Category Archives: Fiscal Cliff

Business Insider-Krugman Has Won

Business Insider Henry Blodget has posted a great piece titled: The Economic Argument is Over–Paul Krugman Has Won.  A worthy, very quick read of the debate and evidence as to what happens when austerity is applied. Pretty much all points Paul Krugman has been making for five years now. Couple quotes here:

“So the empirical evidence increasingly favored the Nobel-prize winning Paul  Krugman and the other economists and politicians arguing that governments could  continue to spend aggressively until economic health was restored. And then, last week, a startling discovery obliterated one of the key premises  upon which the whole austerity movement was based.”


“And in the meantime, for the sake of the country, it would be nice if our  government came together and agreed to restore full funding for basic  services. Because the current state of government dysfunction in  the United States is not just economically harmful. It is also embarrassing,  depressing, and based on a premise that is now demonstrably false.”

Keep Kicking This Horse

A short look back at post recession jobs in a continued effort to keep the R-R discussion alive. Perhaps surmise over what worked well in the past, diffuse a couple myths regarding past policy, and ponder at what could have been without the misguided effort to cut budgets at perhaps the worst time.

BUSHvOBAMA_jobsREVFirst one from my own archives…the comparison of public sector and private sector job growth between the current and last administrations. Pretty surprising given current conservative rhetoric about how much smaller they prefer government.


Next we have a look at what happened to federal growth during the Reagan Administration. Again conservatives grew government.


And here is an interesting one again from the pre-election americanmoneylies archives, a comparison of where unemployment would be IF the current (Obama) administration had spent and retained government at the same rate as the Bush Administration.

Unemployment if Government Remained at Bush Levels

Unemployment if Government Remained at Bush Levels

Oh what a recovery it might have been with all those folks working and paying taxes in lieu of being cut, then held from a complete fall under our social safety nets…costing the feds additional spending anyway. With the R-R theory in shambles there is still time to frame a reasonable response. And a response demonstrated acceptable to the GOP when it was “their guy” in office.

Austerity Change Needed

Aftermath of the Rogoff and Reinhart; Growth in a Time of Debt is indeed causing a stir. I am hopeful …far from optimistic.

Economists continue to cite the major errors of the R-R study and resulting missteps of the financial leadership. Mitchel got right to the point stating how Elementary misuse of spreadsheet data leaves millions unemployed  Followed by almost everybody who’s anybody in the economics world. The iterations are evolving to sound similar as in what could be, or could have been, if we’d avoided all the cuts this error filled research helped drive.

One catching my eye is yesterday’s print by Paul Krugman, The Non-Secret of our Non-Success.  His usual style parks responsibility squarely. Here a quick look at his data comparing the historical post-recession average with what it is after all the missteps for both the EU and US.

Average vs Current Policy-krugman

Here’s real primary (non-interest) spending, from the IMF’s latest World Economic Outlook, with the blue lines representing the historical average in recessions and aftermath, the red lines representing current policies:

The question remains as to what if anything, the folks in Washington and the IMF do. Will they continue holding to the wrong note and the hope it gets right (like a classic blues progression) or will they understand they have been lied to and misled and make the right choice?  History makes a loud statement. Here’s to hoping legislators are reading and listening.

Income Inequality—Day Three

A look at why such inequality of income distribution is occurring. Just why are the rich getting so much richer and the poor getting poorer? Capital gains and dividends. But don’t take my word for it.

Thomas Hungerford, leader of the Congressional Research Service study Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 has just concluded another study addressing Income Inequality. Changes in Income Inequality Among U.S. Tax Filers between 1991 an 2006: The Role of Wages, Capital Gains, and Taxes, Thomas Hungerford, 23 January 2013 takes a look at the income distribution and elements the of influence. One important note made by Hungerford during his discussion whether it is good or bad to have this growing wedge talks about another very important issue, the potential for upward mobility. Being low/middle class isn’t really a bad thing IF I can work really hard and smart and move up…the American Dream right? Unfortunately research indicates income mobility is not very great and the degree of income mobility has either remained unchanged or decreased since the1970s (Hungerford 2011, and Bradbury 2011). It looks that if we fail to do something different, the American Dream may be on life support at best.(I really recommend a read of the Bradbury paper, she advises the Federal Reserve and her work is extensively documented)


A graph of the Hungerford study findings

But here are a few key points from the January research The single greatest driver of income inequality over a recent 15 year period was runaway income from capital gains and dividends.”

