Economic
Recovery Issues for Dummies
Federal Deficits and Debt for Dummies
Economic
Stimulus-Investment Package for Dummies
Federal Deficits and Debt for Dummies
Conservatives
are continually complaining about the federal deficits resulting from the
bailouts, stimulus-investment package and President Obama’s proposed 2010
budget. Even though most never
complained about the deficits during the Reagan-Bush-Bush years.
President Bush left much larger deficits
than are apparent from looking at
deficits during his presidency. He left
the economy is such bad shape, that if nothing was spent to stimulate our
economy, the deficits would have been enormous for many years to come. Production and tax revenues would be down and
social support expenditures would be up.
Future generations would face large federal budget deficits and also
large infrastructure deficits and a tattered social safety net. Thank goodness that John McCain wasn’t
elected.
President Obama’s stimulus-investment
package and proposed 2010 budget will actually produce a lower debt than result
if the do-nothing alternative were pursued. Fixing a leaky roof costs
money, but more would be spent later if the roof wasn’t fixed. The major imperative is that the money spent
on bailouts to increase investment credit, stimulating jobs, maintaining and
enhancing physical and social infrastructure, and providing financial security
(through health, work, retirement and other reforms) be cost-beneficial to
reduce the costs of unemployment and reduced entrepreneurship.
Instead
of increasing our long run federal deficits and debt, President Obama is
decreasing them. Incidentally, President
Clinton’s budgets would have all been balanced, if the interest paid on the
Reagan-Bush dept were excluded.
Economic Stimulus-Investment Package for Dummies
To stimulate the economy, we need people to quickly spend money to provide
demand for goods and services, such that providers will create more jobs. The poorer people are, the more likely they
are to spend any money they receive.
Excellent stimulants are increasing the minimum wage, the earned income
tax credit, unemployment payments, food stamp payments, and tax reductions for
low income persons. These add to our
safety net. They stimulate private
businesses to provide more jobs. They
may contribute some to making our economy more efficient through enhancing our
human resources (infrastructure).
Investing money in shovel-ready
infrastructure projects also quickly creates jobs, some public and some
private. In addition, repairing and
building new roads, bridges, dams, buildings, public transit, communications
and other infrastructure, conserving energy and creating and implementing
non-carbon based energy production make our economy more efficient. Assuming that these infrastructure projects
are helpful instead of make-work or even harmful.
Investment in slower to start
infrastructure projects doesn’t provide immediate stimulus. It would be justified by improving the
efficiency of our economy.
Providing funds to wealthy
people or companies that will not spend it is a waste of stimulus money. We must also be wary of incurring long term
obligations, which can’t be met in future economic downturns. Our regular budget should provide for
permanent increases in government spending on child, disabled and elder care,
education, and health. Note that while
government spending on health should go up, spending to buy private health
insurance should decline or be eliminated, for a net reduction in national
health spending. For more.
To obtain enough votes from
Republican Senators to pass the stimulus-investment, the stimulus-investment
package was modified from the House version to provide more home and auto
purchase tax credit stimulus and less investment in state, local and education
projects. For
a comparison. For more. Paul Krugman
has criticized the Senate version.
California Senator Barbara Boxer defended the compromises as necessary
to pass the bill. More
commentary.
Dean
Baker: How we changed from Earning to Borrowing and how to start back
Federal Budgeting for
Dummies
In general, funds for Federal Government programs
must be authorized by an authorizing
committee through enactment of legislation. Then, through subsequent acts
by Congress, budget authority is then appropriated by the Appropriations Committees of the House and Senate. In principle,
committees with jurisdiction to authorize programs make policy decisions, while
the Appropriations Committees decide on funding levels, limited to a program's
authorized funding level, though the amount may be any amount less than the
limit.
In practice, the separation between policy making
and funding, and the division between appropriations and authorization
activities are imperfect. Authorizations for many programs have long lapsed,
yet still receive appropriated amounts. Other programs that are authorized
receive no funds at all. In
addition, policy language -- that is legislative text changing permanent law --
is included in appropriation measures.
The way
Congress develops tax and spending legislation is guided by a set of specific
procedures laid out in the Congressional Budget Act of 1974. The centerpiece of
the Budget Act is the requirement that Congress each year develop a “budget
resolution” setting aggregate limits on spending and targets for federal
revenue. The limits set by the budget resolution, along with a companion
“pay-as-you-go” rule, apply to all tax or spending legislation developed by
individual committees as well as to any amendments offered on the House or
Senate floor.
