As President Obama demonstrates world class skills at building solid coalitions, from his Africa Summit, to financial embargoes against a variety of aggressor states to a far reaching trade agreement with 11 Asian countries, to the nuclear . . . → Read More: Single Incident Politics
Supreme Court Justice Sonia Sotomayor presented her first oral dissent from the high bench last week. The New York Times coverage also reported a written statement she released the previous year on a case the Court declined to hear. The statement makes plain a profound truth overlooked. A federal prosecutor’s statement* about a group of African-Americans and Hispanics and a drug deal, she noted, was “pernicious in its attempt to substitute racial stereotype for evidence, and racial prejudice for reason.”
Have we become a government by stereotype and blame? Yes. But more importantly, how did it happen? What were the economic and politic elements that created a such a dramatic shift? The answers lie within our political economy, one of five models active as global templates.
Justice Sonia Sotomayor
The most traditional of the five is the European template. In Europe, government is actively engaged in providing public service; it offers benefits to its citizens and is concerned with the public good and common resources, from roads to energy consumption, from employment to schools, from the internet to the arts. No European government would declare the death of Big Bird, the most successful teacher of early childhood language skills, as Mitt Romney did in a presidential debate (overlooking the fact that “Bird” is a part of a private non-profit group that is self-sustained by license fees). By all measures except for taxation, the European model works well, and citizen groups are not in open revolt about its goals, even as the countries of Europe debate its priorities.
European conservatives argue for austerity, but few go so far as calling for the dismantling of national social nets, the transfer of government assets to the private sector, or bizarre gun rights such as “stand your ground.”
The oldest of the models is Russia’s; a model that depends on an economy stuck in the smoke stack communism of the 1930s, whose new products are updates of military equipment. In fact, the US purchased Russian tanks until recently. In 2013, the Russians shipped $15 billion in global arms, including advanced, high-tech weapon systems.
Russia’s model of state economy and strong leader has allowed bureaucratic corruption to produce a wealthy oligarchy, mainly through oil and gas contracts, or imports of food, but the examples of Walmart (and the Walton family wealth) and Apple (and its high global market capitalization) are lacking. The state controls and directs the national wealth. The President directs the state. Its laws restrict freedom, are rigid and often manipulated. Russia’s infrastructure is crumbling. Its people are hungry.
Russian factory worker.
Despite a political structure that limits private investment and market growth, and the free provision of healthcare to all citizens paid for by the government (hampered by limited medical supplies, high costs, and limited capital investments), the Russian president has open admirers among US conservatives and media analysts.
The developing countries have the third template of political economy. They rely upon an international model of political economy that involves international partnerships with countries and corporations, centered on low-wage labor, state-controlled or licensed resources, and large-scale private production of commodities, whether agricultural goods or computer chip sets, and powerful parties with powerful leaders.
Important to developing countries’ national growth is debt management and forgiveness, and the use of the IMF and World Bank for capital borrowing.
Corruption and substandard practices are problems for many developing countries. But often more developed countries turn a blind eye. The advantages of power levers and lower costs that attract investment from developed countries actually supports income inequality and hinders broad prosperity for developing countries.
The developing countries’ model is investing heavily in education (and more recently, and slowly, in women) as the key resources for domestic prosperity. Their next priority after education is infrastructure development, especially water and sanitation. Outside of Asia, across Africa, in Central America, job growth is slow. Development is impeded by internal conflicts, including violence and insurgencies targeting civilians.
China’s newly trained airline hosts.
China is the fourth model of political economy. It is based on an elaborate network of partnerships, from local to international. China relies heavily on national planning. Once key needs are identified, China undertakes partnerships with countries which supply important commodities; Brazil, for example (coffee, timber, beef, oil); Angola (oil); even Trinidad and Tobago (a source of bauxite for aluminum). Its US partnerships provide jobs and huge markets for its export goods.
China advances its model by financing its growth. The Chinese state still controls large sectors of the economy, which means China receives its revenues from a variety of taxes and marketplace revenues. Surprisingly, China spends a great deal of its tax revenue at the local level, almost two-thirds.
