Sunday, January 30, 2011

Tax Rates and GDP Growth

Let's see whether we can prove that higher taxes are bad for the economy by charting the top marginal tax rate versus the % growth in GDP for each year. If higher taxes stifle the economy, we should see an increase in growth each time we lower tax rates. And likewise, if the theory holds, we'll see a drop in growth each time we increase the tax rate. Does that pan out?

Left scale for top US marginal income tax rates. Right scale for GDP growth in chained 2005 dollars. A 10 year moving average for each figure is also included. GDP data from the BEA. Tax rate data from
There's a lot of fluctuation, including some times when the line for GDP growth is off the chart; but the 10 year moving average trend gives a good idea of the general direction. Growth ramped up after the tax rate increased sharply following the Great Depression. Then after sling-shotting back down, growth gradually stabilized with a rather steady 10 year moving average lightly bouncing around 3% growth from the late 1950s through 2007. Interestingly, that 3% stabilization formed during the years when the top marginal tax rate was 91% or higher. From 1951 through 1963 the top tax rate varied between 91 and 92%. During those years, the average rate of inflation adjusted GDP growth (using chained dollars) rested at 3.51%, a rather robust growth rate. By contrast, the GDP growth under the average 37.4% top tax rate from 1986 through 2008 was only 2.83%, 0.68% lower.

Overall, the past 80 years show us a thorough lack of clear correlation between the top marginal tax rate and GDP growth. The data's closest hint of a relationship derives from the slightly more robust average GDP growth back when the top rates were higher, but that closest hint isn't close enough to be sure of an ideal rate. The notion that lowering the top tax rates improves the economy just doesn't hold water. Indeed, these 8 most recent decades show us that increasing the top tax would not necessarily have any impact on the economy, let alone slow it at all.

Update 02/03/2011:  see Chained to Real: Tax Rates, Inflation-adjusted GDP Measures, and the Difference for a version of the above chart using another inflation-adjusted measure of real GDP growth (with roughly the same result).

Original chart
Update 02/07/2011:  Replaced original chart with improved version featuring better parity of scales, better visibility of trendlines, and replacement of the poly trend with a linear. The change in scale does suggest an interesting symmetry in the past two or three decades. We'll look at that in more detail later. 

Thursday, January 27, 2011

Tea Is Just Goldwater

Folks talk about Rep. Bachmann, her caucus, and their supporters as if they're new. Listening to some, both Republican and Democrat, you'd think the Tea Party formed in some kind of virgin birth from the Great Recession or from the stimulus efforts that reversed it.

"The tea parties are mostly an honest spontaneous effort by ordinary people from all over the political spectrum to express their outrage at government hubris from absurd spending, corporate bailouts, etc." - Mike Huckabee (R-Fox News)
"The Tea Party was born because of the economy" - Sen. Reid (D-NV)

But the origins of the Tea Party go back much further than this recent flare-up. To see that, we must first have a clear idea of what exactly the Tea Party means.

  • The Tea Party Patriots [TPP] list their core values as Fiscal Responsibility, Constitutionally Limited Government, and Free Markets. In explaining what they mean by Fiscal Responsibility, TPP describes taxation as unjustly restricting liberty. They reference states rights while outlining what they mean by Constitutionally Limited Government. And they "oppose government intervention into the operations of private business".
  • The National Tea Party Federation lists the same three items under its "objectives" as the TPP's "core values" (see above).
  • The Nationwide Tea Party Coalition lists core values of "Limited Government, as authorized by the Constitution", Fiscal Responsibility, and Free Markets. In other words, the same three as the TPP in a different order.
In all cases, the Tea Party orientation is conservative. And it is a particular familiar flavor and traditional style of conservative. This is the same conservative position as President Reagan, who called for limited government, preached fiscal responsibility, and spoke of "free and open markets". While for one reason or another Reagan did not always practice his ideals during his term (with huge deficit increases and some protectionist policies), those were his ideals nonetheless. But Pres. Reagen didn't invent that stance either, as he learned his conservative politics campaigning for Barry Goldwater and took over spearheading Goldwater's platform after Goldwater failed in the 1964 Presidential campaign.
"My aim is not to pass laws, but to repeal them. It is not to inaugurate new programs, but to cancel old ones that do violence to the Constitution, or that have failed in their purpose, or that impose on the people an unwarranted financial burden. I will not attempt to discover whether legislation is 'needed' before I have first determined whether it is constitutionally permissible." - Barry Goldwater in The Conscience of a Conservative
Goldwater's conservative stance was not stamped out by his 1964 loss. It continued under the banner of Reagan and others. There is no big difference. There is only an additional name, "Tea Party", and more funding from the likes of the Koch brothers who have realized that Goldwater's talking points could be the most effective way to fight reasonable environmental regulations.