· The annual federal budget process
begins with a detailed proposal from the President in February. For more detail.
· Congress next develops an authorizing blueprint called a budget
resolution that sets limits on how much each committee can spend (or reduce
revenues) over the course of the year.
This authorizing budget resolution is for guiding congressional
appropriations committees and is not subject to presidential approval.
· The terms of the budget
resolution are then enforced against individual appropriations, entitlement bills, and tax bills on the House and
Senate floors.
· In addition, Congress sometimes
uses a special procedure called “reconciliation” to facilitate the passage of
deficit reduction legislation or other major entitlement or tax legislation.
· Finally, a companion PAYGO rule
helps ensure that tax cuts and entitlement increases are paid for and do not
add to the deficit. However, the PAYGO
rule is not now in effect. It may be
reinstituted after our economy recovers.
President Obama’s Budget
Less
than two months after taking office, President Obama has presented his preliminary 2010 budget, which
provides the rationale for the 2010 budget, including 10 year projections, with
proposed budget amounts for 2010 and following years. Our house and senate are now deciding upon
authorizing budgetary limits. The budget
resolution should be passed by April 15th.
For
our 2010 budget year, the limits that
are being decided appear to be largely in agreement with President Obama’s
proposals. Congress members who are
most concerned about large budget deficits, even if temporary, have
proposed eliminating or delaying authorizing 2011 funds for health care reform
and cap and trade emissions control system.
Depending upon economic recovery and politics, these funds might be
restored next year when the 2011 budget is decided. They are also attempting to reduce
the 2010 budget by about $100 billion.
In
May, President Obama will present a much more detailed budget. Congressional appropriations committees are
already deliberating authorizations.
Congress hopes to pass all of its appropriations bills by the August recess. Or at least before the October 1st
beginning of our 2010 fiscal year. If
some bills are not passed by then (as has been typical in recent years),
continuing resolutions will be passed to continue spending much as they were
during the 2009 budget year.
So
far it appears that the Republicans will just say no to Democratic proposals,
such that the budget will be decided by Democrats. If enough Republican senators can not be
found to reach 60 votes, a
procedure may be used which requires only 51 votes, with our vice president
voting to break a tie.
Bailouts for Dummies
As I have studied bailouts,
the alternatives seem very complicated.
But I finally have come to realize that the underlying reality is fairly
simple. Driven by infectious greed,
almost all large financial companies speculated in mystery securities (with
underlying mortgages or other assets of unknown value). Based on the market value of these assets, most of these companies are now insolvent.
To bail out (make solvent)
these companies, our government must buy the mystery securities at more than
their market value or otherwise give money to them. If our
government does not bail them out, they will become bankrupt, their
stockholders wiped out and their assets sold at market value. If our
government does bail them out, our tax payers will take a beating. The unlikely exception is if we purchase the
mystery securities for more than they are worth, but manage them so that over
time, they become more valuable. For a succinct
analysis by Dean Baker. Read
about Tim Geithner’s BARF (Bad Assets Relief Fund).
So the question is, “Do we need these financial
companies to survive, at great expense to our government and ultimately our
taxpayers?” As we reduce our speculation and consumption,
we have less need to borrow. Can’t we rely
on local and regional banks and credit unions which are solvent (due to not
participating in speculation in mystery securities)? To provide the credit that we do need for
appropriate consumption and investment by qualified borrowers. Can’t our government loan money to them, to
augment their ability to loan at appropriate levels? For
more.
Unfortunately, many of the
stockholders that will be hurt by the collapse of large financial companies are
mutual and retirement funds, in which many of us have placed our savings. Driven by our desire to maximize returns, we
have unwittingly become speculators. Not
wanting to allow our speculative gains to disappear and to save their cronies,
our government has provided bailouts. As taxpayers, we don’t like bailouts. As speculators, we favor them. We will all be better off in the long run
without bailouts. If we bought or refinanced
houses our bought stocks directly or indirectly, we will be better off in the
short run with bailouts. The major push
for bailouts comes also from financial companies and their stockholders who
benefited from their leveraged speculation and then lost when the bubble
popped.
Note that our highly
leveraged speculative credit bubble is much like a Ponzi scheme. As earlier speculators made money, more
companies, funds and individuals joined.
Until finally there were no new entrants and the weakness of the whole
scheme was revealed. As with Madoff,
many of the victims were unaware that they were speculating. They were attracted by various enabling funds
which took their money and speculated with it.