The fifth model is the US model. Currently sustained by its sheer size, its $17 trillion GDP is now inert; the US model is not producing job growth or the non-financial services that global governments provide for families and businesses, especially in infrastructure, education, healthcare and personal safety. The national government shutdown led by the Republican party over health care cost the US economy $24 billion. (No other government in the developed world shut down.)
US government leadership is no longer merit-based, it’s bias-based. How else can a new health care system that retained the private insurance market, lowered costs, provided key protections from the most devastating health consequences (pre-existing conditions and lifetime limits), capped out-of-pocket expenses, and increased coverage to over 8 million people uninsured (the Rand Corporation reports coverage of approximately 9.3 million uninsured), and increased employer-sponsored insurance (Rand: enrollment in ESI increased by 8.2 million) be repeatedly called an out-of-control failure? Continue reading The Fifth Wheel: America’s Political Economy
After a week that included both the exercise of Harry Reid’s nuclear capability and an interim agreement to curtail the nuclear capability of Iran, Republicans and their media henchjerks are left with continuing to bleat about healthcare.gov while the President heads to the West Coast for some heavy-duty fundraising and speechmaking.
Tomorrow, he’s set to deliver a speech on the economy during a visit to Dreamworks Animation in Glendale, where he’ll discuss job creation in the entertainment industry; a major problem with that job creation will be highlighted by a simultaneous rally at nearby Griffith Manor Park, where visual effects artists will protest offshoring.
While in California, the President will also attend Democratic fundraisers at the homes of Magic Johnson, writer/producer Marta Kaufmann, and producer/media mogul Haim Saban. You can attend all three events for as little as $51,100, but that meager outlay will probably land you at the kiddies’ tables. Maybe opt instead for pricier seats and hope you can make up the difference with Black Friday savings.
Step away from the shards of glass that litter politics as Republicans have tried to shatter the President’s image. Step over the desolate landscape of unemployment that could end tomorrow with bipartisan effort in Congress. Step up and send the message: end the blame. Fix the country. Jobs now! Housing now! Healthcare now! Let all America stand before the bar of justice. Let’s take the corporate cases first.
The facts: Yahoo bought Tumblr. It paid $1.1 billion. In cash.
Background: Yahoo was supposed to be an internet company on the ropes; its current CEO, the Stanford-educated daughter of a Wisconsin engineer and an art teacher, 37-year-old former Google vice president (employee 20) Marissa Meyer is the company’s fifth CEO in five years! One hedge fund recently dumped 4.7 million shares, zeroing out its investment. But Yahoo’s current market capitalization is $27.78 billion dollars, on a profit-to-earnings (P/E) ratio of under 8, a positive sign for investors: it makes a dollar profit for every eight dollars it brings in.
And just last week, Yahoo won a huge victory in a Mexican court. A judgment against the company for $2.75 billion was overturned—and reduced to $172,500! (Appeals are pending!)
So what does Yahoo get for its $1.1 billion (in cash!)? A company founded in 2007.Six years ago. The website Tech Crunch Base describes the company:
“Tumblr is a re-envisioning of tumblelogging, a subset of blogging that uses quick, mixed-media posts... its extreme simplicity will make luring users a far easier task than acquiring users for traditional weblogging. Anytime a user sees something interesting, they can click a quick “Share on Tumblr” bookmarklet that tumbles the snippet. The result is a string of media links and text to pictures and videos that takes very little time and effort ... There is little to no learning curve involved in using Tumblr. . . Users simply sign up and begin posting in a minute.”
For the record, I tried Tumblr. I did not understand it. I didn’t return. But 300 million discrete/discreet users see Tumblr pages monthly. I say that not only to define individual users but also to signal that Tumblr permits adult content; 11 percent of its user content accounts are labeled “not safe for work” (NSFW), its warning and search firewall for its adult content, which currently drives Tumblr’s highest traffic.
But Marissa Mayer says, “I think the richness and breadth of content available on Tumblr—even though it may not be as brand-safe as what’s on our site—is what’s really exciting.”
How many accounts does Tumblr have? A tech specialist at the site All Things D estimates “the total number of monthly users who will see a Tumblr dashboard is at least a third of the company’s 110 million registered user base, and maybe quite a bit higher: My guess is 30 million to 50 million.”
