Category - Fiscal Policy

[cross-posted]

James Hamilton, at Econbrowser, notes that he’s surprised by the 0.75% increase in average house prices (as measured by the S&P/Case-Shiller Index of twenty cities). He also says he’s skeptical because of the backlog of unsold homes, likely increases in foreclosures, and high, rising unemployment, especially since Calculated Risk is, too. I agree that there’s reason to be skeptical, especially since this rise in prices is likely to be a surge of people cashing in on the Obama stimulus package’s $8,000 tax credit for first-time home buyers, which expires this fall. If prices continue to rise beyond that critical point, I’d say my skepticism (and CR’s and Hamilton’s) are wrong.

Congressional Budget Office Director Douglas W. Elmendorf summarizes his testimony to Congress (there’s also a link to the pdf file of the full testimony). Unfortunately, the simplest way to ‘distribute the value of carbon allowances,’ to paraphrase Elmendorf, is not mentioned: dividing it up equally. The technical details (division!) have been dealt with before on this blog by Jonathan.  Why would this obvious alternative be left out? My inner conspiracy theorist whispers that it’s left out to make giving away allowances the most politically viable alternative on the table. After all, why should all those poor folks benefit, when the rest of us have to shell out more at the pump?

Director’s Blog » Blog Archive » Testimony: The Distribution of Revenues from a Cap-and-Trade Program for Carbon Dioxide Emissions

[cross posted]
What gives with this morning’s NPR “Morning Edition” story about banks that are choosing to steer clear of TARP bailout money? Reporter Jim Zarroli mostly profiles the Johnson Financial Group, a bank that at first applied for $100 million, then decided not to take it after all once it learned the details of the the strings that come attached, saying that this bank is just one example of many that represent a “mini rebellion” against the TARP program. As the president of Johnson Financial Group says directly, and as Zarroli reiterates later in the story, Johnson didn’t need the money! Why in the hell would it be news–or be considered “rebellious”–that a healthy bank would not participate in a welfare program for the financial industry? Why is is conceivably news that TARP is designed to include incentives that encourage banks to pay back money they receive through the program quickly? Though undoubtedly flawed six ways to Sunday, the basic idea behind the TARP bailout is that it provides money to large banks that will otherwise go bankrupt or experience major disruptions–and spread those disruptions to other financial institutions, and through them the rest of the economy–and is designed so that the banks will eventually pay back the government (and so, you and me as taxpayers). Zarroli briefly quoted Rep. Barney Frank in defense of TARP and the strings that it attaches to its payouts, but 98% of the story is just bankers whining about either being forced to bank responsibly or whining about not having access to free taxpayer money, free even of the relatively mild strings that are part of TARP. I guess it needs repeating, though I wouldn’t have thought it necessary:

1. TARP money should only be available to banks that actually need it to avoid major business disruptions. That a bank like Johnson, which is in good financial condition, is even allowed to apply for TARP funds is a flaw in TARP. The flaw is not that TARP’s strings cause Johnson to say “no thanks.”
2. Banks that take TARP money not only are required, but by all rights should be required to pay back that money in full, and including interest payments to cover the risk that taxpayers are taking that not all TARP recipients will pay back in full after all is said and done. This is banking after all, right?
3. Banks that take TARP money should pay back the money sooner rather than later. What’s the advantage to taxpayers for having the banks sit on the money longer than they need it?

No-strings-attached banking is what primed the financial bomb that has now exploded in our faces. Responsible banking practices are needed more then ever, and NPR’s promotion of irresponsible banking propaganda does not help.

UPDATE, below

The part of the new bailout bill that’s supposed to bring along the most formerly reluctant House members is to raise the coverage limit for Federal Deposit Insurance Corporation (FDIC) insured personal deposits (which includes savings and checking accounts, cds and money market accounts) from the current level of $100,000 to $250,000. Obama, McCain and the FDIC all approve. See this story, for instance. But who does this really affect? Using data from the 2004 Survey of Consumer Finances (the 2007 numbers aren’t yet available) and adding all covered accounts within households (note that this overstates coverage, since the insurance covers accounts not households) produces this table:

That’s right, this plan will help to insure that 3.5% of households with deposits over $100,000, but not the 1.5% with deposits over $250,000. I guess they’re on their own. Actually, most people in both of these categories already keep multiple accounts, to stay under the insured limit, so it will help not that much. However, it does make it look like a “compromise was reached on an improved bill,” allowing representatives to say that they held out for their constituents while they’re campaigning over the next month.

