Robert B. Reich's Blog, page 146

[I'm taking three weeks off grid. Need it to clear the mind. Be well, all.]

[I'm taking three weeks off grid. Need it to clear the mind. Be well, all.]

The Growing Desperation of the Don't-Raise-Taxes-on-the-Rich Crowd

The much-vaunted Republican pledge not to raise any taxes is crumbling. Today 34 Senate Republicans voted to end the special tax breaks for ethanol.

According to no-tax-increase purists like Grover Norquist, this is tantamount to a tax increase.

The truth is, Republicans are divided between those who want to bring down the budget deficit and those who want to shrink government. Ending a special tax subsidy helps reduce the deficit but doesn't necessarily shrink government. That's why Norquist and his followers have insisted any such tax increase – including even the closing of tax loopholes – be directly linked to a corresponding tax cut.

In order to save face on today's vote, Norquist says renegade Republicans will still be considered to have adhered to the pledge if they vote in favor of an amendment offered by Senator Jim DeMint to eliminate the estate tax. Talk about grasping at straws. DeMint's amendment isn't even up for a vote.

In short, the no-tax pledge is evaporating in the fresh air of reality.

What are anti-tax Republicans to do now?

For one, continue to distort the arguments of those who believe corporations and the rich should pay more taxes.

For example, in the lead op-ed piece in today's Wall Street Journal, Cato Institute fellow Alan Reynolds claims a higher marginal tax on the super rich will bring in less revenue.

Reynolds uses my tax proposal from last February as his red herring. "Memo to Robert Reich," he declares, "The income tax brought in less revenue when the highest rate was 70 percent to 91 percent [between 1950 and 1980] than it did when the highest rate was 28 percent."

Reynolds bends the facts to make his case, picking and choosing among years.

In truth, the most important variable explaining the rise and fall of tax revenues as percent of GDP has been the business cycle, not the effective tax rate. In periods when the economy is growing briskly, tax revenues have risen as a percent of GDP, regardless of effective rates; in downturns, revenues have fallen.

Reynolds also distorts my proposal, implying that the bracket on which I call for a 70 percent tax is the same as in today's tax code. Wrong. My proposed 70 percent rate would apply only to incomes over $15 million.

$15 million, Alan!

Under my proposal, incomes between $5 million and $15 million would be subjected to a 60 percent rate, and incomes between $500,000 and $5 million to a 50 percent rate.

Importantly, my proposal calls for a substantial rate reduction for families with incomes under $100,000. (Conveniently, Reynolds fails to mention this.)

Reynolds entirely ignores my central argument, which is that rather than depress economic growth, higher taxes on the rich correlate with higher growth. During almost three decades spanning 1951 to 1980, when the top rate was between 70 percent and 91 percent, average annual growth in the American economy was 3.7 percent.

Between 1983 and the start of the Great Recession, when the top rate dropped to between 35 percent and 39 percent, average growth was 3 percent.

How to explain this? Easy.

Since the early 1980s, a larger and larger share of total income has gone to the top (the richest 1 percent of Americans got 10 percent of total income in 1980, and get over 20 percent now). That's left the vast middle class with insufficient purchasing power to boost the economy – without going deep into debt.

Lower tax rates on the rich — including lower capital gains rates — have exacerbated this regressive trend.

Finally, having misread the facts, distorted my proposal, and ignored my argument, Reynolds fails to rebut my conclusion that raising middle class purchasing power by lowering their tax rates while raising the rates at the top will help spur growth, to the benefit of all. Top earners will do better with a smaller share of a more rapidly- growing economy a larger share of a slower-growing one.

If I were a cynic, I'd say the Republican right is showing signs of desperation.

The Desperation of the Don't-Raise-Taxes-on-the-Rich Crowd

The much-vaunted Republican pledge not to raise any taxes is crumbling. Tuesday 34 Senate Republicans voted to end the special tax breaks for ethanol.

According to no-tax-increase purists like Grover Norquist, this is tantamount to a tax increase.

The truth is, Republicans are divided between those who want to bring down the budget deficit and those who want to shrink government. Ending a special tax subsidy helps reduce the deficit but doesn't necessarily shrink government. That's why Norquist and his followers have insisted any such tax increase – including even the closing of tax loopholes – be directly linked to a corresponding tax cut.

In order to save face on Tuesday's vote, Norquist says renegade Republicans will still be considered to have adhered to the pledge if they vote in favor of an amendment offered by Senator Jim DeMint to eliminate the estate tax. Talk about grasping at straws. DeMint's amendment hasn't even been up for a vote.

