i am no economist

"I am no economist; and no aggregate demand - aggregate supply model ensnares me." - Anonymous ca. 2012

Like some dreadful joke, the euro needs French reform, German extravagance and Italian political maturity.

THE respite in the euro crisis lasted a few short months. Now, despite a €130 billion ($169 billion) second bail-out for Greece, a fiscal compact agreed on by the euro-zone leaders in December, and €1 trillion of cheap long-term loans from the European Central Bank, the night terrors are back. How dispiriting that Europe is still so ill-prepared for the ordeal to come.

Time is short. In France voters have given their new president, François Hollande, a mandate to alter the “austere” course set by his ousted predecessor, Nicolas Sarkozy, and Angela Merkel, Germany’s chancellor, and to focus on growth. Mrs Merkel says she will not change the fiscal compact, but Mr Hollande needs something to show voters in legislative polls next month. More threatening is the second election looming in Greece, where parties are struggling to form a government. If a majority of Greeks again vote to reject the spending cuts and reforms that go with their country’s bail-out, then euro-zone governments—in particular, Germany’s—will face a drastic choice. Mrs Merkel will either accommodate Greece and swallow the moral hazard of rewarding defiance or, more likely, stand firm and cut the Greeks adrift (see article).

Stories that people tell…The idea of a chaotic Greek departure from the euro at a time of Franco-German disunion should terrify everyone it touches (the damage it would do the world economy may well be the biggest risk to Barack Obama’s chances of re-election, for instance). With so much at stake, the rest of the euro zone urgently needs to lower the risk that contagion from a Greek exit would infect Portugal, Ireland and even Spain and Italy. The worry is that, just at the moment when hardheaded realpolitik is needed, politics has fallen prey to self-delusion, with leaders in all the main countries peddling seductive half-truths that promise Europe’s citizens an easier way out.

The euro zone needs to do a lot of hard things. Our list would include at the very least: in the short term, slower fiscal adjustment, more investment, looser monetary policy to promote growth and a thicker financial firewall to protect the weaklings on the periphery from contagion (all of which the Germans dislike); in the medium term, structural reforms to Europe’s rigid markets and outsize welfare states (not popular in southern Europe), coupled with a plan to mutualise at least some of the outstanding debt and to set up a Europe-wide bank-resolution mechanism (a tricky idea for everyone). It is an ambitious agenda, but earlier this year, with the Italians, Spanish and Greeks all making some hard choices and ECB money flushing through, the politics seemed possible.

Now they have lurched into dreamland. France is the most obvious example. Mr Hollande is right that growth would transform Europe’s prospects, by making debt more manageable, restoring banks and curtailing unemployment. But that truth is undone by two falsehoods. Although he pays lip-service to fiscal consolidation, he has, above all, promised to spend and tax his way out of the crisis, leaving French voters with the fantasy that the rich can pay and that their own hardship will be limited. And he has told them that liberalism, privatisation and deregulation are to blame for Europe’s crisis: France is now committed to the idea of sheltering behind the very barriers to enterprise that have made its economy uncompetitive.

In the short term Mr Hollande should be able to find a compromise with Mrs Merkel: a growth pact could be added to the fiscal one. There is also indeed a good case for Germany doing more to boost demand. But Mr Hollande will have to countenance reform all the same, because he needs a credible medium-term plan to pay for welfare spending without resorting to borrowing. Moreover, as its neighbours embrace reform, France will have to join them or see unemployment grow and wages stagnate. How wonderful it would be if a cut in interest rates, 60,000 extra teachers and some new roads could spare the French from all this. But that growth fairy does not exist.

…and the stories they believe

Across Europe the pattern repeats itself. In Italy the half-truth is that the country can escape its dysfunctional politics by entrusting hard choices to a technocrat. Its prime minister, Mario Monti, is indeed a gifted man, but the strong protest vote in this week’s local elections suggests that unpopular policies which touch so many Italian lives are ultimately best determined by elected politicians. The German half-truth is that the euro zone’s problems can be solved merely by the indebted countries slashing their way to prosperity. In fact, Germans need to live with higher inflation, consume a bit more and prop up the weaker members of the currency union. Indeed, the euro will survive only if every country confronts the choice it shies away from. Like some dreadful joke, the euro needs French reform, German extravagance and Italian political maturity.

