Cut payroll taxes?

One idea to help the economy–advocated by members of both parties–is  to cut payroll taxes, that money deducted from your paycheck.  Here is the case for that from liberal economist Nouriel Roubini:

A much better option is for the administration to reduce the payroll tax for two years. The reduced labor costs would lead employers to hire more; for employees, the increased take-home pay would boost much-needed economic consumption and advance the still-crucial process of deleveraging households (paying down credit card debt and other legacies of the easy-credit years).

Most policy approaches, including the Obama proposals, have tended to subsidize the demand for capital rather than the demand for labor. That has the problem backward. In the second quarter, capital spending reached an annual growth rate of 25 percent. The argument that increased demand for capital leads to greater demand for labor (i.e., if you buy more machines you need workers to run them) has not held up. Firms are investing in capital goods, equipment and offshore offices that allow them to produce the same amount of goods with less — and lower labor costs. To avoid a chronic increase in the unemployment rate, we need to subsidize the demand for labor — achieving job creation — rather than making it cheaper to buy capital, as investment and other tax credits would do.

President Obama could fully fund the reduction in payroll tax by allowing the Bush tax cuts for people making more than $250,000 a year to expire. Meanwhile, the Bush-era cuts affecting middle- and low-income earners — the vast majority of Americans — would remain in place for the time being. . . .

To maximize the incentives for private-sector hiring, there should be sharper reductions to the payroll taxes paid by employers than for those paid by employees. This will counter the argument that the higher income taxes funding these payroll tax cuts will hurt the wealthy and small businesses (many of which are run by those same high-income individuals) and their willingness to hire. Moreover, any cut in the payroll tax reduces the costs of operation and labor for all businesses. Other targeted policies that induce smaller banks to lend to small and medium-size businesses may be needed.

Low-income workers have historically shown a much higher propensity to consume when given extra money, so the payroll tax cut should be designed to provide a larger-percentage break to those on the low end of the income scale compared with the upper middle class.

via Nouriel Roubini – What America needs is a payroll tax cut.

One out of seven is below the poverty line

The recession is officially over, with a quarter showing positive growth after 18 months. Hooray, hooray. Just like the war in Iraq is officially over. So why don’t we feel better? Meanwhile,
we get news like this:

In the second year of a brutal recession, the ranks of the American poor soared to their highest level in half a century and millions more are barely avoiding falling below the poverty line, the Census Bureau reported Thursday.

About 44 million Americans – one in seven – lived last year in homes in which the income was below the poverty level, which is about $22,000 for a family of four. That is the largest number of people since the census began tracking poverty 51 years ago.

The snapshot captured by the census for 2009, the first year of the Obama presidency, shows an America in the throes of economic upheaval.

Since 2007, the year before the recession kicked into gear, the country has almost 4 million fewer wage-earners. There are more children growing up poor. And for the first time since the government began tracking health insurance in 1987, the number of people who have health coverage declined, as people lost jobs with health benefits or employers stopped offering it.

With midterm elections less than two months away, the statistics bare the reality fueling much of the anger toward Washington.

via Poverty stats show the damage.

The price-cutting tailor vs. the New Deal

George Will gives an object lesson about what happened to an ordinary citizen when the government presumed to control the economy:

The crime scene at 138 Griffith St. has changed in 76 years. Today it is a barber shop. In 1934, it was a tailoring and cleaning establishment owned and run by Jacob Maged, 49.

With his responsibilities as a father of four, Maged should have shunned a life of crime. Instead, he advertised his criminal activity with a placard in his shop window, promising to press men’s suits for 35 cents. This he did, even though President Franklin Roosevelt’s New Dealers, who knew an amazing number of things — his economic aides were not called a “Brains Trust” for nothing — knew that the proper price for pressing a man’s suit was 40 cents.

The National Recovery Administration was an administrative mechanism for the National Industrial Recovery Act of 1933, which envisioned regulating the economy back to health by using, among other things, codes of fair competition. The theory was that by promoting the cartelization of labor by encouraging unions, and the cartelization of industries by codes that would inhibit competition, prices would be propped up and prosperity would return.

Soon there were more than 500 NRA codes covering the manufacture of products from lightning rods to dog leashes to women’s corsets. Amity Shlaes, in “The Forgotten Man,” her history of the New Deal, reports that the NRA “generated more paper than the entire legislative output of the federal government since 1789.” Businesses were asked to display the Blue Eagle, an emblem signifying participation in the NRA. Gen. Hugh “Iron Pants” Johnson, an admirer of Mussolini who headed the NRA, declared, “May God have mercy on the man or group of men who attempt to trifle with this bird.