In short, the no-tax pledge is evaporating in the fresh air of reality.

What are anti-tax Republicans to do?

For one, they can continue to distort the arguments of those who believe corporations and the rich should pay more taxes.

For example, in the lead op-ed piece in today's Wall Street Journal, Cato Institute fellow Alan Reynolds claims a higher marginal tax on the super rich will bring in less revenue.

Reynolds uses my tax proposal from last February as his red herring. "Memo to Robert Reich," he declares, "The income tax brought in less revenue when the highest rate was 70 percent to 91 percent [between 1950 and 1980] than it did when the highest rate was 28 percent."

Reynolds bends the facts to make his case. The most important variable explaining the rise and fall of tax revenues as percent of GDP has been the business cycle, not the effective tax rate. In periods when the economy is growing briskly, tax revenues have risen as a percent of GDP, regardless of effective rates; in downturns, revenues have fallen.

Reynolds also distorts my proposal, implying that the bracket on which I call for a 70 percent tax is the same as in today's tax code. Wrong. My proposed 70 percent rate would apply only to incomes over $15 million. $15 million, Alan!

Under my proposal, incomes between $5 million and $15 million would be subjected to a 60 percent rate, and incomes between $500,000 and $5 million to a 50 percent rate.

Importantly, my proposal calls for a substantial rate reduction for families with incomes under $100,000. (Conveniently, Reynolds fails to mention this.)

Reynolds entirely ignores my central argument, which is that rather than depress economic growth, higher taxes on the rich correlate with higher growth. During almost three decades spanning 1951 to 1980, when the top rate was between 70 percent and 91 percent, average annual growth in the American economy was 3.7 percent.

Between 1983 and the start of the Great Recession, when the top rate ranged between 35 percent and 39 percent, average growth was 3 percent.

Since the early 1980s, a larger and larger share of total income has gone to the top (the richest 1 percent of Americans got 10 percent of total income in 1980, and get over 20 percent now). That's left the vast middle class with insufficient purchasing power to boost the economy – without going deep into debt. Lower tax rates on the rich — including lower capital gains rates — have exacerbated this regressive trend.

Finally, having misread the facts, distorted my proposal, and ignoring my argument, Reynolds utterly fails to rebut my conclusion that raising middle class purchasing power by lowering their tax rates while raising the rates at the top will help spur growth, to the benefit of all. Top earners will do better with a smaller share of a more rapidly- growing economy a larger share of a slower-growing one.

If I were a cynic, I'd say the Republican right is showing signs of desperation.

"The Truth About the Economy in 2 Minutes and 15...

"The Truth About the Economy in 2 Minutes and 15 Seconds"

Why the Republican War on Workers' Rights Undermines the American Economy

The battle has resumed in Wisconsin. The state supreme court has allowed Governor Scott Walker to strip bargaining rights from state workers.

Meanwhile, governors and legislators in New Hampshire and Missouri are attacking private unions, seeking to make the states so-called "open shop" where workers can get all the benefits of being union members without paying union dues. Needless to say this ploy undermines the capacity of unions to do much of anything. Other Republican governors and legislatures are following suit.

Republicans in Congress are taking aim at the National Labor Relations Board, which issued a relatively minor rule change allowing workers to vote on whether to unionize soon after a union has been proposed, rather than allowing employers to delay the vote for years. Many employers have used the delaying tactics to retaliate against workers who try to organize, and intimidate others into rejecting a union.

This war on workers' rights is an assault on the middle class, and it is undermining the American economy.

The American economy can't get out of neutral until American workers have more money in their pockets to buy what they produce. And unions are the best way to give them the bargaining power to get better pay.

For three decades after World War II – I call it the "Great Prosperity" – wages rose in tandem with productivity. Americans shared the gains of growth, and had enough money to buy what they produced.

That's largely due to the role of labor unions. In 1955, over a third of American workers in the private sector were unionized. Today, fewer than 7 percent are.

With the decline of unions came the stagnation of American wages. More and more of the total income and wealth of America has gone to the very top. Middle-class purchasing power depended on mothers going into paid work, everyone working longer hours, and, finally, the middle class going deep into debt, using their homes as collateral.

But now all these coping mechanisms are exhausted — and we're living with the consequence.

Some say the Great Prosperity was an anomaly. America's major competitors lay in ruins. We had the world to ourselves. According to this view, there's no going back.

But this view is wrong. If you want to see the same basic bargain we had then, take a look at Germany now.

Germany is growing much faster than the United States. Its unemployment rate is now only 6.1 percent (we're now at 9.1 percent).

