Tag Archives: stimulus

Making Sense of Obama’s Tax Compromise

Marc Seltzer © 2010

By Marc Seltzer; originally published at care2.com on December 8, 2010.

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The Obama compromise, which renews existing tax rates for middle class and wealthy Americans and continues tax incentives aimed at speeding economic recovery is not as simple as it seems.

At first it appears that the President allowed wealthy Americans, who have done exceedingly well in the past decade and generally survived the economic crisis with losses, but not foreclosures or unemployment, to win a battle in class warfare.  It is true that letting the Bush tax cuts (for Americans earning more than $250,000) expire would have forced the wealthy to contribute significantly more to the public budget when high unemployment and underemployment were causing a great deal of stress and suffering to middle and lower class workers. In a simple contest over redistribution of wealth, wealth won.

In the larger context, the President’s compromise may have been a significant achievement.  The President is working to stimulate the economy to speed economic recovery.  The best way that he could have done this without continuing tax cuts for upper incomes would have been to let those tax cuts expire and separately to provide a major new stimulus to the economy.  This could have taken the form of a half-trillion dollar infrastructure program or multi-year green-energy committment to make American energy consumption more efficient and take a leadership role (now held by China) in developing green-energy technology.  However, there was not enough support in Congress, let alone the public at large, for such a major new stimulus program.

Without new stimulus spending, the higher tax rates, as Bush tax cuts expired, would have taken money out of the private economy.  This money would go as tax revenue to pay down the deficit, but would not create new public spending or jobs without additional stimulus legislation.

This is the real problem.  The economic recovery is not yet fast enough or strong enough to endure, without harm, tax hikes, absent a corresponding increase in stimulus from another source.  Yet no other stimulus was politically available.

This put the President in the position of having to accept a renewal of all the Bush tax cuts, to keep the economy from losing steam, at least while the economic recovery was weak.  The two-year tax-cut extension was the estimate of that vulnerable window of time.

Importantly, the high-income tax cuts were not the whole deal, they were only the Republicans’ bargaining chip.  As David Leonhardt reports in the New York Times, the President got unemployment benefits extended, a cut in the payroll tax and some business taxes and college tuition tax credits in addition to continuing the lower tax rates for middle income earners.  The President’s package amounts to significant new stimulus over and above continuing the Bush tax rates.  Economists like Paul Krugman and Christina Romer have said, since the financial crisis, that more stimulus was needed to keep the economy growing and to support employment.  The fight in Congress and in the general public has been about how much to spend on stimulus, in light of the deficit and the Republican preference for free-market solutions and lower stimulus spending.

Seen in this light, the President was able to provide significant governmental support for economic and job growth, at the cost of lower tax rates for the wealthiest two percent of Americans than was the President’s preference.  The President ran for office asserting that wealthy Americans should pay a greater share of the nation’s tax burden to insure that all Americans could afford health care and the continuance of social safety-net programs.  However, the economy was not yet in crisis, the unemployment rate not near 10%.  In the current circumstances, the President must focus first on supporting the economy with stimulus and spending, even in the face of the deficit and his stated belief that wealthy Americans should, in the long term, contribute more.

As the growth rate improves, and unemployment comes down, it will be appropriate to cut spending and raise taxes to balance the budget and make decisions about fair contributions from different income earners in society.  For those that believe in a more progressive income tax with higher earners paying more than the historically low levels they pay today, the real fight will be in two years’ time, when the economy is stronger, and the primary consideration of a tax hike on the affluent will be social justice and the great disparity in incomes between rich and poor, rather than the impact on the overall economy.

Economists will still argue about how much impact tax hikes on wealthy Americans will have on the wider economy and politicians will continue to argue about the social justice goals of a progressive tax system, but the context should be quite different.  Hopefully, substantially more of the millions of unemployed Americans will be back at work and the growth rate will have continued to improve.

UPDATE DECEMBER 11, 2010:  Bill Clinton discusses tax compromise

Marc Seltzer is also a contributor to SupremePodcast.com, a weekly U.S. Supreme Court case review podcast.

