Robert Reich: Op-Ed Contributor - How to End the Great Recession - NYTimes.com

General General Discussion
21

He cut spending and increased taxes. The point was that he tried to reduce debt during a recession and this led to further contraction. The irony here is that FDR ran on a platform that opposed Hoover’s policies and then did exactly the same thing. This of course led to an even larger contraction post 1934 than was had during Hoover.

I wasn’t arguing about your points on Keynes and his caveats, only the deficit spending part that cutting spending in a recession is bad.

I didn’t say it was “bad” per se. I said it would lead to economic contraction. No economist denies this they only debate whether the cure is worse than the disease. The problem here is that the abuse of Keynesian principles means that we have few other options but it is not without some cost.

I disagree that debt in and off itself is not a bad thing. While some very specific cases, like a house, are not normally something you can pay cash for, a car should be. So very narrow cases like a house could be financed, within ones means.

You’re of course free to disagree but capitalism is premised on financing of debt for greater return down the road.

I do not claim to have lived by this and will admit to abusing the debt part, which I am trying to rectify, but am adopting such a mindset for the future. Btw, we rent and would like to buy a house but have not been in a position to do so.

Fair enough but you see the value in getting a house/mortgage even if you can’t afford it.

Debt for day to day operations and short term non capital uses is dumb in my book, even in a non structural sense (as defined by Wikipedia as debt that is incurred in low points in a business cycle and counter acted by the high points).

Short-term debt is how almost all businesses operate. Borrowing to pay for raw materials in order to gain when you use capital/labor to create a finished product occurs every day with no ill effect. The problem lies when the debt is no longer sustainable.

I guess in my book there is nothing the govt should be paying for which would cause a structural deficit. Proper savings and rainy day funds (like states do, or are supposed to do) along with only spending money that the govt is constitutionally supposed to be spending would negate the need to run any sort of deficit.

Military spending is a huge part of our structural deficit. It is a huge expenditure which doesn’t pay off in and of itself but is vital to security/prosperity. I know it may seem counter-intuitive but I promise I’m not making it up. LARGE structural debt (say >50% of revenue) is when it becomes unsustainable.

22

Of course, I did not say to cut spending and to raise taxes :wink: I said to cut taxes when you cut spending so that the money in reduced spending is then taken by the economy (through the private sector) and used

I didn’t say it was “bad” per se. I said it would lead to economic contraction. No economist denies this they only debate whether the cure is worse than the disease. The problem here is that the abuse of Keynesian principles means that we have few other options but it is not without some cost.

I still have yet to see an example where cutting spending AND taxes has caused a contraction. It may be there as I have not looked but Hoover was not it.

You’re of course free to disagree but capitalism is premised on financing of debt for greater return down the road.

It is? Stupid me, I thought capitalism was premised on investing and share ownership. Ie, allocation of capital. If every business was frugal and saved money to make investments or raised capital through share sales, capitalism would still be alive and well. No debt required.

Fair enough but you see the value in getting a house/mortgage even if you can’t afford it.

of course. While people would be better off if they could afford to buy a house with cash (primary residence), most people cannot. I will save until I have a sizable down payment before we buy and will buy what we can afford.

Short-term debt is how almost all businesses operate. Borrowing to pay for raw materials in order to gain when you use capital/labor to create a finished product occurs every day with no ill effect. The problem lies when the debt is no longer sustainable.

I don’t disagree that that is how it is done. However, it does not need to be that way. If businesses operated frugally and on a cash basis they would be better off. They grow as they build up their cash from their business. Look at Apple. Something like 48 Billion in cash and short term investments and very low long term debt. But borrowing for raw materials is different than borrowing to pay payroll, or to finance some hostile takeover that they cannot afford.

I realize that some things need to be financed. I just think that most things do not and saving and being frugal is the better plan. Not that I have lived this way, but am working to adjust my life to conform with these ideas. Govt would work better if it did so too. (It would not get involved with things it shouldn’t be in as it would not have the money to do so).

Military spending is a huge part of our structural deficit. It is a huge expenditure which doesn’t pay off in and of itself but is vital to security/prosperity. I know it may seem counter-intuitive but I promise I’m not making it up. LARGE structural debt (say >50% of revenue) is when it becomes unsustainable.

