OUR FRENZIED FISCAL FUTURE

Often wrong, but never in doubt. ~ Ivy Baker Priest 

So here we are, attempting to figure out how much we may benefit or lose from the ever-changing Republican tax “reform” proposals now winding their way at nearly legislative warp speed through the lobbyist-infested Congress. What is a knowledgeable citizen to do – let alone the vast majority of taxpayers who haven’t a clue about macro- or micro-economic fiscal policies?

Here’s a cast-in-concrete general canon about any change in tax legislation, rules or regulations:

Tax reform always creates winners, losers and unintended consequences.

The winners quietly chortle. The losers loudly cry, complain, moan and commiserate, and hope their public upset will change the rules to lessen their expected torment. Others hope they're not negative unintended consequences. 

I’d suggest we pay some attention now to discussions about who will come out ahead and who will suffer from the Republicans' currently-proposed tax changes. My advice also includes applying a very large discount to the mandated 10-year forecasts that accompany each and every change in federal fiscal policy for the simple fact that making such macro predications are always challenging, and rarely accurate. The Economist posted an assessment of “budgetary crystal balls” that illustrates forecasting’s fallacies. Most forecasters recognize this inevitable problem, but only mention it sotto voce. Outwardly, forecasters firmly stand by their predictions. But as Ivy Baker Priest, a Republican US Treasurer in the 1950s cogently stated, forecasters are “often wrong, but never in doubt.”

Futures that are directly influenced by political dogma and whims, er policy, are especially problematic. The proposed House and Senate tax bills change the principal corporate income tax rate from 35% to 20%, the pass-through rate for subchapter S corps and partnerships drops to 25%.

Intuitively, we can readily realize that despite the Republicans’ unfounded declarations that all this additional corporate welfare will produce higher wages and higher growth (relationships that are not founded on past empirical data), we can understand that businesses and corporations will greatly benefit and most individuals won’t. To recognize these tax changes’ effects we don’t need to rely on complex macro models that involve hundreds of equations and scads of variables – variables in addition to the very necessary but never-talked-about add-factors and mul-factors. 

Nevertheless, such models show that the Republicans’ reforms likely will provide a stunning 67% of the deficit-financed tax benefits to corporations, not citizens, as a Vox article showed. Here’s a summary of that analysis:

Type of Tax Change	Dollar impact over 10 years	Percent of total tax cuts
Individual tax cuts	$3.3 trillion (T)
Individual tax increases	-$3.0 T
Net individual tax cuts	$0.3 T	20%
Business tax cuts	$2.2 T
Business tax increases	-$1.2 T
Net business tax cuts	$1.0 T	67%
Estate tax repeal	$0.17 T	11%
Total tax cuts	$1.5 T

Source: Committee for a Responsible Federal Budget via Vox.

Notice the $3.0 trillion of individual tax increases. Also noteworthy and thoroughly unsurprising is that of 47.5% of the total federal tax reduction will be directed to the top 1% of income-earners. This large share does not include the benefits of repealing the estate tax that will aid only the already-wealthy. The middle 20% of income-earners (aka, the middle class) will receive but 8.7% of federal tax changes (worth on average $320). The Top 0.1%ers will benefit from receiving a disproportionate 25.1% of tax reductions, worth a tidy $278,370. Is this in any way equitable? Not in the slightest.

The Senate bill offers beneficence to high-roller GOP contributors that the House bill does in spades. These dispiriting results are likely to persist when the ultimate legislation has been agreed to by the Congressional conference committee and signed by our deeply-uninformed, don’t-connect-any-dots president. 

There are interesting stories about which slice of the “middle class” will or won’t benefit from the latest version of the House and Senate tax bills; or how residents in high-tax mostly blue states, student-loan holders, future electric vehicle and solar panel purchasers and low-income housing developers will surely suffer. And distressingly, these precursor bills probably have all too much to do with the likely final legislation.

At this point, it’s the many potential losers who are understandably audible. Unfortunately, I remain cynical enough to doubt that individual citizens or worthy causes can motivate any Republican legislator to make reasoned, broadly-beneficial changes to these biased tax change proposals so they can produce more effective and efficient tax policy. Why? Because of flawed Republican dogma and the herds of corporate lobbyists who are now attempting to further twist legislators’ arms and minds.

The Congressional rules that dictate calculating a decade’s worth of impacts are absurd on their face. They’re mostly a cover for false legitimacy. After long-disparaging President Obama’s effective fiscal stimulus legislation in 2009, the Republicans now dismiss any and all concerns about adding at least $1.5T to the national debt. Yet another example of hypocritical political double-speak.

We’ve known since last November that Republican tax reform was unlikely to help many people who need assistance, including countless people who voted for the president. Nevertheless, as Tacitus mentioned several millennia ago, and perhaps reading into the 2017 collective Republican mind, the unknown always passes for the marvelous. The Republican tax reform legislation won't be marvelous for all too many people. 