You don’t suppose that’s the point, do you?

UPDATE:

meanwhile, FDIC is doing a fine job slowing down lending.

As discouraging as votes on things like FISA and telecom immunity have been, there are still some enormous differences between the two (?) major party candidates. For example, there’s the distributional impacts of their tax policy proposals, as well-illustrated in the figure below from the Tax Policy Center’s newly updated analysis (click on image to embiggen).

(Tip of the Econ-Atrocity chapeau to Paul Krugman)

J.S. at Environmental Economics seems to think so. Maybe. According to a NY Times piece the bill

would revoke $17 billion in tax breaks extended to big oil companies like Exxon Mobil Corp and slap a 25 percent windfall profits tax on firms that don’t invest in new energy sources.

My question is: will the Democrats grow a spine in time to pass such a bill, even in the face of some opposition?

[Originally posted here.]

In my post a moment ago I mentioned how I’d once heard that, for the money the US spent on the war in Vietnam, we could have paid for the installation of an in-ground swimming pool for each and every Vietnamese family instead. What a great way to win the hearts and minds of our enemies, eh? So I decided to try out the math for this stupid, awful, and infuriating Iraq war. What if we had tried to bribe the Iraqi people to overthrow Saddam Hussein and install a working democracy instead of imposing these things (rather: trying futilely to do so) by force?

Cost of war to US taxpayers as of March 28, 2008: a bit over $506,359,000,000. Source.

Population of Iraq in July 2008, according to the CIA World Factbook: 27,499,638.

I threw in 2,000,000 extra people to account for the dead and refugees, so the numbers below are based on an estimated population 29.5 million people.

Cost per Iraqi (each man, woman, and child) paid so far by US taxpayers on the war: $17,767.21.

First of all, what if we’d just offered Saddam Hussein and his top leadership only, say, half the total that we’ve spent–roughly $253 billion–to leave Iraq and go live in the Bahamas? Well, if he’d refused but the so-called free market loving leadership in the US had pursued this market line of thinking, we could have had Hussein overthrown–without the loss of a single American life–by offering each man, woman, and child in Iraq any of the following.

• a 16′ x 24′ x 42′ in ground swimming pool ($10,403 each, therefore leaving $7,364 in leftover cash for each Iraqi)
• a 2009 Toyota Matrix ($16,190 each, leaving $1,577 in leftover cash for each Iraqi)
• considering all the hot sunlight they get in Iraq, how about 15 grid-tie photovoltaic solar panels rated at 208 watts each for a total of 3,120 watts of peak output! ($17,685 for the set of panels, leaving $82 in leftover cash for each Iraqi)
• or considering reports of those windy sandstorms, how about 2 Skystream grid-tie wind turbines with a 33 foot monopole wind tower for each ($15,998 for the set, leaving $1,769 in leftover cash for each Iraqi)
• or, in the interest of spreading American culture around to every nook and cranny of this planet, how about 250 traditional and all-American apple pies (each serves eight) plus 846 pints of Ben & Jerry’s organic ice cream! ($17,745 for the package, leaving $22 in leftover cash for each Iraqi to spend on insulin and other diabetes care)

There you have it. The Iraqi people could have had a Saddam Hussein-free Iraq and eaten their apple pie, too. But that’s not the way we did it, because, as usual, the American government tried to do it on the cheap. Haven’t any of these people heard “penny wise, pound foolish” before? And now Bush/Cheney and McCain have got their sights set on going double-or-nothing broke in Iran as well. Will you buy that?

A Modest Proposal: Ten Steps to a Democratic Economy

In my initial installment of this series, I proposed, “Ten Steps to a Democratic Economy.” With this column, I would like to explain and defend my third proposal. I invite commentary and analysis.

3. Reform the Money System – The money supply system is directly under the control of the Federal Reserve. This agency has 14-year terms. They need to be placed under congressional control, not Presidential control. I recommend that their terms be limited to 4 years and they should be checked by Congressional fiscal policy. High interest rates currently only benefit banks and financial institutions.

The Federal Reserve, usually called, ”The Fed,” is the central banking system of the United States. The Federal Reserve System is composed of a central Board of Governors in Washington, D.C., and twelve regional Federal Reserve Banks located in major cities throughout the nation, and a number of member banks. The Federal Reserve Act created the Federal Reserve System in 1913. The board and its chairman are appointed by the President of the United States and approved by the Senate.

