The ‘paradox of thrift’ is where everyone cuts back their spending and increases their savings at the same time, resulting in the ‘paradox’ of everyone losing income and increasing debt.  This results invariably and always in a recession or worse, a depression.  The reason it does is because the cutback of spending reduces demand for product and services which reduces the need for employment, which in turn further reduces spending, which in turn further reduces the demand for product and services—well, you get the picture.

It would not be a ‘paradox’ for long if the public actually did ‘get the picture.’   If they did they’d support a huge increases in public investment and spending which, in turn, would increase demand which would, in turn, increase employment, which would in turn, increase spending–etc. etc.  The cycle of declining income and increasing debt would be stopped or even reversed into a positive cycle of increasing income and declining debt.  The recession or depression would end.  Unfortunately the public, or at least a sufficient  number of the public, do not ‘get’ the paradox.   As a result they are in a muddle, not knowing what needs to be done nationally.

Well, if the average Joe on the street doesn’t understand the paradox, surely the political leadership would and they would enact policies of increasing government spending and public investment.  Nope.  Political leaders in Europe, for example, did exactly the opposite.  They forced countries to decrease spending as a percentage of Gross Domestic Product (GDP), which of course resulted in GDP precipitously declining (the paradox kicking in) and national incomes plunging through the floor, while unemployment rose through the ceiling.   And guess what?  Debt as a percentage of income actually increased!  Got to love that paradox.

In the United States, it took a couple years for the forces of austerity to gain the upper hand.   The delay occurred because the recession came during a presidential election year in 2008 and the majority voted into office a Democrat for President, Barack Obama, and they voted in Democrat majorities in both the Senate and the House of Representatives.  Because of that election year,  Democrats were able to pass modest stimulus over Republican opposition.   But the amount was far too small in absolute terms to do much more than avoid a Great Depression.  In addition, the Republicans were so much opposed to the new President, they forced most of the stimulus to come in the form of inefficient tax cuts instead of funding programs that would have directly helped alleviate unemployment by hiring corporations and labor to rebuild public infrastructures.   Because the stimulus took this form, hiring was subdued compared to what would have happened had  national infrastructure programs been funded.

Even that modest effort ended when Republicans gained a majority in the House during the mid term elections of 2010.  At that point, austerity policies began to be forced by the Republican House majority.  After that the United States became just like Europe in terms of austerity, with the major difference being timing in that the US did implement some stimulus for two years.

The results of austerity in Europe are just as the ‘paradox of thrift’ predicts:   Debt has become more burdensome, both in the public as well as the private sectors; incomes have plunged; unemployment has soared; economies have grown at a snail’s pace at best but most have dropped back into recession.    In the US the recovery is modest and hiring is too slow, but the austerity policies implemented beginning in 2010 are just beginning to have effect, so it is at this point unknown to what degree they will slow the recovery further–or even stop it altogether and reverse the growth as has been the case in Europe.

From the perspective of anyone who does understand the paradox of thrift, there is the puzzle of why austerity ends up being the policy of choice in these circumstances.  Surely leadership must understand that trimming government spending should be applied when economies are robust, not when they are in the dumps.  Why would leadership not understand?  The answer may come from understanding that the wealthy are the owners of debt whereas the majority of the creditors are not the wealthy.  If the wealthy are to be protected, then creditors must be forced to pay.  If they cannot, then their assets must be seized at tremendous discount–a situation painful to the creditor, but an opportunity for the wealthy to increase their ownership of assets at heavily discounted prices.   As for sovereign debt, the wealthy will gain control of the political process and require that any income generated must first be applied to paying that public debt.

There is also another major victory within the grasp of the wealthy:  The elimination of social programs from which the wealthy do not benefit but have to pay for in proportion.

The ground is already being laid for this elimination of programs.  The GOP controlled House has submitted legislation that allows for the federal government to prioritize what creditors get paid first.  That legislation (the Orwellian labeled ‘full faith and credit act’  HR 807) puts first the assets owned by the wealthy, and allows for non payment of social programs which are further down the list of priorities.

So the application of austerity right now, seen in this light of transferring more wealth to the already wealthy, makes perfect sense.   For the wealthy.

Mitt Romney is proposing a 20% across the board tax cut for American taxpayers.  And we all know Americans love tax cuts.  But the biggest, most positive tax cut in the nation’s history would be the one we’d all enjoy if we de-carbonized our nation.  And this tax cut would be permanent.