What is Tumblr’s current revenue? In 2012, $13 million dollars. Yahoo paid $846.15 for each dollar of revenue. Tumblr has not shown a profit. (I have a $20 ebook. At Yahoo’s rate, they would pay me $1692.30 for the right to publish each future copy; not an exact analogy, but the ratio of revenue-to-purchase is true.)
So $1.1 billion will get you $13 million in revenues, lots of dirty pictures and personal musings, hardware, intellectual property, and a promise by the new CEO that she “won’t screw this up!”
Oh. How many employees? 18. A billion-dollar company has 18 employees. Including its Alfred E. Neumann-looking CEO (I’m not kidding!), hood-wearing (stay away from South Florida, dude) 26-year-old CEO who quit high school at 14, at his mother’s suggestion, to be homeschooled.
Some Tumblr users feel betrayed and are angry. One has a petition circulating.
Seriously? You think a petition is going to overturn the sale and stop the founder and the backing venture capitalists from walking away with a cool, no-strings billion dollars in cash, to assuage your emotional boo-boo about the change in ownership of the digital platform that hosts your free account? This is your blow of outrage against the robber barons who provide you and your boys a free site for your porn? You don’t even plan a march in front of Yahoo headquarters? No pies? Not even a Twitter bomb? Keep it up, and David Karp’s mother will visit you and take away your brownies!
Seriously, several issues deserve outrage—and caution. A good staring point is a female CEO buying a site that probably demeans women and treats them as sex objects (An artful rear view photo of Hungarian actress/model Eve Angel kneeling on a chair is entitled “Super-size me”). Mayer seems more concerned about content search safety than the social impact of the attitudes that are enabled by the sites.
Several Tumblr accounts exhibit rape “fantasies” (it shows up in a Tumblr site search), a real non-sequitur, since rape is one of the most physical and psychologically violent crimes imaginable. What does it say that Tumblr users, at least some of them, see rape as a leisure time activity, a publicly hosted, private shared feature of a digital social life?
Will Tumblr advertising take on the character of the back pages of the Village Voice?
Yes, adult digital content is disease-free and can be non-exploitative (at least a case can be made), but in the current atmosphere of misogyny, adult content almost seems the softer side of what the web and real life engage as words and deeds. Remember the Onion’s twitter label for a 9-year-old actress during the Academy Awards? The recent US military report citing 26,000 incidents of sexual assaults last year? The nexus between guns in the home and domestic violence deaths? Or the guy in South Carolina who raped two women while wearing an ankle monitor? Where does Tumblr fit in? Continue reading Jobs Are Losing the Race
Karl Marx would either laugh or be terribly perplexed by what has been wrought from his dialectic. With all of their bluster, the GOP has now stood Marx on his head. Against every assessment of his philosophy, the progress that comes from the clash of opposing forces has come to a standstill, especially in the states, and on jobs and wages. And states are the place where workers have the best knowledge of taxes, services, economic development, wages and power.
And despite wage stagnation, unemployment, low saving rates and other family income issues hiding in plain sight, workers seem unable to unite. Online, support for raising the minimum wage to nine dollars is overwhelming. Yet the expected firestorm of legislative action, lobby days, public rallies, organizing and bill writing at the state level is almost non-existent.
Democrats are missing a chance to take advantage of a winning bi-partisan opportunity, one in which personal interest and motivations meld perfectly with good public policy. One in which plenty of research and previous experience refutes the knee-jerk resistance that Republicans offer, as they never offer a single measure that advances workers’ income. Real inroads into the Republican base in red states is possible. The growing income gap, the direct refusal of Republicans to consider raising the minimum wage while focused on deficits and cutting spending leaves them exposed. Democrats, Carpe diem!
Robert Reich, President Clinton’s former Labor Secretary, makes two telling points. One, there’s plenty of capital available to pay higher wages; it’s being used by businesses to buy or take over other corporations or to make giant buybacks of their own stock. Both increase shareholder value. Two, total private worker compensation is now 57% of GDP, the lowest it’s been since Eisenhower.
