New Tax Breaks for the Rich Here in the USA, Part II

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I stumbled over this link searching for background info mentioned in another article. So this is actually a spin-off of my usual foreign policy interest. It includes two articles from the New York Times and the british Financial Times, both condemning the tax cuts. As the Financial Times put it nicely: "The lunatics are now in charge of the asylum".

Both articles here:

Well, adding the 87 billion for Iraq that were unknown at the time when both articles were written the prospects don't get better. And of course, the maniacs cry that the defence spending still isn't high enough.

So, to put these links in context with the article where I found the comments above referred to:

If you can't wreck the social system you despise because of strong opposition, you need to come up with a really good reason to justify it. A fiscal fiasco would be such a thing.

When the Neocons think they can transform the middle east by attacking Iraq into a terrain much more favourable for Israel, why shouldn't the fiscal ideologues in Bush's crew try to enforce the transformation of America into what they envision? An America without social system.

"Creative destruction is our middle name." sais Michael Ledeen. No one seriously thought the neocons would attempt to put into action their plans for the transformation of the Middle east. Well, with a look at Iraq, people should learn to take ideologues serious. Given the chance they exactly do what they proclaim.

Your opinions?

[ September 24, 2003, 20:16: Message edited by: Ragusa ]

 

The ideology is that the common people shall earn their money in the sweat of their brows. Everyone is responsible for his own welfare, a social system is not necessary. The productive have to get rid of the freeloaders; for them there is church charity.

Considering the crackdown on safety at work and environmental regulations (the tale of Bush and Kyoto) Bush's crew has a very straight policy. That reminds me of John Jay's "the people who own the country ought to govern it". They do.

 

I can't believe that an economist was so outspoken about this. Think about it, if the rich have more money, they'll flood more of it into the development of the economic infrastructure that supports everyone else. This, therefore, improves the standing of the economy, lowers the national debt, and improves the standard of living for the working class.

Spoken like a true capitalist. In some instances, the social welfare system is necessary simply to allow people to maintain their humanity, but yes, the freeloaders shouldn't be getting a free ride at our expense. I have long been a proponent of reducing government intervention in our economic system.

Actually, some of these social issues that we might be losing are responsible for some of the government's fiscal problems. I'll spare you the lecture on the economics regarding this.

Ragusa, some of those articles seem to be out of date. The U.S. economy is not in a downturn. We've been experiencing significant economic growth for three months now.

 

Unfortunately, for you, history is not on your side. The economy does best when companies are well-regulated and workers are well compensated.

Every single time corporations begin to accumulate excessive amounts of wealth the end result is abuse of citizens, investors, consumers, employees, and the environment - to quote Joe Conason.

The man who authored the above article, Paul Krugman, is a mild mannered Princeton professor - as well as an outspoken Bush critic. He has written numerous books including a collection of his articles documenting the failures of Bush economic policies entitled "The Great Unraveling."

Not everyone is happy with Paul Krugman's assessments. One of his assistant's daily duties is to delete death threats from his e-mail box.

 

Another interesting aspect of the current economical situation:

The US dollar has lost 17% versus the Euro in the last twelve months alone. Gold is getting popular again, despite the falling Dollar, that is a sign people feel unsafe.

The dollars you've earned last month are worth a full sixth less than they would be a year ago. It also means recent stock market gains aren't all that impressive after all. So blooming stocks don't mean growth in a time of ... inflation. And while the shareholders receive their dividends the spending power of the average people is shrinking.

And, as the tax cuts mainly benefit the rich they tax cuts can't revive the economy as the major spenders with the best "straying" of money infusion in the economy are the average people.

Bush is making tax cuts while he's spending money he doesn't has and the Dollar looses to the Euro. His claim that the tax cuts will fuel the economy and compensate for the loss of taxes is shaky to say the least. Considering this I can well understand the concern of the economists.

 

I'm not sure you understand the significance of the value of the dollar in relation to the Euro. You shouldn't assume strong = good and weak = bad - that's too simplistic.