But this begs the question: why call it the Tea Party? Calling them the Tea Party, we've been practicing a deceptive comparison to a the Boston Tea Party. The Boston Tea Party protested against a monopolistic corporation and imposition by an authority other than our duly elected representatives. Today's inheritors of Barry Goldwater have no resemblance whatsoever to that Boston Tea Party. They fight for the corporations involved in their issues and the policies they oppose were implemented by duly elected representatives. Shouldn't we be calling a spade a spade? The so-called Tea Party of today are merely re-packaged Goldwater conservative Republicans with corporate conglomerate funding. Michelle Bachmann is just the leader of the Goldwater wing of the GOP, unless they should decide to finally split and form a full-fledged Goldwater-based political party.

They're not Boston-style Tea ... they're just Goldwater.  JJH55DM59KYR

Wednesday, January 26, 2011

SOTU: Guns vs Jobs

Some, including Mayor Bloomberg and the Brady Center to Prevent Gun Violence, were disappointed that there was no overt mention of gun control in the 2011 State of the Union.

They missed the point. Apply some perspective.

Yes, gun control is a big issue. Yes, it's ridiculous to fail to restore restriction on the size of gun ammo magazines back down to a sane level as per the collective failure that's been going on since the assault weapon ban expired.

But the President of the United States can't ignore the big picture. We're living in a time of high unemployment. Too many people call for massive cuts that would likely throw us into an avalanche of crushing unemployment. Too many people call for insane moves like blocking the debt ceiling that would likely jam the entire world economy into a tailspin. These economic issues have the potential to bring widespread violence through collapse if the President doesn't talk them down from that fiscal ledge. If we went there, it would not be the first time that unemployment heated anger to boil over. The first priority of the President of the United States must be to keep our economy from grinding to a halt. Everything else depends on this. All the refinements of civil society to protect this or restrict that depend on our economy running at least well enough to keep our civil institutions going.

Gun control -- even the most sane and obvious restrictions like a cap on magazine size -- can be a very contentious and partisan issue.  Maybe he could have pulled it off.  But were the President to go there in the State of the Union, it would risk focusing his entire message on that issue.  Yes, it's important.  But even bigger concerns loom over our Union.  We have 535 members of Congress who can worry about championing all of the secondary and tertiary issues.  When the basic stability of the nation is at stake, the President needs to be focused on the jobs that make it possible to keep our society together.

Tuesday, January 25, 2011

State of the Union

"Along with others, he began drilling a 2,000 foot hole into the ground, working three or four days at a time with no sleep. Thirty-seven days later, Plan B succeeded, and the miners were rescued. But because he didn’t want all of the attention, Brandon wasn’t there when the miners emerged. He had already gone home, back to work on his next project.

Later, one of his employees said of the rescue, “We proved that Center Rock is a little company, but we do big things.”

We do big things.

From the earliest days of our founding, America has been the story of ordinary people who dare to dream. That’s how we win the future.

We are a nation that says, “I might not have a lot of money, but I have this great idea for a new company. I might not come from a family of college graduates, but I will be the first to get my degree. I might not know those people in trouble, but I think I can help them, and I need to try. I’m not sure how we’ll reach that better place beyond the horizon, but I know we’ll get there. I know we will.”

We do big things."
- President Obama in the 2011 State of the Union 

Well said, Mr. President. Let's hope that doing big things will carry the day in Congress. Because it's been a while since we've done a First Transcontinental Railroad, or an Interstate Highway System, or an Apollo Program. And we could really use some fresh "big things".

Govt And Job Creation

Someone said, "It's not congresses job to create jobs, the market creates jobs."
It is the govt's job to stabilize job creation. Too much growth can be bad (bubbles, inflation). Too little growth is very bad (unemployment, etc.). When the market is over-performing, we need the government to step in and put on the brakes with rate increases and such to limit inflation. When the market is under-performing -- such as now -- we need the govt to step in and do everything it can to accelerate the economy.

The only time the govt should avoid having an impact is when things are humming along at a healthy pace. We're not there right now.
Someone replied, "I disagree, the free market manages job employment, the bubbles and depressions are caused by the government dicking around with the market. Just like how the government pushed sub-prime lending and artificially dropped interest rates, which helped lead to the housing crisis."
History does not seem to agree. When left to itself, the free market has shown itself to be perfectly capable of creating its own bubbles and depressions (see the "Panic of 1857" for starters, but there are plenty of others).

While it seems convenient to blame the govt for "pushing" sub-prime lending, plenty of get-rich-quick lenders were perfectly happy to gamble before getting any "push" from the government. All many of them needed to dive in head first was to see the pool and get the government to step out of the way ... to deregulate and/or avoid sufficiently regulating new products such as CDOs. Indeed, Fannie and Freddie did not lead the charge into risky lending. Fannie and Freddie came late into that game, after the private lenders were aggressively pushing them to the sidelines of the lending market with their sub-prime feeding frenzy. Fannie and Freddie might have been better off staying on the sidelines, but that wasn't the conventional wisdom at the time. Those voices in the wilderness calling out for caution were marginalized by the private sector zeal for profit. Claiming that they only did it because the government was pushing them is like saying a football team would sit in the bleachers for the entire game if the cheerleaders didn't call out for them to score.  Did govt missteps make it worse?  Probably.  That doesn't mean the private sector wouldn't have formed the bubble on their own.