Maged trifled by his 5-cent violation of New Jersey’s “tailors’ code,” written in conjunction with the NRA. On April 20, 1934, he was fined $100 — serious money when the average family income was about $1,500 — and sentenced to 30 days in jail. The New York Times reported that Maged “was only vaguely aware of the existence of a code.” Not that such ignorance was forgivable. It is every citizen’s duty to stay up late at night, if necessary, reading the fine print about the government’s multiplying mandates.

“In court yesterday,” the Times reported, “he stood as if in a trance when sentence was pronounced. He hoped that it was a joke.” Maged was an immigrant from Poland, which in the Cold War would become familiar with the concept of “economic crimes” and the use of criminal law for the “re-education” of deviationists.

Actually, his sentence was a judicial jest. After Maged spent three days in jail, the judge canceled the rest of his sentence, remitted the fine and, according to the Times, “gave him a little lecture on the importance of cooperation as opposed to individualism.” The judge emphasized that people “should uphold the president . . . and General Johnson” in their struggle against — among other miscreants — “price cutters.” Then, like a feudal lord granting a dispensation to a serf, the judge promised to have Maged “measure me for a new suit.”

Maged, suitably broken to the saddle of government, removed from his shop window the placard advertising 35-cent pressings and replaced it with a Blue Eagle. “Maged,” reported the Times, “if not quite so ruggedly individualistic as formerly, was a free man once more.” So that is freedom — embracing, under coercion, a government propaganda symbol.

via George F. Will – Trifle with the government? Just ask Jacob Maged.

Loving austerity

You’ve got to hand it to the Brits, as Anne Applebaum explains:

“Vicious cuts.” “Savage cuts.” “Swingeing cuts.” The language that the British use to describe their new government’s spending reduction policy is apocalyptic in the extreme. The ministers in charge of the country’s finances are known as “axe-wielders” who will be “hacking” away at the national budget. Articles about the nation’s finances are filled with talk of blood, knives and amputation.

And the British love it. Not only is “austerity” being touted as the solution to Britain’s economic woes, it is also being described as the answer to the country’s moral failings. On Oct. 20, the government will announce $128 billion worth of spending cuts, and many seem positively excited about it. . . For these voters, the very idea of instant gratification is anathema, in theory if not in practice. And they elected this government because they’ve convinced themselves that they’ve had enough of it.

Austerity, by contrast, has a deep appeal. Austerity is what made Britain great. Austerity is what won the war. It cannot be an accident that several British television channels are running programs this year with titles such as “Spirit of 1940,” all dedicated to the 70th anniversary of that “remarkable year” of rationing, air raid sirens and hardship. One series, “Ration Book Britain” is even devoted to that era’s parsimonious cooking. “With bacon, eggs and sugar rationed, wartime cooks had to be jolly resourceful,” explains an advertisement for the show. Its host promises to “re-create the recipes that kept the country fighting fit.”

Sometimes the depth of the Anglo-American cultural divide reveals itself in unexpected ways, and this is one of those moments: No cooking show featuring corned beef hash and powdered eggs would stand a chance in the United States. Perhaps for similar reasons, nobody is talking about “austerity” in the United States either. On the contrary, Republicans are still gunning for tax cuts, and Democrats are still advocating higher spending. Almost nobody — not Paul Krugman, not Newt Gingrich — talks enthusiastically about budget cuts. Instead, our politicians use euphemisms about “eliminating waste” or “making government more efficient,” as if no one had ever thought of doing that before.

Despite the deep shock the United States supposedly experienced during the banking crisis of 2008 and the resulting recession, we are, in other words, still far from Clegg’s “long-termism.” Hardly anyone in America is talking about cuts in Medicare, Medicaid or Social Security, for example, the biggest budgetary items (even though “private” pensions now look a lot safer, even when taking stock market fluctuations into account, than those who will depend entirely on a bankrupt federal budget 20 years hence). In Britain, by contrast, everything is on the table: pensions, housing benefits, disability payments, tax breaks.

