use the word Recession.

Then, in December (after it was announced we had been in a recession all along), the press sought to make up for lost time.  Missing out on a full year’s worth of recession talk, they cut loose with a flurry of descriptors:  a deep recession, prolonged recession, economic crisis, catastrophe, financial disaster and what may turn out to be true, the worst downturn since the Great Depression.

Costello: The guy playing…

Abbott: Who is on first!

Costello: I’m asking YOU who’s on first

Abbott: That’s the man’s name.

Costello: That’s who’s name?

Abbott: Yes.

Costello: Well go ahead and tell me.

Abbott: That’s it.

Costello: That’s who?

Abbott: Yes.

750 banks fell within months of the 1929 stock market crash which began The Great Depression.  As many as 9,000 banks continued to fail during the 1930’s.  FDIC Insurance was nonexistent, so people simply lost their money when their bank ran out of funds.

13 banks have failed so far in 2009.  Another 25 failed in 2008.

The contemporary government response has been swift, if not altogether logical.  

Deposits up to $250,000 are now guaranteed by the federal government.  Under the TARP bailout program, banks may be given funds to keep them solvent and lending.  There is a fair amount of confusion over the purpose of the program and whether healthy banks or failing ones are actually seeing the government support.  Some initial money went to Citigroup, a behemoth multi-national organization considered “too big to fail” following the events in October of 2008, when investment bank Bear Sterns failed and cracked the confidence of the entire financial system.

Costello: Look, you gotta first baseman?

Abbott: Certainly.

Costello: Who’s playing first?

Abbott: That’s right.

Costello: When you pay off the first baseman every month, who gets the money?

Abbott: Every dollar of it.

The initial $700 billion bailout was passed in November of last year and was renamed a recovery package in December.  That was soon followed by a $789 billion stimulus bill.  And as furious as we all are at the cost of this crisis, be ready for toxic asset and real estate stabilization plans which will likely total even more than these first two.

Only $500 billion of the stimulus bill is true government spending.  The rest is tax relief or, in the case of the bailouts, investments in companies that should, in theory (it worked before in Sweden), allow the government to recoup the invested money in a few years.

Costello: All I’m trying to find out is the fellow’s name on first base.

Abbott: Who.

Costello: The guy that gets…

Abbott: That’s it.

Costello: Who gets the money…

Abbott: He does, every dollar. Sometimes his wife comes down and collects it.

Costello: Whose wife?

Abbott: Yes.

The original stimulus bill was designed to create 2-4 million new jobs.  Then, as the economy began losing a 500,000 jobs a month, the language changed to “save or create” 3-4 million jobs.

Politicians and pundits who say the stimulus bill will turn the economy around may overstate the case.  So too, those who doubt it will save or create a single job.

A more reasonable assessment is that it will soften the blow and make a long-lasting recession more tolerable.

Immigration 2009

By Marc Seltzer; originally published on March 19, 2009 at care2.com

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No Easy Answers

The announcement that President Barack Obama will begin a public discussion of immigration reform in May will reawaken debate on a highly contentious issue.  At core, the issue pits those fiercely opposed to allowing illegal residents in the United States to convert their status to legal residency against those who, albeit with conditions, seek to legalize most of the U.S.’s estimated 12 million illegal residents.

Political Risks

If the President follows his campaign position in seeking a legislative solution that includes offering legal status to those in the country illegally, he will be investing his political capital in an extremely divisive issue at great political risk.

Prior to the 2008 election in which Democrats gained in both houses of congress, anti-illegal immigrant forces had the upper hand.  While Democratic gains make the congressional votes for reform more plausible, the economic crisis and growing unemployment will intensify concern that giving illegal residents the opportunity to obtain legal status will make already-difficult competition for jobs that much worse.

The President will have his hands full with this one and risks a political fight of an uglier, nastier and more divisive nature than even the financial turmoil has wrought.

Increasing Attention and Concern

The economic crisis and growing unemployment is likely to increase opposition to immigration generally and make compromise more difficult.  However, some commentators such as Thomas Friedman, in his NY Times column, have noted that allowing more legal immigration could bring wealthy immigrants eager to buy homes, shoring up the contracting real estate market.

Illegality is troubling, but what are the alternatives?

Illegal immigration presents the difficult combination of illegal entry into the United States, perceived competition for jobs, and use of public resources that is a too-bitter pill for many Americans.  Yet with nearly 12 million illegal immigrants residing in the United States, it is difficult to realistically imagine a solution that does not involve granting some form of legal status.

One approach would be to grant permission to work for a period of years, without giving traditional legal permanent residency, which begins a path towards citizenship.  However, advocates of a path to citizenship for illegal immigrants, recognize that people who have effectively moved to the U.S., will likely be in financial and family jeopardy if they are forced to leave after having lived for five, ten or more years in the United States.  This type of compromise has not received significant support from immigration opponents, either, who chafe at the idea of rewarding those here illegally with any form of legitimate legal status.

Reagan’s Leadership, or a matter of time?

One thing is certain, poor management of the immigration issue in the past has set up a nearly impossible predicament in the present.  Congress could have largely managed the issue by raising legal immigration quotas sufficiently to keep up with the needs of employers during the 1990s and first decade of the new century.   Instead, the demand for labor far outstripped the legal supply and the debate shifted to unrealistic proposals of effective border enforcement on the one hand and mass deportation on the other.