Neither of the two uses of capital stimulates the economy or produces jobs, but they add market value to the balance sheet. The balance sheet is the writ of GOP economy policy. They will smother the idea of increasing the minimum wage, and other progressive policies on tax breaks and physical and social investments, by allowing sequestration to take place, literally smashing the recovery. We will lose 750,000 jobs this year. It will affect services from air traffic control to meals on wheels.The Army reports layoffs of 250,000 workers by year’s end.
The narrative for putting blame on Obama has started; Paul Ryan calls Boehner’s claim of getting 98% of what he wanted the result of President Obama seeking “partisan advantage.” Mr. “98%” Boehner now calls it “the President’s sequester.” Continue reading Freedom’s Noble Name
Barack Obama has a modest economic record and here’s why: Timothy Geithner, Lawrence Summers, and others gave him bad advice; his political people, David Axelrod, Patrick Gaspard, David Plouffe and others, had no feel for the broad suffering of America and lacked technical know-how or institutional experience in managing the world’s largest macro-economy; from Europe to Asia, global headwinds stalled job growth, the Council of Economic Advisors was a revolving door, and Barack’s own mastery and knowledge of economic fundamentals is weak. Twenty-nine million Americans looking for working is the result, a dismal record, especially four years past the Great Crisis.
Legislatively, Republicans blocked the recovery by threatening the integrity of American credit, by turning wrongheaded ideas into talking points, by ignoring truth (government does create jobs!), by passing bill after bill never destined to reach the President’s desk, bills never intended to help American families, never proposing a change in the rules that aided families burdened by mortgages and foreclosures, never stimulating demand—the key to job growth. They offered instead cuts in safety nets.
Yet the index for equity markets doubled from their 2009 bottom and more than ever companies saw record profits by 2012. Capital tells a very different story than jobs. Why the contradiction between record profits and job recovery, between community suffering and corporate swag?
Hidden in plain sight, it’s the part Mitt Romney conveniently leaves out of his message. Again, Mitt switches positions to pretend he is something he is not: he has no “know-how” about creating jobs—none. Mitt is a balance sheet guy. He creates capital—not work. He extracts capital gains—he does not increase paychecks. Wealth is profit; labor is an expense. His goal is to take out cash, not increase what workers take home. His entire corporate life, his constant activity has been extracting wealth, trading capital, increasing its return as capital gains. His ideas have a single source: profit, capital wealth.
And where did that capital wealth come from? He robbed labor. Without conscience, he fired workers, stole their pensions, stripped their benefits, sold their machines overseas to increase his personal wealth. He did not grow production; he extracted its value. He wrecked perfectly solid companies.
Now, with relish, he thinks his success and its carnage of unemployed workers will benefit the nation, the “small businesses” he cites. He never mentions the word “workers”—or their families, hoping we confuse capital wealth with increased demand. If Romney’s view were true, record profits would already be driving hiring. The top ten companies holding cash are behemoths of strength and stability, all in Fortune’s Top 100 US.
Here’s a partial list: Exxon Mobil (energy), $17.8 billion; WellPoint (health insurance); $20.3 billion; Amgen (biotech), $22.5 billion; Pfizer (drugs, equipment), $24.3 billion; Apple, (technology) $27. 6 billion; Oracle (software) 30.7 billion; Google (technology networks), $41.7 billion; Cisco Systems (technology) $48.7 billion; Microsoft (technology) $62 billion.
These are not small businesses. Mitt Romney knows nothing of small businesses, whether tailoring or coffee shops, lawn care or day care, mobile labs or fund raising, bed & breakfasts or convenience stores. He never walked their path. He does not know their craft—or the balance sheets of the Patels, the name identified with the large Indian community who now own 70% of American hotel rooms; they know more than Mitt about creating jobs and wealth. Washington, DC’s immigrant Ethiopian community turned service jobs into a several-block area of restaurants and stores (bounded by U and 9th Streets NW), creating a core of businesses and experiences that supports a network opening new neighborhoods and cities. Koreans and Iraqis have done the same with inner-city groceries.
