Economic Stimulus
Economic stimulus
In times of recession with less than full employment, there is weak demand for goods and services. At the present time, even those who are employed are weighed down by underwater mortgages. State governments are pinched by weak revenue.
There are several things that the federal government should do to correct this situation.
First, a solution to the “underwater mortgage” problem, in fact all the mortgage problems. A voluntary program for all people with mortgages who have problems, whether they are current on their payments or not. Those with mortgages that have variable, unreasonable interest rates can be converted to a reasonable rate on a federally owned mortgage. Those who are underwater or can’t meet their payments on any mortgage can be bought out by the government and converted to rentals. Actually evicting a family should not be done because it leads to an empty house and distorts rental prices; unless, of course, the family can pay but doesn’t.
Second, a solution to employment problems. A national job database, with government jobs (starting at minimum wage) to fix all the infrastructure, maintain the parks (rake leaves, for example), do research, paint murals on post office walls, and so on. The only people eligible to take these jobs are those who have been unemployed for more than a certain time, laid off due to factory closures, teenagers and young adults, and other unemployables.
Third, aid to state governments. The federal government should give states money to prevent layoffs of policemen, firefighters, and teachers.
These programs will not be cheap. They will be paid back tenfold by increased tax revenue due to stimulation of the economy, especially the part that doesn’t save any money. The income of those employed will enter the economy immediately. Demand will increase, and private businesses will be encouraged to spend more, expand, and hire more workers.
GDP is likely to increase by one percentage point per year due to each of these three programs. What’s more, the stimulus is likely to feed on itself by encouraging business to spend the money it has been saving.
The end result of this expenditure will be rapid economic growth, which results in dramatically increased net revenue for the government, making a balanced budget that much easier.
A fourth program, unrelated to our current recession, is important to our survival as a species on this planet. This program is necessary to address global warming. The first task will be to establish how serious the projected changes will be. Such recently suspected changes as a dramatic increase in violent weather events should be evaluated as an existential threat to people. Changes in the distribution of rainfall are also important. Drought in some areas and monsoon weather in other areas is to be expected, and the projected severity of these changes must be evaluated. The second task is to set up mitigating facilities for the expected changes. Mitigation will range from different crops planted to moving populations away from danger areas. The third task is to develop ways of ending our dependence on fuels that produce carbon dioxide. This may be the hardest task of all.
In the long run, it is critical for animal life as well as plant life on this planet that we establish a balance between the production and consumption of oxygen and carbon dioxide. There is a very long cycle in the atmosphere between these two molecules: it is estimated that it takes about three hundred years for a molecule of carbon dioxide to be consumed, and transformed into carbon and oxygen by photosynthesis. At the current time, carbon dioxide is present at a very low concentration in the atmosphere: about three tenths of a percent. The concentration is increasing by a thousandth of a percent every year, and the rate of increase has been increasing recently.
To return to economic policy:
At the same time, changes in the structure of taxation are extremely important for the purpose of fairness. As a billionare himself pointed out, he is paying a smaller percentage of his income for taxes than his secretary. This is not fair, and must be changed.
Fairness is an incredibly important concept. When the distribution of work and rewards is seen as fair, a person will develop great loyalty to the system that controls the distribution. When it is seen as unfair, resentment and disloyalty, sabotage, and revolt may be the result.
Experiments have shown that fairness is important even to chimpanzees and other primates. However, the concept of sharing a task is alien to primates. As a primatologist once said, “you will never see two chimpanzees carrying a log.”
An even more basic concept than fairness is empathy, which has been shown by experiments even in rats. A remarkable experiment recently showed that a rat will work relentlessly to free another rat that is seen to be trapped.
The institution of an economic stimulus depends on the people as a whole showing empathy for one another. They must get together and elect government representatives who will apply the necessary measures. If they do not, the current situation will not improve spontaneously. The longer it takes to start fighting our problems, the worse they will be and the harder to fight.
Government
Government
Whenever I think about government, the first thing that comes to mind is the Preamble to the Constitution. The intent of the Preamble was to establish what the government (that was being established by the Constitution) was for. Among other things, to begin with “To form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence” there follows another phrase which I would like to emphasize here: “promote the general Welfare.” I do not wish to seem to ignore the final purpose of government enumerated here: “secure the Blessings of Liberty.”