And direct from the report abstract: “Changes in wages had an equalizing effect over this period as did changes in taxes. Most of the equalizing effect of taxes took place after the 1993 tax hike; most of the equalizing effect, however, was reversed after the 2001 and 2003 Bush-era tax cuts. Similar results are obtained with other inequality measures.”

Or, as Hungerford put it in an interview with Greg Sargent: “The reason income inequality has been increasing has been the rising income going to the top one percent. Most of that has come in capital gains and dividends.”

In other words, wealthy beneficiaries of low tax rates on capital gains and dividends are doing extremely well — and their runaway wealth is a major driver of income inequality. A lot of that money could and should be taxed as ordinary income — as some folks in Washington want as a way to help resolve the sequester, and many believe is a way to reduce the growth of income inequality.

As a next project I hope to do up a couple tax examples to demonstrate the differences in how our current tax rates and rules affect the tax bills and percent paid by some hypothetical couples in each of low, middle, and high incomes. What I’m most interested in is how differently incomes are taxed dependent on from where the income was received. Do you work for it? Or do you already have so much you don’t need to?

1937 all Over Again

Can’t help but note that even Jim Jubak is concerned about a repeat of 1937 when cutting the budget too quickly plunged the economy into the dreaded double dip.

 I’m pretty sure that we can’t yet declare victory in the Great Recession, since the specter of a repeat of 1937 still hangs over the global economy. As Federal Reserve chairman Ben Bernanke knows well, 1937 is the year that overconfidence in a US economic recovery led Congress and the President to aim for a balanced budget in the belief that the Great Depression was over. That mistake ushered in another economic downturn that wouldn’t itself be ended until the “economic stimulus program” known otherwise as World War II.

So far that makes Krugman, Bernanke, me, and now Jim Jubak. OK there are a few more, but apparently not enough in the House and Senate. Hello?

As the saying goes, “those who fail to learn from history are doomed to repeat it.” At who’s expense is the real concern…

Blinded by Belief

If someone had told me a few years ago that human beings could completely ignore facts simply because of their beliefs I would have called them wrong. Well, I am wrong. I held human kind in high esteem thinking education, reason, conscious thought could influence them to the truth, at least a large degree of the truth. We see by virtue of Tuesdays Business Insider survey and report, just how wrong I have been. Human opinion IS indeed influenced by what they want to believe, apparently politicians too.

The beauty of this survey is in the methodology, laying out solution options for the self imposed sequestration problem, but stripping away all indicators of political party, title, or who sponsored the plan, these pollsters put potential solutions to the public and the public has spoken. In such a big margin there really is no room for interpretation, they have chosen a strategy far different than their (alleged) representation.  Will Washington listen?

     “The poll asked participants to consider the core points of three sequester replacement proposals in Congress, without telling them the partisan affiliation of those plans. It found that in some cases, both Democrats and Republicans actually opposed their own party’s plans and/or backed their adversaries’ proposal.”

Democrats, Republicans, and Independents, read each proposed strategy and gave their preference, true democracy in action. The result in that most self identified Republicans disagree with strategy put forth by Republican leadership, instead choosing the option pushed by House Progressive Democrats. In a blind poll, verses one in which who put forth what, unencumbered by public arguments influencing the outcome, the strategy put forth by the House Progressive Caucus has the public support as the option considered mast palatable, workable, and good for the country.