The money supply available at any given time in our economy is a product of the interest rates that are set by the Federal Reserve. As it raises or lowers the interest rate it charges to member banks, it increases or decreases the amount of money available to the economy. Higher interest rates slow the economy and lower interest rates speed it up. This means that the economy is producing goods and services and thereby creating jobs in a “slow” manner or in a “faster” manner.

I am not an expert in economics, but I know that high interest rates hurt low-income people and benefit wealthy people. Low interest rates help low-income people, but do not hurt wealthy people. The wealthy have a surplus and they profit from whatever the amount of the interest that it earns. Their complaint would be that they are not being rewarded “enough” for their thrift and/or miserly behavior. People who have surplus money can, of course, give it away, but most wealthy people prefer to “rent” it out. The money you pay in interest on a loan is in effect the rent for that loan. The wealthy are the creditors and the poor are the debtors. Those who lend are the creditors and those who borrow are the debtors. (One problem with this scenario is that truly destitute, impoverished people are hardly ever loaned money. They are considered poor risks.)

When a bank grants someone a loan, most people feel happy. This is understandable but they should not feel happier than the bank. The bank is now getting a 6% return on its money, when earlier it was only getting 2%. This is how banks make money for themselves. They take it in at one window and loan it out (part of it) at the other window.

Low interest rates stimulate purchasing of goods and services. With low interest rates it is easier to borrow money to buy a car, a refrigerator or a house. This means that more people will exercise that purchase option and the economy will move along. This tends to create a bit of inflation.

Wealthy people do not like inflation. It means that their wealth does not buy as much as it used to buy. Large financial institutions feel the same way. They like to have the Federal Reserve under the control of people who are not elected by the citizens, or at least at a distance from the people. The President appoints Federal Reserve Board members. Their terms in office are for 14 years and the Senate confirms them. The House plays no role. The Senate is the more conservative of the two legislative branches. Senators have 6-year terms. There are two per state regardless of population.

Recently, after Hurricane Katrina, hit the Gulf Coast, a number of people felt that the Federal Reserve should have lowered interest rates to make goods and services available to those afflicted. It did not do so. It was focused on the anti-inflationary policy that it had been following. This is an example of monetary policy interfering with fiscal policy. Tax cuts meant that the government would have to borrow to cover the costs of the hurricane and aftermath.

Fiscal policy refers to the ability to raise revenue by way of taxes and to spend money on needed projects. In a phrase, fiscal policy refers to revenue and expenditure policy. With a democratic fiscal policy, we could collect more money from the affluent and provide more services to the poor. Tax the rich and help the poor.

It is for this reason that conservatives fear and loathe democracy. Conservatives fear that a majority would probably want to spend more money on schools, health care and environmental protection, instead of prisons, police and the military. Since the wealthy people would see an increase in their federal income taxes, if this happened, they generally oppose giving Congress strong fiscal tools, and instead rely on monetary policy to adjust the economy.

A more democratic society would give us better economic policies. Better economic policies would put people before profits.

A better world is possible.

References:

Economic Report of the People. Boston: South End Press, 1986.
(Center for Popular Economics, Amherst, Massachusetts)

http://en.wikipedia.org/wiki/Federal_Reserve

Here is a quick quiz question and reality redefinition brought to you by President Bush’s Council of Economic Advisers. Fill in the blank:

“[A]s people’s real incomes grow, they become subject to higher tax rates.”

This phenomenon is known as _______________________.

[The following is a guest post emailed in to the Center for Popular Economics by a reader of CPE’s newsletter]

by Ben Leet

I am a retired school teacher who has done research on the U.S. economy partly for personal reasons and also because I had been teaching at a school in a poverty neighborhood in Oakland. There were many murders, crimes and depressing events in the neighborhood where I taught. Children brought in bullets that had passed through their walls, or one described a murder that happened in his back yard. Those were the worst examples, but violence was not uncommon. Bad economics, I concluded, contributed to poor student performance, poor behavior, and stunted emotional development. Here are the salient facts I’ve uncovered that point to a society mired in inequality.