Hate That Obama’s Near the Middle? Think Again

(Photo:  Obama speaking in Europe, where his views are well received and highly regarded)

By Marc Seltzer; originally published on April 13, 2010, at care2.com

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Contrary to all the talk of disenchantment with the state of the nation, there is reason to be optimistic that President Obama is leading the government in exactly the right direction.  While his critics voice disappointment and outrage, calling on Mr. Obama to govern to the left and to the right, President Obama governs by judgment, not ideology.  This will always disappoint ideologues who see the world through conservative or liberal glasses, but do critics have credible political ideas behind them?

At the outset, a few things need to be set straight.  First, the biggest thing President Obama has done since taking office is not health care reform.  (Complete Story)

To Protest or Reform — Who’s Messing with Our Minds?

(photo:  Greece’s P.M. Papandreou and France’s Sarkozy in Davos, Switzerland, recently, managing economic turbulence)
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By Marc Seltzer; originally published on March 19, 2010, at care2.com

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There is still a strong undercurrent of anger in the United States about bailouts and stimulus spending.  Republicans, and even Democrats and Progressives, have reacted angrily to President Obama and his financial team.  This is significant because President Obama lost political capital on the economic recovery plan, and has far less power now to push though health care, education and financial reforms than he would have absent these actions.

The common critique from the Right is that Mr. Obama is moving in a socialist direction, while from the Left it is that Geithner, Summers, Romer and Bernanke, the U.S. government’s economic chieftains, are corporatist and beholden to the bankers.

More puzzling than the conservative complaints about the administration’s stewardship of the economy, is the Left’s opposition to it.  A significant part of the Democratic party seems to believe that our current leadership is on the side of the wealthy in a new class struggle, and that the government bailouts have effected a transfer of wealth from the little guy to the fat cats.  To be fair, this antagonism towards saving the financial system is in part a more structural distaste for corporate political and legal power — unrelated to recent U.S. government actions.  None-the-less, Obama is now trying to enact reforms in this across-the-spectrum, anti-government political climate.

To challenge the idea that Obama’s actions were pro-bank, pro-corporate, or designed to bail out the fat cats at the expense of the public, I want to compare the European response to the financial crisis with U.S. actions.  European nations, often called “social democracies,” are respected by the American Left and cited as examples for their stronger safety net of worker protections, health care and liberal benefits.

Jean-Claude Trichet, the head of the European Central Bank, equivalent to our Federal Reserve Bank (Ben Bernanke), said recently about American and European government interventions:

“We had to put on the table on both sides of the Atlantic around 25% of taxpayer risk to avoid the Depression, a major Depression, which would have come had we not been that bold.  When I say we, I mean the governments.  Of course, the central banks also have been very bold, in engaging in non conventional measures — the Fed and us [European Central Bank].”  (Bloomberg on Demand, March 12, 2010, from interview with Tom Keene)

What is insightful here is that European governments and related institutions behaved much as the American government did.  As the New York Times reported in early 2009:

“So far, Europe’s largest economies, France, Germany and Britain, have been spared demonstrations. All three governments have introduced huge stimulus measures aimed at spurring employment and protecting banks.

Regardless of the outcome, the three countries will face large budget deficits and higher state borrowing, which economists say will be passed on to taxpayers. And in the case of France and Germany, the governments could find it more difficult to introduce bold reforms at a time of recession.” (New York Times, January 26, 2009.)

To be sure, European nations have faced public protests over the past year, including demonstrations in recent weeks against the Socialist government in Greece.  And modern European nations are a mix of strong state intervention in industry and free markets.  But despite their more left-leaning perspectives, European government actions to save banks and support their nations’ economies with emergency stimulus spending, resemble US approaches.

The underlying reason for this is plain: Healthy economies require healthy banking systems.  The only other option for lawmakers in 2009 would have been to nationalize, through government takeover, the major banks and investment companies.  This would not only have been too radical for a young American President in the first days of his Presidency, but was not favored by European nations, which, despite more Socialist political visions, prefer to keep most individual businesses in the hands of private owners.

It is as much of a stretch to believe that Barack Obama, community-organizer-turned-politician, attained the Presidency in order to embrace the rich and powerful over the little guy, as it is to draw the conclusion that the Socialist and left-leaning governments of Europe transformed in 2009 into standard bearers for corporate and special interests across the Continent.

