Economic Change if the Democrats take Congress
The following commentary was delivered over WAMC radio by Michael A. Meeropol on Friday, November 3, 2006.
“FIRST, DO NO HARM”
What does the admonition, “First do not harm?”[1] have to do with economic issues in the current election? Well, if the Democrats take one or both houses of Congress, the divided government will be gridlocked and the policy-makers won’t be able to do any more harm to the US economy.[2]
But what is the “harm” that allegedly has been done to the US economy under the leadership of President Bush and the Republican majority in Congress?
Most Democrats emphasize the budget deficit as a failure of the Bush Administration. Listeners to this station who have heard my commentaries, know that I am on record arguing that there is nothing inherently wrong with budget deficits – that borrowing money to, for example, rebuild the infrastructure destroyed by hurricanes Katrina and Rita is extremely worthwhile both for economic and humanitarian reasons.[3]
I believe that the focus on budget deficits is a diversion. The deficits of the past five years have actually done more good for the economy than harm.
Imagine the economy since the spring of 2001 (when the last recession began) with a budget deficit half the size. That’s either hundreds of billions of dollars in less spending by the Federal government OR more taxes collected or some combination of the two. The higher taxes would have meant less consumption by at least some of the affected taxpayers and therefore lower incomes and less job growth for the economy.
Less spending by government would have meant fewer people employed by government, fewer roads built, lower grants to state and local governments, and yes, less interest paid to individuals both at home and abroad who hold US government bonds. Aside from the decline in interest payments, all declines in government spending would have translated into lower incomes and lower employment for somebody.
I happen to believe that the tax cuts approved by Congress under the Bush Presidency and the expenditures voted by that same Congress were very poor routes to increasing employment and increasing economic growth. But they didn’t have a ZERO effect. Since 2001 these deficits have made unemployment somewhat lower than it would have been without them.
The main counter-argument is the claim that budget deficits produce high interest rates reducing the amount of investment activity by businesses. This then reduces both incomes today and growth in the future. Therefore a lower deficit would have meant higher investment and faster growth.[4]
Even though this may be an appealing supposition, the facts are that between 2001 and 2004, the Federal Reserve made sure that interest rates fell to rock bottom.[5] In fact, many economists have criticized the Greenspan Fed for pushing interest rates so low they set off the housing bubble that is now painfully deflating before our very eyes. Interest rates have been rising in the past year, but interestingly enough the deficit has been falling.[6]
I would argue that the most significant “damage” done by the Bush Administration and its Congressional allies has been to skew the tax cuts and expenditures and other policies in such a way as to significantly increase inequality in our country. The increased inequality made for a very slow recovery from the recession – economic growth and job creation have been disappointing.[7]
I note with approval that the Democrats promise to raise the minimum wage should they take over one or both houses of Congress. They should also be able to block one of the most ridiculous tax cuts of the Bush Presidency, the complete abolition of the Estate Tax.[8]
More importantly – ideas that Bush and his allies have been pushing – privatizing social security,[9] pressuring Seniors in the Medicare program to enter for profit HMOs, changing from an income tax to a consumption tax[10] [all these were ideas very much in play once Bush won re-election in 2004]. These terrible ideas will die a deserved death.
Also, the Committee on Capital Markets Regulation won’t be able to get their pet proposals through Congress – such as making it harder for shareholders to sue corporate managers for defrauding them.[11]
Unfortunately, stopping the worst Bush policies in their tracks will not create a reasonable health care system, nor will it put the unemployed back to work or make college more affordable. But first things first – DO NO MORE HARM!.
For this reason, I have to hope that the Democrats take over one or both houses of Congress next Tuesday.
[1]This statement is often thought to be a line in the Hippocratic Oath. In fact this line is derived from a passage in Hippocrates’ work EPIDEMICS. The third line in the original Hippocratic oath promises to, “… never do harm to anyone.”
[2] This is the view expressed by Stephen Slivinski of the right-wing CATO Institute the “The main value of divided government is the fact that not much will get done … things won’t get any worse.” [New York Times, “The best of this may be gridlock” Daniel Altman, 10/29/06 Section 3, p. 4]
[3] See my second commentary, delivered in October of 2005, available both on the WAMC web site and at the WNECONOMICS blog available at http://wneconomics.blogspot.com/
[4] This is an economic theory known as “crowding out.” You can follow the argument about crowding out and even read a bit of a test as to whether the large deficits of the 1980s caused crowding out in Surrender: 43-44, 162-265.