The list of cash hoarders that Mitt wants to help in the name of workers are not small business—or job creators. He ignores the successful examples and models right under his nose! The culture of the giants he comes from and supports pushes profit and power, demanding concessions, lowered costs, global franchises. The frantic pleas of 29 million Americans are written off as national depreciation, a group that exceeded its usefulness and is somebody else’s problem. The 47 percent. Continue reading Obama Will Make Bad Better
Hello, my name is Steve Leser. I am a principal with Democratic Spring Strategies and a writer for Democrats for Progress and I am going to talk about the Romney strategy for the First Debate.
In the several weeks’ long run-up to the October 3rd debate between President Obama and Mitt Romney, the Romney campaign let it slip several times that they had been practicing for this debate since at least June. I remember reading that and wondering what he could be working on for so long.
I’ll get back to that in a moment.
One of the astounding things about the October 3rd debate is that it was a debate on domestic policy of which the economy is probably its most important component, and after the debate, we have no idea what one of the candidates would do with regards to the economy if elected.
Think about that.
If you are running in an election to become the executive of any country, state, province, county, city or village, anywhere in the world, you owe one thing to the people who may vote for you. You owe them a fair representation of how you intend to govern. In terms of the economy, the basics for this are all the same. Are you going to raise or lower taxes? Are you going to spend more in your term than is currently being spent? Are you going to cut spending? If you are going to lower taxes how are you going to pay for things? If you are going to raise spending how are you going to pay for the increase? If you are going to cut spending, who is going to bear the brunt of those cuts?
If you are having a debate between two or more candidates, the discussion of those specifics is a vital part of helping the people voting to decide which candidate to choose. The candidates challenge each other regarding their respective plans and tell the American people why their plan is good and why their opponents plan is lacking.
Mitt Romney stood in front of 60 million American people, denied the plan he had been touting for 18 months and didn’t name any plan in its place.
The real loser in what happened in the first debate is the American people. After the debate, virtually all voter groups said that they didn’t receive enough specifics about the candidates’ plans. Actually, there were several specifics outlined by President Obama, including tax breaks for everyone except the wealthiest Americans. There were no specifics from Mitt Romney.
So, back to the five months of practice put in by Romney and his campaign, I thought about it for a few days after the debate. What did they practice? They certainly didn’t practice selling his economic plan because he didn’t talk about one. So what was all that practice about?
Then it hit me.
Every Presidential election year in the US, you have debates with a similar dynamic on the economy. The Republican nominee attacks the Democratic nominee for (in the GOP’s opinion) proposing to spend too much and tax too much, and the Democratic nominee attacks the Republican nominee for proposing to cut taxes too much, increasing the deficit, and for potentially needing to cut programs like Social Security and Medicare.
The public knows about these lines of attack, voters already know where they stand on those issues and thus the debate doesn’t move many people either way. What if, however, you could make it completely one-sided? I think this is the question the Romney senior campaign staff was floating internally back in May and June. I think they tossed that question around for a few weeks, and then someone came up with the idea of denying his plan and not offering any specifics. Continue reading Video: The Plot Behind Mitt Romney’s Debate Strategy
President Barack Obama and First Lady Michelle Obama in the Blue Room of the White House, July 4, 2010, before delivering remarks to military families during a Fourth of July celebration. (Official White House photo by Pete Souza)
Jobs, Growth, and Recovery
Is President Obama accountable for the slow economic recovery? Did the size of the crisis–the biggest since Hoover–have something to do with the US’ weak fundamentals? Or the ongoing saga of Europe, at the brink of collapse every week? Canoes don’t paddle well on dry beds. An American president of any party finds it hard to “fix” a national economy when every idea is labeled and rejected as partisan, even when confronted with empirical proof, theoretical verification, and country examples.
US Job Growth (non-farm), July 2011 - 2012, under President Obama
Globally, the US leads all economies in the recovery!
Accusing someone doesn’t make them guilty. First, choices, players, conditions, opposing forces, and standards must be assessed. The initial stimulus sent money to the states to provide for the increased demand for basic services, health, unemployment, education, public safety during a time when revenue fell dramatically. The money helped cushion the sudden shock of people who lose jobs in the tailspin. This aid to states was essential. Even those guilty of criticizing it requested and received the money for a variety of projects and programs.