Yes, the government can take the wrong steps and bungle into making matters worse. But that doesn't change the fact that -- whether specific administrations and Congressional sessions do it well or not -- it is the govt's job to strengthen and stabilize the economy, which generally means job creation.

Should you need proof of the govt working to create jobs in our early history: Among the more obvious examples from way back in history to gain any sort of current renown is the 1798 "Act for the Relief of Sick and Disabled Seamen" passed by the 5th Congress (featuring Thomas Jefferson as President of the Senate) and signed by President John Adams. The primary point of the law was to encourage the growth of American commerce (jobs and wealth) by reducing the loss of that specific labor pool to poor health. It also served as an incentive to join that labor pool by making it easier to get health care as a member thereof. More mariners meant more commerce. More commerce meant more American jobs. Voilà. Good job, 5th Congress.

Friday, January 21, 2011

Debunking Subramanian: No, China Isn't Bigger

Tom Gjelten of NPR in a piece asking "Is China's Economy Already No. 1?" tells us that "By traditional measures of gross domestic product — the value, in U.S. dollars, of total goods and services produced — the size of the U.S. economy is $14.6 trillion. China's GDP is only $5.7 trillion. But if China's economy is assessed according to its "purchasing power," it may be a different story." He further relates how Arvind Subramanian tells us that by purchasing power, their economy is already larger.

But this isn't just in conflict with tradition. Purchasing power parity (PPP) is mainly useful for assessing living standards because it adjusts for the costs of selected goods within a currency's market area. PPP gives a better sense of how many bowls of rice the average Chinese citizen can buy with their Renminbi vs how many bowls the average American can buy with our Dollar. The strength of PPP comes as a per capita measure on internal purchases. For 2010 the IMF rated per capita PPP of China at 7,518 International Dollars whereas the per capita PPP of the US is 47,123 International Dollars. So we can see that the average American can buy a lot more bowls of rice (or most anything else) in America than the average Chinese citizen can buy in China. By contrast, when they're both touring Germany, if you want some idea what the Chinese citizen can buy there vs what the American can buy there, PPP won't help you as much as GDP because their PPP figures aren't tuned for Germany's market. For international buying, you need to use the actual exchange rates, which means you want the GDP because it is listed using those very same exchange rates that would take effect for international purchases. Anyone (like Subramanian) who'd use PPP as an assessment of "the bigger economy" internationally should generally be considered dubious at best. There are good reasons why it is traditional to use GDP to compare the size of national economies. When you're looking at the ability to purchase outside of your own market, it just doesn't make sense to use a figure tuned to purchasing strictly within your own market.

If that weren't enough, by all accounts other than Subramanian, his assessment of Chinese PPP is bizarrely high. While the IMF, World Bank, and CIA World Factbook all come up with slightly different calculation results from each other, they're only slightly different from each other and way, way below what Subramanian claims. They all list China below the US in PPP by a fairly wide margin.

Then, for icing on the cake, there are the very big problems in China, such as the housing bubble mentioned in Gjelten's article. Their growth is currently on a trajectory to overtake us. But past results do not guarantee future performance. China is likely to generally grow over the coming decades, but they may face some serious stumbles and possible huge crashes as well. And while we're not doing it now, if we were to start revamping our infrastructure and investing more in our own growth, we could actually use our head start to keep our advantage. Not that we necessarily will. But it is a bit premature to say that China's economy will necessarily eclipse our economy at any point in the future. It may. It seems plausible that it will. It isn't guaranteed.

Wednesday, January 19, 2011

China Doesn't Own Us

With the visit of the Chinese President, Hu JinTao, there's a lot of talk about the amount of our debt that China has financed. Paul R. La Monica, writing for, even proclaims "Let's face it. China is kind of like our landlord. Or, if you prefer a more menacing term, our loan shark. We should tread carefully."

The reports of the death of America's financial strength are greatly exaggerated. Yet they're widely believed. According to a Pew poll, nearly half of Americans "see China as the world’s leading economic power." That's a pretty stunning belief when you consider that as of the 2010 IMF figures, the GDP of the US is still higher than that of the next three largest economies combined (14.6 trillion for the U.S.A. vs 14.4 trillion for the combination of China, Japan, and Germany).

So how did a much smaller economy get such a hold over the top mover & shaker? It didn't. According to the Treasury, our total public debt stands a $14.008 trillion. Of that, "intra-governmental holdings" account for about a third at $4.631 trillion. Intra-governmental holdings are the govt writing an IOU to itself from to borrow from all sorts of trust funds and other places where it had money set aside. That portion certainly isn't held by China. The Federal Reserve, various domestic investors (pension funds, mutual funds, etc.), state and local governments, banks, insurance companies, and various other U.S. interests together own large portions of the debt. China only own about $895.6 billion in our debt. Yes, I said "only." That's a large figure to you and me, but it's quite a bit less than is held by our govt lending to itself. It's not all that much more than the amount held by pension funds. It's not all that much more than the amount held by mutual funds. It's not all that much more than the amount held by our state and local governments. It's not all that much more than the amount held by the combination of banks and insurance companies. Lot's of domestic groupings each hold comparable amounts, some more and some less. It's barely more than is held by Japan. It's around 6% of our debt.