4% GROWTH AND OTHER FANTASIES

Economic growth doesn’t mean anything if it leaves people out. ~ Jack Kemp 

There’s now a 16-ring circus of candidates performing for the 2016 US presidential election. Four Democrats and a dozen Republicans have thrown their collective hats into the 24/7 blazing media spectacle. As the New York Times recently pointed out, each of these men and women are searching for economists to dance with them in their efforts to formulate economic positions, distinguish themselves from the other 15 hopefuls, and ultimately win the nomination and presidential election that’s now a mere 504 days away, OMG.  

Even at this prematurely early date, several candidates are running up economic policies on their flag poles to see which way the political winds blow them. Given the clear need to attract media attention, the candidates’ economic proposals can be quite fantastic, including re-treads from long-ago campaigns.

For example, Rand Paul has revived the flat tax concept from a 20-year slumber that was last seen on its death bed after being proclaimed by presidential candidate Steve Forbes; you remember him don’t you? Mr Paul’s one-more-time-with-feeling flat tax includes eliminating the federal corporate income tax (hats off to corporate lobbyists) and replacing it with what’s commonly called a value-added tax (VAT), although Mr Paul pointedly calls his proposed 14.5% tax a “business activity tax.” His tax scheme is a combination of a 14.5% personal income tax together with the 14.5% VAT, which is a type of sales tax that virtually every person and every organization would have to pay directly or indirectly. What’s the likelihood of such a regressive, federal VAT replacing the dearly-unloved corporate income tax? Slim to none, once you multiply the chance that Mr Paul will be elected president (currently he’s given an 8% likelihood of capturing the nomination at fivethirtyeight.com) by the even smaller chance that Congress – even a Republican one – would actually produce such a fundamental change in tax policy.

A more interesting economic policy objective was proclaimed by Jeb Bush last week. Namely, that if elected president he would usher in increased real (inflation-adjusted) economic growth of at least 4% per year for a decade.

The US has indeed carried on without historically-strong macroeconomic growth for some time. Our GDP growth this year is expected to be a miserly 1.9%. Since 1975, the average yearly GDP growth has been 2.8%, which is nearly 2% less than it was from 1945 to 1975. As our economy has grown and developed, if for no other reason than its impressive size, it has become more challenging to sustain previously-attained annual growth rates. As they say, quickly turning a very large ship, like the Titanic (or the US economy), is next to impossible.

The US nominal GDP is now $17,665 billion. Four percent of our GDP is thus $706.6 billion, which is the about same size as the Philippines’ GDP (PPP), the world’s 30th largest economy. That’s a lot of economic activity (and money) to add each year. The figure below shows the annual economic growth attained by each of our 5 most recent presidents. The average growth rate attained by the 3 Republicans is 20% less than that achieved by Presidents Clinton and Obama. Other economic studies have also shown that growth under Democratic presidents since Truman has been greater than under Republicans.

Even though accelerating economic growth is a worthy goal that has many benefits, it’s highly unlikely Mr Bush could achieve 4% real annual growth. Although his statement provided a good media soundbite, it’s more fantasy than eventual fact.

Increasing economic growth requires changes in several factors. First, a noteworthy increase in the working-age population is needed, as well as in the proportion of this demographic group who are actually employed. Second, a substantial change in federal fiscal policy has to occur (e.g., policies that promote investment and spending); third, productivity must be amplified; and last, macroeconomic growth rarely increases suddenly, it takes time.

Given that Republicans generally want to lock the US’s borders to all immigrants (and deport all 11 million “illegals”), it’s hard to imagine our working-age population increasing – especially when the US fertility rate now is 1.9 births per woman, less than the 2.1 births per woman “replacement” rate needed to keep the population stable. In addition, the labor-force participation rate, measuring the percentage of the work force who’s actually working or looking for a job, is as low as it’s been since 1978 – not a good sign for increased growth. Federal spending on research and development (R&D) has declined over 30% between 1995 and 2015. Finally, due to Republican intransience, Congress has rebuffed its responsibilities to complement the Federal Reserve’s efforts in improving our economic performance by passing fiscal policies that promote private investment, R&D and other growth-oriented spending like on infrastructure. Thus, Republican candidates like Mr Bush call for increased growth, but have refused to create policies that can produce it.

The Republican candidates are instead espousing policies that pander to the insular, right-wing Republican base that demands smaller government and ever-lower taxes. This base includes many older citizens whose economic and financial literacy is chillingly deficient. Here’s a sad indicator of this basic lack of understanding. A decade ago, the University of Michigan added 3 questions to its Health and Retirement Study, a biennial survey of Americans over 50:

■ If $100 earns 2% per year, in five years will you have more than $102, less than $102 or $102?

■ If the interest rate on your savings is 1% per year and annual inflation 2%, could you buy more, less or the same with your money in a year’s time?

■ Is it true or false that buying a single company stock usually provides a safer return than the stock of a mutual fund?

Woefully, only about 33% of all respondents answered all 3 questions correctly. Here[1] are the answers.

My bet is that the two-thirds of respondents who answered incorrectly have little or no sense of how to assess the future for themselves or the nation. In economic terms, they maintain an infinite discount rate. For a variety of reasons, they’re only concerned about the present moment. Such typical older households have only $110,000 saved for their retirement.

This broad-based financial illiteracy provides a basis for the fantasy that Republican members of Congress are willing to create policies that stimulate longer-term macroeconomic growth, something they haven't done in over 6 years, and despite pronouncements by their presidential hopefuls.