What's Germany's secret? In sharp contrast to the decades of stagnant wages in America, real average hourly pay has risen almost 30 percent there since 1985. Germany has been investing substantially in education and infrastructure.

How did German workers do it? A big part of the story is German labor unions are still powerful enough to insist that German workers get their fair share of the economy's gains.

That's why pay at the top in Germany hasn't risen any faster than pay in the middle. As David Leonhardt reported in the New York Times recently, the top 1 percent of German households earns about 11 percent of all income – a percent that hasn't changed in four decades.

Contrast this with the United States, where the top 1 percent went from getting 9 percent of total income in the late 1970s to more than 20 percent today.

The only way back toward sustained growth and prosperity in the United States is to remake the basic bargain linking pay to productivity. This would give the American middle class the purchasing power they need to keep the economy going.

Part of the answer is, as in Germany, stronger labor unions — unions strong enough to demand a fair share of the gains from productivity growth.

The current Republican assault on workers' rights continues a thirty-year war on American workers' wages. That long-term war has finally taken its toll on the American economy.

It's time to fight back.

Of Snake Oil, Puff Balls, and the Need for a Real Jobs Plan from the President

Today the President met with business leaders on his "jobs and competitiveness council," who suggested more public-private partnerships to train workers, less government red-tape in obtaining permits, and more jobs in travel and tourism, among other things. The President then toured a manufacturing plant in North Carolina, and made an eloquent speech about the need for more jobs.

Fluff.

Doesn't the White House get it? The President has to have a bold jobs plan, with specifics. Why not exempt the first $20,000 of income from payroll taxes for the next year? Why not a new WPA for the long-term unemployed, and a Civilian Conservation Corps for the legions of young jobless Americans? Why not allow people to declare bankruptcy on their primary residences, and thereby reorganize their mortgage debt?

Or a hundred other ways to boost demand.

Fluff won't get us anywhere. In fact, it creates a policy vacuum that will be filled by Republicans intent on convincing Americans that cutting federal spending and reducing taxes on the rich will create jobs.

Most Americans are smart enough to see through this. But if the Republican snake oil is the only remedy being offered, some people will buy it. And if the President and Democrats on Capitol Hill continue to obsess about reaching an agreement to raise the debt limit, they risk making the snake oil seem like a legitimate cure.

The puff balls being offered by the CEOs on the President's jobs and competitiveness council are hardly a substitute. These CEOs won't suggest hard-ball ideas to boost demand. Why should they? Their companies rely less and less on consumers in the United States – and, for that matter, on American workers. For several years now, these companies' foreign sales have been growing faster than their US sales and they've been creating more jobs abroad than here.

Consider GE, whose Chairman and CEO, Jeffrey Immelt, is also the chairman of the President's jobs council. By the end of last year, 54 percent of GE's 287,000 employees worked outside the United States. That's a turnaround from as recently as 2005, when a majority of the firm's workers were still located in the United States.

GE and the other companies represented on the President's jobs council will continue to do fine regardless of shriveled demand in the United States. But unless demand is boosted here, American workers will continue to be hard hit.

If the choice is between Republican snake oil and the puff balls of the President's job's council, America will be in deeper and deeper trouble. So will the President.

The Swamp of Washington and the Morass of the Economy

Washington was built on a swamp. In the summer, temperatures can reach over 100 degrees — as they did over the last few days when I made the rounds of Washington Democrats, repeatedly asking why no bold jobs plan is emerging. 

Here's a sample of their responses:

"Dead in the water. We'll be lucky if we get votes to raise the debt ceiling without major spending cuts this year and next."

"Are you kidding? It's all budget deficit, budget deficit, budget deficit. Nobody's thinking about anything else."

"Republicans beat us up so bad over the first stimulus there's no way we're gonna try for a second."

"We got them [Republicans] cornered on Medicare. Now they want to change the subject to jobs. Forget it."

"No need. We'll see job growth in the second half of the year."

"The President doesn't want to put anything on the table he can't get through Congress."

And so it went. Not a shred of urgency.

This morning I was on ABC's "This Week," debating jobs and the economy with Republican Senator Richard Shelby of Alabama. Shelby restated the standard Republican playbook of spending cuts and tax cuts (except for one instant when he inadvertently conceded America emerged from the Great Depression only when government spent big time mobilizing the nation for World War II).

But what struck me most was the similarity between Shelby's overall attitude and that of the Democrats I talked with — a kind of shrug of the shoulders, a sense that it's really not all that bad out there, and that nothing can be done anyway. (In the green room, before going on, Shelby told me employment in northern Alabama was actually fairly good and the problem was near the coast.)