I believe it. But if we did not have all the other spending going on (wealth redistribution types) then I bet we could afford the military spending and it would not be a cause of a structural deficit.

23

You’re not going to find it because it doesn’t happen. Cutting spending causes contraction, cutting taxes is stimulative so worse case scenario is they cancel each other out. No one disputes that, not even Keyenes but the gov is never going to operate without some form of debt. Once again there is a difference between “good” debt and “bad” debt. If you cut spending and cut taxes you’d certainly decrease the deficit but you’d do nothing to decrease debt. That interest would continue to pile up. Cutting spending is a necessity but you can’t really cut taxes until you’ve reduced the debt significantly…this is where Reagan/Bush 43 failed.

It is? Stupid me, I thought capitalism was premised on investing and share ownership. Ie, allocation of capital. If every business was frugal and saved money to make investments or raised capital through share sales, capitalism would still be alive and well. No debt required.

Mercantilism is also founded on investing and share ownership. What’s the difference?

Capitalism IS the acquisition of capital but acquiring capital efficiently is premised on good debt. If every business did what you said then they would have to save for years for large capital expenditures. It would still technically be capitalism but growth would happen but at a far slower rate and in the meantime you’re spending cash you could otherwise spend on more hiring, more capital investment or more raw materials. It is simply more efficient to borrow at a reasonable interest rate (pit) and reap returns at 2, 3 or 4(pit). You win, the bank wins and the economy chugs along. Good debt fuels economic growth; bad debt hampers it.

Shares of stock are one way to raise capital but you also have to yield operational control to shareholders, bonds (debt) is another way to raise capital without having to yield that control. Both are entirely consistent with capitalism.

of course. While people would be better off if they could afford to buy a house with cash (primary residence), most people cannot. I will save until I have a sizable down payment before we buy and will buy what we can afford.

Exactly but how long would it take you to buy a house if you simply saved until you had enough money? Of course you would have a house free and clear at the end of 20 years but you would have to still pay rent in the mean time. You’re spending cash you would otherwise have to invest.

I don’t disagree that that is how it is done. However, it does not need to be that way. If businesses operated frugally and on a cash basis they would be better off. They grow as they build up their cash from their business. Look at Apple. Something like 48 Billion in cash and short term investments and very low long term debt. But borrowing for raw materials is different than borrowing to pay payroll, or to finance some hostile takeover that they cannot afford.

No one said you borrow for payroll continuously. It is however very common to borrow for payroll in the short-term for greater revenues down the road. Is it a gamble? Sure is but all of capitalism is some form of gamble/risk.

I believe it. But if we did not have all the other spending going on (wealth redistribution types) then I bet we could afford the military spending and it would not be a cause of a structural deficit.

Defense spending is “good” structural debt the Navy for instance maintains open trade on the high seas and so ultimately keeps the economy growing that would otherwise be at the mercy of rival powers and/or piracy. So are highway expenditures, infrastructure and other things, good roads make transportation costs very low and so “grease the wheels” of the economy which lead to increased revenue in excess of the amount spent. Large structural debt simply to maintain entitlements that yield no long-term payoff is the problem.

24

Lots of things don’t happen but they should.

Cutting spending causes contraction, cutting taxes is stimulative so worse case scenario is they cancel each other out.

I would bet the effect is greater on the growth side from the tax cutting than the reduction in spending. The market tends to spend money more effectively than the government. So taking x billion out of spending and reducing taxes x billion is probably not a simple “cancel out” effect. If the govt was so good at allocating capital that it was the equal of the market, the Soviet Union and stuff would probably be still around.

No one disputes that,

“Crackpots” do

There was a time that no one but crackpots disputed that the world was flat either.

It looks to me like this is one of those conventional wisdom things that probably would turn out to be false (when combined with equal tax cuts)

not even Keyenes but the gov is never going to operate without some form of debt. Once again there is a difference between “good” debt and “bad” debt. If you cut spending and cut taxes you’d certainly decrease the deficit but you’d do nothing to decrease debt. That interest would continue to pile up. Cutting spending is a necessity but you can’t really cut taxes until you’ve reduced the debt significantly…this is where Reagan/Bush 43 failed.