Here are the problems we face:

Here’s an interesting take (read the whole thing, it’s short!) on the Laffer Curve (the theoretical source of the arguments made by people like Rudy Giuliani, that cutting taxes increases government revenues). One reason is that the higher tax rates are, the more people will try to avoid them.  Taking the logic, to it’s absurd conclusion:

If you’re the sort of person who is willing to use these tax avoidance schemes - and I would hazard to guess that not that many people in that situation are not - how low do tax rates have to be in order that you do not engage in those schemes? The answer: half a percent. Guess how low tax rates would have to be for someone making $200 million a year not to use the same schemes.

The implication, of course, is that we want to close the loopholes that allow corporations and the wealthy to dodge paying their share, unless you find 0.5% tax rate on Paris Hilton’s income (I do love to pick on her, but fill in the blank with whoever you want that makes more in a year than whole towns will make in their lifetime) to be a reasonable amount. Do you? I don’t.

Is the New Supply Side Better Than the Old? by Austan Goolsbee is getting a lot of play in the econoblogosphere today. It’s an interesting article that points out some of the weaknesses in the supply-side argument for cutting income tax rates on the highest income people. One small point of correction, however: when referencing the fact that top incomes soared after the tax cuts of the 1980s and 2001, but also soared after tax hikes in other periods, Goolsbee says:

Seeing the same pattern when taxes rose as when they fell indicates that tax cuts weren’t responsible. It suggests that cuts for high-income taxpayers likely gave windfalls to those whose incomes were already rising sharply because of broader market forces.

One might note the impact of the policy climate in various periods, as well. Since the 1980s, it hasn’t just been tax policy that has favored high-income earners over their less fortunate fellows, but deregulation and lax enforcement on a broad range of policies including labor and the environment, as well as overt war-on-the-poor measures such as welfare reform.

Hat tip to Mark Thoma.

Today’s NYTimes article on Federal Reserve Chairman Ben Bernanke’s testimony to Congress yesterday, and the simultaneous drop in the stock market, includes a few noteworthy passages:

The stock market plunged again on Thursday on bad economic news, taking little comfort from reassuring words by the chairman of the Federal Reserve or an emerging consensus about a stimulus plan that many worry could be too late.

On a day when stocks were pushed down another 3 percent on reports of more weakness in housing and manufacturing — bringing the decline this year to a stomach-churning 9 percent — all the major players in Washington agreed on the need for putting extra money into people’s hands quickly.

President Bush publicly confirmed for the first time that he would propose a package of emergency measures, outlining its basic principles on Friday, in an effort to restore the eroding confidence of investors and consumers. The package is expected to include more than $100 billion in one-time tax rebates for individuals and an opportunity for businesses to rapidly write off their capital investments.

…

Adding to the pessimism, which drowned out the reassurances by Mr. Bernanke that a recession could be averted, were reports that manufacturing activity could be slowing even more than analysts had expected, and that housing starts dropped 14 percent last month and reached their lowest level in 16 years.

Mr. Bernanke insisted that despite concerns about “slowing growth,” the economy remained “extraordinarily resilient.”

I say “noteworthy” in light of Dean Baker’s ongoing crusade to right the wrongs in mainstream media reporting on the economy–and in mainstream economists’ ability to figure out what exactly is happening in the real world. Several of his recent posts deal with the failure of most economists to recognize when a recession begins until long after the fact: “economists have an enormous bias against seeing recessions. Virtually no economist saw the recession coming in 2001, even after the stock bubble was already well on its way to deflating (okay, none of them saw the bubble either). This includes all the official forecasters, CBO and OMB both projected solid growth in 2001.” Scroll through all of Dean’s recent posts and you’ll see more of the same clear-eyed view.

In light of this, how reassured should anyone be when Bernanke says a recession can be avoided? What are the odds that a year from now, the economics establishment won’t have determined that the recession actually started a few months back in 2007? And on top if it all, given that it took the stock market five years (and a terrorist-induced recession and boondoggle war) to largely deflate from the peak of the 1990s bubble (only in 1995 did the S&P 500’s price-to-earnings ratio drop down to the 25-year average — and even that average is well above the longer-term average [pdf chart]), how shocking can it be when it tumbles again and again in face of reality?

My wife and I wrote a letter to the editor of our local paper yesterday. Out of respect for the paper’s request that submitted letters be otherwise unpublished, I won’t copy it here, but I will spell out some of what we were writing about.

So it started with an article about the recently successful filibuster by Senate Republicans, to prevent a vote on a bill that would allow Guantanamo Bay detainees, and other prisoners in the “war on terror,” to have access to the court system for review of their cases; that is, to return to them the right of habeus corpus that was stripped in previous legislation. (We read it in our local Valley News, but it was originally from the Washington Post.)

