I have a deep suspicion that the Republicans know that the public doesn’t understand the national budget.  And knowing that, they can tell the public things that they (the Republicans) absolutely know to be false.

This from a comment to a New York Times blog post by economist Paul Krugman.

“This says that the domestic balance, the government balance, and the external balance must sum to zero. If the external balance is constant, then a domestic surplus must be offset by an equal government deficit, and vice versa. Both the government and private sector cannot be in surplus if the trade balance doesn’t accommodate. No one realistically expects the US trade balance to do this, at least anytime soon.

Therefore if the private sector desires to rebuild balance sheets by saving and delevering, then the government must run a deficit that accommodates this desire, or nominal aggregate demand will sag further, risking deflation and depression. The government can run a deficit with either increased expenditure or decreased taxation, or a combination thereof in order to address this. Monetary policy cannot directly affect nominal aggregate demand, as the past year goes to show. Fiscal policy can.

The immediate problem is lagging demand, which created an output gap that is resulting in historically high unemployment. Government deficits must address this in a timely way, since the foregone opportunity of an output gap and the degradation of human resources due to high unemployment and underemployment are very costly. Therefore the multiplier associated with the various forms of stimulus must be considered. The multiplier associated with tax cuts is low, while the multiplier associated with expenditure is much higher. So while a payroll tax holiday would help the middle class rebuild balance sheets, what is needed more is expenditure aimed at bolstering demand. This could be accomplished with per capita block grants to states and amplification of the automatic stabilizers. Worrying about increasing deficits will just be more costly in the end.”

Beezer here.  I would add infrastructure projects as a first priority in spending.  They do create jobs and resulting demand, but they also create public goods that are necessary for developed economies.

The simple fact is that Social Security won’t go broke.  So for those who may be frightened by all the talk of ‘fixing’ social security, here’s the truth.  From Bruce Webb over at the Angry Bear blog.  Of course Bruce has a big advantage over political conservatives.  He knows the math.

“A couple of further notes. If retirement benefits are projected to increase in real terms by close to 100% over the next 75 years, then a projected cut of 20-25% on Trust Fund exhaustion would STILL see those future workers with larger baskets of goods than similarly situated retirees (this is what we call ‘Rosser’s Equation’).

But this real term increase doesn’t come at the expense of younger workers still in the work force, at least not without some forced special pleading. The goal clearly shown in Fig 2 is to keep overall replacement values steady with each future generation just able to hold onto its share of the overall societal increase. This seems fair to me.

There are some that insist that if you ‘really’ look at the numbers you will see that Social Security was simply too generous to earlier generations. How you reconcile this with these graphs showing that each generation will be able to afford a bigger basket of goods than their predessessor would seem difficult. Because arguments from ROI (but I could have had EVEN MORE, and screw Grandma) seem pretty hard-hearted and selfish. But perhaps someone can make the moral case in comments.”

Beezer here.  So if even the math challenged can understand that Social Security isn’t going to go broke, what the heck is going on?  Webb has an idea.

“Nope in my opinion the fundamental motive for opposing Social Security is not driven by greed as such but instead an ideology that depends crucially on the perception that Big Government is always and everywhere a failure, and that the bigger the counter-example the higher the risk to that overall paradigm. If Social Security was just headed for the cliff, its enemies would just stand back and watch it go, arguably this is where they were at in 1993. It is only when they see the coach driver beginning to get the team under control and steer it away from the cliff that they have to jump in and try to spook the horses again.

Which is why people asking why the actions of Social Security opponents don’t seem to be particularly helpful in guiding the stage coach away from the cliff are asking the wrong question, looked at in that way their actions don’t make sense at all. On the other hand if you flip it around a lot of things become clear, there being more than one definition of ‘fixing’.”