Why the American Left should find itself so opposed to the positions of both European and American governments requires little guesswork.  The greed, irresponsibility and power in the financial system made the public angry.  The Republicans, with little post-election political power and prospects, turned anti-corporate anger into anti-government anger with some clever “grass roots” anti-Democrat marketing messages.

Now, instead of joining the administration and embracing reforms, many a Democrat flirts with anti-government energy, which is really just self-serving partisan manipulation pushed by the Republican party.

Democratic Congressman Dennis Kucinich, in discussing his last-minute decision to vote for the President’s health care reform, acknowledged the tension between pressing for progressive reform and falling into a trap laid by the opposition:

“With three years left in the Obama Presidency we have to continue to encourage him, but we’ve got to be careful that we don’t play into those who want to destroy his presidency and say, you know, the birthers and others who say he should never have been President to begin with.  There is a tension that exists. . . .  we have to be very careful about how much we attack this president even as we disagree with him because we may play into those who just want to destroy his presidency.”  (Democracy Now!, March 18, 2010 (radio interview with Amy Goodman))

Careful indeed!  It’s about time.

Bailout Losses Smaller Than Expected

By Marc Seltzer; originally published on December 6, 2009, at care2.com
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The good news is that the losses from the government bailout are far less than many feared.  The New York Times reported yesterday that the Treasury currently counts losses of only 42 billion dollars out of its several hundred-billion-dollar rescue program.

Of course, 42 billion is still beyond comprehension.  It is bad news to lose those public funds, and there are other funds still at risk.  Nonetheless, it’s better than the hundreds of billions that were in doubt.

In fact, for those who feel that the government bailed out Wall Street at the expense of Main Street, the facts may prove otherwise.  It turns out, for example, that the banks are rapidly repaying much of what was given to them.  The financial industry still has TARP funds that may cause public losses over time — no final accounting is available — but the largest share of the current estimated losses, 30 billion, come from the bailout of automobile giants G.M. and Chrysler.

The bailout of the Detroit automobile companies was designed to protect Main Street, not Wall Street.   Middle class workers at the big factories and at the auto-parts supplyers would have lost their jobs without government intervention.  The U.S. was losing more than 500,000 jobs a month at that point.  Adding auto factory closures, that number might have hit a million a month, and who knows what else might have collapsed?

I am still haunted by Thomas Friedman’s New York Times Op-ed saying that giving money to G.M. and Chrysler might stop smaller, greener, entrepreneurial auto innovators from inventing the wonder cars of the future because the competition from a subsidized G.M. was too great to overcome.  Be that as it may.  Main Street jobs and an entire industry were saved at a point when the economy was very vulnerable.

The bailout of the banks, though ostensibly done to save the financial system, gave the government rescue a bad name as it appeared to protect Wall Street over Main Street.  It certainly saved financial industry shareholders and employees from their share of losses.  It turned even uglier when it created windfalls in compensation for the already rich.  However, if the bulk of the money lost went to saving middle class jobs and helping the car companies retain some value in the bankruptcy reorganization process, we may need to rethink who we say was bailed out and why.

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December 7th, 2009 UPDATE:  Food for thought in Newsweek’s take on the jobs data.

December 9th, 2009 UPDATE: A NYT article on the congressionally mandated review of TARP’s effectiveness.

Can We Have Accountability with Our Stimulus?

Originally published at http://www.care2.com/causes/politics/blog



President Barack Obama and the 111th Congress have achieved their goal of creating stimulus legislation to bring aid to the declining economy.  

While both parties agreed that some action was needed to stimulate the economy, the Democratic embrace of public spending did not receive Republican support. Both sides did agree on tax cuts, which put more money in private hands, where it theoretically could be entrusted without fear of misuse.

Remarkably, the stimulus legislation was assembled, debated and negotiated quickly and follows the Bush administration’s $700 billion financial support program, showing both administrations’ willingness to act quickly and boldly–to avoid mistakes made by Depression-era governments.