The Euro debuted at $1.19 Last I checked, the exchange rate was within a 10% deviance from parity rate. I'm not bothering looking up the current exchange rate but last I heard there weren't drastic changes that would negatively effect the US overall. Europe may be a different matter though. It's the Europeans that seem largely concerned with what a weakening dollar would do to them where your post seems to imply it's just more bad news for the US. See some of the more recent G8 conferences for the concerns of the Europeans.

From a board I visit where this has been discussed since June, an exchange between an American and Dutch member:

In sum, it's a complicated issue that I'm thinking you may have shortchanged to pile more bad news on. It isn't clear this is bad news at all - indeed, some argue it is good news. If a weak currency were necessarily bad others wouldn't fight to keep their currency low or at least from rising too high.

I'd say the key word here is "well" and that there is a lot of wiggle room in that word.

Trying to blame economic problems on the president gets overblown imo as I've said before because the president doesn't control the economy. Blame him for things he has direct control over, like steel tariffs as a good example, but when he doesn't have control... He can yell suggestions and ask people with the power to do what he wants but he doesn't have the ability to DO it himself. The tax plan was supported by the administration and received support from both sides of the aisle. Everyone who voted for it can receive equal criticism IF criticism is deserved.

I see a lot of the domestic criticism as akin to people like Lieberman and Kerry being hyper-critical of Iraq while they voted for the war. Luckily Dean is around to call them hypocrites.

 

I don't blame the president for the actual economy. The point I wanted to make is that his program is, well, let's say unballanced - that is for the tax cuts.

The massive deficit is another thing. The money is lend and one day the donors will want to get it back. We in germany atm have a budged that pretty much ties us because of the interests (and that's not even the credits) we have to repay for financing both the cold war and the reunification. Increasing the deficit at such an astounding speed IMO is questionable.
The other problem here is the unemployment which is very costly. Our problem is not so much the economy itself but the efficiency - we don't *need* a lot of these workers as we have streamlined our businesses very well already. On mid term costs in our social sector unavoidably have to be cut and the resistance is stiff about that already. In any case, federal and local tax incomes are sinking, costs exploding and debts are to be repayed. Silly. However, there is light at the end of the tunnel and a slow growth is in sight. That is, for the economy, but it looks less rosy for the federal budged.

IIRC it has never worked to increase public spending in order to fuel the economy. It hasn't worked in germany under Brand and Schmidt and now again under Schröder and it hasn't worked under Reagan. After all the program isn't without risk, a government busy with prepaying debths is limited in it's choices.
Maybe so limited that costs have to be cut, like in the social system some conservatives loathe so much. That's not even that far off.

Sure, I'm a little pessimistic, but the prospects aren't as rosy as administration officials and their cohortes tell. I became sceptic about that at least after "we will be greeted as liberators". If the US economy suffers we will all suffer, the western economies are too interdependent.

 

Well, the weak Dollar is really a issue. But exchange rates are pretty complicated stuff. For one, the Americans are mainly consumers and not producers. Therefore a lot of business gets hurt world-wide, because American consumption of foreing goods gets down. And the other side is, a lot of Americans think for years that the high-Dollar is hurting and weaking them.

Another issue is the interdependence because Americans own a lot of stuff in Europe and Europeans own a lot of stuff in the USA, so. Like that French gaming company, Blizzard.

In the end, the problem for the US is, that going to a low-Dollar means a change of structure with them, because they import a lot and export nearly nothing (except, obviously computer games). Now, the question is, would the gain in export-industries offset the loss of import industries.

Interestingly, China and the Americans have a dispute, because the Americans want that the Chinese take steps to higher the value of their currency. Now, from an American perspective, they shouldn't look for Europe, they should look to their biggest and main creditor, China. So, compared to China, like earlier (or still ?) to Japan, the Americans are struggling to get the Dollar compared to them to a deeper value, to make them able to compete with them (that's the same for the "Euroweenies"). So, the rate-exchange dispute US-China is pretty interesting, I think.

