The idea that we cannot solve our problems is absurd.  Not only can we solve them, but we could at the same time afford putting millions to work on huge infrastructure projects we are going to do anyway.

How can that be?  Today’s interest rate on a five year Treasury is .62%, about 1.4% below inflation.  We could issue $500 billion in five year Treasuries at negative interest rates to fund a five year $500 billion national infrastructure program.  Such a project would cut the current unemployment rate in half!  President Obama’s 2013 tax proposals would raise, net, about $1.7 trillion in additional revenue over 10 years.  Do the math.  We could easily pay off those 5 year bonds, interest and principal, in five years if Obama’s revenue raising were passed into law.

If we simply restored President Clinton era tax rates (you know, the rates that resulted in surpluses) we would generate more than $4.1 trillion in additional revenue the next 10 years!

It’s simply amazing to this author that we aren’t already doing this.  If we don’t get our act together future generations will consider this the ‘dumbest generation,’ of all time.

A study by the non-partisan Institute on Taxation and Economic Policy shows that cutting state income taxes don’t give the state an economic boost.  From an article in Bloomberg Business news:

The findings show cutting state income taxes to stimulate growth relies on “flawed analysis” based on the theories of economist Arthur Laffer, said Carl Davis, a senior analyst at ITEP in Washington and author of the report. Laffer’s work was cited by Republican Governors Sam Brownback of Kansas and Mary Fallin of Oklahoma as a reason to cut income taxes as a way to stimulate job growth and attract business.

“Being low-tax doesn’t generate economic competitiveness or long-term economic viability,” said Ralph Martire, executive director at the nonpartisan Center for Tax and Budget Accountability in Chicago. “There are other factors that are far more important. The state tax burden overall is marginal compared to federal tax burden.”

Nine states have no personal income-tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. The nine states defined as “high rate”by ITEP were California, Hawaii, Maine, Maryland, New Jersey, New York, Ohio, Oregon and Vermont.

Economic Output

Per-capita economic output increased an average 10.1 percent in the nine “high-rate” states, led by Oregon, which grew 26 percent from 2001 to 2010. New York, Maryland, Vermont, Hawaii and California also grew faster than the 8.1 percent average for the 50 states.

Among states with no income tax, New Hampshire, Washington, Texas, Florida, Tennessee and Nevada had growth rates below the 50-state average, with Nevada’s economy shrinking 2.7 percent during the period. The average growth rate for the nine no-tax states was 8.7 percent. Three no-tax states grew faster than the national average, led by South Dakota and Wyoming at 22 percent.

Beezer here.  Just more evidence showing that robust economic growth is not really a direct function of income tax rates.  Other dynamics are involved that wield much more influence and in some cases these influences may be quite unique–a good example is South Dakota which is undergoing a drilling boom.

Nick Hanauer, a billionaire entrepreneur and investor who has created more than a dozen successful corporations, says the wealthy have no right to call themselves ‘job creators.’  The last thing Capitalists do, says Hanauer, is to hire more people.  They do that only if rising demand forces them to hire more people.

Anyway, here’s a six minute speech Hanauer watch?v=bBx2Y5HhplI made recently.

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New York Times columnist Frank Bruni has a piece in the New York Times describing our political penchant for last minute brinkmanship.

“Taxmageddon,” as it’s sometimes called on Capitol Hill, is the new biggie, looming early next year. That’s when, in the absence of Congressional action, supposedly temporary tax cuts passed under George W. Bush and extended by President Obama expire as automatic spending reductions agreed to at the end of the debt ceiling showdown (“debtmaggedon”) begin to kick in. The combined force of those developments, according to some projections, would be a $700 billion blow to the economy in 2013 and, as the year progressed, a recession….

Not to point out the obvious, but the $700 billion doesn’t disappear if these ‘temporary’ tax cuts are not extended and the budget cuts implemented.  Rather, some of the increased revenue goes to the government (estimates from the Tax Foundation run from a low of $100 billion to a high of $250 billion increase annually), and the spending cuts end up reducing deficits and debt. The problem there is what that transferred $700 billion is spent on.  Do we pay down deficits and/or debt?  Do we begin massive hiring on infrastructure projects?  Do we split the difference between these two very different uses?