Beezer again.  There it is, that damn ideology again.  No matter the evidence.  No matter the math.  No matter the real historical record.  Republicans have so bought into the myth that the government can do no good, only harm, that such a large success like Social Security cannot be let stand.  So spook the horses and drive the program off the cliff.  That’s the only ‘fix’ the Republicans have in mind.

Beware America.  You are being sold down the proverbial river of misplaced ideology.

The ‘It Sucks To Be You’ party (aka Republican Party) is expected to gain Congressional seats this November, primarily because of the continuing recession and stubbornly high unemployment.

Unless, of course, the unemployed and those who can’t get health insurance (those who it sucks to be) begin to realize the true nature of the Republican Party.  Recently the Democrats are seeing some relief from the poor polling results so maybe the population at large is starting to smell something fishy about all the serial Republican “no” votes to reform efforts.

Unemployed?  It sucks to be you.  Got a chronic health problem?  It sucks to be you.  Can’t afford to go to college?  It sucks to be you.  Home underwater?  It sucks to be you.  Clam fisherman on the Gulf?  It sucks to be you.  Hotel owner or employee on the Florida gulf coast?  It sucks to be you.  Sick from salmonella poisoning?  It sucks to be you.  Going to rely on Social Security?  It sucks to be you.  Depend on Medicare for your medicine?  It sucks to be you.

This is a pretty long list.  Possibly a majority of voters.  Maybe when they realize that it sucks to be them, they’ll fight back.

Beezer can’t take credit for this line of reasoning.  It came from a friend who is an elected official in Virginia.

Beezer’s long maintained that the country should have sensible, progressive tax rates, and then leave them there.  Underlying this belief is that there are far more important dynamics than taxes involved in producing robust economies.  The appeal of progressive rates is that they help pay the bills — particularly when economies are strong and debt can be reduced.  And if they are unchanged, there’s no added uncertainty when it comes to planning.

With that preface, the Washington Post recently published an article by William Gayle, of the Brookings Institution, entitled “Five Myths About The Bush Tax Cuts.”

“The cuts lowered tax rates across the board on income, dividends and capital gains; eventually eliminated the estate tax; further lowered burdens on married couples, parents and the working poor; and increased tax credits for education and retirement savings. Obama’s proposal would extend most of these reductions, allowing only those for individuals making more than $200,000 and families making more than $250,000 to expire.

Complicating the debate is a gloomy economic and fiscal outlook, one that is decidedly different from the rosy scenario that prevailed at the beginning of the last decade. That outlook has given rise to a number of stubborn myths about what extending the Bush tax cuts would — or wouldn’t — do.

1. Extending the tax cuts would be a good way to stimulate the economy.

As a stimulus measure, a one- or two-year extension has one thing going for it — it would be a big intervention and would provide at least some boost to the economy. But a good stimulus policy can’t just be big; it should also offer a lot of bang for the buck. That is, each dollar of government spending or tax cuts should have the largest possible effect on the economy. According to the Congressional Budget Office and other authorities, extending all of the Bush tax cuts would have a small bang for the buck, the equivalent of a 10- to 40-cent increase in GDP for every dollar spent.

Why? As the CBO notes, most Bush tax cut dollars go to higher-income households, and these top earners don’t spend as much of their income as lower earners. In fact, of 11 potential stimulus policies the CBO recently examined, an extension of all of the Bush tax cuts ties for lowest bang for the buck. (The CBO did not examine the high-income tax cuts separately, but the logic it used suggests that extending those cuts alone would have even less value.) The government could more effectively stimulate the economy by letting the high-income tax cuts expire and using the money for aid to the states, extensions of unemployment insurance benefits and tax credits favoring job creation. Dollar for dollar, each of these measures would have about three times the impact on GDP as continuing the Bush tax cuts.

2. Allowing the high-income tax cuts to expire would hurt small businesses.

One of the most common objections to letting the cuts expire for those in the highest tax brackets is that it would hurt small businesses. As Sen. Orrin Hatch (R-Utah) recently put it, allowing the cuts to lapse would amount to “a job-killing tax hike on small business during tough economic times.”