[5] The interest rate that indicates the direction of monetary policy is the Federal Funds Rate (the interest rates banks charge each other for overnight loans). This is the short term rate that the Federal Reserve directly controls by their actions of buying and selling government securities on the Open Market. The regular meetings of the Federal Open Market Committee are immediately followed by an announcement of the new level to which they wish to move the Federal Funds Rate. In 2000 that rate averaged 6.24%. That was the year the stock market bubble burst and by the end of the year there was great fear of a new recession (which in fact arrived in April of that year). Anticipating the danger of recession, the Federal Reserve began an aggressive policy of rate cutting that brought the rate down to 3.65% by the end of August of 2001 and then to 2.49% by the end of October and finally to 1.82% by the end of the year. The rate stayed close to 1.75% for most of 2002 and was cut to 1% by the second half of 2003. The Fed began to slowly raise rates by July of 2004 and they reached 4.26 per cent by the end of 2005. (Economic Report of the President 2004: 370-371 and Economic Report of the President 2006: 369)
[6] The budget was in surplus for fiscal year 2001 (which ended October 1) and the deficit rose beginning in 2002 till it reached 3.6% of GDP in 2004. Then it fell to 2.6% of GDP in 2005. [Economic Report of the President, 2006: 376] The Treasury originally estimated that the deficit would grow in 2006 to $423 billion (or approximately 3.2% of GDP) but the press release for October 11, 2006 with a preliminary estimate of what happened in the fiscal year just concluded (FY 2006) stated that the deficit was actually $248 b. which is clearly a lower percentage of GDP than the deficit in the previous year. See http://www.fms.treas.gov/mts/index.html and click on the Oct 11 release.
[7] Employment in 2000 was 136.89 million. Employment in 2005 was 141.73 million. That’s total job creation of less than 5 million or less than 1 million net jobs created per year. By contrast, job creation between 1990 and 1995 was 6.1 million for an average of 1.2 million per year. Both periods included recessions. Even 1980 to 1985, which included an incredibly deep recession that lasted longer than the 1990 and 2001 recessions saw a net job creation of 7.8 million. See Economic Report of the President, 2006: 326. Median family income (in real terms) was $54,857 in 2001 and it was actually lower -- $54,061 in 2004. By contrast, median family income was $48,608 in 1991 and was a tiny bit higher in 1994 ($48,895). See Economic Report of the President, 2006: 322. For details on the Bush presidency, see Robert Pollin, Contours of Descent (NY: Verso, 2004) paperback edition. (see especially, Chapter 4 and the added material in that edition).
[8] It is hard for me to take seriously anyone who claims they believe that only hard work should be rewarded (that giving allegedly lazy people handouts from the government would damage their character) and who then turns around and supports the idea of letting sons and daughters of multi-millionaires inherit all of daddy’s wealth for doing absolutely nothing – talk about a way to destroy incentives with handouts! The Estate Tax affected only two percent of the population before the estate size that escaped taxation began to be raised. It is true the estate tax does not raise much revenue (all taxes other than income and payroll taxes accounted for approximately 6 % of federal revenue in 2004 and that includes all excise taxes) but even $1 trillion dollars over 5 years has to be raised from some other source or be cut from expenditures. If I had the ability to make policy I would raise the estate and gift taxes and impose a wealth tax. Then I would cut payroll taxes and raise the earned income tax credit. That would be a much fairer way to tax people.
[9] See Economic Report of the President, 2004: ch. 6. Here they note that the only way to solve the alleged financing problem of Social Security is to cut benefits (p. 142). The “personal accounts” are a way of “promising” more income from successful investment in the stock market to supposedly more than make up for the cut in guaranteed benefits. I call that trading in a guarantee for a lottery ticket!
[10] See Economic Report of the President, 2006: ch 5. See especially p. 120-122 where they approvingly quote the President’s Advisory Panel on Tax Reform’s two proposals that “lower the effective tax ratet on capital income…”
[11] See Ben Stein, “Has Corporate America No Shame? Or no Memory?” NY Times, 10.29.06 sec 3, p. 3. What columnist Stein was most angry about was the association of the new Secretary of Treasury, Mr. Henry Paulson, with the goals of this committee. As Stein argues, “It is fine for corporate bosses to be lobbying to kee0 themselves at the trough. That’s what we expect of them. But Mr. Paulson is sworn to represent all of the people, not just the powers that be on Wall Street. He is way, way too high up the pay scale to be their lackey.” I might add that Ben Stein was a staunch supporter of the re-election of President Bush believing his macro-economic policies had been quite successful.
