Too Much Debt, Not Enough Income
Bush’s economic policy has had real world consequences. You know it and I know it. It does matter who you elect. I can’t stress that enough…as cynical as I am, as disappointed in my own party as I often am, I still think it matters. Leadership at the top dictates how well your government runs; your economy, your foreign policy, and your regulatory bodies.
Jerome a Paris over at dKos always has the most comprehensive economic diaries. Often, they go way over my head. But this one really helps lay out the “rules” (or lack thereof) that the Bush economy relied on, and why it was so terrible. It outlines that a country which spends more than it makes, whether that’s the enormous trade deficit, or the rampant government borrowing, or the individual debt rate, will eventually have to pay the piper. It seems like common sense. Nothing is free forever.
But I get the feeling that this is part of an attempt (likely to get louder as things get worse) to blame the “foreign” bit rather than the “credit” bit.
I hope I’m wrong, but as we begin to see loud calls for bailouts (unfair, as they reward the bankers that created the problem n the first place, but, you see, the alternative is worse), the availability of a ready-made outsider scapegoat is likely to be irresistible.
And yet, the fact remains that the problem is not who provided the credit, but the fact that it was provided in such large amounts.
Did anyone really think that credit could be extended to float the economy forever? How could anyone who claimed to be an MBA president be so stupid? Now we have a falling dollar, and the banks are asking for their money due before extending more credit, and the assets that we borrowed to buy are getting to be worth less and less as there are fewer people who want them.
Because that sea of debt had one real purpose: hide the fact that income for most are stagnating.
I never tire of posting this graph of the “W economy”, because it summarises in a nutshell what happened: growth happened, but did not trickle down to the middle classes, let alone the poor. Thanks to wage stagnation, made possible by the threats of outsourcing and offshorisation, and by the demonisation, emasculation or dismantlement of regulations and institutions (like unions) protecting workers, the fruits of growth have been captured by a very few - and this has been hidden because consumption was propped up by readily available debt and the apparently growing virtual wealth of homeowners.
The problem is that, while a lot of that growth was illusory (and is now unravelling), the wealth capture that took place thanks to it was very real, and, in particular, the mechanisms ensuring that an ever grower share of the pie got into a few lucky hands are still in place, and will bite even more harshly as the pie shrinks.
And what’s more, this is masked by the “conventional wisdom” of economic political policy: free trade good, protectionism always bad.
The current economic consensus - that of “labor market reform”, of “unsustainable liabilities of Medicare”, of “protectionism is the ultimate danger” - in short, of those that think that economic prosperity is correctly summarised by the value of the Dow Jones Index is the one that has been cheerleading the shrinking of the share of the pie (remember: labor market reform = lower wages. Full stop), and they are part of the problem, not part of the solution.
And you see that all the remedies are focusing on ways to make the pie be (or better, look) bigger than it can - more money injections, more cheap debt, more support for the financial sector.
They are the problem, not the solution.
Jerome a Paris tells us there is a simple, common sense solution to all this. There always has been.
Too much debt and not enough income was the problem.
And the solution is simple: stop debt (this is happening on its own anyway). and boost income.
How do you do that when there isn’t enough money around?
By creating real activity rather than the money-shuffling kind.
He even gets really specific - solve our current climate crisis and create “real” value instead of fake ballooning debt value:
And, as it were, there is a sector that is “real” and has an urgent need for action: infrastructure, and in particular energy-related infrastructure.
A plan that focuses on a few simple things:
- massive public support for energy efficiency refurbishment of existing homes;
- a massive, New Deal rural electrifaction scale plan to build renewable energy assets and the corresponding grid infrastructure;
- a similarly massive plan to develop smart public transportation, both locally and intercity;
Spending the money currently wasted in Iraq on these 3 things alone would provide a real boost to the economy in the sectors that actually need it, would reduce oil&gas consumption and carbon emissions, and be an actual investment in the future, as opposed to the current drain on the future that’s been engineered via debt used on mindless consumption of junk.
Add in plans to boost minimum wage, reinforce union rights and tax imports of carbon-rich goods, and you’d have a pretty damn good economic - and geopolitical programme.
Like any household planning a smart budget, the federal government can be responsible in the choices it makes, the way it encourages money to be produced and moved around, and in how it regulates money (for instance, not allowing the banks to make stupid bad loans now so we can reduce the pain in the future). All of this dictates the government telling us how to do some things, or telling business how to do some things. But the alternative is to have huge ups and downs in the economy, to have stagnant wages for the middle class and the poor, and for the rich to get far richer. Laissez-faire failed this time around, as it always has. As Jerome a Paris says (bold mine),
Because the problem is the most of America’s population is living, by design, above its means. It is kept dependent, fearful and distracted while the happy few gorge. Call it what it is: class war. Time to fight back.