     “The House Progressive Caucus plan replaces the entire sequester with a new plan with equivalent savings. It accomplishes this by ending subsidies to fossil fuel companies, closing several tax loopholes, cutting the corporate meal and entertainment tax deduction at 25 percent, and enacting a 28 percent limit on certain tax deductions and extensions”

In the end, while many humans may truelly not have the ability to set aside preconceived preferences, they chose good option in the blind. And in a democracy, they speak. I sure hope Washington pays attention. After all legislators are the ones who created this self imposed problem in the first place.


I’ve mentioned once or twice…OK maybe a few times more how bad an idea it is to cut the Federal budget right now. Oh it can be cut and should, but not now while still climbing out of a recession. I even talked about how much less unemployment we would have right now if we had grown government (like during the Reagan and Bush administrations. There have been few believers. Unfortunate.

But now with sequestration a few days away, somebody is actually getting, and more importantly transmitting, the same message.  Not just anybody, let’s hear it for Fed Chairman Ben Bernanke. He deems it “significant headwind” From his comments yesterday:

    “The challenge for the Congress and the Administration is to put the federal budget on a sustainable long-run path that promotes economic growth and stability without unnecessarily impeding the current recovery.


Significant progress has been made recently toward reducing the federal budget deficit over the next few years. The projections released earlier this month by the Congressional Budget Office (CBO) indicate that, under current law, the federal deficit will narrow from 7 percent of GDP last year to 2-1/2 percent in fiscal year 2015. As a result, the federal debt held by the public (including that held by the Federal Reserve) is projected to remain roughly 75 percent of GDP through much of the current decade.


However, a substantial portion of the recent progress in lowering the deficit has been concentrated in near-term budget changes, which, taken together, could create a significant headwind for the economic recovery. The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise. A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO’s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant. Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.”


“To address both the near- and longer-term issues, the Congress and the Administration should consider replacing the sharp, frontloaded spending cuts required by the sequestration with policies that reduce the federal deficit more gradually in the near term but more substantially in the longer run. Such an approach could lessen the near-term fiscal headwinds facing the recovery while more effectively addressing the longer-term imbalances in the federal budget.”

It’s getting less lonely over here.

Deficit Myths

     Many put forth by business, bankers, and political parties, some by individuals often with personal gain as motivation. It is most unfortunate when we see masses in belief of these myths, supporting political action which would not be supported if truth were known.

 Bush Obama Spending    Paul Krugman hit on one this week in his discussion of the national deficit and debt. He points out as many have before the myth that the debt is growing because of massive growth in the U.S Government. It is just not so.    He offers a comparison of deficits among past administrations IF we can consider the GDP as a constant vs the up/down that it really is, just like using 2013 dollars to compare prices.



  “The fiscal debate in Washington is dominated by things everyone knows that happen not to be true. One of those things is the notion that we have a fiscal crisis, an assertion belied both by the low interest rates at which the Feds can borrow and by the fact that medium-term deficit projections really aren’t that alarming. Another is the notion that our current deficit is driven by a surge in government spending.”



BUSHvOBAMA_jobsREVWe’ve taken a look here at government employment in the past and the numbers show unequivocally that government has not grown at all; in fact it has gotten smaller over the last four years. Yet we see calls to cut its size, reduce support for programs, and cut back on this “liberal” growth.


    This week Mr. Krugman approaches the reasons why. We agree and believe credibility counts. We called out Paul Ryan the day his candidacy was announced. So here is Paul Krugman’s take.

“most of the deficit scolds don’t really care about the deficit; it’s all really about using deficit fears to bully us into downsizing government and tearing down the safety net. Remember, three of the leading deficit-scold organizations gave Paul Ryan an award for fiscal responsibility even though anyone who understood numbers could see that his plans would actually increase the deficit; and David Walker endorsed Mitt Romney despite his budget-busting proposals on taxes and military spending.”