A Republican filibuster in the Senate yesterday shot down a bipartisan effort to restore the right of terrorism suspects to contest in federal courts their detention and treatment, underscoring the Democratic-led Congress’s difficulty with terrorism issues.
…
The detainee rights amendment was an effort to reverse a provision in last year’s Military Commissions Act that suspended the writ of habeas corpus for terrorism suspects at the military detention facility at Guantanamo Bay, Cuba, and other offshore prisons.
…
The authors of last year’s bill said that advocates of such rights would open the federal courts to endless lawsuits from the nation’s worst enemies. “To start that process would be an absolute disaster for this country,” said Sen. Lindsey O. Graham (R-S.C.), an Air Force Reserve lawyer who was instrumental in crafting the provision in question in last year’s bill. …

FedSpending.org is a new website sponsored by effective OMB watchdog organization and Right-to-Know enforcer OMBWatch.org, which keeps an eye on the deregulatory manias of recent administrations. The new FedSpending.org website allows visitors to track Federal grants and contracts using various search criteria, e.g., location of the recipient (how about “Halliburton”), place of performance (try “Iraq”), sponsoring agency (”Defense”), and whether or not the contract was open to competitive bidding.

The Federal government was supposed to produce such a website itself, but Senator T. Stevens (Alaska) put a secret hold on the legislation. Although the hold was eventually withdrawn, the government still has not come up with the promisted user-friendly database.

Here’s the Halliburton search. Notice that you can refine the search by asking for more years and more detail.

Leave comments that describe your searches.  Ethanol?  Pharmaceuticals?

The main finding of Peter Lindert’s intriguing 2003 paper, “Why the welfare state looks like a free lunch” (a warm-up for his 2004 book Growing Public: Social Spending and Economic Growth since the Eighteenth Century is that generous social democratic welfare states, with a variety of universalist and means-tested safety net and family support programs, grow just as robustly as stingy laissez-faire states. Here’s the key summary from the abstract:

There is no clear net GDP cost of high tax-based social spending on GDP, despite a tradition of assuming that such costs are large.

The finding should obviously be plastered on bumper stickers, refrigerator magnets, and dorm-room walls and played continuously on a loudspeaker outside the Chamber of Commerce, Club for Growth, Council on Competitiveness, etc. The welfare state doesn’t just look like a free lunch, it is a free lunch, at least from the standpoint of national aggregates.

Class conflict may mean that it’s hard for us to order that free lunch in the U.S. anytime soon, but the barrier between us and the free lunch doesn’t come in the obvious way.

This just came out a couple days ago. It even crossed the desk of Rush Limbaugh, who used it as an opportunity to recommend increasing taxes on those below the poverty line. Rush, egalitarian that he is, feels it is unfair for people with low-incomes to avoid sharing equally in the funding of the state. Har!

THE IMPACT OF STATE INCOME TAXES ON LOW-INCOME FAMILIES IN 2006
By Jason Levitis

Summary

Poor families in many states face substantial state income tax liability for the 2006 tax year. In 19 of the 42 states that levy income taxes, two-parent families of four with incomes below the federal poverty line are liable for income tax. In 15 of the 42 states, poor single-parent families of three pay income tax. And 29 of these states collect taxes from families of four with incomes just above the poverty line.

Some states levy income tax on working families in severe poverty. Six states — Alabama, Hawaii, Indiana, Michigan, Montana, and West Virginia — tax the income of two-parent families of four earning less than three-quarters of the poverty line such families. All of these states except Indiana also tax the income of one-parent families of three earning less than three-quarters of the poverty line.

In some states, families living in poverty face income tax bills of several hundred dollars. A two-parent family of four in Alabama with income at the poverty line owes $573 in income tax, while such a family in Hawaii owes $546, in Arkansas $427, and in West Virginia $406. Such amounts can make a big difference to a family struggling to escape poverty. Other states levying tax of more than $200 on families with poverty-level incomes include Indiana, Iowa, Michigan, Montana, New Jersey, and Oregon. In 2006, the federal poverty line for a family of four was $20,615, and the line for a family of three was $16,079.