---

[1] Answer to Question 1: more than $102. Q2: you would be able to buy less. Q3: it’s false. 

GIVING CREDIT WHERE IT'S UNDUE? NO.

Austerians want tribute for doing nothing.

Republicans demand praise for the US's modestly-growing economic pie, despite trying to shrink it. It's an Olympian level of chutzpah. Several news reports, including this one, recently stated that the GOP wants some credit for getting the US economy growing once more. To me it's an unassailable example of the GOP leadership suffering from political Alzheimer's. John Boehner, Mitch McConnell and their congressional amnesiacs expressed upset that President Obama has received (deserved) praise for helping to lower the unemployment rate – now at 5.6% - and increase the GDP's growth – now at 5%.

In my book, their consistent efforts to thwart the Obama administration's every attempt to increase government spending and offer vital economic benefit for middle- and working class citizens earns them a leaden medal, certainly not a bronze one.

Speaker Boehner actually criticized the administration for average hourly wages failing to increase. It's yet another example of the GOP's empty fiscal pot calling the economic kettle black. After all, the Republicans have stymied any rise in the federal minimum wage, as well as predominantly opposed increases in state-based minimums. Ominously, their new control of Congress will likely result in Congress doing nothing to help the majority of Americans escape continuing economic challenges. Why? Because they're "austerians."

Austerian is an inventive term applied to politicians (and economists) who have dogmatically stuck to austerity-focused public policies – ones that reduce debt and government expenditures – despite elevated unemployment and frail growth. Austerians in Congress have prevented needed expansionary fiscal policy efforts from being enacted during the past 5 years and regularly raised the fearful specter of high inflation if the government spends more on unemployment support, infrastructure or education. Their fears are completely unfounded. How much have overall prices increased during our fragile recovery? The latest Consumer Price Index increased 1.3% on an annual basis. That's almost 50% lower than the Federal Reserve's 2% inflation rate target. With broader austerian policies in place, Europe is actually experiencing deflation, elevated unemployment and an incipient recession.

Austerians include virtually all GOP and Tea Party members in Congress, as well as several governors; including Sam Brownback in Kansas whose disastrous fiscal efforts have burdened everyone in the Sunflower State. Other members of the austerian alliance include foreign heads of state like German Prime Minister Angela Merkel. In 2 weeks she'll likely face another show-down with a new Greek government. This face-off could lead to the Grexit (the departure of Greece from the Euro-zone), if the European Community (economically lead by Germany) doesn't re-negotiate with Greece and it defaults on its loan obligations. Once again, we'll see who blinks first, and whether her long-standing austerianism bends at all. I bet not.

The nascent Austerian school of economics, just across the philosophical border from the Austrian school of economics, is populated with conservative economists and similarly-minded politicians, who aren't burdened by the facts of recent history. In sum, the austerians have done nothing to get the economy growing again (or improving the lives of 99.5% of its citizens). Austerians have been myopically focused on halting the Affordable Care Act, increasing income and wealth disparity and ending nonexistent inflation.

Yet they want credit for doing worse than nothing. It's enough to turn a skeptic of American politics into a true cynic.

OUR MISSING MACROECONOMIC POLICY

Fiscal policy is not just, or even principally, the purview of the president. ~ Carly Fiorina

 

Appropriate fiscal policy has been missing-in-inaction (MII) since 2009. Every Econ101 student learns there are two complementary, federal macroeconomic policies – monetary and fiscal policy – that the government uses (ideally) to keep our nation's economy in "just-right" balance (not too much unemployment, not too much inflation). Monetary policy concerns changing the nation's money supply mostly by altering interest rates. Fiscal policy involves changing government spending and taxes through Congressional legislation.

All political eyes were focused last week on monetary side of macro policy. Fiscal policy remained the unspoken elephant in policy-makers' rooms, as it has for all too long. Why monetary policy? Because Janet Yellen was talking.

It was interesting to hear Ms Yellen testify before the Senate Banking Committee. She is expected to be the next Chairwoman of the Federal Reserve Bank (the first time that title has been used at the Fed). But before she receives the monetary scepter as this nation's (and the world's) primo central banker – and be in charge of US monetary policy – she needs to be confirmed by the Senate. Hence her testimony.

During her tenure on the Federal Reserve Board –as vice-Chair for the past 3 years and President of the San Francisco Federal Reserve Bank from 2004-10 – she has generally supported Fed's and Ben Bernanke's innovative, expansionary and controversial monetary policy called quantitative easing (QE). She has been correct in her support. Most recently, QE has involved buying $85 billion per month of long-term Treasury bonds and other financial assets to stimulate the economy. As a result of QE and other financial activities, the Fed now has more than $3.59 trillion of financial securities' assets on its balance sheet. Before the 2007 recession, the Fed held between $700 and $800 billion of Treasury note assets on its balance sheet.

Several senators questioned her testimony and implicitly her qualifications. Two of them, Senator Bob Corker (R-TN) and Senator Sherrod Brown (D-OH) characterized the Fed's QE-based monetary policy as “an elitist policy” and “a sort of trickle-down economics," respectively. They said monetary policy only helps the well-to-do Americans who participate in the (now rising) stock market rather than middle-class folks whose finances are far more precarious and puny. They have a point.

