Tag Archives: Economic Policy

Why One Quarter’s Growth Tells Us Nothing

Published / by Stephen

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A good econ growth comment by Krugman. 

For the most part, reporting on 2nd quarter growth has been pretty decent. But I haven’t seen clear explanations of why one quarter’s growth tells us so little about longer-term growth prospects.

…the economy’s actual output depends both on its capacity – the amount it is capable of producing on a sustained basis – and the rate at which it is using that capacity. That is,

Output = capacity * capacity utilization

So what is going on? What is our capacity and what is our capacity utilization? The long-term and short-term are very different. To understand the long-term growth prospects you must answer two questions:

  • Why does capacity utilization fluctuate?
  • What leads to growth of capacity?

The answer to the first question is fluctuations in demand. The answer to the second question is investment and how consumer demand and economic policy affect the level of investment.

The real news is that we’re still waiting for both the investment surge and the wage gains the tax cutters promised; as far as we can tell, they’re never coming.

 

Is A Trade War Coming?

Published / by Stephen

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Paul Krugman, one of the smartest people on the planet when in comes to international trade, just posted his thoughts about Trump and trade wars, The art of the Flail. It is worth a read. Below are some exerts just to get your attention:

So is a trade war coming? Nobody knows — even, or perhaps especially, Trump himself. For while trade is one of Trump’s two signature issues — animus toward dark-skinned people being the other — when it comes to making actual demands on other countries, the tweeter in chief and his aides either don’t know what they want or they want things that our trading partners can’t deliver. Not won’t — can’t.

…Let’s talk in particular about the will-he-or-won’t-he confrontation with China.

In some ways, China really is a bad actor in the global economy. In particular, it has pretty much thumbed its nose at international rules on intellectual property rights, grabbing foreign technology without proper payment. And to be fair, Trump officials do sometimes raise the intellectual property issue as a justification for getting tough.

But if getting China to pay what it owes for technology were the goal, you’d expect the U.S. both to make specific demands on that front and to adopt a strategy aimed at inducing China to meet those demands.

In fact, the U.S. has given little indication of what China should do about intellectual property. Meanwhile, if getting better protection of patent rights and so on were the goal, America should be trying to build a coalition with other advanced countries to pressure the Chinese; instead, we’ve been alienating everyone in sight.

More on Trump & Trade-Wars by Krugman

Robert Reich – On Rise-Up Economics

Published / by Stephen

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WHY WE NEED RISE-UP ECONOMICS, NOT TRICKLE-DOWN

How to build the economy? Not through trickle-down economics. Tax cuts to the rich and big corporations don’t lead to more investment and jobs.

The only real way to build the economy is through “rise-up” economics: Investments in our people – their education and skills, their health, and the roads and bridges and public transportation that connects them.

Trickle-down doesn’t work because money is global. Corporations and the rich whose taxes are cut invest the extra money wherever around the world they can get the highest return.

Rise-up economics works because American workers are the only resources uniquely American. Their productivity is the key to our future standard of living. And that productivity depends on their education, health, and infrastructure.
Just look at the evidence. Read On

Tax Bill – Bad Policy Justified by Lies & Myths

Published / by Stephen

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There is a lot wrong with the republican tax bill – a gift to large corporations and the rich; punishment of blue states, unequal taxing based on how income is earned; cutting medical benefits for those who need benefits; cutting the safety net for those less fortunate. The list goes on. It is a cruel bill.

Justification is “trickle down.” This is a myth and a bold-faced lie. Robert Reich explains The True Path to Prosperity. Below are his key points:

Democrats are the party of economic growth and fairness. Republicans are the party of neither.

The only way to grow the economy is by investing in the education, healthcare, and infrastructure that average Americans need in order to be more productive. Growth doesn’t “trickle down.” It rises up.

Republicans say their tax overhaul will promote growth by increasing the profits of American corporations and investors. This is trickle-down nonsense.