At 6% of our debt, that's not ownership. That's not an overwhelming landlord. It's not even a loan shark. Yes, they're a significant lender for us. But they don't have a controlling stake.

Meanwhile, our imports account for about 25% of their exports. And their economy is still largely export driven. If we put strict controls on imports from China it would severely hurt their economy. Strict controls interfering with their exports to the US might well hurt their economy even more than it would hurt ours if they suddenly started dumping our debt. But, of course, they're not about to do that, since much of their cash is tied up in our debt. If they were to sell it quickly, they'd lose a lot of their value from their cash reserves. And where would they put it anyway? The crisis-prone Euro? Not if they've got any sense.

To ice the cake, as David Frum says, it's "a country facing problems as huge as its achievements." They're battling rapid inflation. Their aging workforce situation over the next couple decades may well make our Baby Boomer retirement hurdle look like child's play. And there's been talk of a growing housing bubble in China that may dwarf our Great Recession housing market trouble.

All of this means that China is at least as tied to us as we are to them. They've developed an important relationship with us ... important for both nations. They don't own us.

Tuesday, January 18, 2011

Plan For Growth

"It takes as much energy to wish as it does to plan." - Eleanor Roosevelt
We have uncomfortably high unemployment. We want that to come down. We also have an uncomfortably high deficit. That needs to drop too. What we need is a plan. One that can do both. One that can work.

Our new House majority has loudly pushed focusing on the deficit with budget cuts. The trouble, as I've previously shown and discussed in relation to specific budget cutting figures, is that any significant budget cuts are very, very likely to steer us into far higher unemployment. That would further reduce tax revenues and make the deficits worse. So that just won't work. We can't get rid of the deficit by chopping growth and making the deficit worse.

What can we do?

Well, what happens if we maintain the status quo? What happens if we proceed with spending at the exact dollar amount it is now, keep tax rates exactly where they are, and manage to keep the pace of growth at the roughly 3% estimated for 2011? (Note that spending is scheduled to shrink in 2012 with the expiration of stimulus programs and the winding down of expensive wars. So this assumes we actually spend more than is currently expected for some of these years.)

Deficit/surplus assuming budget holds steady, 3% GDP growth, and revenue stays at the current 14.81% of GDP
Interesting. We'd have a surplus by 2029 at that rate and could start reducing our debt. That's without budget cuts. That's even assuming more spending for at least one of those years than is currently projected. We'd all love to see that budget gap closed sooner, but that's going in the right direction.

OK, how can we speed that up? What happens if we go back to the 30-year average of revenue as a percentage of GDP starting in 2012 but keep all else as before, with spending staying at the 2010 dollar level and a 3% GDP growth rate?

Deficit/surplus assuming budget holds steady, 3% GDP growth, and revenue goes back to 18.2% of GDP in 2012

A bit better. That'd have the surplus and its potential paying down of the debt begin in 2022. But let's try for more. What happens if we go back to the 30-year average of revenue as a percentage of GDP starting in 2012, keep spending at the 2010 dollar level, and find some way to increase our growth rate over 3%? For the sake of charting, let's imagine we get it up to 4% in 2012, peak at 5% in 2013, and then manage 4% thereafter.

Deficit/surplus assuming budget holds steady, but revenue goes back to 18.2% of GDP and avg. 4% GDP growth from 2012
That's more like it, don't you think? If we could achieve an average 4% GDP growth over that time, we could be seeing revenue eclipse spending in 2019, assuming we keep spending at the dollar amount from 2010 and return revenue back to the 30-year average of 18.2%. That's just 8 years from now. I don't know about your kids, but that's even before my older daughter will start college.

That's fairly vague, I'll admit. I've left a lot of room for what exactly those efforts to increase the rate of GDP growth might be. Where to get the money? I'm not a defense expert, but even some conservatives are suggesting we have some fat to trim in the defense spending. Imagine if we took those proposed cuts on spending beyond what the Pentagon actually needs to do its job and transferred that money into real job creation programs.

Off the top of my head, I can come up with several ways we could be doing more to create jobs through our Federal govt:

  1. a reborn national Civilian Conservation Corp chartered for 5 with potential to renew
  2. repairs to all of our crumbling bridges (and maybe revamping some roads too)
  3. high tech research towards "green" energy and products
The first two of these would easily pay off right away. We've got a lot of unemployed construction workers, and it shouldn't take a terrible lot of retraining to put a lot of them to work in a CCC or on improving our transportation infrastructure. The research part might take a bit longer to get going, but the pay-out would go even further. Well beyond when we might have brought our unemployment down using a CCC and beefed up infrastructure projects, we could be benefiting from jobs and sales in exporting of green tech, just like we've benefited from Defense Department and NASA research in our computer industry. That's investing prudently in a future for our children.

