Thoughts on the Economy

A new economic term to be learned: the Liquidity Trap. This is when investors have money to invest, but no where to invest it. We have one today. In order to put money in the Bank of New York Mellon, you have to pay the bank. This is because neither the bank, nor the investors who put their money in this account, have any use whatsoever for cash. No one is buying anything, so it would be foolish to invest in the economy. It is obviously an absurd state of affairs, when the government seems unable to pay its bills and corporations are basically paying no taxes. Wall Sreet Journal blog, August 4, 2011, by Jon Hilsenrath. http://blogs.wsj.com/economics/2011/08/04/bny-mellon-deposit-fee-life-in-the-liquidity-trap/

Interviewed an individual today who wanted a part-time retail job nights and weekends at Gabriel Brothers. She had worked 10 years in a factory and when it closed she was making $17.00 per hour. She spent two years in another factory which also closed. She then got hired at Lake West Hospital, but is paid so little that she now wants to take on an evening and weekend job to make things meet: $7.50 per hour. We talk to these people all the time, but they find it very difficult to actually perform well at two jobs.

Daniel Griswold, Director of Trade Policy Studies at the Cato Institute, founded and funded by the Koch Brothers, gave the following statistics in his talk to the City Club of Cleveland. I didn't right the numbers down, so my memory might be off, but very slightly. In 1990, it took 10 man hours to make a ton of steel. In 2000, it took 5. Today it takes less than 2. There are two obvious conclusions. First, this increased productivity means that all things made of steel are much cheaper than they would otherwise be, and this is a wonderful thing for all Americans, especially the working class. Second, the effect on employment is a catastrophe for the working class.

The international economy has undergone a fundamental shift in the last 30 or 40 years, which requires the American people to engage in thoughtful and open-minded discussion. The problem is that the the economic changes have created immense corporate and personal fortunes which have nothing to gain and everything to lose from thoughtful and open-minded discussion.

In a series of speeches in 1933, 1934, Franklin Roosevelt addressed the nation to state the necessity of government providing work to the people. He said that if industry was unable or unwilling to provide jobs, then the government would have to do it. Over the next 10 years, the US government created 11 million jobs.

Many Americans have been convinced that the government should not be involved in creating jobs, but I believe the alternative is an extended period of high unemployment and low wages and all the negative social consequences which result from that. There seems to be a mood sweeping the country that the time has come to suffer.

Why We Have a Large Federal Deficit

I. Our government decided that corporations should not have to pay for anything.

According to Richard Wolff, Emeritus Professor of Economics at University of Massachusetts Amherst, Democracy Now, 7/20/2011: "If you go back to the 1940s, here’s what you discover, that the federal government got 50 percent more money year after year from corporations than it did from individuals. For every dollar that individuals paid in income tax, corporations paid $1.50. If you compare that to today, here are the numbers. For every dollar that individuals pay to the federal government, corporations pay 25 cents."

II. Our government decided that the extremely wealthy should not be called on to contribute more than anyone else. From 1940 to 1970, the highest earnings were taxed at 70% or more. At one point the rate hit 91%. During these 30 years, the economy boomed. Reagan lowered the highest rate to 28%. Clinton raised it to 39% and balanced the budget. Bush lowered it back to 36%. You may think it unfair to tax anybody at a rate of 70% and up, but the results of this major shift in taxation have been dramatic. In 1977, the top 1% of Americans had 9% of the nation's wealth. Today, they have 20%. Today, 120 million at the bottom have the same combined wealth as the 150,000 at the top. While corporations publish record profits, wages and employment are in a long-term state of decline. The top 1% of Americans makes close to 25% of the total income made in America. Just moving the rate back to 39% would make a tremendous difference.

The right-wing propaganda machine likes to speak of "a vast expansion of government under Obama." This is total nonsense. Ezra Klein posts a blog reproduced in yesterday's Plain Dealer, which shows where the debt really came from. To read the original post: tinyurl.com/4xogtb5 (I can't seem to copy his graph, so I'll have to describe the content).

Under Bush, 2002-2009, new costs incurred totaled 5.07 trillion. The biggest four items being:

1.) 1.469 trillion: multiple wars. (Joel Stiglitz argues that the total cost of the Bush-Obama wars will hit 5 trillion.)

2.) 1.812 trillion: Bush tax cuts (non-stimulus tax cuts first proposed by Bush during the 2000 election. He was concerned about the Clinton surplus. This is true. Not sarcasm.)

3.) 0.773 trillion: 2008 stimulus and other changes

4.) 0.608 trillion: Non-defense discretionary spending

Under Obama, projected 2009-2017, the new costs minus planned cuts total 1.44 trillion

1.) 0.711 trillion: Stimulus spending

2.) 0.425 trillion: Stimulus tax cuts

3.) 0.278 Non-defense discretionary spending.

4.) 0.152 trillion: Health reform and entitlement changes

It deserves repeating that the bulk of the current deficit comes from the consequences of having over 9% of our workforce unemployed. Not only did those people stop paying taxes, they are receiving unemployment and other government benefits intended to help them until they find a job. In the meantime, the government is doing nothing to get them back to work. Indeed, the government is laying people off.

In the Cleveland Public Schools, they are discussing whether class sizes will hit 50.

So far Obama has:

1) Agreed to cut Social Security benefits. He backed off after pressure from his own party.

2) Agreed to raise the age when the elderly can begin Medicare. He backed after pressure from his own party.

3) Signed on to a deficit reduction package which does nothing to increase revenue.

In a speech to the U.S. Senate, Bernie Sanders, Senator of Vermont said the following: "Despite Democratic control over the White House, despite Democratic control over the Senate, despite overwhelming opposition from the American people, a small minority of the members of the Republican-controlled House have successfully pushed an extreme right-wing agenda onto the American political landscape. It is an ideology which believes that despite the fact that the rich are getting richer, the middle class is shrinking, and poverty is increasing, all—all of the burden for deficit reduction should rest on working people."

August 2, 2011

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