Some people will be surprised to know that I have just enumerated all of the purposes of government named in the Constitution. I am doing this to make it clear that there are specific purposes for government, and they are limited. It is important to remember that we all believe in limited government, or else we would not support the United States.
We have so far set out a few of the most basic thoughts about what we want our government to be: “a more perfect Union” that is limited in its total extent yet supplies certain basic needs: justice, tranquility, defence, welfare, and liberty.
We quickly see that some of these purposes are very close to the names of current departments of government: justice and defence. At one time, there was a “Department of Health, Education, and Welfare” (with the understandable assumption that Health and Education are essential to Welfare) but because of the negative connotation of “welfare”, the name was changed to “Health and Human Services.” It would be more honest, and more effective, if we had seperate departments of “Health”, “Education”, and “Welfare” as well as a Department of “Liberty.” I don’t know just what a Department of “Tranquility” would do.
The Constitution does not specify any of the Executive branch of the government other than the President and Vice President; all the inferior “officers” of this branch are to be appointed by the President. The highest “officers” such as judges of the Supreme Court, ambassadors, and public ministers and consuls, are subject to the approval of the Senate, but otherwise he/she is free to install anyone that seems appropriate in any department of executive government.
It appears that the power to create the separate departments of the executive is vested in Congress, with its power to make laws, and specifically: “to lay and collect taxes…borrow money…regulate commerce with foreign nations, and among the several states, and with the Indian tribes…coin money…punish piracy…declare war…raise and support armies…no…longer…than two years…provide and maintain a navy…” but most importatntly: “To make all laws which shall be necessary…for…all other powers vested by this Constitution in the government…”
In other words, Congress is vested by the Constitution with the power to make laws which execute all the powers in the Constitution. The President is empowered to ensure that the laws are “faithfully executed.” Unfortunately, the Congress has not carefully read the Constitution and they neglected to vest some of the powers granted to the government. They did alright with Justice and Defense, but they’ve been very fickle with Welfare, and they’ve forgotten Liberty and domestic Tranquility altogether.
It may be that “domestic Tranquiltiy” just means the absence of civil disturbances such as riots, but I would like to expand on the word “Tranquility”. Let us say that it means “Happiness” and “Contentment.” How the government would ensure this state of affairs is somewhat of a mystery.
Taxation
Taxation
We need to change our taxation system so that it is fair, by which I mean progressive. A flat tax is much easier for a millionare to pay than for someone who isn’t making enough money to live on as it is. Flat tax is only fair in the imagination of those who have plenty of money.
To start, we will say that all income should be treated equally for taxation purposes, that is capital gains will be taxed the same as ordinary wages or salary. Instead of a flat 15%, capital gains will be taxed progressively from zero to 15 to 25 to 35%, or whatever total revenue requires.
At the same time, Social Security and Medicare taxes will no longer be flat with a cap: they will also be progressive with no ceiling. Rates will be adjusted to ensure that revenue matches expenses.
Corporate taxes will be treated in the same way: as ordinary income. All the profits of a corporation will be taxed in a progressive fashion, as if the corporation was a person.
Total tax rates will be based on the amount of revenue needed, and progression of rates will depend on the same formula: three or four steps, from 0 to 10 to 15 to 25 to 33 percent, for example.
With a larger tax base, it will be possible to reduce taxes for the poorest people. For example, someone making minimum wage might be exempted from any taxes. All his or her income could then go to living expenses; at minimum wage, it is impossible to save anything. Eliminating taxes on these people would encourage them and stimulate the economy by increasing spending on the cheapest commodities.
Why have a deficit at all? Just set the tax rates for next year based on the expenses of last year. That way, you will have a pay as you go government.
With all the rates set in a progressive fashion and all income treated equally, it will be completely clear that the cost of government is paid by those with the ability to pay: those who have more income.
All changes in the taxes must be made gradually, in yearly steps for three to five years. This will reduce the shock of the changes.