Robert F. Kennedy Jr., is one of the most successful venture capitalists in America, in any discipline.  He’s investing in clean, non carbon power.  For $3 trillion, or about what we spent on the Iraq War, Kennedy says we could basically supplant all the carbon power plants in America with clean solar, wind and geothermal power.  And once we’ve done that our power supply would be essentially free going forward.  We could tie all these new power sources together nationally by installing a smart power grid, the one we now have is a dumb one, for about what we spent in one year on the Iraq War.  Basically free and clean energy that doesn’t pollute our air and water and thus frees up all the billions we spend each year fighting, or trying to clean up, pollution.  Free domestic energy that cuts our trade deficit by more than half because we now have to import more than 8 billion barrels of foreign oil annually.  Here’s the video of JFK Jr., explaining all this before the Commonwealth Club in San Francisco.
 

Beezer here.  The reason we haven’t already started these types of projects is because the fossil fuel corporations control our national energy discussions.  They have spent literally billions of dollars funding their surrogates in Congress, and on K St. lobbyists.  They do this because clean energy is continuing to experience a technology revolution that is quickly reducing the cost to the point where, despite the billions of taxpayer dollars spent subsidizing fossil fuels annually, clean energy is becoming more competitive.  Without those subsidies, it would become very apparent to the average American that fossil energy is too expensive and not competitive with the cleaner, safer, healthier, sustainable energy power plants we could be building right now in size.  We really need to toss these vampires off our necks and get on with building a cleaner, healthier, safer and more competitive America.

The Tax Policy Center has done an analysis of what is being called the ‘fiscal cliff:’  These are the tax cuts that will disappear and the spending cuts that will appear if Congress does not unwind much of what it agreed to do last year when the administration and Congress made a ‘compromise’ in order to keep the House of Representatives from shutting down government by refusing to raise the debt ceiling limit.  Even the radical Tea Party Republicans in the House are doing a fast backstroke on what they forced to happen in the debt ceiling compromise.

From the Tax Policy Center’s abstract.

ABSTRACT

The fiscal cliff threatens an unprecedented tax increase at year end. Taxes would rise by more than $500 billion in 2013—an average of almost $3,500 per household—as almost every tax cut enacted since 2001 would expire. Middle-income households would see an average increase of almost $2,000. Policymakers are rightly concerned about the potential impact on families and the economy of such a sudden tax increase and are considering proposals to delay, repeal, or offset parts of the cliff. To inform that discussion, this report provides a detailed look at the revenue, distributional, and incentive effects of these increases. Almost 90 percent of Americans would see their taxes rise if we topple off the cliff. For most households, the two biggest increases would be the expiration of the temporary cut in Social Security taxes and the expiration of the 2001/2003 tax cuts. Households with low incomes would be particularly affected by the expiration of tax credits expanded or created by the 2009 stimulus. And households with high incomes would be hit hard by the expiration of the 2001/2003 tax cuts that apply at upper income levels and the start of the new health reform taxes. Taken together, the scheduled changes would significantly increase the marginal tax rates that can influence behavior. Average marginal tax rates would increase by 5 percentage points on labor income, by 7 points on capital gains, and by more than 20 points on dividends.

The basic idea is fairly straightforward–taking all this out of people’s pocket at one time, combined with the mandated cuts to government spending, would tank demand and tip the economy into a second recession.

That said, the money doesn’t disappear from the economy.  Don’t forget the identity here:  My spending is your income.  For example, revenue increases created by returning to Clinton era tax rates, can fund massive infrastructure projects which would result in several million new jobs, which would in turn stimulate demand and the private economy.  It should not be forgotten that these billions of dollars would go directly into private companies who would produce the new, improved infrastructure.  Also don’t forget that these investments are targeted at improving economic productivity, a far more wise choice than undifferentiated spending created by broad based tax cuts.

Clinton era tax rates did not tank the economy.  In fact the economy expanded smartly during Clinton’s two terms, discrediting those who claimed the higher taxes would tank the economy.

That said, it is probably unwise to restore all the rates at the same time when the private economy remains weakened by the damage of the Great Recession four years ago.  Bottom line:  Whatever new revenue that’s raised by whatever tax increases must be immediately recycled back into productive, directed, investment that guarantees new jobs.  If that’s accomplished the raised revenue will be more than offset by a stronger private economy created by the new jobs.

If you step back a minute and simply listen, what you are hearing from Republicans is the following:

“You must not press on with telephones or electricity, because this will raise the rate of interest.”

“You must not hasten with roads or housing, because this will use up opportunities for employment which we may need in later years.”

“You must not try to employ everyone, because this will cause inflation.”

“You must not invest because how can you know that it will pay?”

“You must not do anything, because this will only mean you can’t do something else.”

“Safety first!  The policy of maintaining a million unemployed has now been pursued  for eight years without disaster.  Why risk a change?”