It's time.

Saturday, January 15, 2011

GOP Seeks Lower GDP

Rand Paul in Louisville by Gage Skidmore; no affiliation to this site
Sen. Rand Paul
Sen. Richard Shelby (R-AL) feels we can cut 30% across the board. Or maybe 10%. According to Ben Armbruster of ThinkProgress, "It is unclear which reduction figure, 10 percent or 30 percent, he is officially advocating." On ABC's "Top Line", Rep. Michele Bachmann (R-MN) says that she's found "about $450 billion worth of cuts." That'd be around 12%. Sen. Mike Lee (R-UT) has talked about cutting the budget by 40%. Sen. Rand Paul (R-KY) strikes it at a balanced budget, which means roughly 33%.

As previously detailed, when we cut the budget to avoid borrowing, those cuts don't come from nowhere. They come out of spending, reducing demand, lowering our nation's GDP. In good times, that's fine. When GDP growth is high enough, we can afford to cut. But we can't afford to drop our growth below around 2.5%. Otherwise we get rising unemployment. One would hope that these members of Congress understand national budgets, have done the math, and wouldn't propose a drop that would take us below 2.5% GDP growth, right?

So what would each of those figures mean? We can plug these into a rough formula. Some of the lower estimates figure the government around a 25% share of GDP. To give these members of Congress the most benefit of the doubt, we'll go with this low estimate. So when you cut government spending by a percentage, you effectively cut the GDP (or more precisely lower the percentage change in GDP) by roughly 1/4 of the percentage by which government spending was cut. Applying Okun's Law (or Okun's Rule of Thumb), we can expect roughly a 1% drop in employment per 2% reduction of the GDP growth below 2.5%. It's a rough figure, but it tells us more or less what we should expect.

Govt budget cut % / 4 = -% GDP impact

Our baseline is 3%. Why? That's a typical estimate for our GDP growth for 2011. Since the stable point for unemployment is around 2.5%, we might theoretically be able to take about a 0.5% drop in GDP without adding more to the unemployment roster and reducing our payroll tax revenue (thus increasing the deficit).

Let's start with the most modest of these, Sen. Shelby's 10% (assuming he didn't really mean 30%).

10% budget cut / 4 = 2.5 % GDP impact
est. 0.5 % GDP meaning 1% added to unemployment rate

Well, that's not very pleasing. So what do we get from the others?

Rep. Backmann's 12%:

12% / 4 = 3%
est. 0% GDP meaning 1.25% added to unemployment rate

Sen. Paul's 33%:

33% / 4 = 8.25%
est. -5.25% GDP meaning 3.875% added to unemployment rate

Sen. Lee's 40%:

40% / 4 = 10%
est. -7% GDP meaning 4.75% added to unemployment rate

So just how much unemployment do they suppose we can handle? Either the answer is above, or they just don't realize that their slash and burn plans would raise unemployment. Even the most modest of them would cause unemployment to rise at this point of not particularly fast growth.

Meanwhile, each of these increases in unemployment would mean fewer people on payrolls. That means less income tax revenue. Since a drop in revenue doesn't generally cause our costs to drop, that means that assuming we went with Sen. Paul's balanced budget, we'd build ourselves a brand new deficit because of that extra almost 4% tacked onto the unemployment picture. So to use Sen. Paul's "ironclad" balanced budget rules, we'd have to make further cuts. Assuming nothing else rescued our GDP from outside, that'd mean a further drop in GPD and more unemployment. Let's not do that. Not now. Not while we don't have enough growth to afford cuts.

Wednesday, January 12, 2011

Gun Stances

In the wake of the assassination attempt on Rep Giffords that turned into a mass shooting, it is only natural that we're all reminded of the repeatedly forgotten issue of gun control.

"Is there a good reason to have 33 bullets loaded in a handgun?" - Sam Stein

There have been repeated mentions that Giffords herself is a gun owner and "strong supporter of the Second Amendment".  At least one news reporter has made remarks claiming that Rep Giffords ironically supported the right of the shooter to buy the very gun with which she was shot.  Take from it what you will, but that doesn't seem to be the exact case.  The gun used was a Glock 19 semi-automatic with an extended clip.

Here's a line item from the list of principles Rep Giffords indicated regarding gun control:

"Ban the sale or transfer of semi-automatic guns, except those used for hunting."

Does anyone really think that pistol is hunting gear?  If not, you can't honestly claim Giffords supported the availability of that specific weapon just because she is a "strong supporter of the Second Amendment".  While she has supported the right to own guns and owns one herself, she is on record for opposing specific guns, including semi-automatics.