States’ tax treatment of low-income families for 2006 has improved in some states since 2005 but gotten worse in others. Between 2005 and 2006, Oklahoma and Oregon reduced the income tax liability of poor families, Delaware entirely stopped taxing the incomes of poor families of three, and Virginia entirely stopped taxing the income of poor families of four. But four other states increased their taxes on poor families by 25 percent or more, and New Jersey began taxing poor families of four for the first time since 1998. The reason for these tax increases is that provisions designed to protect low-income families from taxation — including standard deductions, personal exemptions and low-income credits — were not increased to keep up with inflation. Overall, there was virtually no change this year in the number of states levying income taxes on families with incomes below the poverty line.

The outlook for the future is somewhat better. A number of states have recently enacted significant reforms that will reduce taxes on low-income families. Between 2007 and 2010, Alabama, Arkansas, Hawaii, Michigan, Oklahoma, Oregon, and West Virginia each will improve their income tax treatment of the poor. In Arkansas, Michigan, Oklahoma, and West Virginia, the changes will wipe out or dramatically reduce tax liability that now costs poor families hundreds of dollars. Overall, the number of states taxing poor families of four could decline from 19 to 16. And quite a few other states are currently considering similar measures.

Taxing the incomes of working-poor families runs counter to the efforts of policymakers across the political spectrum to help families work their way out of poverty. The federal government has exempted such families from the income tax since the mid-1980s, and a majority of states now do so as well.

Eliminating state income taxes on working families with poverty-level incomes gives a boost in take-home pay that helps offset higher child care and transportation costs that families incur as they strive to become economically self-sufficient. In other words, relieving state income taxes on poor families can make a meaningful contribution toward “making work pay.”

States seeking to reduce or eliminate income taxes on low-income families can choose from an array of mechanisms to do so. These mechanisms include state Earned Income Tax Credits (EITCs) and other low-income tax credits, no-tax floors, and personal exemptions and standard deductions that are adequate to shield poverty-level income from taxation. Some states go beyond exempting poor families from income tax by making their EITCs or other low-income credits refundable. These policies provide a substantial income supplement to families struggling to escape poverty, but they are relatively inexpensive to states, since these families have little income to tax.

Despite some progress, there remains much to do before state income taxes adequately protect and assist families working to escape poverty.

A sweet week for family policy in the print media. Don’t miss Ruth Rosen’s cover article on “The Care Crisis” in The Nation of March 12, 2007 OR the special report entitled “The Mother Load” in The American Prospect of March 2007, with contributions by Heather Boushey and Janet Gornick, among others. Both magazines insist that creative feminist family policy ideas should move to front and center-left of the Democratic party agenda.

First, a confession. I am a virgin blogger so I may not get the links–or the lingo–quite right. But here goes:

By Heidi Garrett-Peltier, CPE Staff Economist

You are what you eat. And according to Michael Pollan, author of The Omnivore’s Dilemma, that means we’re corn. Corn has now made its way into our diet in the form of fillers, sweeteners, oils, alcohols, pills, and breakfast cereals, not to mention of course the indirect path it takes through animal feed. Why should we care? Because cheap corn has been linked to obesity, and obesity will soon overtake tobacco as the leading cause of preventable death.

The following post is the text of a radio commentary I (Mike Meeropol) delivered over WAMC radio in early October.

Did you know that the US Congress has rejected efforts to punish, investigate and criminalize war profiteering?

Yes, that’s right. This past February, the House on a mostly party-line vote rejected an effort to forbid expenditures from going to any contractor, “…if the Defense contractor audit agency has determined that more than $100,000.000 of the contractor’s costs involving work in Iraq … were unreasonable.”[1]

Meanwhile, the Senate on an equally party-line vote, rejected an amendment to an appropriation bill “to prohibit profiteering and fraud relating to military action, relief and reconstruction…”[2]

What’s going on here?

By Jonathan Elsberg, CPE Staff Economist

A funny thing happened on the road to liberation. The U.S. military has discovered that high unemployment among Iraqis has a lot to do with the strength of resistance to the occupation. Those parts of Iraq that suffer from the worst unemployment are also the places where militant resistance to the U.S. and its allies is the fiercest. The U.S. military’s reaction is an overt, though painfully slow-going, policy by commanders in these battle-torn areas to create jobs for Iraqis, a sort of “Keynesian militarism.”

