Tax Cuts and a Pipeline: The Kudlow-Romney Economic Plan

"Conservative" political/financial pundit Larry Kudlow (he's really a Keynesian) came out yesterday with this article,  The Jobs Report Bad News. He makes some valid points based on data but offers some not-so-conservative advice to improve the nation's economy. He also claims that it is Romney's plan. Here it is:

"My modest proposal for the worst economic recovery in modern times is threefold: Extend all the Bush tax cuts, slash the corporate tax rate, and approve and begin building the Keystone Pipeline. This is a supply-side proposal. It's completely unlike all of Obama's goofy, short-term, spending-and-tax-credit stimuli, which have completely failed."

Let's consider them one at a time:

1. Extending all of the Bush Tax Cuts would mean mounting raise the deficit by $3 trillion over ten years.  It's well understood that fiscal soundness of government policy is an important factor investors consider before expanding operations and hiring more workers. The fiscal problems of Greece, Italy, Portugal, and Spain are having a negative effects on the global economy. Kudlow proposes no tax cuts in his article. More red ink here in the U.S. would make things even worse. 

2. Slashing the corporate tax rate would further reduce government revenue at a time of record high corporate profits at a time when we need to pay down the deficit.

Let's not forget how the U.S. government got into the current fiscal hole: two big Bush tax cuts, the Iraq War, and Medicare Part D Prescription Drug Program - and none of it paid for. All of those items were put on the national credit card.

Larry Kudlow wants to keep running up the balance. Again, he doesn't propose any cuts in spending.

3. This one's a "red herring" issue. The Keystone Pipeline has been made into a political football by the Republicans. In a budget deal, the Republican-led House imposed a time limit on the Obama Administration to approve an international pipeline (Keystone) running from Canada to the Gulf of Mexico. This is a big, complicated project with economic, environmental, and societal impacts. Obama told the House they would not be able to approve it by their deadline. The Republicans now use the "delay" to blame the president for bad energy policy.

The fact is, the southern leg of the Keystone XL Pipeline has already been approved and is slated to begin construction. The rest of it will be likely be approved and built after the final route is determined. Obama and Kudlow apparently agree on this one - just not on the timing and the need for a thorough alternatives analysis.

Government procurement spending, that is, contracts between the government (taxpayers) and private corporations (ref) soared under the Bush Administration. Kudlow isn't calling for cuts in procurements. Sounds like he wants government financial support to corporations to continue.

Footnote: One-third of the "goofy" Obama stimulus consisted of tax cuts.

When Potential Rewards Overwhelm Risk

An interesting blog post over at the venerable site inanis et vacua (possibly the blog of writer Jim Harrison) asserts that the problem with capitalism is it is too rewarding. An excerpt:

"We know that people will lie, cheat, and steal for relatively small payoffs. What do you suppose they’ll do if they can make $345 million a year doing it?...

The opportunity to get ahead can certainly make people work harder and sometimes smarter, which is very often a good thing. Increasing the potential rewards without limit, however, simply means that other motives and considerations will be overwhelmed. Offer me enough and I’ll not only ignore my obligations to my fellow man, I’ll feel that I ought to ignore them."

It's an interesting theory.

Ben Stein's Useless Criticism of Obama's Handling of Europe's Finances

In this article in the American Spectator, vacationing economic pundit and former Nixon speechwriter Ben Stein does a masterful job of playing the reader like a small mouth bass at the end of a fly line. Setting himself up as an all-round good guy: nature lover, breakfast-making husband, friend of gentiles, hater of Nazis and racism, Ben makes point after unassailable point. Who can argue with him? 

Then, at the very end of  the article, fresh off the images of "life better than anyone deserves" and war-ravaged Europe, "Uncle Ben" uses Eurozone financial problems to make an absurd attack on President Obama:

"But out at Hope, and in Sandpoint tonight, life is better than anyone deserves. And the Vissers are better than I deserve.