Then, the "hostile" inflation game did only work once, back 2500 years ago in Athens, as one of those greek mathemicans had the idea, to lower the silver (or was it gold, cupper ?) of the coins about 1/7. Since then, everyone knows. If this continues, the European national-banks will take steps to lower the Euro.

Well, I disagree here. It worked in the 30ies for the Americans and the Germans. It worked after WW2 and it worked for Reagen. And honestly, I wished that my country would do the same in some areas as the Americans. Raise goverment spending. I was shocked, but acutally, the American goverment spend more per head-in-school then the Swiss do. And that is really worrying me. Worrying me big time.

 

I don't know that the US is the world's largest exporting nation but just for giggles I compared the US exports with those of a few other nations:

US - $687 billion f.o.b.
Germany - 608 billion f.o.b.
France - 307.8 billion f.o.b.
Japan - 383.8 billion f.o.b.
China - 325.6 billion f.o.b.
Russia - 104.6 billion f.o.b.
Canada - 260.5 billion f.o.b.

I obviously didn't check them all - did I miss any other contenders? Maybe Columbia or... well, I'd think a lot of the heavy hitters are there anyways.

A weakening dollar would reportedly increase the US number and may well decrease the number next to other nations - I think it said Germany exported about 10.5% of its goods to the US for example.

Anyways, *shrug*, that's a lot of computer games.

Edit - oh yeah, the U.K. - $286.3 billion f.o.b.

 

Confused generally, ahm, yes. Confused concerning the particular issue, ahm, no. As Laches post above shows, the US is mainly an importing, not an exporting country. So, infact, the value of the Dollar has to be adapted to its real value, i.e. lowered. But going from a keep him high to a push him low-policy, will not happen. The pro would be, that the trade-deficit, you mentioned it, would be decreased. Not by a big growth of exports, but by a big cut-down in imports. But I do not think that the US-domestics will appropve that. So, the way to go is, I guess, letting the Dollar slowly lower down to its real worth, instead of letting him crashing down. Besides, the goverment can't afford letting the Dollar slide down, they have an ongoing war to finance and to keep an economy going, now a big rise in interest rates isn't what most are looking for, I guess. Surely not a goverment which finances its budget through credits.

Well, I acutally overestimated the US-exports, I thought they would be way more then a 10th. But Italy is also member of the G-8.

Italy: $241.1 billion
Netherlands: $210.3 billion
Taiwan: $148.38 billion
Korea, South: $172.6 billion
Singapore: $137 billion
Spain: $120.5 billion

By the way, I guess that California is responsible for about 50% of the US-exports. So, Movies, Software, Electronics.

 

What are you talking about? I'm confused.

The numbers I listed and that you list have the US exporting more than anyone else. (CIA World Factbook by the way). That's precisely what BTA said. What do you mean, "way more than 10th?"

And what are you talking about California is 50% of all US exports? Where are you getting these figures? A two minute search makes it look like California in 2002 wasn't even the state with the highest % of US exports - that honor went to Texas with 13.8%. (I confirmed this with 2 sites because it surprised me; here is one:
http://www.eflorida.com/infocenter/trade/FLOriginAnnual/AnnualUSExportsbyStateofOrigin.pdf)

No state is anywhere close to 50% like you assert.

And a weaker dollar would make it easier for other nations to buy US goods increasing demand so of course it would increase the exports. And....

And the war stuff? And, and...

There is a disconnect here because I just don't get it. I'm tempted to think you vastly underestimate the breadth of the US economy.

 

In the long run a lower dollar might help boost the US economy a little bit but in the long run it is very very bad. Sweden managed to live high during the 80's by writing down and devaluing the krona but that came crashing down with a vengeance at the start of the 90's. I remember what it said in my economics book last semester about lowering the value of your currency: "it is kinda like peeing your pants, it is warm and comfy at first but it soon starts to get uncomfortable."
Even more so I think as the US as have been shown imports more than it exports, thus foreign goods gets more expensive which will drive up the inflation. One thing I am pretty sure of is that inflation higher than a percent or two is not a good thing. There is also the fact that the US dollar is considered to be the safest currency in this world, used by any countries in their cash reserve if the value of the dollar starts to get hollow they might change it to a stronger and perhaps in their eyes more reliable currency. This might lessen the influence the US can have on the countries whose currencies are linked to the dollar and their dependability on the US. Not to mention the fee that is paid to the US by those countries for the bills themselves which is not inconsequential.