But politicians like Sen. Corker deserve gold medals for extreme hypocrisy and ironic blindness. The idea that a Republican Senator was berating Ms Yellen of implementing "elitist policy" would almost be humorous except for the huge harm Republican politicians like Sen. Corker have loaded onto working Americans during the past 4 years – because of their caustic, elitist policies. Recent examples include opposing increases in Federal (and state) minimum wages, drastically reducing funding for the food stamp (SNAP) and low-income food and nutrition (WIC) programs and opposing increased infrastructure spending. Such policies are terribly hurtful snap judgments.

If these senators want non-elitist, non-trickle-down economic policies, they themselves can create them – they're called fiscal policies. Republican and Democratic congress folk should wake up from their stupor and pass a fiscal stimulus bill, based on fiscal policies that have worked in the past.

Instead, after taking the Congressional hypocritical oath ("do no harm to those who pay for my re-elections"), Congress continues to sit on its thumbs and criticizes prospective monetary policy-makers like Ms Yellen for not doing what Congress itself (and President Obama) should be doing. Successful expansionary fiscal policy would offer much more broad-based economic benefits that come from directly increasing employment, putting more money in the wallets of middle- and working-class people and providing necessary support to folks who can't afford food, care and/or housing.

Why does fiscal policy remain MII? Why doesn't Congress authorize expansionary economic policy? Have its members forgotten what fiscal responsibilities they have? Not likely; it's because many of its members are too duplicitous and ideological to do what's needed for the public at large. They remain falsely fearful of non-existent inflation from ever-moderating deficits.

Ms Yellen was too demure in not forcefully stating to the Banking Committee that the Fed – soon to be her Fed – cannot by itself pull the US out of its continuing economic malaise with only its monetary efforts. Congress must re-activate its fiscal authority by passing substantive expansionary fiscal policy legislation. This means lowering taxes for the 97%, increasing government expenditures to improve infrastructure like roads, bridges and the internet, providing more employment-training funding, especially for the long-term unemployed, and increasing SNAP and WIC budgets. Senators Corker and Brown can rest assured these fiscal expenditures will not be elitist or trickle-down policies.

We would have all benefited from hearing Ms Yellen clearly describe the elephant in room and tell Congress to get on its fiscal stick and start doing its part to revitalize the economy, rather than berating the Fed for not doing Congress' job.

FOR WHOM THE TOLL CHIMES

Never mistake motion for action. ~ Ernest Hemmingway

Our young people are suffering mightily. The combined, ruinous effects of fiscal policy idiocy, minimal macroeconomic growth, and much reduced wealth/savings and stagnating wages for the majority of American working adults has devastated the employment possibilities for young people throughout this country and beyond. Over the past 5+ years, all too many Millennials are becoming our Lost Generation. The chart below shows the shameful youth unemployment rates that persist in too many so-called developed nations. In May, the US teenage unemployment rate is an astonishing 322% more the overall US unemployment rate. As high as our youth unemployment rate is, it's less than one-half as large as either Spain's or Greece's youth unemployment.

Meanwhile members of the Senate sit on their derrieres and pat themselves on the back for adding billions of unnecessary dollars to "strengthen" the US-Mexican border with ever-longer 20-foot high fences, drones, cameras, hired-guns, guards and electrified razor wire. Congress has delusionally dismissed the facts of immigration: the number of immigrants seeking legal or illegal entry into the US has decreased by 80% during the past decade. Members of Congress still live on their mental plantations of the past [decade, century?]. Perhaps this all too common evidence of reality-denial by public decision-makers should be added as yet another "disease" in DSM-5.

Congress and the President have not addressed far more consequential economic issues concerning our nation's present and future. These concerns including encouraging equitable macroeconomic growth that supports hiring workers, especially young people, and improving the incomes of more than the top 0.001%. Last week, the Bureau of Economic Analysis reduced its estimate of this year's first-quarter GDP growth to a moribund 1.8%. Parsimonious conservatives continue to endorse cutting education, training and support programs' budgets and worry about non-existent inflation. Businesses remain reluctant to hire more workers, especially young ones, when Congress is retreating. Meanwhile many corporations sit on mountains of retained earnings and cash. This is most definitely not the needed counter-cyclical fiscal policy that I explain to high-school economics students.

Congress' and the President's dismissal of youth's travails borders on myopic madness. It doesn't have to be this bad; look at Canada in the figure, which has the lowest youth unemployment of any OECD nation. But even its 13.5% rate is quite high by recent historical standards.

In 2012, of the 2.1M 16 to 24 year olds who want a job but can't find one, 217,000 were so discouraged that they dropped completely out of the labor force. The labor force participation (LFP) rate for US teenagers is now 35.0%, the lowest of any category of US workers and the lowest in decades. The LFP rate for all US workers has dropped to 63.4%, also low by historical standards. Most of the decline in the US unemployment and LFP rates is caused by workers (like teenagers) leaving the labor force (not "actively" looking for work), rather than actually finding jobs. There has been no improvement in youth employment for almost 5 years, especially for those who haven't gone to college or who are non-white.