AIG Bailout for Dummies
Large
financial companies made highly leveraged purchases of mystery securities
composed of bundled mortgages. They then
purchased insurance from American International Group (AIG) to protect them
from the failure of these securities.
Without regulation and assuming that (since housing values would
continue to increase) the securities could not fail, AIG sold insurance without
reserves which insurance companies need to assure payment of claims.
Failure
of the mystery securities held by large financial companies triggered their
insurance claims against AIG, well beyond what AIG can pay. To keep the large financial companies (which
are customers of AIG) from failing, our government is providing billions to AIG
so that it can pay the claims. These
funds are not so much saving AIG, as they are passing through to save large
financial companies, both American and foreign.
An
alternative would be to let AIG default on their claims, and then directly bail
out the large financial companies which are affected, at least those which are
needed to provide credit. Also important
to note is that many companies purchased AIG insurance as a gamble instead of
as protection from any loss. Just as if
you bought insurance on a neighbor, not because the neighbor’s death would
cause you any loss, but because you thought you would make money if your
neighbor died earlier than the insurance company expected. When we bail out AIG, we are also bailing out
gamblers. For more. For
more.
This
actually seems fairly easy to understand.
So why are we bailing out AIG instead of only the financial companies
which might be needed to buy credit? How
can we justify bailing out speculators who serve no public purpose?
Unfortunately
both the Bush and Obama people who are dealing with our credit crisis have a
Wall Street mindset, fueled by their past experiences in working for or with
large financial companies and/or by lobbyists for these firms. Most of our congress members (especially
those on relevant committees) have also been bought and paid for by these
lobbyists. I wish that less biased
experts such as Dean Baker, Robert Kuttner, Paul Volker, Joe Stiglitz, James
Galbraith, Paul Krugman and George Soros were playing a larger role in our
attempts to restore appropriate levels of credit. To prevent future credit collapses, we
need to ensure that no corporation becomes too big to fail. And that larger ones are prevented from
taking risks which could harm our economy.
Senator Bernie
Sanders says bailed out firms shouldn’t charge usurious credit card rates.
Earnings for Dummies
The wage ratio is defined as the relationship of incomes from dependent work (employee
payment) to the national income and is an important indicator for the
functional income distribution, i.e. the distribution of the national income on
the factors of production "work" and "capital". It is
well known that earnings have not kept up with productivity gains since
1973. I have unsuccessfully spent
several hours web-browsing to find statistics necessary to detailing the
changes in the wage ratio from 1945 to the present. I did find the following relevant commentary.
Dean Baker’s
commentary The
Productivity to Paycheck Gap: What the Data Show shows that from
1948 to 1973, average annual productivity increased 2.72% while real wages
increased 2.23%. From 1973 to 2006,
average annual productivity increased 1.56 percent while real wages increased
0.02%
Baker stated that:
“After making all the appropriate adjustments, there is still a large gap
between the rate of usable productivity growth and the rate of growth of hourly
compensation for the typical worker. Over the period from 1973 to 2006, median
hourly compensation rose by 20.1 percent while usable productivity grew by 47.9
percent. This indicates that there was still a very substantial upward
redistribution from typical workers to profits and high paid workers.
This redistribution
was the result of a number of policies that were supposed to increase
productivity growth, such as the removal of trade barriers, the deregulation of
major industries (e.g. airlines, trucking, telecommunications), and less union-friendly
labor rules. However, usable productivity growth remained far lower than in the
early post-war period throughout the period from 1973 to 2006. Even in the
period following the productivity upturn in 1995 the rate of growth of usable
productivity was still 1.2 percentage points lower than in the early post-war
period.
While it is possible that
productivity growth in the years since 1973 would have been even slower without
these policy changes, they clearly have not succeeded in boosting productivity
growth back to rate for the years from 1947 to 1973. If the economy had
sustained the early post-war rate of usable productivity growth rate in the
years from 1973 to 2006, the level of usable productivity would be more than 80
percent higher today. This would have allowed for substantial increases in
wages and/or leisure.”
As Baker stated, instead of
going to workers, the productivity gains went to profits and high paid workers
(i.e. executives). Some of the profits
were distributed to stockholders. Others
went to service debts, often the result of real or threatened takeover
attempts. Ultimately many of these
undistributed or distributed profits ultimately were used for speculation. For
more. For
more.