The recovery is stalling across the nation yet in the Washington swamp it's business as usual. 

Americans are scared, with reason. We're in a vicious cycle in which lower wages and net job losses and high debt are causing consumers to cut their spending — which is causing businesses to cut back on hiring and reduce pay. There's no way out of this morass without bold leadership from Washington to rekindle consumer demand. 

If the Democrats remain silent, the vacuum will be filled by the Republican snake oil of federal spending cuts and cut taxes on big corporations and the wealthy. Democrats — starting with the President — must have the courage and conviction to tell the nation the recovery is stalling, and what must be done. 

The Stalled Recovery, Smoke and Mirrors, and the Carnage on the Street

The Dow ended the week below 12,000 for the first time since March. This is the sixth straight week of downs for the Dow. It's almost as bad over at the Nasdaq. All the gains racked up in 2011 have now been erased.

What's going on?

The real economy is catching up with the financial economy, as it always does eventually. Wall Street is built on smoke and mirrors, while the real economy is based on jobs and wages. Smoke and mirrors can only take you so far – as we learned so painfully three years ago.

Jobs and wages stink, if you haven't noticed. They've been bad for months, even before this week's data made it fairly clear the recovery has stalled.

Stock prices had been rising nonetheless. That was partly because big corporations were enjoying big sales and fat profits from their foreign operations. But foreign sales are slowing. Chalk that up to the European debt crisis, Europe's insane austerity measures, Japan's tragedy, and China's concerns about inflation.

Meanwhile, other companies have been busy restocking inventories in the hope American consumers will be in a mood to buy. But that hope is coming to an end, as the reality dawns that American consumers can't and won't buy very much, given their shrinking home values, high debts, and job worries.

Stock prices were also rising because of Wall Street's certitude that it can make loads of money from the gullibility of millions of small investors. Here's where the smoke and mirrors come in.

Over the past year, the Street lured small investors back into the market on the smokey promises that the worst is over and stock prices are bound to rise. The lure became a self-fulfilling prophesy. As investors re-entered the market, they bid up stock prices. Hence, the mirror.

Insiders on the Street are always the first to bail when they sense they've been overselling, as they started to do a few weeks ago. This gives them a second opportunity to make money off small investors — by selling short.

The nation's second-largest financial redistribution in history (the largest, on a percentage basis, occurred in 1929) came in 2007 and 2008 – from small investors and their pension funds to the Street's savvy traders who shorted them. Now it's been repeated, although on a smaller scale.

And Washington? Completely clueless. Our representatives in the nation's capital continue to obsess about future budget deficits and games of chicken over raising the debt ceiling — neither of which has anything at all to do with the stalled recovery and the carnage on the Street.

Otherwise, the airwaves are filled with Weiner's tweets, Gingrich's implosion, and Pallin's emails. When times are tough we look for entertainment.

Why the President Must Come Up With Demand-Side Solutions, And Not Go Over to the Supply Side

"I am concerned about the fact that the recovery that we're on is not producing jobs as fast as I want it to happen," President Obama said Tuesday, amid the flood of bad economic news, including last Friday's alarming jobs report.
 
Does this mean we're about to see a bold package of ideas from the White House for spurring growth of jobs and wages? Sadly, it doesn't seem so.
 
Obama says he's interested in exploring with Republicans extending some of the measures that were part of that tax-cut package "to make sure that we get this recovery up and running in a robust way."
 
Accordingly, the White House is mulling a temporary cut in the payroll taxes businesses pay on wages. White House advisors figure this may appeal to Republican lawmakers who have been discussing the same idea. It would, in essence, match the 2 percent reduction in employee contributions to payroll taxes this year, enacted as part of the deal to extend the Bush tax cuts.
 
Other ideas under consideration at the White House include a corporate tax cut, accompanied by the closing of some corporate tax loopholes.
 
Can we get real for a moment? Businesses don't need more financial incentives. They're already sitting on a vast cash horde estimated to be upwards of $1.6 trillion. Besides, large and middle-sized companies are having no difficulty getting loans at bargain-basement rates, courtesy of the Fed.
 
In consequence, businesses are already spending as much as they can justify economically. Almost two-thirds of the measly growth in the economy so far this year has come from businesses rebuilding their inventories. But without more consumer spending, businesses won't spend more. A robust economy can't be built on inventory replacements.
 
The problem isn't on the supply side. It's on the demand side. Businesses are reluctant to spend more and create more jobs because there aren't enough consumers out there able and willing to buy what businesses have to sell.
 