The public has largely followed party positions with Democrats accepting President Obama’s claims that spending, with accountability, is necessary and proper, and Republicans rejecting public spending beyond the financial bailout as unjustified, except that a significant vocal minority of the public from across the political landscape believe that the government’s management of public funds is corrupt, self-serving, and unnecessary.

The conflict highlights a problem President Obama gave voice to in the 2008 presidential campaign, before the economic crisis captured center state. Many Americans have lost faith in their government. They perceive government as the game board of the wealthy and powerful, where tax revenues and rights to government spending are divided up by lobbyists and their representatives in office.

The truth is likely more complicated.  But Obama campaigned for more openness and accountability in the federal government, and crucially in the government’s use of public funding. Now is the time to make good on those promises.

Both the Treasury plan to support bank balance sheets and real estate values and the new stimulus legislation will only gain legitimacy if the public believes that they are worth the money. President Obama must put great effort into communicating and demonstrating that each dollar was spent wisely, obtained value, and served a public purpose that could not have been achieved otherwise.

This is no easy task. But with such doubt in the responsibility of government and the economic justice of our system, it is necessary. When the crisis ends and President Obama needs to move to the difficult tasks of cutting government spending, including entitlements, and working again towards a balanced budget, such calls for sacrifice by our leaders will require for their success the trust of the American people.

Economy in Decline (part 2 of a 3 part series)



Stimulus legislation comes in at $789 billion.


As the stimulus legislation is formalized into law, the public is still reeling at the price tag.  

Congress has committed $789 billion in new spending and tax relief, as well as the $700 billion already committed in October of 2008 to support failing banking institutions and an additional $2 trillion dollars, proposed by Treasury Secretary, Tim Geithner, to support financial and real estate sector recovery.

Economists from government, academia and business, whose trade is big numbers and abstract concepts, have been at the forefront of analyzing this crisis.  There is fervent activity among economists across the political spectrum and disagreement as to what should be done to solve problems that individually and collectively are not exactly like those faced, studied and dealt with in the past.

A Major Government Effort

A significant number of leading economists agree that stimulation of the economy, as it slows, will help counter the worst effects of its decline. 

This is more than a political concern for the personal hardships of unemployment, foreclosure, bankruptcy and lost opportunity that recessions engender.  The overall cost to the nation in growth, productivity and economic leadership is also significant.

With an economy estimated to lose trillions of dollars in activity because of the credit crisis and recession, only a massive stimulus law could have substantial impact.

Painted with a broad brush, the stimulus bill gives money to the pubic in the form of tax cuts ($282 billion – $400 per individual, $800 per family or $250 in Veterans and Social Security benefits) and increased unemployment benefits.  It increases public spending ($507 billion) on a wide variety of programs including infrastructure, green technology, support for cancer research and education.  It also provides emergency funding to states ($87 billion) to support state Medicaid funding.  

The hope is that this money will keep people employed, spending and receiving services until the worst of the recession is over and private business activity resumes at a level sufficient to increase employment, spending and tax revenue.

Doubts and Fears

The bill is only a part of the government’s efforts to remedy the economic decline, and yes, the price tag is staggering. 

Despite fears about the economic decline, many Americans have expressed concern and outrage at the scale of public spending, fearing that the money will be wasted and that increasing the deficit will pass the buck for fiscal responsibility to our children and grandchildren.  

Some accept the tax cuts as needed for stimulation of the economy, preferring money in private hands to government spending.  The abrupt increase in public spending also raises fears of inflation in the long run, even as deflation from falling prices and incomes is the current worry.

Among supporters, there is the belief that money lost from the private economy should be made up at least in part through public and private spending, but also that public services have been shortchanged and commitments to public education, green initiatives and infrastructure will improve the nation and lives of citizens.

Costs and Benefits

The real aim of the legislation is to stabilize the economy by supporting business activity through the most dangerous phase of the slowdown.  President Barack Obama has spoken of keeping the recession from spiraling downward as more layoffs cause more foreclosures and drops in personal and business spending, eventually leading to more businesses closing their doors and a snowball effect of economic contraction.

An alternative to this action is to accept dramatic decreases in economic activity with resulting unemployment, business closures and cuts in government services and wait for the eventual economic recovery.  