If Congress does extend the tax cuts, where does that $700 billion go in the private sector?  The presumption is, depending upon your income, some of it goes to consumption, some of it goes to whittle down debt, and the remainder basically goes into some form of savings.  But these are assumptions.  The fact is no one can predict where that $700 billion in ‘temporary’ tax cuts really goes and in what proportion.

The two government options, paying down deficits and or debt, or hiring millions of people doing infrastructure projects, are predictable.  Applying the $700 billion against public debt is easy enough to figure out.  It’s simple math, only complicated by the interest rates applied to the debt that’s retired.   The downside to this option is that the benefits of lowering debt, accrue over time in the form of less interest that needs paying.  If the $700 billion retires $700 billion in debt that carries a 4% interest rate, then the annual savings is $28 billion.  If it’s applied directly to deficits, then the benefit accrues more quickly in the form of dramatically reducing the deficit.

The second option, infrastructure projects, is even more straightforward.  Estimates on these projects range from 10,000 jobs per billion to as much as 18,000 jobs per billion.   Research by the University of Massachusetts Public Economy Research Institute estimates $148 billion in infrastructure work would create as many as 2.6 million jobs.   That would drop the unemployment rate down to 5.6%.

These jobs don’t appear instantly, of course, but they do have legs.  These types of projects can run for three or more years.   And the net economic benefits can last for decades.

Beezer here.  The upside is greater than the downside, in our opinion.  Predictions of a double dip can’t be ignored, but any recession is guaranteed to be fairly brief simply because of the employment that would be created.   Splitting the difference two ways with some of the tax cuts extended but not all, and the resulting  revenue increase dedicated to infrastructure and its employment, would be the most effective course.  Our dysfunctional Congress, particularly the Tea Party members in the House, are determined to defund almost all  government spending and that means no tax increases.  Period.   They have single mindedly pushed the nation to the so-called ‘fiscal cliff’ at every opportunity.  Democrats should say the nation is going to build a bridge over the fiscal cliff. 

While the private economy is growing, slowly but still growing, the public sector is shrinking in this recession–primarily at the state and municipal level.  It wasn’t that way in the past when Congresses were smart enough to transfer funding down to states and muncipalities so they wouldn’t have to lay off people.  In fact public employment grew during past recessions and that helped Main Street.

Not in this day and age.  This Congress says the states and municipalities can just go to Hell.

Beezer here.  This  graph is part of an article in the New York Times about the ‘hidden’ austerity going on in American when it comes to public employees.

The New York Times reports on the most recent findings of the Federal Reserve’s Survey of Consumer Finances.

A hypothetical family richer than half the nation’s families and poorer than the other half had a net worth of $77,300 in 2010, compared with $126,400 in 2007, the Fed said. The crash of housing prices directly accounted for three-quarters of the loss.

Families’ income also continued to decline, a trend that predated the crisis but accelerated over the same period. Median family income fell to $45,800 in 2010 from $49,600 in 2007. All figures were adjusted for inflation….

While the numbers are already 18 months old, the survey illuminates problems that continue to slow the pace of the economic recovery. The Fed found that middle-class families had sustained the largest percentage losses in both wealth and income during the crisis, limiting their ability and willingness to spend.

“It fills in details to a picture that we already knew was quite ugly, and these details very much underscore that,” said Jared Bernstein, an economist at the Center on Budget and Policy Priorities who served as an adviser to Vice President Joseph R. Biden Jr. “It makes clear how devastating this has been for the middle class.”

Beezer here.  Not really news, but the survey details the damage.  Incomes haven’t risen for a long time for most working people, that we knew.  Homeowners are still very much underwater and that hole will take a long time to fill.  In the meantime it will continue to be a drag on the economy.  Ironically, the poor held up better than other cohorts due to increases in government aid.  They are still poor and often unemployed, so getting them back to work would help.    The wealthy got hit too, but because their sources of income are often not wage related, they were cushioned.