“FIRST, DO NO HARM”
What does the admonition, “First do not harm?”[1] have to do with economic issues in the current election? Well, if the Democrats take one or both houses of Congress, the divided government will be gridlocked and the policy-makers won’t be able to do any more harm to the US economy.[2]
But what is the “harm” that allegedly has been done to the US economy under the leadership of President Bush and the Republican majority in Congress?
Most Democrats emphasize the budget deficit as a failure of the Bush Administration. Listeners to this station who have heard my commentaries, know that I am on record arguing that there is nothing inherently wrong with budget deficits – that borrowing money to, for example, rebuild the infrastructure destroyed by hurricanes Katrina and Rita is extremely worthwhile both for economic and humanitarian reasons.[3]
I believe that the focus on budget deficits is a diversion. The deficits of the past five years have actually done more good for the economy than harm.
Imagine the economy since the spring of 2001 (when the last recession began) with a budget deficit half the size. That’s either hundreds of billions of dollars in less spending by the Federal government OR more taxes collected or some combination of the two. The higher taxes would have meant less consumption by at least some of the affected taxpayers and therefore lower incomes and less job growth for the economy.
Less spending by government would have meant fewer people employed by government, fewer roads built, lower grants to state and local governments, and yes, less interest paid to individuals both at home and abroad who hold US government bonds. Aside from the decline in interest payments, all declines in government spending would have translated into lower incomes and lower employment for somebody.
I happen to believe that the tax cuts approved by Congress under the Bush Presidency and the expenditures voted by that same Congress were very poor routes to increasing employment and increasing economic growth. But they didn’t have a ZERO effect. Since 2001 these deficits have made unemployment somewhat lower than it would have been without them.
The main counter-argument is the claim that budget deficits produce high interest rates reducing the amount of investment activity by businesses. This then reduces both incomes today and growth in the future. Therefore a lower deficit would have meant higher investment and faster growth.[4]
Even though this may be an appealing supposition, the facts are that between 2001 and 2004, the Federal Reserve made sure that interest rates fell to rock bottom.[5] In fact, many economists have criticized the Greenspan Fed for pushing interest rates so low they set off the housing bubble that is now painfully deflating before our very eyes. Interest rates have been rising in the past year, but interestingly enough the deficit has been falling.[6]
I would argue that the most significant “damage” done by the Bush Administration and its Congressional allies has been to skew the tax cuts and expenditures and other policies in such a way as to significantly increase inequality in our country. The increased inequality made for a very slow recovery from the recession – economic growth and job creation have been disappointing.[7]
I note with approval that the Democrats promise to raise the minimum wage should they take over one or both houses of Congress. They should also be able to block one of the most ridiculous tax cuts of the Bush Presidency, the complete abolition of the Estate Tax.[8]
More importantly – ideas that Bush and his allies have been pushing – privatizing social security,[9] pressuring Seniors in the Medicare program to enter for profit HMOs, changing from an income tax to a consumption tax[10] [all these were ideas very much in play once Bush won re-election in 2004]. These terrible ideas will die a deserved death.
Also, the Committee on Capital Markets Regulation won’t be able to get their pet proposals through Congress – such as making it harder for shareholders to sue corporate managers for defrauding them.[11]
Unfortunately, stopping the worst Bush policies in their tracks will not create a reasonable health care system, nor will it put the unemployed back to work or make college more affordable. But first things first – DO NO MORE HARM!.
For this reason, I have to hope that the Democrats take over one or both houses of Congress next Tuesday.
[1]This statement is often thought to be a line in the Hippocratic Oath. In fact this line is derived from a passage in Hippocrates’ work EPIDEMICS. The third line in the original Hippocratic oath promises to, “… never do harm to anyone.”
[2] This is the view expressed by Stephen Slivinski of the right-wing CATO Institute the “The main value of divided government is the fact that not much will get done … things won’t get any worse.” [New York Times, “The best of this may be gridlock” Daniel Altman, 10/29/06 Section 3, p. 4]
[3] See my second commentary, delivered in October of 2005, available both on the WAMC web site and at the WNECONOMICS blog available at http://wneconomics.blogspot.com/
[4] This is an economic theory known as “crowding out.” You can follow the argument about crowding out and even read a bit of a test as to whether the large deficits of the 1980s caused crowding out in Surrender: 43-44, 162-265.