Should the success of the stimulus be measured solely by job creation? That ignores that fully one-third of the stimulus was a payroll tax cut to put more money in the hands of families. It also helped families who couldn’t find jobs.
The recession was international. Where does the US rank globally, among all nations? Globally, the US leads all economies in the recovery!
The US has a higher per-capita GDP than Germany, Europe’s leading economy. China, the world’s second largest economy, had a strong 2011, but now, its year-over-year GDP is falling and its growth rate is slowing.
US GDP growth in constant dollars has trended consistently upward since the recession’s end. In contrast, our most prosperous neighbor in the hemisphere, Brazil, whose economy is now larger (6th in the world!) than Britain and Canada’s, saw its GDP (in constant dollars) drop significantly last year.
In 2011, US corporate profit hit record highs. The aggregate? $824 billion. Profit margins (profit after expenses and taxes) also accelerated to an all-time high. In fact, profits recovered quicker and grew faster after the recession than anytime in US history. Conversely, wages are down. Obama has promised to address the inequity of the middle class’ income and wealth. Wages are revenues for other companies, and as long as wages are low, the recovery will be inhibited, creating a negative feedback cycle of job losses, low wages, and low demand.
Germany’s unemployment is lower than the US, at 6.5% having fallen since February from 7.5%. Brazil, Canada (7.5%) and England match the US rate at 8% (for Brazil, a metropolitan-based rate). Mexico’s unemployment? 5.5 percent, the hemisphere’s best, is severely undercounted. Our economy is still almost a third larger than China’s and 15% larger than Eurozone’s.
Finally, US interest and inflation rates are at all-time lows. Inflation-indexed 10-year treasuries have negative returns! (You pay the government to park your money!) Currently, fixed-yield securities (constant maturities for 10 years) return 1.63 percent.
It’s hard for a single country, even one the size of the US, tied to so many markets, to outpace the world! Sometimes, for reasons or events beyond political control, times are hard. As the US de-leverages from the housing bubble and banking crisis, demand will not return until private debt levels (not public!) provide an impetus to spend.
US Job Growth (non-farm), July 2007 - 2008, under President Bush
Looking at the global details, the benchmarks, GDP comparisons, the rates of growth worldwide by verified standards and measures, the US is still the number one economy in the world and leads the global recovery.
Slowly, the US is shaking off the effects of a deep crisis without falling back into a double dip, as England did. Add record corporate profits and lower taxes to the US’ leadership record, and Barack Obama has done an outstanding job resetting the economy in a world still stalled, trying to recover its punch.
President Barack Obama hugs Stephanie Davies, who helped keep her friend, Allie Young, left, alive after she was shot during the movie theater shootings in Aurora, Colorado. University of Colorado Hospital, July 22, 2012. (Official White House photo by Pete Souza)
Health Care and the Savings Debate
The President’s plan expands and protects services for seniors and the uninsured
Rising costs? Cuts in Medicaid services? Taking away seniors paid-in benefits to pay for expanding Obamacare? Under the President’s plan, seniors keep their full range of services while coverage is expanded.
In his speech Mitt Romney said no:
His [Obama’s] $716 billion cut to Medicare to finance Obamacare will both hurt today’s seniors, and depress innovation – and jobs – in medicine.
Here’s an insight from a New York Times reader in San Francisco that explains why Medicaid clients will keep their coverage and tells how the savings work.
I’m a little worried that the worst lie is not being pointed out completely. It is not that Ryan, hypocritically calls for the same cuts in Medicare reimbursements to hospitals as Obama; but rather Obama doesn’t really cut the total reimbursement to hospitals at all–while Ryan would.
Everyone keeps missing the Medicare point. Reimbursements to hospitals are overpaid because hospitals carry the extra expense of providing care to the uninsured for which they aren’t reimbursed. The Obama plan essentially insures that hospitals continue to get the same amount of total reimbursement–less from medicare but more from the previously uninsured because they will be required to have insurance under Obamacare (shouldn’t be ashamed to call it that).
The Ryan plan is an actual cut–because they are not going to require the uninsured to get insurance. HUGE difference that seems to be ignored in the sea of Ryan prevarication.
The President’s plan expands and protects services for seniors and the uninsured.