I've mentioned before the problems facing our Millennial generation, and unsurprisingly no Federal programs have been created to remedy this generation's considerable economic plight. In fact, interest rates on Stafford student loans doubled on July 1 – from 3.4% to 6.8% – because Congress couldn't find time to authorize the continuation of lower rates before it adjourned for its extended July 4^th vacation.

The meager life of all too many US young people – as well as their compatriots in Europe, South America, Africa and Asia – has not been a priority for politicians. However, as politicians across the globe have seen, they disregard these issues at their own peril. Witness the "revolutions" and massive displays of public upset in Egypt, Brazil, Turkey, Chile and China.

When youth movements like Occupy here and tamarrod in Egypt figure out how to organize people within the political process – and not just for impressive public demonstrations – and be clearer about what they want (not just what they don't want), politicians will be forced to remedy the issues that young people are facing.

What types of public actions can help Millennials gain a more assured economic life here in the land of the free (disregarding the ever-present PRISM, of course)? There are at least 4 inter-related types of human-capital investment programs that in the past have proven their worth for improving people's economic well-being now and in the future.

First, immediately resume subsidized public loan programs for post-high school education. This includes re-funding Federal Stafford loans at below-market interest rates and increasing similar State-specific education loan programs.

Second, increase funding for Community Colleges and vocational programs (including high-school programs especially those that include joint private-public sector participation). By "vocational" programs I'm not talking about traditional wood shop classes, I'm referring to a broad array of classes from mobile software development to applied engineering to health-science that provide skills which will remain in demand by private employers.

Third, Federal and State post-high school education funding should be provided only to institutions that limit student cost increases to less than the yearly inflation rate. Continued super-escalation of tuition and fees should not be allowed to continue. In other words, Federal and State education funds should be provided only if colleges, universities and other education providers' student expenses are reduced in real (inflation-adjusted) terms. With the sizeable fiscal leverage that Federal and State government agencies have on all types of educational institutions that charge tuition and fees, and assuming these agencies – such as the Dept of Education, National Science Foundation and Dept of Health & Human Services – wish to exercise this leverage on behalf of enrolled students (rather than administrators; always a large assumption), I'm sure tuition and fee increases can be much moderated as soon as such policies are enacted.

Fourth, create a multi-year public job corps program that principally focuses on youth without college degrees. Sure, all age groups need more employment opportunities, but our future rests most directly on having 16 to 24 year olds in full-time jobs, and especially "disadvantaged" youth – principally Hispanic, Black youth without college degrees who are not enrolled in post-high school education programs. Remember, although much media attention is deservingly made of under-employed college graduates (7.0% of youth with a BA or more are now unemployed), the unemployment rate for youth with only a high-school degree is 18.5%; with less than a high-school degree it's 28.5%. These numbers support the well-recognized maxim; the longer you stay in school and get decent grades, the more likely you'll find a job.

Current unemployment rates for Hispanic-Latino youth and Black-African American youth with only a high-school degree are disproportionately huge, 34.8% and 40.8%, respectively. A job corps program that helps such youth would initially be expensive, but the nation's overall, longer-term health requires it. The economic benefits of this investment would be both broadly-received and substantial. Very few voters disparage the G.I. Bill (the Servicemen's Readjustment Act of 1944) that provided an expansive range of benefits to returning US soldiers, including cash payments of tuition and living expenses to attend college. [US public debt right after WWII was as high as it's ever been, 122% of GDP. This debt didn't cripple us, as conservatives now expect, and we survived to become a mega-power. We will carry on now as well, in spite of Republicans' ill-founded prophecy of certain economic catastrophe.]

This pioneering, publicly-funded human capital investment law paid for itself and more. Like the G.I. Bill, the youth job corps outlays can create hundreds of thousands of jobs for currently-displaced young people that would buoy our economy and thus benefit everyone.

Should we middle-aged (and beyond) citizens be uncharacteristically magnanimous about spending billions on such youth-oriented programs? Absolutely. Because Millennials are now starting to pay for our public retirement and Medicare expenses. And because Millennials are our future; the better off they are, the more protected we Boomers (and the rest of the US) will be. The Millennials' economic welfare is vital at this point if the rest of us want to enjoy a sustainable, secure future. We need to act now and mitigate the toll that our youth are suffering from.

THE ZERO-SUM AND MICRO - MACRO GAMES

I never lost a game. I just ran out of time.. ~ Bobby Lane

Money talks...but all mine ever says is good-bye. ~ Anon.

No, these aren't new events at the upcoming X Games. They've been played for quite some time in our nation's capitol. Washington continues live in its own self-contained bubble where priorities are all discordantly political and too rarely founded on what once-upon-a-long-time ago were termed the public interest - providing the greatest good for the greatest number of citizens. Instead, policy objectives are fractionalized, not collective, and principally aimed at narrow, special interests rather than a broad, public interest.