Still, I went to sleep with foreboding. Europe is falling apart. Mr. Obama is doing nothing, zero, about it. NOTHING. A cratered Europe will have immense effects on the world economy. Europe's economy, in toto, is larger than ours. Is Mr. Obama thinking of a rescue plan? Is he thinking about it at all? Does he even care if we go into another leg of recession as demand for U.S. exports to Europe corrects? What is he doing? Did he resign? Where is Mr. Geithner on this? Have we ever had a President without an international economic policy before? No. Never mind. Just go to sleep."

"Foreboding," "cratered Europe," "rescue," "recession" - more than enough to ruin a vacation that's "better than any of us deserve." My God, it's devastation time again. That's powerful writing, Ben.

I wonder what Ben Stein would say about Great Britain's David Cameron, or Germany's Angela Merkel coming over to the United States with a "rescue plan," telling us how to run the US economy - or how to overhaul our health care system.

What does Ben Stein think President Obama should do to fix Europe's economic problems?

By the way, many northern European nations such as Norway, Sweden, Denmark, Finland, Netherlands, Germany, Poland, and others are doing pretty well. Right-wing pundits like to paint the entire European continent as a financial basket case, when, in fact, the main problems are found in Greece, Spain, Portugal, and Italy.

Is it really true, as Ben Stein says, that the Obama Administration is doing NOTHING about the European financial mess?  Ben is not just implying that Obama is doing NOTHING with respect to Europe, or that he's not doing enough, he flat out says Obama is doing nothing. How does he know?

Does Ben Stein spend all his time at the White House shadowing President Obama's every move?

Pretty hard to do from that cabin by the lake.

The Steady Devaluation of Human Labor

Over the years, inflation has generally gone up and the minimum wage has been adjusted periodically to bring it in line with the higher cost of living. Raising the minimum wage usually involves a big political fight.

In 1970, minimum wage was $1.60 per hour. Now it's $7.25 per hour, an increase of 453%.

However, due to inflation, it takes about $9.28 in today's dollars to buy what used to cost $1.60 in 1970, an increase of 580%. Minimum wage statistics are found here and an inflation calculator is available here. 

The graph shows that the minimum wage, in constant dollars, has had its ups and downs since 1970 but the overall trend indicated by the straight black line is down. The numbers show that the American economy puts less value on the entry level worker than it did in 1970. Why is that? Are minimum wage workers less intelligent now than they were forty years ago? Are they lazier?

The reason probably has a lot to do with the rise of the global economy and cheaper Chinese labor. It may also have to do with basic attitudes toward labor. Some see labor as a commodity, while others believe it is not.  

Here are some remarks made by Representative Steve King (R-IA) on the floor of the House of Representatives last year:

"Labor is a commodity just like corn or beans or oil or gold, and the value of it needs to be determined by the competition, supply and demand in the workplace."

That very attitude toward workers was a powerful motivator during the early days of the labor movement. The idea that people were on par with animals, equipment, and raw materials was offensive and demeaning to workers who wanted a better life for themselves and their families.

  

Samuel Gompers, cigar maker-turned-labor organizer and founder of the American Federation of Labor in the early 20th Century, had a different business ethic related to labor and said this: “You cannot weigh the human soul in the same scales with a piece of pork.”

Labor advocates actually managed to insert a statement affirming the status of human labor in the 1914 Clayton Antitrust Act:  “The labor of a human being is not a commodity or article of commerce.”

So, is labor a commodity or not? The recent remarks by Rep. Steve King stand in direct opposition to the those of Samuel Gompers and the Clayton Act. The fight has gone on for decades, but, based on the above chart, it looks like King's side is winning.

Federal Procurement Spending Declines Slightly

According to this report, federal procurement spending, that is, government payments to contractors for goods and services dropped in 2010 for the first time in 13 years. This is somewhat different than the data available at USASPENDING.GOV, which indicates contract spending has come down slightly since FY 2009.

The main story shown in the chart, however, is the enormous increase in contract spending during the Bush Administration, and the current reversal in trend.

The next question, then is how much will contract spending decline as the role of the US military winds down in Iraq and Afghanistan.

Tax Rates Are Lowest in Sixty Years

The bonddad blog reports that, contrary to the constant rhetoric from the Right Wing, taxes rates as a percentage of GDP are lowest they've been since the Truman Administration. They are now substantially lower than during the Reagan Administration.