Keynesianism, named for British economist John Maynard Keynes (pronounced “Kaynz”), is commonly distilled into the idea that governments can and should pursue “counter-cyclical” policies. These are policies that aim to boost employment and economic activity when the economy is sagging, and to tone it down when it gets overheated, to avoid a disastrous crash. Keynes famously suggested that in the face of an unemployment crisis, the government should do almost anything to create jobs, even going so far as burying money in old mines and hiring people to dig it back up.

(4/21/04)
By Alanna Hartzok, Co-Director, Earth Rights Institute

One day, while riding horseback in the Oakland hills, merchant seaman and journalist Henry George had a startling epiphany. He realized that speculation and private profiteering in the gifts of nature were the root causes of the unjust distribution of wealth. The insights presented in Progress and Poverty, George’s masterwork, launched him to fame. His policy approach was known at that time as the “single tax” - meaning that taxation should be shifted off of labor and onto the socially created surplus value of land and other natural resources. His message reached as far as the great Russian Leo Tolstoy, who was so taken with the idea that he frequently referred to George and “Georgism” in his novel Resurrection.

During the last 20 years of the 19th century George built an impressive populist movement bent on solving the problem of the wealth gap, and he died in 1897 while campaigning to be New York’s mayor. The “Georgists” were determined to free labor and all productive effort from the burden of taxation. Land and natural resources were gifts of nature to be fairly shared by all. The role of government would be to secure democratic rights to the earth for all people via the collection of resource rents, the surplus value accruing to natural wealth, which would be distributed in social goods, services or by direct citizen dividends.

But just as this solution to the rich/poor gap was gaining momentum, the Georgist movement was stopped in its tracks. Wealthy individuals poured their money into leading schools of economics to encourage the writing of treatises against George and the movements he had spawned. The ethical perspective that land is a common heritage and the policy approach of land value taxation were subsequently eliminated from the field of economics. The newly dominant theory focused on only two primary factors - labor and capital - with capital having the upper hand as “employing labor.” “Labor,” of course, is quite capable of self-employment given access to land. This is what the elites and the plutocrats feared most - that labor would gain full power to directly produce capital given conditions of equal rights to the resources of the earth.

Despite the elites’ success in mangling the science of political economy, the Georgist paradigm has had some influence over the years. The 1887 Wright Act in California enabled bonds raised by local irrigation districts to be paid from the increase in land values, resulting in a powerful and beneficial land reform, though this equitable and successful public finance approach was eventually undermined by private banking institutions. Now taxpayers nationwide subsidize the irrigation needs of agribusiness. Alaska’s state constitution vests the ownership of oil and other natural resources in the people as a whole and the state’s Permanent Fund distributes substantial oil revenue as citizen dividends to state residents. With no state income or sales taxes, Alaska has been the only state where the wealth gap has decreased during the past decade. This is essentially a Georgist paradigm approach, and surface land values and electromagnetic spectrum rent could be similar sources for citizen dividends.

Meanwhile, Georgist economics is again making steady progress. In Pennsylvania, eighteen municipalities, including Harrisburg and Allentown, have been revitalizing their local economies via property tax reform which shifts taxes off of homes and the built environment and onto the value of land sites. Movements for land value taxation are growing now in Scotland, UK, Ireland, South Korea and elsewhere, while Venezuela, Russia and other countries are pushing for greater resource rents from oil and mineral resources. Georgist economics is increasingly recognized as a key to economic democracy based on equal rights to the earth for all.

Recommended:

Mason Gaffney, Fred Harrison and Kris Feder, The Corruption of Economics. Shepheard-Walwyn Ltd., 1994.

Henry George’s books can now be read online. Hardcopies of his books, and those of other Georgist authors, can be ordered from The Robert
Schalkenbach Foundation (212-683-6424).

J.W. Smith, Economic Democracy: The Political Struggle of the Twenty-First Century. This excellent Georgist paradigm book can be ordered from The Institute for Economic Democracy (866-588-7445).

Kenneth C. Wenzer, ed. Land Value Taxation. M.E. Sharpe, 1999.

Georgist paradigm articles and links to other sites: Earth Rights Institute.

The Council of Georgist Organizations 2004 conference will be held in Albuquerque, New Mexico, July 21 - 25. For details: www.progress.org/cgo.

The International Union for Land Value Taxation conference is scheduled for May 27 - 30 in Madrid, Spain. For details: www.interunion.org.uk/.

Leo Tolstoy’s novel Resurrection can be read online.