While this approach would risk less in the way of upfront public spending, current leaders feel that to do nothing or only cut taxes, when the risk of long-term economic decline is significant, would be to repeat the mistakes that led to the Great Depression, which lasted more than a decade.  Other proposals, such as one for a short-term capital gain tax waiver to stimulate reinvestment and market confidence were ignored in this bill, but remain available to a government firmly committed to fighting large-scale economic collapse moving forward.

From this perspective, the aggressive action taken by Federal Reserve Chairman Ben Bernanke, Treasury Secretaries Henry Paulson and Geithner, President Obama and two Congresses seem promising.   

The government is being responsive, bold and aggressive.  Now, whether it will work, remains for the future to tell. 

Our Government in Action — Will Stimulus Succeed?

By Marc Seltzer; originally published on November 17, 2008, at politicsunlocked.com

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Know Your History
The Federal Reserve lowered interest rates back in 2007, with hopes of persuading businesses to borrow more money, bolstering their operations and growth.  Unfortunately, there is a considerable lag time between when rate cuts are enacted and resulting increases in business activity occur.  These rate cuts may have stopped even more dramatic declines than we are currently seeing, but they certainly have not reversed the downward slide in stock prices or business activity leading the global recession.

Consumer and business spending reflects confidence in stable prices, employment and business prospects.  As exploding oil prices sucked up a disproportionate share of family budgets and business profits and as real estate values declined, confidence fell.  Now, with the unemployment rate rising significantly, people are increasingly less confident, and more importantly, spending less, regardless of whether they have a job or not.

Now What?
The talk in Washington and near water-coolers around the country, concerns fiscal policy related to revenue and spending.

There are two approaches:  Lowering taxes to leave money in private hands and government spending to boost commercial activity and jobs.

Polls have found that the middle class tended to pay off debts and save for a rainy day with recent tax rebates, although these rebates were meant to stimulate spending in the economy.  Small tax cuts for a distressed middle class may ease hardship in the heartland, but have not stimulated the economy as predicted.

On the other hand, rebates for the lowest income segment of society are immediately put back into the economy, being used on day-to-day necessities.  Tax cuts for wealthy Americans may promote entrepreneurial enterprise, but were already significantly lowered during the Bush administration.

President-elect Obama campaigned against the widening gap between the richest members of society and the middle class, so it is unlikely he will lower high-end income taxes further.  However, Obama may decide to delay repealing Bush’s tax cuts for the wealthy, so that in the near term, this money could enter the economy directly rather than being paid to the government.

Government spending programs also face a significant delay from the passage of legislation until full implementation.  If we could predict recessions more than a year in advance, it would be highly advantageous to commence most of our nation’s infrastructure spending before recessions and slow public spending when the economy heats up.

Traditional stimulus legislation allocates public money for infrastructure, although bailing out the auto industry could also be seen as maintaining or promoting economic activity.  Spending on defense programs such as FDR’s Manhattan Project or Reagan’s Strategic Defense Initiative, “Star Wars,” also created jobs, as did civilian spending, such as the Kennedy’s Moon Mission and the great dams of the Tennessee Valley Authority.  “Star Wars” led to a boom in civilian software and Internet technologies, which were responsible for a lion’s share of the prosperity and productivity gains in the 1990s.

President-elect Obama gave a hint of his thinking on fiscal stimulus recently, responding to a reporter’s question about aid to the auto industry, “It should be a bridge to somewhere, not a bridge to nowhere.”

The real risk with government spending is not deficit, but waste.  Temporary deficit spending that produces a stronger economy, more prepared to compete in the global marketplace, is well worth the cost.  Infrastructure such as bridges, ports, green technology and alternative energy or even a trained and educated workforce, that advances the productivity and competitiveness of the nation, creates employment and serves the long-range national interest.

However, if the money only temporarily stimulates jobs and spending, but produces no long term productive gains, it will be just a “bridge to nowhere,” the moniker attached to an expensive and unnecessary Alaskan pork-barrel spending project.  Such wasteful spending not only uses up limited resources, but increases the deficit without providing improvement to the foundation of our future economic prosperity.

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