 

Just a note: I don't think anyone is advocating letting or pushing the dollar to historic lows or anything. I don't think anyone wants the greenback to crash and burn.

The US has kept the greenback high for decades though and people are starting to say - 'hey, we're tired of pulling the cart. let's let the dollar slide a bit to a more natural level particularly during times when we could use a bit of a pick me up.'

It isn't an all or nothing proposition.

 

Ahm, no, I said that the US was mainly an importing, not an exporting nation. And the other one may be my lack of English. A tenth I ment. The world-wide exports are about 6 trillion. The US has an export value of about 600 billion, that is ~ a tenth of the whole. That means "tenth" isn't "10th" in this cases. My fault.


Now, my point is, the Netherlands is an exporting nation. The US is not. The US is about twenty-times bigger than The Netherlands, yet their exports are only three times bigger then those of the Netherlands.

That is true. But it's more complex then that. The first question is, with what goods would the Americans penetrate other markets versus Chinese, Japanese, Taiwanese, Indian, Canadian, Dutch, British, Irish, Finnish competition. People buying American cars ?

The second question is, how will other countries react with their currencies, wouldn't they adapt and drown their currencies. That's the main problem with US-China issue I mentioned. The Chinese will not tolerate a currency high valueted versus the Dollar. They simply will not.

The third question is concerning the other level currency-plays in. The US-goverments have pursued an active keeping the Dollar high policy. Because there are advantages in having a high-valued-currency. For one,it's getting goods cheap. And it is attractive for investors. Now, if the Dollar drowns, the Dollar looses attractivity, that is foreign investors will lose interest and go somewhere else. That will rise interest rates, for private persons and the goverment, which, I gather, has a huge bilance deficit right now.

http://www.usatoday.com/money/economy/2003-05-27-depression-cover_x.htm

It was a wild guess, and pretty far off, seemingly.

http://www.calchamber.com/index.cfm?navid=302

I think that's the software-electronics-movies from californa. Which I think are the biggest part of the exports to Europe. But obviously, I guessed them 5 times (assuming that the EU-exports of American goods are about 150 billion) as much as they acutally are.(That is, Silicon Valley IS in California ? right ?)

[ September 27, 2003, 00:22: Message edited by: Yago ]

 

Part of it. It's actually northern California into southern Washington.

Depends on how cheap they are. We've more or less caught the Europeans in car quality and our communications equipment tends to be better.

If American goods are significantly cheaper, then we won't be importers, that's for sure.

Our GDP is over 8 trillion dollars. If we're only exporting $600 billion, then obviously we're consuming a lot of our own stuff. If the dollar goes down in value, we'll consume more American goods and less imports.

 

That is a very elegant way to put it. A way I wasn't able to put it, obviously. So, yes, the US is not an exporting nation and the gains in export aren't the big thing for their economy. Because Exports would need to rise 100% and more.

So the problem is, rise in US-Exports want be able to balance the deficit. The deficit is about 0.5 Trillion. To balance the deficit with exports, the US would need to sell additionally goods for about 200 billion Dollars to the Canadians and the Mexicans for example. I do not think, that's likely to happen. This means, that the gains of the export-industry won't be able, to outbalance the losses of the import-industry. If this would be the case, no foreigner would be worried, that the Dollar would lower it's value, because obviously, there still would be enough consumption elsewhere.

So, that means the trade-deficit will mainly be balanced by less-importing. Less importing means less consumption. Less consumption because the Dollar is worth less, or on the other way, prices get high. That means Americans won't be consuming more American goods, they simple will consume less.