March 15th, 2008 at 3:19 pm
Let me point out one piece of the wealth transfer problem. Recently, the Boston Globe exposed KBR (aka Halliburton) was end-running the payroll taxes of 21,000 employees by establishing a shadow company in the Cayman Islands. This has been going on for several years, apparently with the knowledge of the US DoD. Supposedly, they have been the “beneficiary” of lower costs in Iraq due to this tax elimination. The immediate concern of the Globe is that the employees in question do not receive unemployment and social security benefits, and companies competing with KBR for these contracts do so at a distinct disadvantage.
But let’s take this one step further - the Bush Administration has controlled its costs (in this respect only) in Iraq at the expense of the Social Security and Medicare Trust Funds. While they have given substantial tax breaks to the wealthy despite the cost of war, some of this money is effectively diverted from the Trust Funds. The fact that they are running government in a severe deficit notwithstanding, they have deprived the Trust Funds of income, while wasting the money in Iraq or by giving it out to the wealthy.
Too much money in the hands of too few deprive the economy of the funds necessary to keep it going.
March 15th, 2008 at 7:46 pm
Hamilton Canal Vision Session today was nothing short of spectacular!!!! I missed the previous charrette sessions and was extremely impressed with the vison the developer and the comunity came up with. It is really going to be exciting to see this lot turned into the vision put forth today! Between this and what we’re seeing going on in Kearney Square lately there sure is a LOT to like about Lowell!!!! Sorry to post this here, but I was sad to see no mention of the session.
March 15th, 2008 at 10:51 pm
President Bush has left no choice but for the middle class to be in a state of debt. Many are doing interest only mortgages. The poor are not going to provide the tax revenue that Bush needs to fund his oil war. The rich are busy getting estate tax breaks, capital gains breaks, even fancy SUV write offs and just getting richer. (still providing the blunt of tax money though) The middle class are paying for Bushes mistakes. We are getting hit with the AMT (bushes way to pass the rich tax cuts to the middle class and we were suprised to get this the last two years), losing our hybrid car credits, and losing our fuel bill credits all while not receiving our pay increases and having increased health premiums(just finally got hit). It is really sad when those making over $125,000 a year can’t afford to start a business, feel philanthropic, or even want to define themselves as middle class. (daycare is like a second mortgage) There is no voice for the middle class. Obama is against AMT reform, McCain is for it. The only problem is that Obama stands for everything else you believe in and McCain does not. The middle class can not seem to win either way. I feel bad saying that it is hard getting by in Massachusetts on what should be a really good income when others make far less. (you constantly ask yourself how they do it) Makes you think it is time to dump the cells, the atm card, and the cable channels as maybe even with our incomes we can not afford them and start the college fund. Maybe it would be fair to start a federal consumption tax to encourage savings and to reward families like myself that try to stay in their means. (we moved to lowell so that we would not be mortgage poor)
March 16th, 2008 at 8:03 am
Peter:
No need to be sad. I also attended Session III. I did not have time yesterday to post, so I did it Sunday morning.
March 16th, 2008 at 6:22 pm
Wow, this rant is so wrong all over the place. I don’t know where to begin. I guess I’ll start with the idea of stagnant wages. I hate that cliche chart… it just ain’t so! I’ll refer to something of mine printed in the Lowell Sun a few weeks ago.
http://www.lowellsun.com//ci_8367536?IADID=Search-www.lowellsun.com-www.lowellsun.com
It was actually a series of letters printed after John “chicken little” Edward printed a series of columns (similar to this one) arguing that the sky was falling.
Next, the idea that a trade deficit is inherently bad and protectionism is the answer is, in fact, ridiculous. There’s is no debt involved in a trade deficit at all. We get goods and they get money. It’s as simple as that. If you want to reword the trade deficit to sound pretty and nice then it could be called a capital account surplus. People around the world think America is such a good place to invest in that we have a surplus of capital flowing in here. It’s the other side to the trade deficit and it too means nothing really. Trade protectionism of any kind is reactionary - plain and simple. It’s a basic tenet of economics that is just undeniable. Funny how someone who slams creationists so hard could believe that mercantilism is still a valid economic system!
Lastly, you begin the rant by talking about runaway government spending (which I agree is a big problem) and then end it by calling for more government spending as the solution. It’s as if wasting billons of dollars building bridges in the United States is any better than wasting billions of dollars building bridges in Iraq.
Too much rhetoric and no substance to back it up. Same old song and dance.
Happy St. Patrick’s Day.
March 16th, 2008 at 7:20 pm
re: kpem
We make less than you do ($125K in Lowell is waaaay above the median household income) but we’ve been able to put away quite a bit over the years so that we’ve been debt-free since the 1990s and able to write checks for college tuition costs. But we’ve lived so far below our means for so long that people kind of laugh at how we live when they find out. Living in NH made a big difference in being able to save. We moved from Westboro MA from a 600 sq ft apartment to a 1200 sq ft townhouse (living space was 1800 sq ft) and our expenses were still lower than what they were in MA. We’re spending some of those savings now in MA but those savings were able to grow more effectively in NH.