A recent letter to the New York Times pointed out a fact which is shocking in the extreme to all who are concerned about drug shortages. Apparently, the cancer drug Doxil is protected under the Orphan Drug Act, a federal law which allows companies to seek extended patent protection for drugs which are not in enough demand to induce competition for their production. These drugs are needed by only a small number of patients in most cases. The Act allows companies that have developed such drugs to obtain extensions on the usual twenty year patent (which was increased from seventeen years some time ago.) Under the extended patent, a company has the exclusive right to produce (or license production for) a drug for longer periods, thus allowing the company to avoid competition.
Unfortunately, Johnson and Johnson, the company that applied for and received extended protection until 2014, is no longer producing Doxil. No other company would plan to produce Doxil until Johnson and Johnson’s patent protection has expired. The result is that there is no Doxil, nor is there any generic equivalent. This drug is useful in the treatment of some cancers, and up to now has been the subject of continued research. Treatment with this drug is no longer available, and research is impossible.
The web site for Doxil has an update today on the “supply shortage” (actually the complete unavailability of any more of the drug) which states that the third party company that was making Doxil has suspended production until they can implement “lasting corrective actions” for the “equipment issues” that they are facing. They are currently estimating that production will not resume until late 2012. The Wall Street Journal has an article which describes “overdue preventive maintenance and other required actions” and mentions recalls of two other drugs produced at the plant, which produces sterile injectable drugs for several companies. It appears that equipment at this plant is worn out and in need of replacement.
There are speculations that Johnson and Johnson will attempt to find an alternate manufacturing facility for Doxil. We can, however, speculate that the manufacturer has been negligent and has failed to respond to FDA inspections and warnings in a timely fashion. We can also speculate that finding a solution for the manufacturer’s problems has not been a priority to J+J, since they have not overseen their third party manufacturer in an expeditious manner.
The company has made a management decision that the needs of a few thousand cancer patients (there are about one thousand on a waiting list) are less important than the company’s profits. It seems unreasonable that a company which makes huge profits on many popular drugs (like Risperdal and Aciphex) could not support the production of a small amount of an unprofitable drug, as part of the cost of doing business in an ethical fashion. Yet that is what has happened: the management has failed to adequately supervise the “third party” it has contracted with, by not inspecting the manufacturing facility, and not discovering in a timely fashion that the equipment needed to be updated or replaced. As a result, the “third party” has been shut down, partly due to FDA warnings and partly due to recalls of faulty product. Responsibility, diffused through a “third party”, has been shirked. When a person fails to get the oil changed in his car, that is a personal failure. When a large company fails to perform preventive maintenance on its manufacturing facility (which produces drugs vital to the treatment of lethal diseases), that is a systemic failure.
Decisions of this nature have led to shortages of many drugs, not just unpopular ones. There are several drugs for which demand has increased dramatically in recent years and which are in the throes of shortages. These shortages are not due to increased demand, but from cutbacks in production that appear to be strategic in nature: designed to force patients to take alternative drugs on which profit margins are much higher.
The behavior of pharmaceutical manufacturers is a clear explanation of why regulation is needed. Companies that have enough power to make anticompetitive and unreasonable, yet profitable, decisions will do so unless they are prohibited by law and policed by regulatory agencies.
Deregulation is the biggest fraud ever perpetrated by the Republican Party and its conservative base. Ronald Reagan was the biggest liar ever, and he started this fraud by claiming that regulations were at fault for the problems that deregulation had provoked. There are videos still extant of Mr Reagan proclaiming that “excessive regulations” were causing the government collapse that he had just provoked by cancelling the regulations that would have prevented it.
A copy of the letter is appended:
Re “Drug Scarcity’s Dire Cost, and Some Ways to Cope” (The Consumer, Dec. 13): In a free market, another manufacturer could step in to take advantage of the unavailability of the cancer drug Doxil and other lifesaving drugs that are in short supply. For several reasons, there is no longer a free market in these drugs.
In the case of Doxil, Johnson & Johnson sought and won extended patent protection under the Orphan Drug Act. The company has the exclusive right to manufacture Doxil until 2014, but it isn’t making it, thus endangering the lives of the more than 7,000 people who were depending on it and bringing to a halt many of the 30 clinical trials that require it.