The reason consumers aren't buying is because consumers' paychecks are dropping, adjusted for inflation. And job losses are mounting. The 83,000 new private-sector jobs created in May represent a net loss because 125,000 jobs are needed merely to keep up with an expanding labor force. The number of Americans filing new claims for unemployment benefits edged higher last week.
 
At the same time, many Americans are falling behind in their mortgage payments. And housing prices continue to drop – making homeowners feel even poorer.
 
Close to 60 percent of the half-trillion drop in household debt since the depth of recession has been defaults rather than repayments. This makes it harder for people who'd like to enter the housing market to get new mortgage loans, or for anyone to refinance.  Other consumer debt burdens are rising. On Tuesday the Fed reported consumer credit outstanding rose in April – mostly from record-high levels of student-loan debt and an up-tick in credit-card borrowing due to food and gas price increases outpacing wage gains.
 
All this translates into a continuing crisis on the demand side. Consumers can't and won't buy more. Between January and March, sales grew just .15 percent around the country – perilously close to no growth at all. May sales look even worse. Chain stores are reporting weaker sales. Consumer confidence has dropped sharply.
 
How to get jobs back, then? By reigniting demand. Put more money in consumers' pockets and help them renegotiate their mortgage loans.
 
For example: Enlarge the payroll tax break for workers — not just for employers. Exempt the first $20,000 of income from payroll taxes for a year. Create a WPA for the long-term unemployed. Allow distressed homeowners to declare bankruptcy on their primary residence, thereby giving them more clout with lenders to reorganize their mortgage loans. Lend federal money to (rather than bail out) states and cities that are now firing platoons of teachers, fire fighters, and other workers because state and local coffers are empty.
 
But we're not hearing any of these sorts of demand-side solutions from the White House. In seeking Republican votes, Obama is putting forth Republican supply-side ideas – lowering the employer costs of hiring, cutting corporate taxes – that have nothing to do with this demand-side crisis. He may attract some Republican votes for these, but what's the point if they're irrelevant to the real problem?
 
The President's putative embrace of the false notion that businesses need more financial incentives in order to hire also risks giving legitimacy to other Republican supply-side nostrums being pushed by House Republicans and GOP presidential aspirants. On Tuesday, Tim Pawlenty called for lower taxes on corporations (down to 15 percent from the current 35 percent), and lower taxes on the rich (to 25 percent from the current 35). Newt Gingirch wants to lower corperate income taxes to 12.5 percent and eliminate the estate tax altogether. And so on.

Better that the President advance ideas that work, and go to battle over them. 

Supply-side economics doesn't work. It's been tried for thirty years, to no avail. And now, when our continuing economic crisis is so palpably being driven by inadequate demand, it's bogus than ever.
 
The last thing we need is for the President to go over to the supply side.

Jamie Dimon's Bizarre Idea About Why The Recovery Has Stalled

According to JPMorgan Chase CEO Jamie Dimon, the recovery has stalled because of strict banking regulation.

I'm not making this up.

At a financial conference today, Dimon told Fed chief Ben Bernanke there's no longer any reason to crack down on Wall Street. "Most of the bad actors are gone," he said. "[O]ff-balance-sheet businesses are virtually obliterated, … money market funds are far more transparent" and "most very exotic derivatives are gone."

Dimon said he worried that financial reform legislation is "holding us back at this point" from a stronger economy.

Someone should remind Dimon that a few years ago, before any stricter regulation or oversight went into effect, he and his colleagues on the Street almost eviscerated the American economy. Remember, Jamie? The Street's antics required a giant taxpayer-funded bailout.

JPMorgan Chase and the other giant banks on Wall Street are bigger than they were before. And now they're certain they're too big to fail. Without far stricter regulation they have every incentive to repeat their binge.

Dimon believes most of the bad actors are gone. To the contrary, none of the truly bad actors has been prosecuted. In fact, most are making more money than ever before.

Off budget businesses obliterated? Funds more transparent? Exotic derivatives gone? Dimon still doesn't get it. The only reason there's been any progress at all to date is because rules have been tightened and regulators are more vigilant. But at this very moment the banks — including JPMorgan Chase — are lobbying heavily to relax the rules so they can return to their old ways.

The recovery has stalled because most Americans are still in the gravitational pull of the recession — unable and unwilling to buy enough to keep the economy going. And that's largely because the terrible consequences of what Dimon et al did to the economy are still being felt by most Americans.

On what planet has Jamie Dimon been living?