This private-interest political regimen is fundamentally different from policy-making for common interest, and is exemplified by the Republican's two focal points: (1) aiding the top 1% or 2% of income-earning citizens; and (2) significantly reducing government expenditures. Adding to the dissonance is the growing notion that "something has to be done" to get the country back on track towards greater economic growth, but it can't cost much, and certainly not me.

I think the metastasis of groups like the tea party is founded on the belief of more and more folks that the economic game is fixed against them, and they're losing. These people believe they're in a zero-sum game, where one person's (or group's) gains in an activity (say their participation in our economy) is balanced by the losses of other participants. In other words, there is not enough slices of the (economic) pie to go around for everyone who wants a piece so if one person/group takes a larger slice, that means there's smaller slices available for all other folks. It didn't use to be this way.

In more benevolent times, more people believed there was a positive-sum game, where everyone can benefit; when all participants end up with more than they started with – a bigger pie. A rising tide (of a sustainably growing economy) raises all boats. This is why President Obama's and Congress' principal policy goal should be to raise US economic growth sustainably and equitably to at least 3.2%.

But for the past 4 years, the US economy hasn't substantively grown; the average annual real GDP growth rate is a wretched 0.75%. In addition, 12.2 million people remain unemployed; the length of unemployment now is, on average, 38.1 weeks, that's almost ¾ of a year. Average productivity has risen over 38% during the past 16 years, but median wages have stagnated and increased only 16% since 1995.

So it's understandable why more people are seeing their future darkly. Aware of this anxiety, some politicians, offering fearful views of the future, proselytize that only by drastically reducing the burdensome government [except for entitlements like Social Security and Medicare-Medicaid], can individuals regain their economic well-being. What's one of the means such politicians are making their points? By playing the micro-macro game.

There is usually a big difference between macroeconomic policies' effects on us as individuals (micro effects) and on us all together as a nation (macro effects). The micro-macro game comes in many versions and is often played by politicians of various persuasions to confuse and distort the effects of proposed policy changes.

A prime example is the macro "fact" illustrated by the abysmally low overall (macro) rating that Congress gets from the public at large; only 9% of polled people now approve of Congress' performance – my real surprise is that it's as high as 9%. But, within the very "micro" voting booth, citizens continue to overwhelmingly re-elect their incumbent Congress-person. In 2010, 85% of incumbent House members were re-elected and 84% of Senators. As many commentators have said, Congress as an institution is held in very low regard, but in this gerrymandered world it's all the "other" Congress-people that's the problem, not my representative. Go figure.

The micro-macro game is constantly played by both parties in the policy arena as well. Consider the discussion that's occurring about the federal budget deficit and debt. The Repubs concentrate only on the macro future and dismiss the nation's current economic situation that has been adversely affecting large numbers of individual middle-class individuals and families. The Repubs' focus on now reducing discretionary federal expenditures to ameliorate our possible future macro debt (to "save the Republic" among other fantastic rationales) would magnify individual middle-class members' already-dire economic straits. Similarly, the Repubs insistence (until yesterday) on holding the US hostage by their threats to not renew the debt ceiling represent no sensible view of future consequences. By contrast, the Dems focus on the micro effects of changes to entitlement programs – like Social Security and Medicare-Medicaid – to reject any consideration of needed macro policy modifications so the programs can survive in the future.

The Dems dismiss the macro future (that shows ever-increasing entitlement expenditures due to aging Boomers and fewer Gen X'ers and Y'ers) when they utterly reject any consideration of incremental changes to these programs. They (mistakenly) state since there are no problems now with Social Security (SS) and these alterations would adversely affect individual senior citizens, no changes should be now made.  

Their over-emphasis of the current micro costs of changes is akin to a 5-year old threatening to hold her breath until she gets what she wants. After she is soon forced to gasp for a breath before passing out, she's in worse shape than before. [Sort of what happened yesterday when the Repubs, realizing they've been idiots about their debt ceiling shenanigans, finally caved – but only for 3 more months.]

A change that could help avoid Social Security (SS) and Medicare collapse is to make these benefits means-tested (eg, dependent on income level). Making such a change represents a fundamental adjustment to such entitlements, and thus goes against Democratic orthodoxy. But if the Dems continue to play the micro-macro game and refuse any changes to entitlements, the rest of us (like the 5 year old) will be much worse off afterwards.

Consider making incremental changes that involve means-testing entitlement benefits, say reducing Social Security benefits by 15% only for individuals making more than $120,000 per year. Such a change can have useful macro effects over time via the magic of fiscal multipliers. My guestimate of possible direct macro savings for Social Security is 3% of total SS benefits paid or $236M/year, not small change. But for these high-income individuals the effects will almost certainly be very modest. The 15% Social Security benefit reduction sounds sizeable , however for people earning more than $120k/yr will not likely be more than $377/month, since the maximum monthly Social Security benefit currently allowed now is capped at $2,513 for the highest-income people [$377 is 15% of $2,513]. This $377 reduction in monthly SS benefits is unlikely to meaningfully affect these high-income recipients of Social Security, because their monthly gross income is more than $10,000.
Will such a change "save" Social Security? Not by itself, but it would represent an important step. Achieving real savings in SS costs will require broader reductions in benefits, increases in the qualifying age, and/or removal of the ceiling on income that is subject to FICA (Social Security) tax. Any of these steps are an anathema for Dems.