This claim is misleading. If, as proposed, the Bush tax cuts are allowed to expire for the highest earners, the vast majority of small businesses will be unaffected. Less than 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets — individuals earning more than about $170,000 a year and families earning more than about $210,000 a year.

And just as most small businesses aren’t owned by people in the top income brackets, most people in the top income brackets don’t rely mainly on small-business income: According to the Tax Policy Center, such proceeds make up a majority of income for about 40 percent of households in the top income bracket and a third of households in the second-highest bracket. If the objective is to help small businesses, continuing the Bush tax cuts on high-income taxpayers isn’t the way to go — it would miss more than 98 percent of small-business owners and would primarily help people who don’t make most of their money off those businesses.

3. Making the tax cuts permanent will lead to long-term growth.

A main selling point for the cuts was that, by offering lower marginal tax rates on wages, dividends and capital gains, they would encourage investment and therefore boost economic growth. But when it comes to fostering growth, this isn’t the whole story. The tax cuts also raised government debt — and higher government debt leads to higher interest rates. If estimates of this relationship — by former Bush Council of Economic Advisers chair Glenn Hubbard and Federal Reserve economist Eric Engen, and byoutgoing Office of Management and Budget Director Peter Orszag and myself — are accurate, then the tax cuts have raised the cost of making new investments. As the economy recovers and private borrowing rises, the upward pressure on interest rates is likely to grow even stronger.

I have used standard growth and investment formulas to calculate that the overall effect of the Bush tax cuts on economic growth has therefore been negative — and it will continue to be negative if the cuts are extended.

4. The Bush tax cuts are the main cause of the budget deficit.

Although the cuts were large and drove revenue down sharply, they are not the main cause of the sizable deficit that exists today. In 2007, well after the tax cuts took effect, the budget deficit stood at 1.2 percent of GDP. By 2009, it had increased to 9.9 percent of the economy. The Bush tax cuts didn’t change between 2007 and 2009, so clearly something else is to blame.

The main culprit was the recession — and the responses it inspired. As the economy shrank, tax revenue plummeted. The cost of the bank bailouts and stimulus packages further added to the deficit. In fact, an analysis by the Center on Budget and Policy Priorities indicates that the Bush tax cuts account for only about 25 percent of the deficit this year.

5. Continuing the tax cuts won’t doom the long-term fiscal picture; entitlements are the real problem.

One theory holds that the country’s long-term budget shortfall is “just” an entitlements problem, the result of rising costs associated with growing Social Security rolls and increased health-care spending (via Medicare and Medicaid). Republicans like this idea because it plays down tax increases as a potential solution. Democrats like it because it makes the recent health-care package seem like even more of a triumph.

But it just isn’t true. The deficits we face over the next decade reflect a fundamental imbalance between spending and revenue, one that goes beyond entitlements. Based on projections by the CBO, Alan Auerbach of the University of California at Berkeley and myself, among others, even if the economy returns to full employment by 2014 and stays there for the rest of the decade, the continuation of current fiscal policies, including the Bush tax cuts, would lead to a national debt in the range of 90 percent of GDP by 2020. That’s already the highest rate since just after World War II — and Medicare, Medicaid and Social Security aren’t expected to hit their steepest spending increases until after 2020.

According to these same projections, the yearly deficit would rise to 6 to 7 percent of GDP by 2020. The Bush tax cuts would account for a significant chunk of this, considering that in each year they are in effect, the revenue lost because of them amounts to nearly 2 percent of GDP.

Compounding the problem: By increasing the government’s debt, the tax cuts have already led to higher interest payments on that debt. So even if all of the cuts expire on Dec. 31, we will still be paying for them for years to come.”

Former Federal Reserve Bank Chairman Alan Greenspan, in a Financial Times interview, reveals that he believes the Bush tax cuts should be allowed to expire as planned.