    So where are we? Back where we started this blog in that we, all of us, need to look for reality. Question those cute little soundbites to see if the facts come forth or most likely, they fall apart unsupported. Meanwhile, let’s not hack away at the government safety net until economic growth proves significant. We just might get right back to where the recession started.

Hand Puppets Prioritize the Wealthy

Today we see another debt ceiling plan from legislators: “ Republican lawmakers are preparing to introduce legislation to direct the U.S. Treasury to make interest payments on U.S. bonds first and then prioritize other government outlays in case Congress does not raise the debt ceiling.” But let’s not mince words here; this is a plan to protect the wealthy while playing a game of chicken with the remainder of the country.

    First and foremost they are fighting over paying the bills they, the legislators themselves, have already voted to pay. But the real message here is the priority.  Stating the intent to pay the interest first and dole out the remainder as they are able simply insures the wealthy investors will get their share while retired vets, homeless, and other programs (investments) for the needy or uneducated get to stand in line. Meanwhile these clowns keep holding the government hostage while arguing over the fictional debt ceiling.

    Could this work? Not a chance unless of course your only goal remains the same political power play we’ve seen for the past four years. Even GOP members argue against. “Prioritization is impossible,” said Tony Fratto, who was deputy press secretary for Bush and a spokesman on economic policy. “Is the government really going to be in the position of withholding benefits, salaries, rent, contract payments, etc., in order to pay off Treasury bondholders?” But Fratto even goes further and mentions the political fallout mentioning the word “catastrophe,”

   And then there is Keith Hennessey, Bush’s National Economic Council director, who too mentions how bad an idea it is as well as the fact it being an unworkable concept. “Payment prioritization doesn’t stop payments, it just delays them. Then the aggrieved party sues the government, and probably wins, and it turns into a bloody mess,” Hennessey is now an economist at Stanford.

    Another crazy plot to delay making a decision with the poorest of Americans absorbing the cost and the wealthy have their interest paid by their political hand puppets.

Senators to President; “Ignore Congress”

       This weeks discussion following the Fiscal Cliff Deal are getting even stranger. Just when we may have thought we’d heard it all over this needless struggle, the quotes of the week prove we have not.

     Remember first the debt ceiling is not an issue as it is described by the media and many in Washington. I mentioned last post and it’s worth mentioning again “the U.S. Constitution, 14th Amendment reads the U.S. “debt shall not be questioned”.” But his week we see quotes making the point even stronger. Senate Republicans’ budget chief: “I think it should be a firm principle that we should not raise the debt ceiling until we have a plan on how the new borrowed money will be spent,” Alabama Sen. Jeff Sessions told the Washington Examiner on Tuesday.

     Here is the crux; while Senator Jeff Sessions wants a plan as to how the money is spent he apparently forgets about the Congressional Record. Yes it’s all there, the plan, complete, and detailed. Every government program, every government expenditure, past, present and projected well into the future are laid out in what Congress itself has already passed and funded i.e. already approved by both congressional bodies and signed into law by the President per the U.S. constitution. That is how it works, the plan

    There is always a bit more relating to the Senate and the wrangling within so I’ll also point out the Senate has largely ignored much of their responsibility for now almost four years. The last budget actually passed by this distinguished body was 1,352 days ago today, while the law requires them to pass a budget annually. Clearly they are quite used to ignoring the constitution.

     Next we have: “It may be necessary to partially shut down the government in order to secure the long-term fiscal well being of our country,” Texas Sen. John Cornyn, Republicans’ No. 2 in the Senate, wrote last week in the Houston Chronicle. “President Obama needs to take note of this reality and put forward a plan to avoid it immediately.” Laying the need for a “plan” on the Executive Branch, In fact he’s telling the President to “put forward a plan”.

     What we’re really hearing is but one of two things: Either these ‘leaders”  are forgetting their and their legislative bodies’ votes and responsibilities per the Constitution; Or they are telling the Executive Branch to ignore what is already passed, funded, approved, and signed into law, i.e. the plan. Either way, it’s a clear game of passing the buck.