(c) 2004 Center for Popular Economics

Econ-Atrocities are a periodic publication of the Center for Popular Economics. They are the work of their authors and reflect their author’s opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.

By Jim Crotty, CPE Staff Economist

The Keynesian economics that Paul Samuelson popularized in the United States after World War II was a sanitized version of the radical critique of capitalism offered by Keynes himself. John Maynard Keynes’s deep-seated attack on free-market economics led him to call for direct government control of the lion’s share of investment spending, industrial policy, a confiscatory wealth tax, strict control over cross-border financial flows and managed trade. But US “Keynesians” defanged his attack, arguing that if the government regulated interest rates and budget deficits, all other decisions could be left to market forces.

In the aftermath of World War I, the British economy experienced sluggish growth and high unemployment until war preparations began in the late 1930s. The conventional analysis of the time was that high unemployment was caused by high wages that priced British products out of the global markets they traditionally dominated. The conventional solution was to smash the
strong unions in these industries.

Keynes argued that the correct policy was for the government to initiate a large long-term program of government infrastructural investment. This would reduce unemployment not only through government employment, but also by the spending of the newly employed - the famous Keynesian “multiplier” effect that has puzzled generations of students. Focus on large-scale government investment was not just a post-war expedient for Keynes. He supported this policy until his death in 1946.

Keynes believed that free-market capitalism was subject to extreme instability primarily because business investment spending was inherently volatile. To build a factory, a firm must gamble that the future profits from the factory will more than compensate for its cost. But firms cannot know what future profits will be. As Keynes put it, “About such matters, we simply do not know.” Therefore, investment can only be based on hunches or guesses about the future, and these are profoundly influenced by waves of optimism and pessimism in market psychology. Boom euphoria leads to over-investment and excess capacity, while fear of loss in the downswing causes investment to plummet. Keynes considered stock markets to be “gambling casinos” whose instability only made investment more volatile.

Keynes thought that there were almost unlimited opportunities for productive state investment - in education, housing, transportation, utilities, health, culture and so forth. He believed that if the government could keep public investment on a steady growth path, this would provide a center of gravity for private profit expectations that would drastically lower private investment instability. In 1928, he proposed a “National Investment Board” to plan and control a massive investment program, arguing that “an era of rapid progress in equipping the country with all the
material adjuncts of modern civilization might be inaugurated which would rival the great Railway Age of the nineteenth century.”

In 1935 in The General Theory he said: “I expect to see the state … taking an ever greater responsibility for directly organizing investment.” In 1943 he argued that “if the bulk of investment is under public or semi-public control and we go in for a stable long-term programme, serious fluctuations are less likely to occur.” Keynes specifically rejected the idea that government should rely on changing interest rates and budget deficits to control instability, the macro policy attributed to him by Samuelson.

Keynes understood that capitalists and renters would be likely to ‘run away’ from Britain in reaction against his program, causing skyrocketing interest rates and plummeting investment. To prevent this, he called for an ironclad regime of government control of financial flows into and out of Britain, and saw to it that every country was given the right to control capital movements by the Bretton Woods Agreement that created the International Monetary Fund in 1944.

The economic prospects of the majority of people would be greatly improved if government policy followed Keynes’ more radical vision, rather than the timid version promoted in nearly all college textbooks.

Reference:

Jim Crotty. “Was Keynes a Corporatist: Keynes’s Radical Views on Industrial Policy and Macro Policy in the 1920s,” Journal of Economic Issues, September 1999. [pdf]

Keynes’ most famous book, The General Theory of Employment, Interest, and Money, is available online.

(c) 2004 Center for Popular Economics

Econ-Atrocities are a periodic publication of the Center for Popular Economics. They are the work of their authors and reflect their author’s opinions and analyses. CPE does not necessarily endorse any particular idea expressed in these articles.

(6/25/03)
By Anita Dancs, Staff Economist for the Center for Popular Economics and Research Director of the National Priorities Project

With great fanfare, President Bush signed the ‘No Child Left Behind Act’ in 2001. Contrary to Administration claims, this Act will leave many children behind. The Act sets out requirements on public schools in an effort to raise student achievement, but it also promises additional funding. Despite these promises, the Bush Administration’s proposed budget for the coming year would underfund the Act by $7 billion. State and local governments mired in fiscal crises in recent years, will have to find ways of meeting the Act’s requirements while also dealing with rising Medicaid costs, underfunded homeland security mandates, and neglected roads.