Of course, we shouldn't necessarily base our policy on Rep Giffords' stance just because she was shot.  And even if the shooter had not been able to get a semi-automatic, he might still have shot Rep Giffords.  But we should be aware that if semi-automatic guns had been banned according to her stated stance -- or even if extended magazines such as the one that allowed him to load so many bullets at once were still illegal -- it would have made it significantly harder for the shooter to kill and injure as many people as he did without having to reload.  After all, it was when his first magazine ran out of bullets and he tried to reload with a second magazine that he was tackled and disarmed.

Tuesday, January 11, 2011

The Cost of Cuts

To break even on employment, we need around 2 or 3% growth in GDP.
"Putting this in our current context we can see that growth has to do two things. First it has to cover, or absorb, growth in the workforce due to population changes. A good rule of thumb in the US is that GDP needs to rise by about 2.5% for unemployment just to stay even with such changes." from "Sticky unemployment – Okun’s Law" by Peter Radford
Our GDP, the amount of goods and services we produce, comes from the amount that is spent on American goods and services ... the supply rises and falls to meet the demand. Of that spending (or demand), private sources (individuals and corporations) spend only a portion of the total that makes up the GDP. The government also spends, and that spending makes up a portion of the total demand for goods and services.

Supply doesn't discriminate. Supply is blind to the source. It doesn't care whether the demand comes from private or public sources. No matter what portion of the demand comes from each, supply doesn't care about anything other than the total. If the total demand rises, supply will meet it and require more workers to do so. If the total demand falls, supply will meet it and require fewer workers to do so.

Government's share of GDP has mostly risen over the years, although not in an exactly straight line. Some hate this fact; but whether you call it positive, negative, or neutral, there it is. Government's shared of GDP has been estimated at 25% (or even 43.85% by one source) for 2010. For the sake of avoiding any exaggeration of the impact of government spending cuts, let's go with that smaller 25% figure. At 1/4 of GDP, a 10% cut in government spending would mean about a 2.5 % reduction in GDP. Let's simplify the numbers so that is easy to see. Imagine if we had a total GDP of 100 million dollars and 25 million of that were from the government:

100 - (25 * 0.10) = 100 - 2.5 = 97.5

So there you have it, a 10% cut in govt spending would shrink our GDP by 2.5%. Of course, this assumes that what we're cutting is to make up for deficit spending, i.e. govt foreign borrowing. Considering that the main reason there's talk of cutting government spending in the US is to reduce foreign borrowing, that seems a safe assumption. Borrowing brings in money from outside, so a reduction in debt-based spending does not get offset inside the system. If we had a balanced budget and were cutting spending in order to lower taxes, the offset might just be shifted from public to private spending. But that's not where we are. We're looking at cuts to reduce the amount of GDP we cover by bringing in money from outside, which means we'd reduce the total spending in the system, the total demand, the total GDP.

But what does it mean to have a cut in government spending reduce our GDP? This brings us back to that minimum GDP growth of about 2.5% in order to keep employment stable. Estimates vary, but many forecasts for 2011 US GDP growth are around 3%. So if we cut our government budget by about 10%, that'd subtract 2.5% and give us a GDP growth of about 0.5%, which is roughly 2% below the level needed to sustain stable employment. That means we'd have rising unemployment. Of course, rising unemployment lowers payroll tax revenues. Dropping payroll tax revenues increase the deficit. Deficit increases make people think about cutting more from the government spending. See how this could spiral?

To balance the 2011 budget, we'd need to cut government spending by about $1.27 trillion. The total spending for 2011 at this point is estimated around $3.83 trillion. This means that we'd need to cut the budget by around 33% in order to balance revenue with spending.

Assuming the lower 25% share of GDP, thus less impact, a 33% drop in government spending strictly to avoid taking on more debt would slash 8.25% from our GDP.

100 - (25 * 0.33) = 100 - 8.25 = 91.75

Downward spiral
Pulling 8.25% from our GDP growth would leave us with a GDP growth of around -5.25 for 2011, which is a severe contraction. Remember that we need around 2.5% growth to keep unemployment stable and higher than that to see a reduction in unemployment. So with a -5.25% contraction in GDP, unemployment would go up, up, and up some more. That rising unemployment would promptly lower our revenue (and increase our costs for the unemployed) and give us a deficit again. That deficit might make people cut more, which would lower our GDP further and bring more unemployment.

"What you see is that unemployment tends to fall when growth is high, rise when it’s low or negative. You also see that growth has to be fairly fast — more than 2 percent — just to keep the unemployment rate from rising. Why? Well, productivity is rising, so that you can produce any given level of output with fewer workers; so output has to rise to keep employment from falling. And the working-age population is growing, so you need positive employment growth just to keep unemployment from rising." from "Growth and unemployment" by Paul Krugman

Bad recipe. Clearly, we can't cut our way out of this deficit. We have no choice but to find a way to grow. If we had high GDP growth (like 7%), we could to cut meaningful amounts (like maybe 10%, assuming 7% GDP growth), and still have rising employment, reducing unemployment. Rising employment would also mean more payroll tax revenues, thus lowering the deficit directly. Growth such as this is the only way to spiral upwards. During slow growth, cuts force a downward spiral.