Thus, saying that economically well-off high-income people will be hurt by minor benefit cuts – and a reason for not undertaking some form of means-testing SS benefits – is simply mistaken. However, the politics of such a marginal change in entitlement benefits, of course, are anything but incremental. And Dems seem willing to keep using the micro-macro game to waylay needed changes to entitlements, the same way Repubs do it for tax and spending changes.

Finally, politicians on both sides of the isle also use a variant of the Micro-Macro game to dismiss alterations that could benefit our longer-term (macro) structural deficit – or other issues. You hear it when a politician or a self-interested talking head states, "This possible change in policy is too small to solve our problem with [fill in the blank here], so we need to think of some other, more significant solution." My example above to begin means-testing SS benefits – just like the suggestion that SS benefits should be subject to a different COLA – would initially be met with howls of rage from Dems because changing anything to do with entitlements is verboten. But after that, politicians would (and did) say the new COLA, or my proposal, should be dismissed because it doesn't really solve the problem; its effect is too small for this large issue. You have to start somewhere, even if it's a small step.

This logical incongruence – stopping smaller changes because they're not large enough to "count", but not allowing consideration of significant changes – is used to stop any remedy from happening – just what the status quo, looking-only-at-the-present politicians want.

I guess we will continue to keep holding our breath.

BEYOND THE CLIFF, A QUARTET FOR GROWTH

"The growth and development of people is the highest calling of leadership." ~ Harvey S. Firestone

With considerable justification the Democrats have been gleefully pleased with last Tuesday's election events and been pointedly stating that Republicans have no hope of future electoral success.[1] President Obama has been re-elected and the Dems have managed to retain control of the Senate. And for what it's worth, the Dems filled 2 more seats in the House. This is both a relief and good for the USofA.

Nevertheless, it's entirely understandable why the President hasn't been shouting "gotcha" from the Oval Office. As he properly mentioned in his victory address, there's still a lot of work to do. Most immediately, this political work involves spurring the country's economic growth in a more balanced and sustainable manner.

The President and Republicans will need to first resolve the December 31^st "fiscal cliff." I hope Mr Obama will not now begin actual negotiations with John Boehner about the Cliff. The Cliff's curtailments are large, over $650 billion. Unsurprisingly, the Congressional Budget Office has stated the obvious, that if such spending reductions and tax increases are allowed to remain in place for a while, they could drag the economy back into another recession. So there are strong incentives for a political agreement to be forthcoming promptly.

But the President should not negotiate the Cliff; he should use the Cliff to negotiate a broader agreement to foster sustainable and balanced growth. Negotiating in mid-November would diminish the President's leverage, which will only grow as the clock keeps on ticking towards New Years. Instead, he should continue to make clear public statements emphasizing his flexibility and absolutely adhere to increasing taxes on the rich and wealthy. The House Republicans, despite their flimsy denials, are in a self-constructed cage with nefarious help from folks like Grover Norquist. They should not quickly escape the consequences of being caged in by unsuitable policy and dogmatism that lost them the election. And the President should take full advantage of this.

I recommend that President Obama forcefully support a quartet of economic actions that will produce needed economic growth, reduce of our structural deficit and detour the Cliff. These actions are presented below in my November 8^th letter to the President. Will the Democrats and Republicans have to make some compromises for this agreement to be successful? Yes, as my letter illustrates. The rich/wealthy must pay more tax, education must be improved and entitlements must be more means-based.

 If Republicans remain intransigent (not an unlikely possibility), Mr Obama should be fully prepared to jump off the cliff, let the Bush tax cuts expire and have the sequestered budget reductions proceed. No worries, he's got an election victory and broad public support to act as his parachute. In other words, please Mr President don't blink before the clock strikes 12 on New Year's Eve unless you have received an acceptable and binding agreement from Mr Boehner and Mr McConnell to resolve the nation's broader economic challenges. This Cliff is made for you Mr President and it can be the opportunity that fosters our nation's longer-term economic progress. Here's my letter.

November 8, 2012

President Barack Obama

1600 Pennsylvania Ave., NW

Washington, D.C.  20500

Dear President Obama:

First, congratulations on your impressive re-election win yesterday. Now you are facing the challenge of moving our macroeconomy forward to promote both greater growth and greater equity. This letter offers several ideas about how you (and Congress) can accomplish this.

Like others, I believe your campaign's economic goals are correct; the US needs to increase our economy's growth in a sustainable, equitable fashion that benefits all citizens, not just the richest and wealthiest. I believe sustainable and equitable are necessary descriptors for any macroeconomic policy objectives you may be considering.

I hope you give serious thought to the following quartet of macroeconomic policy actions that I propose for legislation that Congress should pass and be executed by you by Feb. 28^th, 2013. I believe these actions will get the US moving in the right direction and involve everybody (including you and me) making changes and sacrifices needed to create this essential macroeconomic re-balancing.

These actions will promote broad gains from higher, fairer GDP growth. As you know, returning to substantive and balanced economic growth will resolve many issues we are now facing as a nation. Increased growth is the most effective antidote for elevated unemployment, middle-class income stagnation and lack of consumer and business confidence.