The consolidation of the drug companies has resulted in powerful monopolies that increasingly do not serve the public interest.
Anne M. Dranginis
Glen Cove, N.Y.
A few days ago the New York Times online reported a curious series of events involving the Administration and its attempts to regulate vocational schools. There has been a dramatic increase in the number and enrollments of these schools that teach such skills as medical assisting and computer repair. Without any publicity, certain Wall Street speculative investment firms have bought up a proportion of these vocational schools and are expecting further growth in profits.
The problem is that a proportion of graduates from these schools are unable to find a job, and thus unable to repay the loans with which they went to school. In cases like these, the federal government is on the hook because the loan was federally guaranteed when it was made. So the investors expect a sure profit one way or the other.
The federal government is on record as deploring the useless degrees handed out by some of these schools and promising a regulatory solution. A plan was formulated and put out for comment. There was a storm of protest, some of it financed by $16 million from the investor group (according to the NYT story) and the staff at the White House was buttonholed by certain friends of the schools. As a matter of fact, in order to avoid new federal antilobbying rules, a mentoring process was developed. A recent alumnus of the WH inside staff hired by the investors advised those who were to meet with current WH staff rather than meeting with them directly.
As a result of protests to the original plan, changes were made that eventually reduced the proportion of schools that would be put under sanction from 16% to 5% (Again, these are figures from the NYT story.)
Frankly, the whole system of vocational schooling is rotten to the core. Young adults, who have not been taught a vocation in high school, have to borrow tens of thousands of dollars to go to a vocational school that teaches them skills (how well it teaches is open to question) and then find that there is no job market for those skills. The unemployment rate now among young people is much higher than the national average and often approaches a quarter of recent high school graduates.
The compassionate answer to this problem is to teach children vocational skills in high school, skills that prepare them for further training in high level technologies that are in demand because there is a large amount of research going on; and the research is funded by the federal government, all to stimulate the economy.
This means a deliberate emphasis by the federal government on funding education and research. The reason for this change is to prepare the population to compete on a high level with the populations of other countries that threaten to outdo us. There should be a vast flow of research discoveries coming from the United States, discoveries that lead to lucrative patents for new processes that out compete the rest of the world. If we don’t compete, we will become a failed state.
200 trillion dollars in global debt
Here is another, more radical view of the problems we are facing: http://www.thestreet.com/story/11332796/1/dont-blame-millionaires-for-wealth-inequality.html
The author says that there are a small number of extremely wealthy people who are sucking the life out of the global economy by holding 200 trillion dollars in debt over our heads. He advocates a global bankruptcy to eliminate this debt and get us free from these vampires.
The author advocates a tax, not on income, but on wealth: the savings of this tiny group of incredibly wealthy people. This is, of course, impossible because these people have bought the government that they want, and there is no chance of the government biting the hand that feeds it.
So, a global economic revolution? Man the barricades!
Joseph Stiglitz on the Great Recession
The great economist Joseph Stiglitz has written an article that addresses the root causes of both the recent recession and the Great Depression, and his insights are remarkable. He advocates government investment on a large scale in education, research, and even health care. His conclusions are that the banking system has failed to respond to the bailout with renewed lending, and this has added to our problems. He says that the recent recession has been caused, in part, by increased productivity and reduced manufacturing in this country. As a result, the number of jobs in manufacturing has fallen dramatically, and wages in these jobs have fallen as well.
Consumer spending prior to the recent recession was sustained by increases in housing prices. Most people were actually spending well beyond their means because their house prices kept going up, allowing them to borrow more on their house values. When housing prices started to drop, the bubble was burst and the banking system was caught in the turmoil. Banking was vulnerable because the bankers were involved in speculation as well as normal lending. Government rescued the banking system, but bankers have not returned to their normal business: lending. Neither has the banking industry effectively dealt with the huge number of bad mortgages still outstanding.