In the end, Obama’s political skill and the Democratic congressional majorities may forge a “legalization” solution, much as Ronald Reagan did in 1986.  However, the opposition will be charged, and losing control of the issue could not only lead to defeat of immigration reform, but chip away at the President’s momentum and, so far, commanding authority.  While both sides in the debate should compromise and seek to offer creative solutions to the real problems that exist, within their principles, there will be those primarily looking to use the issue against Presidential authority and to position candidates for the 2010 congressional elections.

What to expect, at least initially

President Obama will likely push for a legalization process that aims to implement legal status after the recession eases and the unemployment rate declines.  Mr. Obama is opening the debate in May, and it would not be a surprise for legislation enacted in 2009 or 2010 to provide opportunities for legal status in 2010, 2011 or 2012, when employment is predicted to increase, if the recession ends.

Any proposal is likely to impose penalties and conditions as an attempt to deal with and discourage “unlawful” entry and residence.  More today than in the past, surveillance technology at the border and electronic identification procedures in the workplace make future enforcement of immigration laws possible, although by no means guaranteed.

UPDATE: In Immigration Solutions I push towards a compromise and ask both sides if they are willing to meet half way.  Whether it was because his hands were full with health care of because the prospect for immigration reform legislation was not good, President Obama has put off immigration legislation for at least a year.  In a later post I will review what is going on in enforcement and changes that result from the economic downturn with respect to illegal immigration.

The Right Direction Now and For The Future

To Senators Obama and Reid and Representative Pelosi:

In the sixties, President Kennedy put hundreds of thousands to work on the space program, putting a man on the moon, aptly symbolizing American leadership, and foretelling United States military superiority and civilian commercial dominance in aerospace and communications for thirty years. The technological advantage American industry gained on the investment could not have been achieved absent the governmental commitment or resources. 

In the eighties, President Reagan funded Star Wars, which achieved little in missile defense, but nonetheless, changed the world, leading to U.S. civilian computer, satellite and Internet superiority and prosperity for another thirty-year period.  The time is again right for government investment in creating the future. 

First, the beginning of a recession is a good time to act, because stimulus is helpful, jobs are at stake, and a government-funded program will immediately instill confidence in long-term labor conditions.  This is far more productive stimulus than refund checks, which do ease family budget concerns, but only  marginally improve commerce.  They do little to support employment prospects and nothing to support long-term wealth creation.

Second, there are many areas, such as pharmaceutical research, Green technologies or military hardware, that require massive investment to achieve their full potential.  No one can claim that research and development in alternative energy or pharmaceutical testing is near capacity.  Both are so financially risky that only a fraction of what could be done is being done, even though the lives of millions and the future economic health of many nations hang in the balance.  As with past science and technology programs, the initial public investment in energy, medical or environmental technology would surely be followed by decades of highly profitable private business applications.

Finally, the arguments against publicly funded investment misunderstand the real problems of government spending and deficit spending in particular.  We can agree that private investment and direction of resources is superior to public, and yet still acknowledge the need for a military, Civil Corps of Engineers, or law enforcement to meet national needs.  In the 1940s, the Government put the nation to work to produce armaments on a vast scale enabling our defeat of Fascism. Some tasks are just too large to be left to the private marketplace. 

The real question is what should public money be used for, and crucially, what should it be used for when we are over budget? 

The answers are not the same.  Most commentators today oversimplify the issues surrounding deficit spending.  They assert that a balanced budget or small deficits are always good and large deficits are bad, with the caveat that deficit spending during a recession is good as it stimulates the economy while spending during high growth periods is bad as it adds to inflation. 

Without more, neither view is adequate. 

Deficit spending is essentially borrowing from the future for the present.  Thus, deficit spending can be thought of as irresponsible, and in some ways unethical, because it uses future resources to satisfy today’s needs.  However, deficit spending only depletes future resources and weaken financial integrity when it does not lead to long-term financial health.  When such spending is for infrastructure and facilitates wealth and revenue in the future, it is neither irresponsible nor unethical. 

Such spending should be judged on the benefit versus risk of success at achieving its goals.  Kennedy’s Sending of a Man to the Moon was a huge risk, but it paid off handsomely in its political, scientific and commercial legacy.  Reagan’s Star Wars research was less of a reach and it paid off, even though the goal of the original research has still not been achieved.

In this light deficit funding for Green technologies would stimulate the economy during a recession and, if successful, would lower energy and environmental costs in the long run.   This is how prosperous periods have occurred.  Improvements in productivity mitigate inflationary pressures while increasing wealth during economic expansion.  

Politically and commercially the benefits are obvious as leadership and wealth will be the rewards to nations that meet the challenges of the future most efficiently and profitably.  Medical research presents similar cost/benefit prospects and military investment, though to a lesser extent, may also be useful given the difficulties we have had achieving military goals in the past decade.

The alternatives pale in comparison.  Giving stimulus to individuals and businesses in the form of refunds or tax cuts at a time of economic slowdown has short-term social and economic value at a cost that is roughly equal to what has to be paid back later with interest.  Investing in roads and bridges provides some job support and infrastructure upkeep, but no dynamic future benefits.  Doing nothing has such great lost-opportunity costs.  On the other hand, investing in the technology of the future will have a modest short-term economic benefit in confidence and jobs, and in the long term, if past is prologue, it will present unimagined opportunity.

Marc Seltzer