Politics explain some of this difference, but I reckon history explains more of it. The last period of real national hardship Americans might remember is the 1930s, too long ago for almost everyone alive today. But rationing in Britain lasted well into the 1950s, long enough to color the childhoods of many politicians now in power. Nostalgic Brits, longing to re-create their country’s finest hour, remember postwar scrimping and saving. Nostalgic Americans in search of their own country’s finest hour remember postwar abundance, the long consumer boom — and, yes, a time when even instant gratification wasn’t fast enough.

via Anne Applebaum – For the U.S., Britain’s austerity is a foreign concept.

The conventional wisdom is that politicians dare not ask Americans to make sacrifices of any kind.  Do you think Americans could come to love austerity?

The unemployment conundrum

Steven Pearlman offers a sobering analysis of why just tinkering with government spending–whether increasing it or decreasing it–will not bring the uneployment rate down significantly:

The reason there were 8 million additional jobs back in 2007 is that demand for goods and services was artificially – and unsustainably – inflated by cheap, plentiful credit. Between 2002 and 2007, household debt was increasing at the torrid pace of more than 10 percent annually, while business debt and the debt of state and local governments was growing at an average of 9 percent. Much of that money was used to finance present consumption.

Now all that has reversed. Household debt is shrinking at a rate of 2.4 percent per year as the savings rate has risen from nearly zero to more than 5 percent. Meanwhile, business debt declined 2.5 percent last year and is now flat, as is the case for state and local governments.

All that deleveraging and living within our means is obviously a good thing in the long run. But what it means for the economy in the short run is that neither the excess consumption nor the jobs it supported are coming back. During the past two years, the federal government has been actively trying to take up some of the slack by going on a borrowing-and-spending binge of its own. But continuing on that path is also unsustainable – certainly politically, and probably economically as well. And once federal deficits begin to decline next year, we’ll have yet another drag on economic growth and employment.

At this point, there is only one clear path out of the unemployment box we have created for ourselves.

Right now, the United States is running a trade deficit that is likely to reach $450 billion this year. That’s down considerably from the $750 billion at the height of the economic bubble, but still more than a wealthy advanced economy should have. Bringing it down – either by producing more of what we consume (fewer imports) or more of what other countries consume (more exports) – represents the path toward sustainable, long-term job creation.

The problem with that strategy is that for the past two decades we have allowed our industrial and technological base to deteriorate as talent and capital were grossly misallocated toward other sectors of the economy, even as other countries were able to attract the investment, the technology and the know-how to serve the U.S. and global markets.

For a time, none of this seemed to matter because we were consuming so much that we were able to support job creation at home as well as overseas. But now that the debt-fueled consumption binge is over, we find that we don’t have the companies, the workers or the competitive products to replace the stuff we now import or expand our share of export markets. Even when we do, our companies are disadvantaged by an overvalued currency or unfair trading practices.

via Steven Pearlstein – The bleak truth about unemployment.

So the previous decades of spending beyond our means cannot be made up for by the government spending beyond its means.  Prediction:  Someone will propose policies of protectionism.  It may be a Democrat or it may be a Republican, since both labor and big business tend to want government protection for their industries.  The thinking may be that America cannot compete in a global economy as it used to. Instead of the current bipartisan commitment to free trade, we will start putting tariffs on foreign imports to give an advantage to American-made products.  Prices will go up for consumers, but more of them will have jobs.  Do you think this is likely, a good idea, or a potential disaster?  Meanwhile, what policies might help create jobs?  Or do we just need to hunker down until our new thrifty lifestyles create an economic equilibrium?

Consumers are acting too responsibly

Why is the economy faltering?  Robert Samuelson blames consumers, who are saving more and paying down their debt instead of spending:

“Consumers are deleveraging (reducing debt) . . . and rebuilding saving faster than expected,” writes economist Richard Berner of Morgan Stanley. In 2007, the personal savings rate (the share of after-tax income devoted to saving) was 2 percent. Now it’s about 6 percent. Temporarily, this hurts buying. Declines in consumer spending in 2008 and 2009 were the first back-to-back annual drops since the 1930s. Since World War II, annual consumption spending had fallen only twice (1974 and 1980). . . .

Household debt has already dropped $800 billion from its peak of $11.7 trillion, estimates economist Mark Zandi of Moody’s Analytics. The Federal Reserve reports that debt service — the share of income going to interest and principal payment — has decreased from almost 14 percent in early 2008 to about 12.5 percent, the lowest since 2000.

via Robert J. Samuelson – The saving mentality is hurting the economy’s recovery.

And what has economists in a panic is the prospect of people continuing these good habits!


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