I thought Reagan cut taxes but did not reduce spending. I think that is what you said in a previous post. That is the opposite of what your saying here.

You can cut taxes as that leads to overall greater growth which leads to more income from the same level of taxation.

In fact, you should probably cut taxes to start as a way to force you to cut spending.

I bet that growth in this country would take off and jobs and manufacturing would come back to the US if

  1. eliminate the corp income tax (permanently, not just for say 2 years or something)

  2. leave dividend and capital gains taxes where they are or even lower them some more.

  3. Eliminate Obamacare

  4. Cancel the “stimulus”, “tarp”, etc that has not been spent yet

  5. Reduce overall federal spending, in addition to #4, by 10% (now, with more over the long haul)

Of course, things like reducing the power of unions, getting public sector pay and pensions under control, making sure environmental regulations makes sense and severely curtailing the ability of enviro-whackos from initiating lawsuits, etc would be needed along the way as well. But the 5 steps above would pull us out of this funk right away. It would encourage investment, and eliminate the uncertainty that is strangling business now.

25

Fair enough.

I would bet the effect is greater on the growth side from the tax cutting than the reduction in spending. The market tends to spend money more effectively than the government. So taking x billion out of spending and reducing taxes x billion is probably not a simple “cancel out” effect.

If that were the case the debt would have shrunk under both Reagan and Bush 43. It did not.

If the govt was so good at allocating capital that it was the equal of the market, the Soviet Union and stuff would probably be still around.

You’re conflating one thing with another. First Communism isn’t “short-term” spending that Keynes advocated, it’s an entire economic system. Second in Communism government doesn’t allocate capital, it owns capital. Keynes still operated within the confines of capitalism.

I thought Reagan cut taxes but did not reduce spending. I think that is what you said in a previous post. That is the opposite of what your saying here.

No it’s not. Re-read. There is a difference between “deficit” and “debt.” Reagan not only did not reduce deficits, he increased debt. There is no more virtue in “borrow and spend” to fund bad debt than there is in “tax and spend.”

You can cut taxes as that leads to overall greater growth which leads to more income from the same level of taxation.

In fact, you should probably cut taxes to start as a way to force you to cut spending.

Again if that were the case Reagan/Bush would have reduced deficits/debt, they did not. If you’re going to cut taxes, you have to cut non-discretionary spending, if you do not, deficit/debts climb.

They both tried to cut taxes to force a cut in spending…unfortunately the exact opposite occurred. Sorry. Prior to Obama Reagan/Bush saw the largest increases in debt.

I bet that growth in this country would take off and jobs and manufacturing would come back to the US if

  1. eliminate the corp income tax (permanently, not just for say 2 years or something)
  1. leave dividend and capital gains taxes where they are or even lower them some more.
  1. Eliminate Obamacare
  1. Cancel the “stimulus”, “tarp”, etc that has not been spent yet
  1. Reduce overall federal spending, in addition to #4, by 10% (now, with more over the long haul)

No one is disputing that philosophically speaking but reality is different. You can’t cut taxes endlessly. You have to have some form of taxation to create revenue. Like anything there is a law of diminishing returns…the only dispute is where the ideal balance is found. The more you cut taxes the sooner you will reach a point of diminishing returns.

That said your understanding is flawed…most businesses don’t pay corporate income taxes as they are taxed at the individual/personal level.

You’d get far more stimulative effect by cutting personal income taxes than corporate income taxes.

Of course, things like reducing the power of unions, getting public sector pay and pensions under control, making sure environmental regulations makes sense and severely curtailing the ability of enviro-whackos from initiating lawsuits, etc would be needed along the way as well. But the 5 steps above would pull us out of this funk right away.

Uhm no, while it would help there is no instant payoff and there is always a cost involved.

26

Some definitions to help people understand some of this stuff:

Deficit – Government takes in revenue in the form of taxes, fees, licenses, etc. Government then spends that money. The government also has the ability to spend more money than they take in through revenue mechanisms like taxation. Say a government takes in $100 in revenue, but spends $135 dollars.