Every major study (including Congress’s own Congressional Budget Office and Joint Committee on Taxation) finds that its benefits would go mainly to big corporations and the wealthy.

Share prices may rise for a time. They’re already at record highs in anticipation of the tax cut. But higher share prices don’t trickle down, either. The richest 1 percent owns almost 38 percent of the stock market. Eighty percent of Americans together own just 8 percent of all shares of stock.

This won’t fuel growth. Corporations expand and invest only when customers are eager to buy what they produce. And most of these customers are middle-income and below, who spend just about all they earn. The rich spend only a small fraction.

After the Bush tax cuts of 2001 and 2003, economic growth stalled and then dissolved in recession. After the 2004 corporate tax holiday for bringing foreign profits home, corporations didn’t invest or expand. The Reagan tax cut of 1981 didn’t cause wages to rise; they flattened.

What’s the real formula for growth? Better access to education, healthcare, and transportation, all of which make workers more productive.

These more productive workers command higher wages. With higher wages, they purchase more goods and services. These purchases motivate companies to expand and invest, and create more and better jobs.

The Trump-Republican tax overhaul would take us in the opposite direction. It raises taxes on the middle class, which would reduce their purchasing power. The Senate version would cut the Affordable Care Act, causing millions to lose coverage.

It also explodes the federal debt, which will stymie growth. Debt service itself would likely require cuts in other programs such as Medicare, Medicaid, education, and transportation.

For years, Republicans have been selling tax cuts by lying that they spur growth, which trickles down to average Americans.

For just as long, Democrats have been selling fairness, but without explaining why a fairer economy is also more productive and prosperous.

It’s time for Democrats to make the case. It has the virtue of being true.

Analyses: The Republican Tax Bill

Published / by Stephen

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Concerning media reporting on the republican tax bill, I am appalled by the lack of homework especially by television media. For the most part they seem to be parroting press releases. That is what motivates this post. I plan to update this post as information becomes available,

1. For a good summary read Robert Reich, The Huge Tax Heist.

2. A NYT Nov 2 Editorial, A Tax Plan for a New Gilded Age. My summary follows:

A. The primary goal of this bill is to slash taxes on corporate profits to 20 percent, from 35 percent.

Credible economists believe the benefits of the cuts would accrue nearly exclusively to shareholders and executives.

about $70 billion a year, or 35 percent of the benefits, would flow to foreign investors who own shares in American companies, according to Steven Rosenthal at the Urban-Brookings Tax Policy Center.

B. The bill would also lavish benefits on real estate partnerships, hedge funds and other pass-through businesses, which send their profits directly to their owners without taxes being withheld

Republicans want those business owners to pay taxes of just 25 percent on that income, rather than ordinary rates, which go up to 39.6 percent. Republicans argue that this will benefit small businesses. In fact, a large majority of small-business owners already have personal tax rates below 25 percent.

C. On personal income taxes, Republicans say they are simplifying and cutting taxes for most people. But that is not really true. They propose reducing the number of tax brackets to four, from seven, while raising the lowest bracket to 12 percent, from 10 percent. They want to double the standard deduction but eliminate personal exemptions. One new benefit that could help many families would be a $300 tax credit for tax filers and their dependents who are over 17, like an aged parent. Strangely, it would end after five years. By contrast, the bill’s cuts to corporate and other business taxes would be permanent.

The changes that could affect middle-class families the hardest include the elimination of the deduction for state and local income taxes. And the property-tax deductible would be capped at $10,000. Many people in high-tax states, like California, New Jersey and New York, would be especially hard hit.

One particularly hardhearted change would eliminate the deduction for medical expenses, which is primarily used by people with serious and chronic illnesses. Gone, too, would be important tax credits and deductions for college tuition and interest on student loans.