Stiglitz advocates strong government programs to support changes in the types of jobs available to workers. He proposes new support of education, research, and health care. Education is an important service that clearly will help to teach skills that will prepare us for the new jobs. Research is an equally important service because it will discover new methods and capabilities that will create new jobs. Health care is another labor intensive service that needs government support and reform.
We will not be able to grow out of this recession unless we recognize that the old types of jobs have disappeared. We must create and support new types of jobs, in the service sector rather than in manufacturing. Government must take the risk and spend money on creating and supporting the new types of jobs: in education, research, health care, and other services, even infrastructure.
Economists agree that, in order to deal with recession, it is necessary for government to engage in deficit spending, and on a large scale. The time for government to balance its budget and even run a surplus is when the economy is running hot and producing surpluses of money and jobs. Now is the time for government to take a (small) risk and spend more than it is taking in.
At the same time, it is important for government to seek revenues to pay for its programs from people and companies that have sufficient resources to spare. It is only fair that those who are still doing well should pitch in to help the government support programs that will improve the economy. The current upside down tax system that punishes the middle class must be reformed.
Read the Stiglitz article at: http://www.vanityfair.com/politics/2012/01/stiglitz-depression-201201
Those who consider the plight of the poor will think about why people are poor. Some will say because of character failings, bad behavior, or the like while others will cite social and family circumstances, bad luck, or victimization by theft or fraud. None of these explanations is completely effective at throwing light on the totality of the circumstances of the poor.
During the early nineteenth century in England, a change in general opinion about the reasons for poverty occurred. The old moral hazard theory, in other words, the notion that sin causes poverty, was abandoned for the theory that poverty causes sin. Consequent reasoning about the issue motivated a popular move to alleviate poverty as a Christian way to prevent sin. This lead to reforming legislation and gradual improvements in the way the poor were treated.
Nowadays, however, conservatives have reverted to the old moral hazard theory, which basically states that if you are poor, it is your fault. This reasoning decreases motivation for measures to alleviate poverty. This also leads to measures to criminalize poverty, which have proliferated in contemporary America. For example, laws that prohibit vagrancy are being considered or strengthened in many city halls. Programs that help poor people, such as assistance with child care expenses so that a single mother can go to work, are drying up.
We should recall that no-one is in control of the circumstances of his or her birth. Overcoming adverse circumstances is considered heroic because it is rare. Failing to live up to the advantages of one’s birth, however, is common. Being poor or rich is not necessarily a consequence of a person’s actions, whether they be constructive or destructive. Therefore, a person’s moral worth should not be related to his or her net worth.
Most important, we have all inherited from our distant ancestors a sense of compassion and an urge to help our fellow human beings. There is no sense in denying that this impulse exists, is strong, and is ancient. I submit that the organization of an efficient mechanism for delivering compassion that includes everyone is only one more step up the evolutionary ladder for mankind.
That means, you guessed it, a Federal Department of Human Welfare, or if you prefer, a Department of Compassion.
Don’t buy that? Well, here’s the capper: it’s in the Constitution. The Preamble states:
“We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.”
In addition, the power to pass laws that “provide for the general Welfare” is specifically vested in the Congress.
Please note the words: “promote the general Welfare” as in “Welfare.” That means the institution that Bill Clinton and Newt Gingrich agreed to “end as we know it.” It is clear that those who would deny welfare to “ourselves and our Posterity” are breaking their oath to the Constitution and fighting against the greater forces of Evolution.
New data on levels of income inequality have become available, covering 2009 with pre-tax data from the IRS. Inequality has declined somewhat and the average income of the top one percent has fallen. From 23 percent of all income in 2007, the top one percent has gone down to 17 percent of all income, and average income has fallen over 40%, from 1.4 million dollars a year to just under one million.
Data from the last 100 years (well, since 1913) have shown some interesting correlations. Income inequality peaks just before a stock market crash; in 1928, the figure stood at an all time high of 24%. The same thing occurred before the latest episode, now termed the Great Recession by some, and before the previous dip, in 2001, after the election of President Bush.
More importantly, in 1980, income inequality was less: the top 1% took home just 10% of all income.