Greenspan, still referred to as “the Chairman,” is still the same laissez faire advocate familiar to those who take the time to watch the Federal Reserve.  Although his sterling reputation has been seriously damaged by the financial collapse of 2008, he seems unconcerned about that in this interview — at 84 years of age such setbacks apparently dim in importance.

Here’s the relevant quote in the FT article:

“The other part of his record seized on by critics, especially Democrats, is his support for two rounds of tax cuts. One came in 2001 at the beginning of the administration of President George W Bush and one two years later. The week before we met, with an eye to the US’s huge fiscal deficit, he told an interviewer that he supported reversing those tax cuts, a remark seized on by his detractors to argue that he was irresponsible to have backed them in the first place. Here, too, he has a carefully worked-out response. One, both administration and congressional forecasts back then predicted huge fiscal surpluses, so a tax cut was quite sensible. Two, he argued at the time that a second round of cuts should be made conditional on how the economy and the public finances developed, which they were not. Three, he underestimated how his words would be seized on to justify reducing taxes willy-nilly, and he has already admitted that mistake in his 2007 memoirs, The Age of Turbulence. “Criticisms are wholly deserved when you’ve done something wrong, I grant you,” he says. “But I still prefer when I’m criticised that it be accurate.”

Beezer’s long argued that the obsession over tax cuts, and truthfully over monetary tools in general, has prohibited public discourse about other more important dynamics for maintaining robust economies.   Sensible, progressive tax tables that are kept unchanged, provide an all important stability in planning and additionally help pay down government debt accumulated in recessions, while providing surpluses when times are good.  Constant fiddleing with tax rates are a waste of time, in other words.  The more important issues are balanced trade, tariffs, currency manipulation, industrial policies aimed at full employment, innovation and capital investment, among many others.

That Greenspan, the icon of regulatory forebearance (blind regulation), thinks a return to the Clinton tax tables is interesting.  What’s amazing is that the media completely ignores his viewpoint now.  Republicans, to a man and woman, still maintain tax cuts are the cure to all evils.  Despite their guru acknowledging they aren’t.

No wonder we can’t get out of our own way.

As per usual, thanks to Mark Thoma’s economist’s view blog for highlighting this interview.

From Tim Duy over at his website Tim Duy’s Fed Watch.  Retail sales came in lower than expected.  Which means demand has weakened.  Which means now is definitely not the time to withdraw stimulus.

But if we do withdraw stimulus now, that means the economy won’t improve (it might get worse, even) and that means Republicans can pick up more seats come November!  OK, now I get the strategy.  Too bad for the unemployed/underemployed, you have to know what’s truly important right?  Republican roolz!!

“The retail sales report for June was weak, as expected.  From Bloomberg:

Sales at U.S. retailers dropped in June for a second month, indicating the economic recovery dissipated heading into the second half of 2010.

 

Purchases decreased 0.5 percent, more than projected, after declining 1.1 percent in May, Commerce Department figures showed today in Washington. Excluding auto dealers, demand fell 0.1 percent, matching the median forecast of economists surveyed by Bloomberg News…

 

…“The consumer is losing some momentum,” said Harm Bandholz, chief U.S. economist at UniCredit Group in New York. “Job gains are not enough to bring the unemployment rate down. It means the recovery goes on, just at a slower pace.”

Looks like the pent-up demand was been satisfied.  Retail sales excluding gasoline have now reverted back to the pre-recession growth rate (growth rates are log approximations):

For those counting, the gap between prerecession trend and actual sales now exceeds a trillion dollars – correct, a trillion dollars of foregone spending relative to the previous trend.  That gap is growing by over $50 billion each month.  One can argue that the previous trend wasn’t sustainable, but where would sales be if unemployment rates were closer to 5% rather than 10%?

Just more evidence that the US economy is settling into a suboptimal equilibrium.”