D. Unsurprisingly, the tax bill contains a couple of provisions that are designed to benefit the Trumps and others like them. It would get rid of the alternative minimum tax, which is paid primarily by upper-income families with lots of deductions. This tax accounted for a vast majority of the income tax Mr. Trump paid in 2005, according to a leaked copy of his return. The Trumps would also benefit from the bill’s proposed estate tax changes. That tax currently applies to inherited wealth above $5.5 million. Republicans would exempt wealth up to $11 million starting next year and eliminate the tax after six years. That would benefit the heirs of just 0.2 percent of people who die every year, but cost the government $269 billion over a decade.

3. A NYT Editorial by Paul Krugman, Trump’s $700 Billion Gift to Wealthy Foreigners. My summary:

Why is Donald Trump planning to give away $700 billion — that’s billion, with a “b” — to foreigners, no strings attached? You probably didn’t know that he’s planning to do this. In fact, he himself almost surely has no idea that he’s planning to do this. But it would be one clearly predictable consequence of the tax “reform” he and his congressional allies are trying to pass.

… the benefits from cutting corporate taxes would overwhelmingly flow into after-tax profits rather than wages, especially in the first few years and probably for a decade or more. And this in turn means that the main beneficiaries would be stockholders, not workers.

[in addition] these days there’s a lot of cross-border investment. In particular, as Steven M. Rosenthal of the Tax Policy Center notes — in a paper I found revelatory — around 35 percent of U.S. equities are now owned by foreigners, triple the level during the Reagan years.

What this means is that around 35 percent of a tax cut from an administration that proudly uses the slogan “America first” — $700 billion over the next decade — wouldn’t even go to Americans. Instead, it would be a windfall to wealthy foreigners, who would probably gain a lot more from the tax cut than U.S. workers. Oh, and it makes all that talk about allies not paying their “fair share” sound kind of silly, doesn’t it?

4. The Atlantic: How Trump’s Corporate-Tax Plan Could Send American Jobs Overseas. My summary (read the Atlantic article for a detailed example):

The Trump-GOP plan will also propose a minimum tax rate on foreign income, according to multiple reports. But whereas Obama’s plan (which ultimately didn’t become law) assessed a company’s taxation in each country individually, the Trump framework would come up with an average for all foreign earnings combined, a so-called “global minimum.”

This might seem like a small difference, but the design of their global minimum tax creates perverse incentives for companies to offshore jobs and shift profits to tax havens—outcomes that a per-country minimum tax would avoid.

This is a big flaw in Trump’s plan: The more an American company moves its profitable [US] operations to countries that have tax rates of 20 percent or higher—often rich countries that are seen as America’s economic competitors—the more that company can shift profits to tax havens without paying taxes on those profits. And the more that U.S. companies already take advantage of tax havens, the bigger the incentive they will have to offshore operations to other advanced countries: This provision of the GOP plan encourages companies to blend income from low-tax countries with that from higher-tax countries, completely avoiding paying money to the U.S. government.

Taking From The Poor & Giving To The Rich

Published / by Stephen

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Trump will sign any healthcare legislation that the Republicans send him. He has no empathy. He does not care.

The republicans likewise have no empathy. They do not care. They are in the pockets of the insurance industry and wealthy. Their healthcare bill is a terrible piece of legislation.

  • It will discriminate against the poor, elderly and sick.
  • I will facilitate a tax break for the wealthy.
  • It will allow insurance to cherry-pick based on pre-exisiting conditions.

Consider this: The administrative costs of government-run Medicare is about 1%. In contrast insurance takes 10 to 20 percent off the top for the task of distributing money to healthcare providers.

This 10 to 20 percent cost is huge given that healthcare is between 1/6th and 1/5th of the national economy (between at least 3 trillion and 3.6 trillion of our 18 trillion dollar economy). By going to a single payer system, and getting the insurance industry out of the money-transfer business, the system would save at least something like $300  to $400 billion annually in pure administrative costs.

$300 to $400 billion looks like a pretty good improvement over the current insurance based system! And it does not include other health policy efficiency improvements like allowing negotiation with big pharmacy for better deals on prescriptions.