This leaves them with a deficit of $35.00. That deficit is generally made possible through borrowing…generally by issuing bonds, instruments where the government agrees to pay a fixed amount of money plus interest to the purchaser of the bond.

Money borrowed to finance current spending, plus the interest on it, becomes debt. If left unpaid, debt piles up. If our hypothetical government with $135.00 in spending had taken in the same $100.00 in revenue the previous year and had spent $125.00, then they carried a debt of $25.00 over from the year before. The current year’s $35.00 deficit gets added to the previous years $25.00 deficit for a combined debt of $60.00.

The terms “deficit” and “surplus” refer to the ratio of revenue to spending within a given budget year. In the 1990’s after the Republican takeover the budget generated surpluses because decreases in spending forced by the Republican congress and revenue exceeded government projections by a fairly large margin, meaning that at the end of the day Congress hadn’t spent all the revenue that came in…thus there was a budget surplus.

Note that the budget surpluses had no impact on the overall level of debt carried by the nation.

Keynes –

When considering that a recession is a drop in the demand for goods and services in the economy, Keynes theorized that the government could step in and, for a very brief period of time, make up for the drop in private demand for goods and services hopefully long enough to spur the economy back to health.

Say that the computer industry tanks, but the federal government buys a new weapons system for the military that requires a lot of production from chip manufacturers, software engineers, etc. Suddenly the firm that was looking at bankruptcy because their processors were not needed for the private market now find a potentially lucrative contract supplying chips to the weapons program. That would be an example of government stimulus under the Keynes theory…government spending for the short term making up for a lowering of aggregate demand in the economy.

Liberals fuck this simple principle up in many ways, including holding that ever dollar spent by government has a 1:1 stimulus effect on the economy. It does not, and nobody with an iota of sense has ever contended that it does. Liberals can get away with it because so few people in the country have any economics education or even a basic familiarity of how government budgeting works. Thus their 787 billion dollar “stimulus” package, of which the majority of money went into paying teacher salaries, did not actually stimulate anything because instead of going into sectors which had the potential to actually grow demand the money went basically into efforts to help state and local governments meet payroll…governments that were already spending beyond their means in the first place.

Like any other idea in history, when politicians get their hands on it the end result is often utterly foreign to the person who came up with the original concept. That’s not to say that Keynes was the final authoritative word in economics, but it should be rightly understood that what our government has done for the last 70 years is not remotely in keeping with the principles even he outlined, as he saw a short term expansion of government spending on genuine economic growth followed by a reduction of government spending after the economy got moving again and a focus on paying down debt generated during the recession.

Notice that we haven’t done that in over 50 years.

Now as for the original article, Reich’s arguments are stupid and hideously irresponsible. Part of the reason for the continuing instability in the economy is uncertainty. By floating ideas about confiscatory tax rates (leaving aside the argument about how the the high tax rates we already endure are somehow not sufficiently redistributive…) he contributes to the uncertainty that causes people who have money to spend to hold on to it rather than invest it into things that can grow the economy. In uncertain times people are primarily interested in protecting what they have. To get things moving again you want to make it attractive for them to take risks and to see the downturn as an opportunity. That does not happen when you yap about 90% tax rates or more types of taxes or creating insane new levels of debt that make people think that the piper is going to demand payment soon.

It should be noted that simply posessing the title of “economist” does not mean that an individual is actually competent to offer advice on fiscal policy. Reich is living proof of this.

27

quit worrying about the rich !! you are so eager to make a comparison why not compare those on the same level to see who it really hurts or helps !!!

%10 across the board on things you buy is pretty flat and Fair !

if someone wants to save more and buy less then they should be rewarded !
does that person need a flat panel ? NOPE so its a luxury you pay for

some families I know in the islands grew their own gardens and hunted for food and really did not buy much at all !!!
why penalize them with hitting their salary

so that way if you make X amount two people the same
one is stupid and buys luxury items not needed ? $4 loaf of bread Vs $1.50
those that bulk up at costco and think ahead etc…

which is more fair now !!! the person that tries to save or the one that does not !!!