We can't afford cuts. We have to find a way to grow.

Monday, January 10, 2011

Stop Whipping Up Crazy People

What we need to look at goes beyond just a single shooting, horrific as that shooting may have been. That particular shooting might have been coincidental to the violent, inciting language that's been gathering steam for years. Maybe. Maybe not. But either way, it was made less surprising by all the violent, inciting language, whether that particular one was actually incited by it like others had been in the past.
"...Republicans need to stop whipping up crazy people with violent political rhetoric. This is really not a hard concept to follow. There are crazy people out there. Stop egging them on."
from "Day 2- The Excuse Making Begins"

Gabrielle Giffords about Sarah Palin's gun imagery and about attacks on Democratic offices including hers. A radical blog poster claimed responsibility for inspiring the breaking of the windows with one of his posts inciting people to smash windows in Democratic offices.

We don't know enough about Loughner's motives to be certain of why he did it. The details of the extremist Web sites he is alleged to have visited have not been released. We don't have anything beyond conjecture to go on as to whether he watched TV or listened to the radio, let alone whether he followed any specific media personalities. The challenge of considering "why" has been made even harder by fake pages on the internet claiming to be Loughner's but posted after the shooting. From his actual pages, we know a few things. Loughner posted about wanting a currency on the gold standard. Loughner talked about mind control. Loughner's favorite book listing includes Mein Kampf and the Communist Manifesto. Loughner rambled about "read the United States of America's Constituti­on to apprehend all of the current treasonous laws" and "Every police officer in the United States as of now is unconstitutionally working". Loughner posted, "Don’t trust the current government, listener!"

Again, we don't really know where he got these things. Here are some interesting points that may be strictly coincidence.
  • Glenn Beck pitches gold regularly, both the gold standard for currency and buying plain old gold directly.
  • Glenn Beck talks about government "mind control".
  • Glenn Beck frequently talks about Mein Kampf and recommends reading it.
  • Glenn Beck talks about Communism quite frequently. While I'm not sure he's actually recommended reading the "Manifesto," he certainly seems obsessed with it.
  • Glenn Beck talks about his political targets allegedly "...doing all these little usurpations of the Constitution..."
  • Glenn Beck talks about broken faith in government and not trusting government.
It isn't conclusive. It's not like Loughner explicitly called himself a Beck follower. But it's not a big leap. And, it has happened before. Does that mean Beck is responsible for Loughner? Maybe not. It certainly doesn't mean as much as the verified influences Glenn Beck has had on other violent people. So why bring this up now? Because it's time -- well past time -- to pay attention to the consequences of Glenn Beck's message. Even if Loughner weren't related, there needs to be more widespread repudiation of Glenn Beck before the next unstable would-be martyr for Beck's causes loads up his guns and drives off to try to start a revolution in a mad attempt to bring down our duly elected representatives. That truth doesn't depend on the specifics of just one unstable man. It has been proven by several including Byron Williams, Richard Poplawski, and Charles Alan Wilson. How many more of Beck's followers must we see attempt or achieve violence to make the pattern clear?

Regardless of what we eventually find out about the motives of Loughner, it is certainly prompting some perhaps overdue thought about civil discourse in our society.
"Last spring reported on a surge in threats against members of Congress, which were already up by 300 percent. A number of the people making those threats had a history of mental illness — but something about the current state of America has been causing far more disturbed people than before to act out their illness by threatening, or actually engaging in, political violence.
And there’s not much question what has changed. As Clarence Dupnik, the sheriff responsible for dealing with the Arizona shootings, put it, it’s “the vitriolic rhetoric that we hear day in and day out from people in the radio business and some people in the TV business.” The vast majority of those who listen to that toxic rhetoric stop short of actual violence, but some, inevitably, cross that line."
from "Climate of Hate" by Paul Krugman
It's great that people are thinking about the prevalence of incitement and discussing it. But will this cause the hate mongers to truly stop? Or will they just take cover for a bit, pause, pretend to be all peaceful and anti-hate ... until it all blows over and then start back up again?

Sunday, January 9, 2011

Private Payroll Employment picture

Quite the picture...

Speaking of job growth, in Repealing the Affordable Care Act will Hurt the EconomyStephanie Cutter, Assistant to the President for Special Projects, says that repealing health care would be "Preventing 250,000 to 400,000 jobs from being created annually over the next decade." Part of the reason why:
"The law reduces small businesses’ health care expenses by giving them $40 billion worth of tax credits,and through the creation of new, competitive state-based insurance Exchanges. Exchanges will enable individuals and small businesses to pool together and use their market strength to buy coverage at a lower cost, the same way large employers do today, giving them the freedom to launch their own companies without worrying whether health care will be available when they need it."