The problem is, goods aren't the only thing which are traded. Money is traded too.

That means the Portugal/England example is only one part of the picture: compartive advantage

If money wouldn't be traded (~ invested or borrowed), then the Dollar would never have gotten that high, because the Dollar value isn't reflecting the actual worth of production, which is shown in the trade-deficit.

And a trade-deficit of 0.5 trillion means simply that there is a credit in worth of 0.5 trillion. And the same for the year before, before and before. It's foreign investement into the US-economy. And that means that the Americans have more consumed then they actually could afford. So, and that's why so many want a lowering of the Dollar value, because it is seen as an unhealthy development. The Dollar would have to be get down to it's real level, which means that consumption will be reduced to an affordable level. (Which isn't too big a problem for the Americans good-wise, because they mainly consume their own).

So, in the long-term, the reducing of the Dollar is desirable for all. But it should be a slow-fall. Because in the short-term, there is no other world-region aviable to replace. Logically, there the Asians will replace it in the long-term, but the problem is, heavy short-term fluctuation will cause problems.

Problems for the exporting- nations in trade and the Americans in capital. Because they have borrowed a lot of money from the outside to finance their consumption (and the outside was happy to finance it). For exporting nations that means, that their market ceasses to exist. Which means less sells, and laid off workers.

For the Americans, the con would be, that foreign money would be taken out of the Dollar, that means foreign capital-investments would flow away, meaning people in the US looking for investment would have to pay more money for the money they get, which means interest rates will rise. Which means prices will rise, consumption fill fall, which is the long-term healthy goal.

here

So, in the whole, there is a world-wide overproduction (and over-consumption), which would either have to be reduced now (recession) or one has to wait and pray for the Asians and Americans to grow faster, making the overproduction a production adapted to reality.

And commend to Europe. Europe is only a small part of the world. The world turns around the east of the Euroasian continent, not the small part on the western shore.

[ September 27, 2003, 16:00: Message edited by: Yago ]

 

Where there is a debth there is a donor. An interesting analysis of the consequences of debth and trade deficit:

Taken from the Auerbach Report.

 

Ok, let's get real here. The American fiscal policies are achieving exactly what the pundits who put them in want.

Time for a history lesson: L. B. Johnson instituted the "Great Society" programs back in the 1960's. The claim was to 'help the poor'. What came of this? Since a hard-working stiff would be outraged at someone else gettin more money from the government for 'free' that he earned, all of the welfare programs were designed to give poor people less than the lowest-paid workers. Since the lowest-paid workers were, virtually by definition, in the poverty level, all of the people receiving welfare would also be in the poverty level. In addition, many of those people were under-educated. Thus they needed to keep on voting in those who supposedly cared about them in order to survive.

Next: government housing was increased. The cheapest, most efficient way to create this extra housing was to put it in big cities with large high-rise appartments. This had the effect of putting many, many poor people together. Since some of the healthier (physically, not mentally) residents of these apartments would likely not enjoy their existence, they decided to take up crime as a way out (not a big surprise). Crime usually affects those who are closest to the criminals, so the welfare recipients in government housing were some of the first victims of the increased crime wave. Where could these people go to get help fighting the crime? From the government, of course. However, this could only occur if they elected those who actually cared about their plight. Are you starting to see a trend here?

Now we add in the Gerrymandering of the voting districts. Those in power try to make sure that more of their friends (read party members) would get elected to office. Grouping large sections of poor in one area helped to determine which way a large portion of people in a small area would vote. In addition, voting in the United States takes place on a Tuesday, which is a work day for most folks. Those who are slightly apathetic about the choices they might have often chose to get to the supermarket (sic)instead of the voting booth.

Enter the party who supposedly cares less for the poor (i.e. the Republicans). What did they do under Ronnie Reagan? Well...Reagan promised three things. 1. Increase defense spending (i.e. but more weapons and build up the military). 2. Reduce taxes (actually he meant immediate taxes, since borrowing implies increasing taxes on another generation...Oh! don't get me started on this yet!). 3. Balance the budget.