Soon doctors will get out of practicing medicine? With the provisions in the ACA to cap and deter frivolous lawsuits, malpractice costs should drop. But adjustments can be made–as Bush did with Part D, and with the Advantage program.
The Democrats have a plan! Their plan for cost savings is included in the PPACA (Patient Protection and Affordable Care Act, or Obamacare) and is already showing great results. Its major thrust targeted fraud. Last fiscal year, the Attorney General announced a record total annual recovery: $4.1 billion in fraud. In February, he brought the single biggest case against fraud, taking down an extended network that bilked $375 million in illegal payments by, in some cases, going door to door to sign up recipients for false claims. No small change! Continue reading Opportunity! Health Care, Jobs, and Race
This is my third in a series of videos with Steve Leser from Democrats for Progress.
Today, we are going to discuss supply side economics and the two frontrunners for the Republican nomination. Steve, what impact does Ronald Reagan play in the economic beliefs and proposals of Newt Gingrich and Mitt Romney?
Steve: Hi, Charles, and thanks for interviewing me.
It has been 32 years since Ronald Reagan took office at 1600 Pennsylvania Avenue. His economic policies and the perception that they were successful have dominated American economic policy ever since.
Newt Gingrich is touting his involvement in the implementation of Reagan’s supply side economics as part of the reason people should vote for him. Mitt Romney also refers to Reagan’s economics as the underpinnings of his economics proposals.I think it makes sense at this point to look at whether Reagan and his supply side economics were as successful as we’ve been led to believe.
The cornerstone of his [Reagan’s] policies and supply side economics is the implementation of lower taxes in general, but particularly important is a lower tax rate for the top income bracket.
When Ronald Reagan took over in January of 1981, those earning the highest income paid 70 percent of the topmost portion of their income in taxes. Over the course of his administration, he lowered that rate to 50 percent and then to 28 percent.
Since Reagan left office, the top tax rate has oscillated between 28 percent and 35 percent, where it now stands. That seven-percent variation is insignificant in comparison to the rates between 1945 and 1980 which ranged between 70 and 94 percent.
I think it is fair to say – and a lot of people across the political spectrum are going to howl at this – that Reaganomics, at least as far as tax policy goes, remains in place today even under President Obama.
Charles: I have two questions at this point, but let’s take them one at a time.
First, I remember the way things were in the late 70s and early 80s. Things were really bad. Inflation was high, oil prices were high, unemployment was high. The way it seems is that Reagan took office, lowered taxes and things got better. Is that not the case?
Steve: That is such an important question.
There is a Latin phrase that applies here, and it is: post hoc, ergo propter hoc. This phrase describes a logical fallacy wherein someone suggests that because something occurred before something else, it necessarily caused the second thing to happen.
For instance, I am walking outside and I drop a penny and then a minute later it starts to rain. If someone were to conclude that my dropping the penny caused it to rain, I think we would all agree that would be a ridiculous suggestion of causation.
There is a similar situation with the economic recovery of the mid-1980s and the policies of the Reagan administration. Here are the facts.
In 1973, the first of two 1970s era energy crises exploded on the world scene with OPEC instituting an embargo against the US and its allies in retaliation for US support of Israel during the Yom Kippur war. At the start of the embargo, the price for a barrel of oil was around $20 a barrel in 2008 dollars.
By the way, for all of the prices I am going to discuss, I am going to use what the equivalent of the prices would be in 2008 dollars so it is easier for us to understand the effect of what happened.
The price of a barrel of oil promptly doubled and then some as a result of the embargo to nearly $45 a barrel. The effects of that first crisis on oil and gas prices hadn’t ended by 1979 when a second crisis ensued from Iran’s Shah coming to the US for medical treatment and the hostage crisis that occurred when our embassy personnel in Tehran were taken hostage.
At that time, the price of a barrel of oil shot up to $100 a barrel in 2008 prices. The price of a gallon of gas went up to an equivalent of $4 a gallon. The hostage crisis ended in 1981 the day that Reagan was inaugurated, and almost immediately the price of a barrel of oil and of a gallon of gas began to drop.