This quartet of actions focuses on achieving two important, inter-related goals: (1) improving the economic well-being for the majority of citizens (not just the top 1%); and (2) encouraging the GDP to grow more sustainably, at least 3.2% per year. Here are my 4 fiscal policy actions.

1.  Improve economic fairness.  (A) Individuals with annual gross incomes exceeding $250,000 will be subject to a minimum Federal tax rate of 35% on all income, regardless of source - the current effective tax rate for many wealthy people who earn most of their income from investment returns (rather than wages) is in the range of 14-20%. (B) The social security (FICA-payroll) tax will apply to all earned income, and not be limited (as it is now) to the first $110,100 earned, with no FICA tax applied thereafter. This needed change will accomplish two important objectives, provide more funding for Social Security (see #2 below) and require those most able (richer tax-payers) to pay more for this keystone program. (C) Payroll taxes for employees and independent contractors with incomes less than $70,000/yr (roughly the US median family income) will be cut by 3% for up to 2 years or when the unemployment rate is 7% or below. (D) Salaries and expenses of Congress members and the President will be immediately reduced by 8.1% (see below). Starting Jan 1, 2014, these leaders' salaries will be adjusted yearly by the annual change in median US household income. What's happened to the incomes of Joe and Jane America will equitably happen to our leaders as well. This adjustment will provide a modest fiscal incentive for public leaders like you to create policies that actually increase median income, something that hasn't happened in too long a time.  [US real median household income in 2011 was 8.1% less than real median income in 2007.] 

2.  Remember Sandy: enhance environmental quality, now.  Beginning October 1, 2013, the Federal government will institute a national carbon consumption tax. This charge will apply to all fossil-fuel usage that produces air and/or water pollution that is subject to EPA air- and water-quality standards. My proposed tax on fossil fuel usage would be in proportion to the fuel's carbon content and no lower than $100/ton of CO2 produced. The carbon charge will be annually adjusted using the CPI energy cost index. This tax's potentially regressive impact on lower-income people will be reduced by providing an income tax credit (from funds received from the carbon tax) to families whose annual income is 200% or less of the poverty line. [In 2012, the annual income for a family of 4 people earning 200% of the Federal poverty line is $46,100.] Twenty-eight percent (28%) of revenues from the tax will be spent on research and development for non-fossil technologies (e.g., solar, wind, geothermal).  [This charge will provide significant economic incentives for fossil-fuel users to switch to greener technologies.] 

3.  Reduce entitlement program costs fairly.  Medicare and Social Security benefits will be reduced by 4% for all people earning more than $250,000/year, by 2% for people earning less than $250,000 but more than $70,000, and no reduction for people earning less than $70,000. In addition, minimum qualifying retirement age for Social Security will be increased by two (2) years starting Oct 2013.  [Federal, state and local governments' expenditures on pensions and health care represent 13.6% - $1.96 trillion – of all govt expenditures, the single largest (and fastest growing) type of govt spending. These expenditures are a principal cause of the nation's structural deficit. They need to be trimmed to promote long-term fiscal health and growth.] 

4.  Implement fiscal policy actions to promote durable economic growth.  (A) The Dept of Education will coordinate $50.4 billion of increased spending to invest in teaching and improve the effectiveness of public K-12 schools and public two- and four-year colleges-universities in qualifying states. To qualify, states must first commit to increase their public education funding by at least 5% based on their 2010 public education expenditures. The cost of these government education expenditures will be partially balanced by imposing a 0.03% (a rate of $3 per $10,000) financial transactions tax effective Feb 1, 2013.  As Nelson Mandela correctly observed, "Education is the most powerful weapon which you can use to change the world.”  [This quite tiny tax has been termed by some the "Robin Hood" tax. It could raise $35B in tax revenues per year. Improved public education will magnify our citizens' economic prospects.]

(B) The Dept of Commerce will administer $40.2 billion of spending to upgrade US internet infrastructure (II). This will include requiring telecommunications and internet providers to install 4G Wi-Fi and broadband fiber-optic cable directly to consumer's residences during the next 30 months. These expenditures will partially fund this needed electronic infrastructure investment by private providers. Internet providers will receive a 5% investment tax credit (ITC – a type of subsidy for business investment) on this new investment to encourage telecommunications/internet providers to implement these needed improvements. This funding will be allocated based on the 2010 population of each state and its population density; the more populous and dense the state, the more funds will be proportionately allocated. With these subsidies, individual customers' internet service charges will not increase more than the annual change in the CPI over the next 3 years. The cost of these government II expenditures will also be partially financed by increasing the Federal Universal Service Charge (telephone) tax and the FCC User Fee by 5%.  [US "data highways" are in woeful shape; our internet speeds rank 26th in the world, just behind Hungary. Overall, US speeds are only one-quarter as fast as the top-ranked nation, South Korea. We must do better if we want domestic commerce to grow substantially during the coming decade.]

Thank you.

                                                                                                  Sincerely yours,

                                                                        Bruce A. Smith

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[1] The Dems can be forgiven for their glee, but will do well to remember that politics is always kaleidoscopic and changing; just like life in general, nothing is permanent.