Saturday, January 8, 2011

Improvements to Education Benefit for Veterans

On the Post-9/11 Veterans Educational Assistance Improvements Act of 2010, "“The young men and women in the Armed Forces provide an incredible service to our nation,” said Senator Akaka, a World War II veteran who attended college on the original GI Bill.  “With the signing of this bill, young veterans will now have an easier time utilizing the education benefits they have earned.  I applaud President Obama and my colleagues in Congress for enacting this important legislation.”"

from "President Obama signs Post-9/11 Veterans Educational Assistance Improvements Act into law"

Innovation Please

The COMPETES Act "...represents a major milestone on this Nation’s path to building an innovation economy for the 21st century—an economy that harnesses the scientific and technological ingenuity that has long been at the core of America’s prosperity and applies that creative force to some of the biggest challenges we face today. Whether it’s developing new products that will be manufactured in America, or getting and using energy more sustainably, or improving health care with better therapies and better use of information technology, or providing better protection for our troops abroad and our citizens at home, innovation will be key to our success. And that is exactly what the COMPETES Act is all about."

from "America COMPETES Act Keeps America's Leadership on Target "

Don't turn back the clock on health care

"As a new Congress takes office today in Washington, Republican leaders have made it clear that their first priority is to repeal the new health care law. I can't think of a worse idea for American families.

The law is giving Americans more freedom in their health care choices. It's freeing families from the worry that they'll lose their benefits when insurers unfairly cancel or cap their coverage. It's freeing children with disabilities and pregnant women from being discriminated against by insurers because of their health status. It's freeing seniors to get the care they need, whether it's a prescription medication or a preventive screening like a mammogram. It frees all of us to look for a new job or start our own business without worrying about losing health coverage.


from "Don't repeal health care law" by Kathleen Sebelius, the secretary of Health and Human Services

Friday, January 7, 2011

Tea Party: What would the Bostonians have done?

"Today’s “Tea Party” movement arises in a moment of far greater corporate misfeasance and political corruption.  However, it remains curiously silent on even the most shocking corporate crimes and depredations.  These misdeeds have been made possible by deregulation, weak oversight, cozy relationships among government officials and lobbyists and executives, and the capturing of regulatory agencies by the regulated industries.  A Tea Party that lived up to its honorable name today would have spent the 2010 election demanding that the government bring to justice the large corporations that caused far more harm to Americans over the last decade than the East India Company ever did.  It would have insisted on criminal prosecution of the CEOs and executives who engineered the sub-prime mortgage crisis through securities fraud and predatory consumer practices and brought millions of Americans to the brink of foreclosure, homelessness, unemployment, and financial ruin—and then pushed them over."

from "Corporate Infusion: What the Tea Party’s Really Serving America" by Jamie Raskin, a professor of constitutional law at American University’s Washington College of Law, a Maryland State Senator (D-20), and a Senior Fellow at People for the American Way

Tuesday, January 4, 2011

Austerity in Modern History

"Those who cannot remember the past are condemned to repeat it" - George Santayana
On the Dylan Ratigan show, Mark Ames, founder of, describes what happened in the Weimar Republic when they implemented the measures that the GOP are currently pushing in America::

"The incoming Republican congress is promising to deliver a megadose of austerity this year and the media and financial elites are telling us we need a major dose of austerity for our own good, whether we like it or not. But what none of the dictionaries or politicians or financial experts are telling us us is that austerity's been tried before -- many times, which might make you think "Oh great, so it's been tried and it works, right?" And that's where things get a little tricky. For example, one of the most infamous austerity programs was tried out in Germany in 1930 by Chancellor Bruning, one of those fiscal responsibility buffs who was sure that the answer to Germany's economic problems was to balance the budget and strengthen the currency by slashing unemployment benefits, pensions, and wages, hiking taxes, and sticking to the gold standard. The result: unemployment exploded, riots in the streets, the collapse of democracy, and the rise of Adolf Hitler. The rest is history. But hey, at least he got that deficit under control."
(Ames also added a further example that he witnessed first hand, the total collapse of the Russian economy in the 1990s after they implemented austerity measures.)

Republicans are fond of referring to the Weimar Republic whenever they're fear-mongering about inflation and advocating the ransacking of our social safety net. What they don't mention -- perhaps cannot remember -- is that the Weimar Republic coped with its inflation and stabilized its currency. It was not their hyperinflation that caused the demise of the Republic by descent into fascism.

Not that inflation was nothing. The hyperinflation was painful. And it was used politically. But the Republic survived the inflation itself, handled the situation, and got on with life after the hyperinflation with a currency that had been mostly stable for years after the reset of 1923/1924 established the Reichsmark. They didn't just achieve stability. The prosperity of the Roaring Twenties ran beyond the United States. In the latter 1920s, Germany also boomed after the hyperinflation under the Weimar Republic.

Then the Great Depression hit, giving the Nazi party more discontent with which to work. Then Chancellor Brüning slashed and burned what remained of the German economy with austerity programs. In theory, austerity was meant to deal with the financial problems of debt and the Great Depression while avoiding a return to inflation. But it was those austerity efforts and their side effects that collapsed the Weimar Republic and the launched Germany into fascism.