The principle to be drawn from this correlation is that the top 1% depend on the stock market for most of their income, and their disproportionately high incomes are derived from economic booms reflected in stock market prices. At the same time, the top 1% lose big when the stock market drops. This means that the top 1% are, by definition, not actually doing any work to obtain most of their income. They are simply buying and holding stocks and selling them when they appreciate.
What is more, a proportion of these high income earners are putting money into derivatives and other instruments that promise higher returns (and are more risky.) The uncontrolled trade in financial derivatives was a cause of the 1929 crash, and probably also of the 2007 crash. At the same time, uncontrolled trading in securitized mortgages was another cause of the 2007 crash.
We can see that higher inequality ratios are directly related to the practice of taking one’s money and investing it in risky financial instruments rather than putting it in a bank or buying “safe” instruments such as Treasury notes.
The ideal practice for a country with a really level playing field would be to prohibit the use of complex and risky financial instruments that lead to economic turmoil when wide swings in value occur. Money should be deposited in a bank or with the Treasury. Banks should then be responsible for financing construction, startups of new businesses, and other lending activities. Their profits should be regulated and they should be insured so that they can take reasonable risks, like investing in companies that have new ideas. Furthermore, tax policy should be directed towards a lowering of the inequality ratio when it is above ten percent, as it was in 1980, by the use of really progressive overall tax rates (instead of rates that leave Warren Buffet paying a smaller percentage of his income in taxes than his secretary.) There is really no excuse for not charging enough in taxes to cover the entire government budget; a federal budget deficit is unnecessary except in the midst of severe recessions. In good economic times, the federal budget should show at least a small surplus.
It’s not a sin to have a lot of money, nor is it a sin to live off the interest earned by investing that money. It is immoral to try to get high returns by taking excessive risks, particularly with “leverage”, thereby putting the entire economy at risk. It is also wrong not to pay one’s fair share of the expenses of government, from the roads you drive on to the care of the indigent.
There have been innumerable editorials about “what is wrong with America today” and almost as many areas of disagreement about the root problems of the USA. A recent theme has been income inequality, and we also have weighed in on this issue.
An important contributor to income inequality is the perversity of our tax system. As Warren Buffet has pointed out, the most wealthy of citizens (who get most of their income from capital gains) actually pay a smaller percentage of their income in overall taxes than do the average wage earner. This is because capital gains are taxed at a flat rate of 15%, but wages are taxed first for Medicare and Social Security at a flat rate of about 14% (counting both “employer” and employee” portions) from their first dollar up to $106,000, and then assessed income taxes from about $20,000 of income on up, at a rate that progresses from 15% to about 33%. (My figures are only approximate, but small errors will not obscure the basic principle.) This means that the poor pay about the same percentage of their income in taxes as do those who own enough stocks to realize capital gains; however, the middle class pay closer to 1/3 of their income in taxes than 15%.
Republicans are aware that income inequality is a problem for their party. I happened to catch a discussion on Fox News in regards to this problem. They say that they “just want a level playing field” while Obama wants to “take away your hard earned money and give it to those who are too lazy to work.” If Republicans really want a “level playing field” than they will not mind taxing capital gains at the same rate as ordinary income. This amounts to a dramatic tax increase, but it really does level the playing field. Which pledge do you think will get a Republican president elected? No new taxes, perpetuating the unequal burdens that currently exist, or “a level playing field”? Equalizing tax rates would also go a long way towards eliminating our current accounts deficit.
To anticipate the complaint, “higher taxes (on the rich) will inhibit the economy,” economists agree that the wealthy do not, as a rule, create jobs. Very few wealthy people are entrepeneurs, and less than 1% of small business owners are in the top 1% of incomes. When a little money is taken away from wealthy people, they do not fire their servants or close their companies (companies only pay taxes on their profits, not their total income); they simply have a little less surplus money to save. The economy does not depend on how much money people have saved. Since the wealthy already have surplus income, giving them more with a tax cut is unlikely to result in more spending, and thus will not stimulate the economy.
On the other hand, if you put money into the hands of a poor person, he/she will immediately spend nearly all of it. When a poor person spends money, it goes into circulation and helps everyone who receives it, amounting to a significant stimulus to the economy.
Conrad Theodore Seitz 