By 1984, the price of a barrel of oil had come down from the equivalent of $100 to $60 a barrel and the price of a gallon of gas had gone back down from the equivalent of $4 a gallon down to $2.80 a gallon
Now we all know what the effect of a massive increase or decrease in the price of gas and oil does to the economy. In economic terms, a huge increase or decrease in the price of oil and gas is known as a supply shock.
Supply shocks cause major shifts in the direction of the economy.
It is no coincidence that the economic recovery for which Reagan is credited follows the decrease in the price of oil almost exactly. Here are a couple of graphs that emphasize the point.
Here is a graph of oil prices from 1960 to 2010. The orange line is the line that shows the prices in their 2008 equivalents. You can see that prices take off in 1973 and spike again in 1979 and then start to decline sharply in 1981. They are significantly lower by 1984 and continue lower and stabilize in 1986.
Here is a graph of gross national product from 1979 to 1988 from tradingeconomics.com. You can see that the turnaround in the economy occurs in the 1983-1984 time frame and continues through the rest of Reagan’s Presidency.
I’m not saying Reagan deserves no credit for the turnaround; what I am saying though is that it was not his economic policies that improved the economy. What credit he deserves, he deserves for his foreign policies that produced somewhat of a cooling off of the situation in the Middle East and a resulting moderation in the price of oil and gas.
Reaganomics and supply side economics did not cause the recovery in the 1980s; a reduction in the prices of oil and gas did.
Charles: So the Reagan economic policies did not cause the recovery of the 1980s.
My second question – remember I had two questions – my second question is: over time, has the record validated those policies? Are we better off as a country as a result of Reaganomics and supply side economics?
Steve: We’re clearly not better off as a result of supply side economics. Well, let me back up slightly. If you are in the top five percent of wealth and income, you are better off. One would expect that because the lower taxes were aimed mostly at people in that bracket.
Analyzing and understanding the US $14.5 trillion economy enters an alternate universe starkly different from the family checkbook. Yet many pols and policy makers continue to act as if they were the same. Those who decry spending and debt as bringing down the sky and the economy blithely express no frustration as interest rates remain near zero and demand flat-lines. Which “deficit” is more important in a $14.5 trillion economy, debt or demand, especially if 14 million Americans are out of work and the jobs created barely keep up with the population increase?
The key GOP macroeconomic concept (non-quantifiable) is “uncertainty.” It’s a constant in their sound bites. Easy response: What is certain is interest rates are below 2%, so borrow, buy, and build! Germany’s bond sale this week actually had investors paying the government for the privilege of buying debt! And it is certain that demand is non-existent. Demand is a real economic concept, measured in real numbers. It isn’t boosted by tax cuts but by spending. Demand leads to jobs.
Not being certain what uncertainty is, I suggest voting for the math, for the spending that will increase demand, create jobs, and increase the family checkbook’s bottom line.
One thing is certain: You really can’t give a tax cut to a person out of a job.
But for Republicans, government isn’t about people; it’s about balancing the ledger. They no longer calculate the costs of waste; they calculate the costs of living.
But slashing taxes will not close the widening income gap. Underfunding education will not make students more competitive. Leaving education to states will not lift our students above those in schools funded and supported by national plans. Lying about or ending health care will not tend the sick or improve productivity.
Republicans have called social security a “Ponzi scheme.” But the fact is the program is self-sustaining, costs the government nothing (it pays its own nominal overhead) and has never missed an individual payment in its 76-year history. It actually has a surplus of $3.2 billion. It provides not only retirement income but survivor’s benefits to spouses and children, disability supplements to disabled workers. But anyone with an income over $102,689 pays no payroll taxes above that limit.
“In hard times, the US needs to cut back.” This common sense idea runs smack into a hidden economic paradox. How can you grow by cutting back? If we all buy less food, will the grocery stores hire more clerks? The paradox is that what makes sense for one doesn’t make sense for the group. That’s the difference between microeconomics (the economics of individual and consumer trends) and macroeconomics (the economics of nations and states). In recessions, the group has to make up for the individual, or the economy implodes, falling into a black hole from which it becomes harder and harder to pull out. Continue reading Digging Deeper: A Person Without a Job Doesn’t Need a Tax Cut