It is worst of all in Greece. The half-truth in Athens is that bigoted northern Europeans give Greeks no credit for the hardship they have borne. Greece really has suffered: between 2007 and 2012 its economy is expected to have shrunk by almost a fifth. The economy is being strangled by a severe credit and liquidity crunch, with more budget cuts and tax rises to come. Even if all goes well, Greece’s debt will be 161% of GDP next year. Whatever the make-up of its next government, the idea that Greece can repay this is the biggest fantasy of all.

Does that mean Greece is still better off in the euro? Probably, though the judgment gets ever finer. An exit, and the ensuing default, would lighten its debt, re-establish competitiveness and challenge its politicians to grasp their own destiny. Yet leaving the euro would also create chaos and destroy savings and, as often in the past, its advantages might rapidly inflate away. The rest of the euro zone is also better off with Greece “in”, if only because of the risk of contagion (and the inadequate preparations for that). But again, not at any price.

If Greece rejects the second bail-out or falls drastically behind in its programme, its exit could become inevitable. Mrs Merkel and Mr Hollande may have as little as a month to prepare for that. They have a lot of work to do.

The euro will survive only if every country confronts the choice it shies away from. (via theeconomist)

(via theeconomist)

The economy is treated as a
potentially workable, but always troublesome and recalcitrant
patient, with a continual tendency to hive offinto greater inflation
or unemployment. The function of the government is to be the
wise old manager and physician, ever watchful, ever tinkering to
keep the economic patient in good working order: In any case,
here the economic patient is clearly supposed to be the
subject, and the government as “physician” the master.

—Murray N. Rothbard; Economic Depressions: Their Cause and Cure (1969)

Buffett Rule 101 (excerpt)

From: The Heritage Foundation*  (http://blog.heritage.org/2012/04/11/morning-bell-buffett-rule-101/)*Conservative news blog.

According to a recent analysis by the congressional Joint Committee on Taxation, the Buffett Rule would raise a mere $47 billion over ten years. Meanwhile, President Obama’s budget calls for adding $6.7 trillion to the national debt. That means that the Buffett Rule will only cover one half of one percent of the President’s new spending. Soaking the rich cannot get deficits down, only spending reductions can do that.

When it comes to the biggest problem America is facing — a weak economy and high unemployment — the Buffett Rule would weaken the economy and make matters worse. Heritage’s J.D. Foster and Curtis Dubay write that the tax would fall most heavily on job creators (who pay taxes at the individual rate) and confiscate their resources that would otherwise be used to start new businesses, grow existing businesses, and hire more workers. As a result, economic growth will slow down right along with job creation.

The President says, “This is not about a few people doing well. We want people to do well, that’s great. But this is about giving everybody the chance to do well.” Really? Raising taxes on the rich, weakening the economy, somehow gives everybody the chance to do well? Raising taxes on anybody somehow gives everybody the chance to do well? This is absurd even by the low standards of American political rhetoric.

Here’s what you really need to know about Obama’s plan.

Under the Buffett Rule, businesses and families earning $1 million will pay a minimum 30 percent effective tax rate. The President says those Americans aren’t paying enough, and as proof he points to billionaire Warren Buffett’s secretary who reportedly pays a higher tax rate than her uber-wealthy boss. But right from the get go, the President is distorting the facts.

So how can President Obama get away with saying that Warren Buffett pays lower tax rates than his secretary? Many wealthy Americans who have done well like Buffett receive dividends and capital gains — a form of investment income that is subject to multiple levels of tax. First, the investment income results from investment. This capital didn’t appear out of thin air. It was earned and taxed previously, often many times over at rates up to 35 percent.

Then, once invested, it generates income that is taxed at the corporate level at a 35 percent rate, and then it’s taxed again at the individual level at a 15 percent rate on dividends and capital gains. The combined rate on corporate earnings alone is over 45 percent, and this is all after the first layer of tax.

One way to think about this is to imagine you’re driving down a toll road, and you pay three separate tolls. The first toll of $3.50 is when you get on the highway. Then after a few miles you pay another $3.50 toll, and when you exit there’s a final toll of $1.50. A reporter asks you as you leave the last tollbooth how much toll you paid. What’s the most accurate answer — what you paid at the last tollbooth or what you paid altogether? Obviously, feeling some $8.50 lighter in the wallet, the correct answer is to respond with the total.

Conveniently for him, President Obama only talks about the last level of tax, the 15 percent portion, leaving out the rest. He only wants to talk about the last toll paid, not the total, and that’s how he makes his disingenuous argument. And all of this leaves out the final tax that many wealthy Americans pay — the death tax, which is set to return to its 55 percent level in 2013.