28

agreed. the theory and principles are sound. but the way its been put into practice (or not) is crap.

29

You missed the point; economics is not like physics there is no single, “sound” theory of stimulative spending. My point wasn’t to praise Keynes or even agree with him on a macro level. My point was that Democrats invoke Keynes but then ignore his precepts.

This is my biggest problem with Krugman/Reich - they often make the claim that “every economist agrees with Keynes” which is not only a flat lie but also fails to understand that Keynes himself would contradict them.

Keynes can work sometimes but generally Friedman and his Chicago boys are more correct…the best way to stimulate the economy in the short-term is to cut taxes. To do that however you need to pay down the debt, to do that you need to run surpluses without raising taxes, to do that you need to cut entitlement/discretionary spending.

30

Why do you think that my 5 point proposal is cutting taxes endlessly? There are still mountains and mountains of taxes to be cut…

That said your understanding is flawed…most businesses don’t pay corporate income taxes as they are taxed at the individual/personal level.

Partnerships, LLC (most), sole proprietors, S-Corp pay taxes at the personal level. C-Corp (many small companies, and most big companies) pay corporate income tax. In the end it is all the same since companies pass it all through any way.

According to the charts at this link, rough eyeball shows corp taxes are about 20% of combined personal and corporate tax receipts. That is a significant value.

Since since corp taxes are just a pass through anyway, making costs of goods go up to cover them, lowering corp tax rates to 0% should hopefully bring increased business being done in the USA which would mean more personal income to tax so the money would just be shifted but with increased employment.

And tangentially, for those interested in reading more, here is a CATO publication on the corp tax rate

http://www.cato.org/pubs/tbb/tbb_62.pdf

You’d get far more stimulative effect by cutting personal income taxes than corporate income taxes.

The effect of cutting corp taxes is to provide as stable, and from a tax perspective, desirable location to do business, which should lead to employment growth and more personal incomes to tax. So it should come to the same thing anyway.

31

Yes, I think my 5 point plan would (relatively) get us out of the funk. It would provide stability and certainty. I did not claim that it would instantly revive the economy. Just get us out of the funk (the malaise, the lack of anything happening) which is due to uncertainty and people trying to preserve wealth instead of create wealth.

32

The point isn’t “pass through” taxation. LLC, proprietors etc. pay at the personal level because it’s less than corporate taxes. It’s not realistic to cut both personal/corporate so you’re going to have to pick one.

Since most businesses and the bulk of employers pay at the personal level you’ll get more stimulus/employment from lowering personal taxes than corporate taxes.

According to the charts at this link, rough eyeball shows corp taxes are about 20% of combined personal and corporate tax receipts. That is a significant value.

It is not value unless you lower debt as well as cutting taxes. There has been little spending on Obamacare so while getting rid of it makes sense from a psychological point of view it has almost no impact on current deficits/debt. Similarly getting rid of TARP/Stimulus is only a drop in the bucket compared to what you need to address.

Your 5 ideas are all well and good but are somewhat gimicky without a wholesale shift in mindset in lowering entitlement spending.

There’s a reason SS is called the third rail…then you’ve got medicare/medicaid and other unfunded liabilities. Did I mention all the IOUs in the SS “lockbox”?

Since since corp taxes are just a pass through anyway, making costs of goods go up to cover them, lowering corp tax rates to 0% should hopefully bring increased business being done in the USA which would mean more personal income to tax so the money would just be shifted but with increased employment.

Again lowering taxes without cutting spending only aggaravates the long term problem. I’m all for lowering corporate taxes but it requires making hard choices, I don’t see the appetite for that politically.

And tangentially, for those interested in reading more, here is a CATO publication on the corp tax rate

http://www.cato.org/pubs/tbb/tbb_62.pdf

CATO has some great ideas and I’ve worked with their people before but in and of itself is only a piece of the puzzle.

The effect of cutting corp taxes is to provide as stable, and from a tax perspective, desirable location to do business, which should lead to employment growth and more personal incomes to tax. So it should come to the same thing anyway.