He accomplished #1. No doubt there. Interestingly, however, after spending one trillion dollars in a few short years, the country did not have ammunition and medical supplies sufficient to counter their then, presumed, major threat. The top Brass conceded to congress that the military was woefully under-prepared for a war since it lacked ammunition and medical supplies. (The reason for this is as follows: if you cut spending on weapons, such as fighter jets and tanks, you only get a portion of your money back. If you cut bullets and bandages, you get all the money you cut back.)

Getting back to Reagan's policies. #2 looked as if he met his promise. He did cut the (then) current tax levels. However, since #3, balancing the budget, was not only not met, but the extreme reverse accomplished; the claim that he actually 'cut' taxes is a myth. When the government borrows money to pay its bills, it not only does not 'cut' spending (and thus taxes), it raises taxes at a premium...but for the next generations. This occurs because those who lend the money do not do so for free. They expect interest to be paid. This means that, when taxes are 'cut' at the expense of borrowing the money, the taxes are actually increased, since the government will have to pay that interest.

I told my wife in 1992 that if the next president did not implement a program of reversing the deficits and start paying off the debt, then the country would eventually reach a fiscal crisis the likes of which would cause the world to shudder. I now admit that I may have been wrong. The Clinton administration did not get a surplus until (I think) 1997 or so. Yet even then, we may have had a chance to avoid crisis. However, the country's lawmakers saw fit to piss the surplus away and continue the spiral into oblivion anyways, so I was not as wrong as I had hoped.

For many years, the Social Security department has been collecting surplusses from American workers in order to pay off an expected increase when the baby-boomers start retiring. Back in the 1960's, again under Johnson's supreme wisdom (read the sarasm here), the funds collected by the Social Security administration were grouped into the entire tax base. In other words, all of the Social Security surplusses were pissed away and the country was borrowing even still. Where are all of the SS surplusses, suposedly? The best one can assume is that they are in the 'safest investment in America', i.e. U.S. savings bonds. Unfortunately, as far as I can discern, the SS department does not even know how much the government owes to this department. If it does, one can assume that it is so staggering that the government will never be able to pay both the principal and the interest.

My assumption, back in 1988 was that the country would see a fiscal crisis by 2020. My assumption, back in 1992 was that the country would see a fiscal crisis by 2020. My hope, in 1997, was that maybe, just maybe, the politicians had finally decided to do right by the country and solve the ridiculously high debt. My assumption today is that the country will see a fiscal crisis by 2020...

 

Yes, time for a "history lesson" here, I guess. LBJ was for many years a good old boy conservative from Texas (yes, we all know that). Just because he was a democrat - back in the 60's - did not mean that he was somewhere out on the left, which is the current conservative propaganda. Eveyone knows that dems are all liberals, right?. Well, unless you are from the South, where back in the 60s they would not vote republican because old Abe Lincoln had been a republican and had freed the slaves (imagine the nerve of that!).

So, LBJ goes off and gets to be president because of a terrible misfortune in Dallas. Then he happens to tour a place called Appalachia. There, he sees people living in horrid poverty. Now, one has to remember that this is during the great propaganda wars of the 1960s and 70s: The Cold War. The question was: Who had the best economic system? The East claimed they did; and the West claimed capitalism was where it was at.

Well, LBJ was one of those unfortunates who really believed that nonsense, or that there really was a clear-cut answer to that question. Then he goes to this place with all these poor, uneducated people who were living the "American Dream," and I guess he asked a profound question: Why is it that in such a great, wealthy country like America, are people living like this? That is a question that needs some kind of answer for someone who has been talking up how great we were. The question changed him. Thus, the "Great Society" was concieved.

Well, he may not have come up with the best answer, but at least he had the humanity to ask such a question, and then to try to fix the problem, which is more than I can say for Shrub and his cronies. Now, the republican motto seems to be, with the latest taxcut: We will leave no billionaire behind. Times have changed.

[ October 12, 2003, 18:10: Message edited by: Chandos the Red ]