Then there’s the inconvenient fact that if you look at only the last level of tax, the data show clearly the highest-earning families and businesses in America are already shouldering the vast majority of the country’s tax burden. Heritage’s Curtis Dubay writes that the top 1 percent of income earners — those earning more than $380,000 in 2008 — paid more than 38 percent of all federal income taxes while earning 20 percent of all income. Meanwhile, those in the top 10 percent ($114,000 and above) earned 45 percent of income and paid 70 percent of all taxes. By comparison, the bottom 50 percent of income earners — those earning less than $33,000 — earned 13 percent of all income and paid less than 3 percent of federal income taxes.

Like clockwork, the President has returned to his favorite policy solution: raising taxes. When gas prices went up, he called for higher taxes on oil companies. When he wanted to try to create jobs, he called for higher taxes to pay for stimulus spending. When health care needed a fix, he called for higher taxes to fund Obamacare. If President Obama truly wanted to be fair, he would pursue tax reform like The Heritage Foundation’s “New Flat Tax,” included in its Saving the American Dream plan. It’s simple, coherent, and comprehensive, encourages saving and investment, offers relief for seniors, and helps low and middle income families purchase health care and pay for higher education.

Leading with effective policy solutions, though, isn’t the name of the President’s game. Rather, his goal is to concoct a distraction from his failed leadership. Under his watch, the U.S. Senate has failed to pass a budget for the last 1,078 days, the House unanimously rejected Obama’s latest budget, and meanwhile the national debt is closing in on $16 trillion. Medicare, Medicaid and Social Security are careening toward implosion, gas prices have doubled, the economy is underperforming, 12.7 million Americans remain out of work, and the President’s signature legislation — Obamacare — has never been more unpopular. Instead of offering solutions, the President is offering class warfare branded as the Buffett Rule.

I don’t know how reliable the specifics are, but the idea is that the Buffet Rule is an election-year stunt. The fact of the matter is that the Buffet Rule will not help tackle the deficit, is based on inaccurate statistics, and might actually slow economic growth.

People making more than $1 million have had their income taxed multiple times before paying dividend/capital gain taxes (15%). These people are not just funding our government (top 1% pay 38% of income tax; top 10% pay 70% of income tax according to the article), they are also running our economy. A statistic I would like to see is who benefits most from the government programs the income tax funds. I may be wrong, but I believe that it is not the rich who benefit from food stamps, student loans and grants, medicare, and other programs. Why should an even higher percentage of their income go toward something they won’t benefit as much from? [This is just a presumption, I don’t have the numbers.]

Let me be clear: it is unwise to make it unprofitable for business-people to do business in the United States. If you think they are the problem, just wait until they take their business to another country. I hear Brazil and China treat their rich better.

lost-and-searching-in-america:

This is designed, contrived, and artificially manufactured class warfare by our President.

Agreed. This is completely divisive and irresponsible. It’s election time, no time for the truth. 
I still haven’t heard anybody ask the magic question. If Mitt Romney’s secretary pays a higher tax rate than Mitt, why not try reducing the secretary’s tax rate?

lost-and-searching-in-america:

This is designed, contrived, and artificially manufactured class warfare by our President.

Agreed. This is completely divisive and irresponsible. It’s election time, no time for the truth. 

I still haven’t heard anybody ask the magic question. If Mitt Romney’s secretary pays a higher tax rate than Mitt, why not try reducing the secretary’s tax rate?

(Source: the-flame-imperishable)

theweekmagazine:

Cartoon of the day: Looking under the hood
copyright Gary Varvel, 2012 Creators Syndicate
See all health care cartoons

U.S Supreme Court decision on the Individual Mandate portion of the Healthcare Bill is drawing near. It seems like the Court is even more split than analysts thought at first. Republican-appointed Justices are questioning the mandate heavily, while Democratic-appointed Justices seem to be on board.   

theweekmagazine:

Cartoon of the day: Looking under the hood

copyright Gary Varvel, 2012 Creators Syndicate

See all health care cartoons

U.S Supreme Court decision on the Individual Mandate portion of the Healthcare Bill is drawing near. It seems like the Court is even more split than analysts thought at first. Republican-appointed Justices are questioning the mandate heavily, while Democratic-appointed Justices seem to be on board.