The falling dollar does make it more attractive to retain employees in the US instead of outsourcing it. And kids avoiding tech jobs for fear of outsourcing has resulted in demand for those with tech skills. Something that MA universities are good at producing.
In harsh jobs market, tech companies an oasis
http://www.boston.com/jobs/news/articles/2008/03/13/in_harsh_jobs_market_tech_companies_an_oasis/
The nation may be teetering on the brink of recession, with payrolls shrinking and many employers casting off workers.
But out by thawing Lake Nagog in this western suburb, a steady flow of job candidates is arriving for interviews at SeaChange International Inc. In the past three months, the company has hired nearly 80 employees worldwide. And it still has about 75 openings, including 30 at its headquarters here, as it hustles to keep up with customer orders for its video-on-demand software and hardware.
“It’s a very competitive job market for software engineers,” said Laura Watson, the SeaChange senior director of human resources. “Most of the people who come in here have offers in a few days.”
Worker shortage looms for defense sector
http://www.boston.com/news/education/k_12/articles/2008/03/04/worker_shortage_looms_for_defense_sector/
WASHINGTON — Recruiting has become a major challenge for the U.S. military as the wars in Iraq and Afghanistan press on. But in the quest to protect the country, it isn’t just the government that fears being under-staffed.
more stories like this
The aerospace and defense sector is bracing for a potential brain drain over the next decade as a generation of Cold War scientists and engineers hits retirement age and not enough qualified young Americans seek to take their place. The problem could impact national security and even close the door on commercial products that start out as military technology.
The causes of the potential worker shortage are manifold:
– U.S. universities are not turning out enough math, science, technology and engineering graduates to meet growing demand.
– There is fierce competition for technical experts from all corners of corporate America, including booming energy and technology industries.
– Contractors working on classified government programs are hamstrung by government rules that restrict them from hiring foreigners or off shoring work to other countries.
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So lets keep working on turning out high-school graduates that can go into math, science and engineering programs for these area where there is demand.
March 16th, 2008 at 9:42 pm
Josh,
Do you think we are just suffering the consequences of personal ignorance at this time? (foreclosures, high adjustable rate mortgages?) The problem with pay and employment levels is that they are on the whole. Health and Tech jobs may be up but construction and many other industries are way down so you can’t just act like the economy is rosey for all. (people will have to adapt though)I am real curious about how you feel about the AMT and it’s effect on the middle class. It seems that with all the tax loop holes the middle class are getting hit hard. I did read that McCain is for changing the AMT and wonder what argument there is for taxing families that make $75,000+ additional money because they have large write offs such as daycare and some savings.
Michael,
The truth of the matter is that we are probably both living with in our means and not just being frugal. We never buy new cars, own much less home than we could, and always set aside a portion of income to savings. I think it is not being cheap it is being realistic. The daycare is what kills us(over $1200 per month).
March 17th, 2008 at 12:04 pm
I think a lot of the current situation is just a result of fed policy which is largely out of the hands of the executive branch (I’m not a Bush fan, but I not going to blame something on him if its not his fault). It’s a temporary downturn in the business cycle. Anymore intervention into the economy can only make it worse.
I’m against the ATM regardless of its scope and who it targets taxes. Repeal the whole darn thing. The idea that the wealthy don’t pay their fair share is 100% Grade A Bull. They pay the overwhelming majority of income taxes in the country even after all the deductions they take. Of course the thousands of deductions in our current tax code are distionary in themselves and I would rather see the taxrate fall and have the deductions (and “loopholes”) eliminated, but simply raising taxes by eliminating deductions is worse.
March 17th, 2008 at 3:40 pm
How do you feel about a flat tax or a national sales tax? I guess you do not realize until you finally make some decent money (there are alot of expenses that come with doing that like daycare, a reliable car etc.) that the way things are now you get whacked to make up for those not paying in. I do not want to subsidize everyones tax credits (nor do I want my boss to) but I also think that a flat tax would stop the loopholes.
March 18th, 2008 at 10:39 am
I’d love a tax where the amount of paperwork was sharply reduced. Flat, graduated, whatever. But it will never happen. Accountants would never go for it. The power of Congress is that they can stick in little adders all over the place with minimal justification.
March 19th, 2008 at 12:44 pm
Whether a tax rate is flat, graduated, or a complex algebraic equation, has nothing to do with loopholes.
A national sales tax, imho, is a really, really bad idea, and would likely have to be much higher than anyone advocating for it will admit.
March 19th, 2008 at 2:11 pm
“…and would likely have to be much higher than anyone advocating for it will admit.”
But Tim, if this is so, isn’t it that the sum of current taxes is equally high?
March 19th, 2008 at 10:56 pm
Yes, you’re correct waittil. But ‘all current taxes could be replaced by a 20% sales tax’ is much more appealing than ‘all current taxes could be replaced by a 50% sales tax’.
Not sure of the exact numbers, but I think those are in the ballpark.