While certainly desirable, it is not the same thing. If you wanted to lower corporate tax spending, simplifying the tax code without changing the rate would have as much stimulative effect as businesses would spend less money on accountants/lawyers which they could in turn spend on hiring/capital.

33

I’m no economist and don’t profess to have more than a working knowledge of major schools of economic theory. However, there is one overarching problem that jumps out at me every time I lend my attention to a debate on economic policy.

Why is it that economists (and their political acolytes) consistently adhere to the view that one, and only one, school of economic theory is valid and must be adhered to regardless of the situation? It seems rational to me that different situations might require different solutions and, as the saying goes, if the only tool you have is a hammer, than every problem starts looking like a nail. If our decision makers, both in the public and private sector, see every problem or challenge through only one ideological lens, then their ability to respond effectively is significantly diminished.

And that, at least in my view, is what’s undermining our ability to successfully navigate out current problems and, coincidentally, also got us in hot water in the first place.

Our political leadership, the major parties, and their congressional minions have so rigidly aligned themselves with one economic school or another that they lack the flexibility to adapt and respond to changing circumstances. Pardon the mixed metaphor, put they get on one horse and ride that bastard right into the ground, regardless of whether it’s pouring rain or sunny and crystal clear.

As far as I’m concerned, economic ideologues are as dangerous and destructive as religious fundamentalists.

34

Probably the same reason why we only have one school of theory in physics.

35

principals of Keynesian economics basically justifies big government thinking to politicians and thats why they love it.

Economic law is a natural law just like the laws of physics. Austrian economics has been far more accurate than Keynesian economics. Over the past 100+ years we’ve made so much progress in physics and the sciences yet the study of economics is stagnant.

36

That is incorrect.

There are certain principles that are immutable (e.g. supply-demand) but Keynesians and Austrians and Supply siders all operate within those principles. This is different than the theories themselves.

The theory of gravity never varies (except at the quantum level so even that is not an absolute) economic theories works in “trends.” Sometimes trends work, sometimes they can be problematic.

37

I am continually amazed how people will jump up and down over their favorite Constitutional sacred cow, like the 1st Amendment or 2nd Amendment, but give short shrift to the actual nuts and bolts of the US Constitution.

The Founders already figured out US tax policy over 200 years ago - Apportionment and Tariffs!

Apportionment - each state sends a portion of their total taxes collected to the US Treasury based on their population as determined by the Census.

Tariffs - a direct tax is applied to all goods (and I would argue services) crossing the boarder into the United States.

End individual Federal income tax, make the States fund the Federal govt, and apply a 20% tariff to all foreign goods and services, and our economic troubles will be over very quickly.

Right now the US is a terminal cancer patient. It will die unless we use aggressive pro-growth pro-citizen economic policies.

Strangely, no less than Pat Buchannan and Ralph Nader both agree on this. Establishment Dems and Republicans do not. What does that tell you?

38

Not really, at best that is simplistic.

First that is not what the intent of apportionment in the Constitution as that mostly deals with slavery/representation and since slaves were property it was a capitation tax. Income tax is not a direct/capitation tax. The Constitution establishes no mechanism for states collecting income taxes and then passing them up to the Fed.

That said the 14th and 16th Amendments of the Constitution undid apportionment as you describe.

39

Yep!

Like I said, the US is terminal. In other words, the Republic WILL die. We WILL go the way of the Roman Empire, the British Empire, Spain, Greece, Tsarist Russia and the USSR. Your home town will most likely still exist but the American Republic will look more like modern day Russia - a third world country with a big military and govt apparatus.

And even though we know our current course will be the death of us, ‘we’ will not change it because the obvious solutions are too ‘simplistic.’

If anyone sees a rosy outlook for America, given out current course, please lay it out for me.

40

Life is 100% terminal. Same with governments. Nothing man-made is eternal. The British “empire” no longer exists but Britain still does. They still rank as one of the world’s great economic and military powers. That said America’s “imperialist” phase has long since gone bye-bye but we’re still the greatest power on Earth, short a catastrophe of apocalyptic proportions that’s not likely to change in the near future.

This shift however had nothing to do with apportionment nor will re-instituting it make our problems go away.