[5] The interest rate that indicates the direction of monetary policy is the Federal Funds Rate (the interest rates banks charge each other for overnight loans). This is the short term rate that the Federal Reserve directly controls by their actions of buying and selling government securities on the Open Market. The regular meetings of the Federal Open Market Committee are immediately followed by an announcement of the new level to which they wish to move the Federal Funds Rate. In 2000 that rate averaged 6.24%. That was the year the stock market bubble burst and by the end of the year there was great fear of a new recession (which in fact arrived in April of that year). Anticipating the danger of recession, the Federal Reserve began an aggressive policy of rate cutting that brought the rate down to 3.65% by the end of August of 2001 and then to 2.49% by the end of October and finally to 1.82% by the end of the year. The rate stayed close to 1.75% for most of 2002 and was cut to 1% by the second half of 2003. The Fed began to slowly raise rates by July of 2004 and they reached 4.26 per cent by the end of 2005. (Economic Report of the President 2004: 370-371 and Economic Report of the President 2006: 369)
[6] The budget was in surplus for fiscal year 2001 (which ended October 1) and the deficit rose beginning in 2002 till it reached 3.6% of GDP in 2004. Then it fell to 2.6% of GDP in 2005. [Economic Report of the President, 2006: 376] The Treasury originally estimated that the deficit would grow in 2006 to $423 billion (or approximately 3.2% of GDP) but the press release for October 11, 2006 with a preliminary estimate of what happened in the fiscal year just concluded (FY 2006) stated that the deficit was actually $248 b. which is clearly a lower percentage of GDP than the deficit in the previous year. See http://www.fms.treas.gov/mts/index.html and click on the Oct 11 release.
[7] Employment in 2000 was 136.89 million. Employment in 2005 was 141.73 million. That’s total job creation of less than 5 million or less than 1 million net jobs created per year. By contrast, job creation between 1990 and 1995 was 6.1 million for an average of 1.2 million per year. Both periods included recessions. Even 1980 to 1985, which included an incredibly deep recession that lasted longer than the 1990 and 2001 recessions saw a net job creation of 7.8 million. See Economic Report of the President, 2006: 326. Median family income (in real terms) was $54,857 in 2001 and it was actually lower -- $54,061 in 2004. By contrast, median family income was $48,608 in 1991 and was a tiny bit higher in 1994 ($48,895). See Economic Report of the President, 2006: 322. For details on the Bush presidency, see Robert Pollin, Contours of Descent (NY: Verso, 2004) paperback edition. (see especially, Chapter 4 and the added material in that edition).
[8] It is hard for me to take seriously anyone who claims they believe that only hard work should be rewarded (that giving allegedly lazy people handouts from the government would damage their character) and who then turns around and supports the idea of letting sons and daughters of multi-millionaires inherit all of daddy’s wealth for doing absolutely nothing – talk about a way to destroy incentives with handouts! The Estate Tax affected only two percent of the population before the estate size that escaped taxation began to be raised. It is true the estate tax does not raise much revenue (all taxes other than income and payroll taxes accounted for approximately 6 % of federal revenue in 2004 and that includes all excise taxes) but even $1 trillion dollars over 5 years has to be raised from some other source or be cut from expenditures. If I had the ability to make policy I would raise the estate and gift taxes and impose a wealth tax. Then I would cut payroll taxes and raise the earned income tax credit. That would be a much fairer way to tax people.
[9] See Economic Report of the President, 2004: ch. 6. Here they note that the only way to solve the alleged financing problem of Social Security is to cut benefits (p. 142). The “personal accounts” are a way of “promising” more income from successful investment in the stock market to supposedly more than make up for the cut in guaranteed benefits. I call that trading in a guarantee for a lottery ticket!
[10] See Economic Report of the President, 2006: ch 5. See especially p. 120-122 where they approvingly quote the President’s Advisory Panel on Tax Reform’s two proposals that “lower the effective tax ratet on capital income…”
[11] See Ben Stein, “Has Corporate America No Shame? Or no Memory?” NY Times, 10.29.06 sec 3, p. 3. What columnist Stein was most angry about was the association of the new Secretary of Treasury, Mr. Henry Paulson, with the goals of this committee. As Stein argues, “It is fine for corporate bosses to be lobbying to kee0 themselves at the trough. That’s what we expect of them. But Mr. Paulson is sworn to represent all of the people, not just the powers that be on Wall Street. He is way, way too high up the pay scale to be their lackey.” I might add that Ben Stein was a staunch supporter of the re-election of President Bush believing his macro-economic policies had been quite successful.
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