I refuse to call those of the Right Wing "conservatives." 

If you think it's better to put our nation's operating costs on a credit card than to pay the bill with fair and adequate tax revenues such as we had in the 1990s, you're no conservative.

If you pass two big tax cuts in 2001 and 2003 and don't bother to cut spending, you're no conservative.

If you launch a war in Iraq for dubious reasons but refuse to pay for it, you're no conservative.

If you pass a major new entitlement, Medicare Part D, the prescription drug benefit for seniors, and, astonishingly, the rules prevent the government from negotiating prices with drug companies, you're no conservative.

Well, if you do all that stuff and you're not a conservative, what are you?

You're working for the Top One Percent.

Chart source: Reuters

  

Exposing the Supply-Side Myth

“If you don’t pay the people enough money, they can’t buy the cars.” - Henry Ford

Norton Garfinkle, former economics professor and current chairman of the nonprofit, nonpartisan education and research organization, Future of American Democracy Foundation, has written a highly readible book about the modern American economy.

The American Dream vs. The Gospel of Wealth: The fight for a Productive Middle-Class Economy is written for the lay reader, has a good reading pace, and uses minimal jargon. Early in the book, Garfinkle lays out the framework for the economic debate:

"Every important economic policy has three kinds of consequences: factual, moral, and political. In effect, in evaluating economic policy, we have to ask three questions: (1) Does it work? (2) Is it fair? and (3) Will it sustain the democratic structure of our society? Today, our debate tends to focus on the first question, at the expense of the other two. It was not always so."

Garfinkle traces the history of American economic thought from the Declaration of Independence to the present. Perhaps what the book does best is discredit the so called “supply-side” economic dogma, the “Gospel of Wealth.” One of the most influential gurus of neoconcervative supply-side movement is Irving Kristol, father of Fox News pundit and editor of the Weekly Standard, William Kristol.

Supply-side basically says that cutting taxes for those in a position to produce goods (corporations and their wealthy investors) will stimulate production, increase worker productivity, and make more goods available to consumers without causing inflation. A key to this idea is increased productivity, which comes from a combination of efficiency, technology, and cheaper unit labor costs.

The opposite of supply-side is demand-side economics. Henry Ford’s comment at the top of this post exemplifies the demand-side approach: that the economy is built from the foundation, and that a large, prosperous middle class arises from people having access to good schools and earning enough to better their lives. 

That’s the American Dream

Dating back to the bad-old stagflation days of the late 1970′s is the supply-side idea that tax cuts grow the economy so that more revenue is generated than if taxes were not cut. The mathematical limits of this absurd logic would have revenues approaching infinity as taxes approached zero. It is not hard to find economists and editors of the Wall Street Journal who preach this economic “gospel” to whomever will listen.

From page 150:

"As for the economics of the supply-side doctrine, few economists believed that supply-side tax cuts would pay for themselves. The consensus view among economists was probably expressed by Alan Greenspan, former chairman of President Ford’s Council of Economic Advisers. He thought the tax cut might generate 20 percent new revenue, that is, a $100-billion tax cut would increase tax revenues by $20 billion and cost the government $80-billion."

Garfinkle uses readily available government economic data to refute the association of income tax cuts with economic health.

Dr. Garfinkle may have bolstered his argument even further by addressing three powerful factors at work in the late 1980s and 1990s: cheap oil, the technology boom, and demographics. During that time, workers of the Baby Boom generation moved into their peak earning years. These three fortuitous factors coincided with the implementation of supply-side dogma and helped create the illusion that it actually might have worked. Garfinkle has plenty of data to show otherwise.

The economic mess we find ourselves in now, especially the slow growth and massive national debt, is a direct result of tax-cutting supply-side policies of the last thirty years. I highly recommend this book to understand how we as a nation got to this point, and where we are likely headed if we don’t examine, understand, and confront the supply-side snake oil for what it is – a strategy to end the middle class and create a small super-rich, elite political class with even more power to buy the government they want..