“We will not promise more than we can perform.  We, therefore, promise nothing.”

Beezer here.  This is what John Maynard Keynes heard back in 1929 when he wrote an essay,  A Programme of Expansion, which included the statements above. 

“This is what we are being fed with.  They are slogans of depression and decay-the timidities and obstructions and stupidities of a sinking administrative vitality…”

Beezer again.  Update the language a little and you have today’s Tea Party conservatism in a nutshell.   It’s the ‘Treasury View,’ a classical attitude that has its origins in economic theories formed more than 200 years ago.  They ignore the massive costs of unemployment, both in terms of treasury revenue and payout for unemployment insurance and other programs, not to mention huge losses in productive output and declining demand, but instead worry about inflation and rising interest rates on debt–neither of which have appeared the past four years.   We  are in a classic liquidity trap created by a collapsed asset bubble that blew up the banking system and made private homeowners insolvent.  Doesn’t happen very often.  In fact the last time it happened was when Keynes wrote his essay.  The only cure is to raise employment.  The private market is recovering, but at an insufficient rate.  The federal government should be hiring people by the millions rebuilding America’s tottering infrastructure.  Only this response will speed up recovery.  And with recovery will come relief from deficit and an ability to pay down debt.   

Investor and investment manager Dan Alpert has published an article in the blogsite EconoMonitor detailing what he calls the ‘four factors’ we must address in order to get out of our prolonged recession.

Alpert is the founding Managing Partner of Westwood Capital, LLC, and it affiliates, a New York-based investment banking firm. He is also a Fellow of The Century Foundation.  As such he takes an unbiased view because bias is deadly when it comes to investment performance.  This article does an excellent job of explaining why we continue to stumble economically.

Here is what we know about the global economy given the experiences of the past four years:

• There is a global insufficiency of demand relative to an immense oversupply of labor and productive capacity.
• The imbalances between high-wage/current-account-deficit/balance-sheet-indebted nations and lower-wage, surplus nations have produced a glut of savings in the latter, relative to the opportunities offered for profitable investment of those savings in additional capacity either at home or abroad, given the absence of demand for such additional capacity.
• The excess savings have inexorably reduced the cost of money in the developed world to the historically low levels we again achieved this week. The sole exception to this phenomenon being in the peripheral regions of the Eurozone, owing to the perverse and economically unnatural condition of their being caught in a currency union absent a fiscal union and internal credit support (a subject of many earlier posts on this blog).
• The private sector debt overhang in the advanced deficit economies (including, for this purpose, the portion of the sovereign debts of those countries that was taken on to subsidize internal welfare systems in lieu of, or in addition to, households taking on debt directly) is preventing the recovery of internal demand. Moreover, as the great Irving Fisher wrote during the Great Depression, the very act of attempting to reduce debt has once again ignited the paradox of reduced economic activity, employment and income causing consumers to become even more debt-dependent. Quoting Fisher: “The more debtors pay, the more they owe.” We saw this materialize vividly during the second quarter as aggregate consumer debt zoomed past its bubble era highs.
• We are enduring the unfortunate coincidence of the two foregoing phenomenon coincident with a generational (as in, once-in-a-generation) new technological plateau that appears to find an ever expanding number of labor-saving, productivity-increasing, job-obsoleting applications; and
• The developed world has achieved population demographics that force us to confront painful intergenerational economic issues—amidst the historic levels of economic insecurity that impact younger generations as a result of the foregoing issues….

There is so much cash floating around in the capital markets that money supply long ago ceased to be the metric targeted by the Federal Open Markets Committee of the U.S. Federal Reserve Bank—it is now all about interest rates and I would dare say that with 10 year and 30 year U.S. treasury bonds, at below 1.5% and 2.5% respectively, if nominal GDP can’t be made to grow, and inflation to ignite under present circumstances there must be something else going on! Something bigger, even, than the classic liquidity trap in which we are very much caught….

We must move from stabilize and reflate, to stabilize and recalibrate:

• It is time for creditors throughout the developed world to finally take the write downs that have long been coming their way in connection with the trillions of dollars of truly un-payable household and sovereign debts that resulted from the credit bubble of the 2000s.  Yes, this will pressure lenders and, yes, they will need to be recapitalized to the detriment of their existing stakeholders.  But there is presently no shortage of capital seeking reasonable risk-adjusted returns, and I have every confidence that it will flow eagerly into the financial sector—if only the balance sheets of our institutions were honestly reckoned by having the currently unrecoverable carrying value of assets written down to that which can be recovered today from borrowers and/or underlying collateral.
• As I have been saying and writing about for years, we must accept the reality of what the credit markets are telling the planet’s most creditworthy governments, particularly that of the U.S.  The message is “please, here, take our money…take it cheaply and keep it safe…we have no fear of lost purchasing power, the trend is not inflationary…now take it (and use it to fix your  economy).” And that is what we must do. We must take as much 30-year money at these depression level interest rates as we need to re-employ our underemployed workers directly, on public infrastructure projects that return benefits to the economy more than sufficient to repay the sums borrowed when the time comes.  The private sector will not hire until it sees a recovery in demand—so the only agent for re-employment of workers and regeneration of demand may, for an extended time until the imbalances at least decline somewhat, be our governments.  It is long past time to pack away austerity agendas.
• And yes, we must address and manage the process of nominal price, wage and asset value declines. The advanced economies are experiencing the effects of a supply glut, a debt overhang, massive technology-induced productivity (soon to transfer to the emerging economies, worsening the glut), and aging populations. These are all disinflationary factors. And the aggregate effect of their contemporaneous existence is deflationary—full stop. Yet in relying on monetary intervention alone we are fighting the battle to control the pace of deflation (forget about reflation) with one hand tied behind our back.n  Instead of targeting growth in nominal GDP, which I am proclaiming here to be a futile endeavor, we must target renewed global competitiveness and, at the very least, growth in real GDP. That means both allowing our price and wage structures to align themselves with global supply and demand and, more importantly, feeding and nurturing investment in those areas of the private sector that can employ large numbers of people at market clearing wage rates. Especially in those sectors that are more readily protected by geography from global competition.

Beezer here.  As I’ve been harping on all along, the only way out of our mess begins with direct hiring.  There’s no lack of capital, no lack of work to do and no lack of people willing and able to do that work.  What we lack is the will to act.

From a recent column by economist Bruce Bartlett, former advisor to Presidents Ronald Read and George W. Bush, as well as staffer for Representatives Ron Paul and the late Jack Kemp.  In other words, a rock ribbed Republican.

Beezer here.  The important columns in this chart are the last two.  The next to last column measures what’s known as the ‘tax wedge.’   The tax wedge is the difference between the cost to an employer of employing a worker and the after-tax reward that the employee receives.   This is the underlying principle Republicans espouse to claim that lowering taxes (the cost to the employer) will result in more hiring.

As one can see, the United States is a low-tax country with a total tax wedge of 29.5 percent. Three-fourths of O.E.C.D. countries have a larger tax wedge on average workers.

I have also included the latest data on the percentage of workers employed as a share of the working-age population. I think this is a better measure of the health of the labor market than the unemployment rate, which goes up and down for a variety of reasons unconnected to taxes.

Here, too, there is little evidence that taxes affect employment one way or another. Almost half of the countries with a bigger tax wedge employ a larger percentage of their working-age populations than the United States does, and more than half of those with a smaller tax wedge have lower employment ratios.

One problem with the tax-wedge theory is that taxes are at a historical low as a share of the gross domestic product. According to the Congressional Budget Office, federal revenues will be 15.8 percent of G.D.P. this year. The postwar average is about 18.5 percent, and taxes averaged 18.2 percent during the Reagan administration; indeed, at their lowest point in 1984, federal revenues were 1.5 percent of G.D.P. higher than they are now.

Another problem is that there hasn’t been a significant tax increase affecting average working people since 1983, when Reagan raised the payroll tax rate to 15.3 percent from 13.4 percent (employer plus employee). Contrary to popular belief among Republicans, there have been no significant tax increases during the Obama administration. In fact, there have been tax cuts aimed directly at workers.

The making-work-pay tax credit consumed some 40 percent of the budgetary cost of the 2009 stimulus package and reduced taxes for every person or household with a positive income-tax liability and an income below $75,000 in 2009 and 2010. In 2011 and 2012, the making-work-pay credit was replaced by a temporary 2 percent cut in the payroll tax rate, reducing taxes for every worker.

The reason that unemployment is high clearly has nothing to do with taxes. Consequently, there is no reason to think that reducing taxes further will do anything to raise employment by reducing the tax wedge.

Beezer again.  We’ve long maintained that reasonably progressive taxes have little or nothing to do with robust economies, they just help pay the bills.   Strong economies are created by dynamics much more important than reasonable taxes.  Things like innovation, strong educational institutions, robust infrastructures and solid research and development investment are far more important.  Robust economies are also most often characterized by high employment rates.  Which is why the number one job of Congress today should be to guarantee job growth.  We have the labor, we have trillions of dollars worth of infrastructure projects already identified, and the rest of the world is literally paying us to take their savings.  That we haven’t already begun hiring millions of people to go back to work this way is criminal.