Sunday, January 18, 2015

A Few Links to Dispel Conservative Myths Part Four: The Economy and Federal Spending

What's bigger than the federal budget? Not much, except maybe Americans' misunderstanding of it. The federal budget deficit is down by about two-thirds since President Obama came into office. Apparently most Americans would be surprised to learn this, if anyone bothered to tell them. According to a recent Bloomberg poll, 73% of Americans believe the deficit has increased in the last six years.

How can this be? I think it boils down to:
1. Republican leaders lie a lot, and their followers aren't exactly big on fact-checking. During the first Presidential debate in 2012, candidate Mitt Romney said the President had "doubled" the deficit.
2. Democrats are a disaster when it comes to talking about their successes. For some strange reason, they've decided that reducing the deficit by two-thirds is not worth mentioning. As John Stoehr of The Hill noted before last fall's election, "But mostly we haven't heard a word about the deficit because the Republicans are so skilled at controlling the terms of debate. If they don't say something is a problem, then it isn't a problem. Their mastery of the narrative is evident in Obama's apparent decision not to broach the subject for fear of inviting a Republican response, as well as in the pains Democrats are taking to get as far away from the president as they can."
3. Americans don't know because they don't care. When only one in five voters under 30 bothers to vote, what more can you say?

Well I care, and I'm going to keep dispelling conservative lies and nonsense. In the first three parts of this series I covered myths regarding Obamacare, climate change and immigration. In this post I'll be covering government taxation, revenue and spending as well as some general economic issues.

Part Four. The Economy and Federal Spending
Myth: The federal deficit has increased under President Obama
Fact: Since the President came into office, the deficit has fallen by 66%, from $1.413 trillion in fiscal year 2009 to $483 billion in 2014.

Myth: The President has dramatically increased federal spending and grown government.
Fact: Federal spending declined during President Obama's first term in office. For the first time in 40 years, the government sector of the American economy shrank during the first three years of a presidential administration (2009-2012). In 2013, the number of federal employees reached a 47-year low.

Myth: Democratic tax and spending policies, also known as demand-side economics or "Keynesianism", have repeatedly been demonstrated to not work. President Franklin Roosevelt's "New Deal" policies of the 1930s actually made the economy worse.
Fact: There's a lot to cover in here, dissecting decades of economic policy, but I'll try to keep it brief.

For most of a century, Democratic administrations have practiced demand-side economics. Demand-side policies, most famously suggested by economist John Maynard Keynes, propose that the public sector use monetary policy and fiscal policy in order to stabilize output over the business cycle. This counter-cyclical budget management mitigates the ebb and flow of economic cycles of glut and recession, and works to create full employment. Demand-side policies function on the idea that when money is injected into the bottom of the economy, that is, among working people and consumers, there is a multiplier effect that generates growth upwards through the economy. This is because an injection of extra income leads to more spending, which creates more income. For example, extending unemployment benefits and increasing food stamps are among the fastest ways to stimulate economy. A 2008 study concluded that for every dollar spent on the food stamp program $1.73 is generated throughout the economy.

President Franklin D. Roosevelt's "New Deal" brought a demand-side approach to the crisis of the Great Depression in 1933. He raised taxes on businesses, backed legislation to regulate banks and financial markets and hired millions of unemployed Americans to build the country's infrastructure.

America's industrial production fell by half during the four years prior to FDR's inauguration. Non-farm unemployment stood at 37%. America was subject to widespread bank failures and farm foreclosures. During FDR's first two terms in office:
* US industrial production doubled, and GDP rose nearly 100%.
* Non-farm unemployment fell from 37% to 14%.
* Farm foreclosures fell by about 80%.
* Real disposable income nearly doubled, from $5,100 per capita to $9,100.
* Federal Deposit insurance was created in 1934. That year, 4,000 banks had failed before the FDIC went into effect. In the following years, the number that failed was close to zero.
* Among the many federal projects to build the country's infrastructure and improve conservation while putting the unemployed to work was the Works Progress Administration. From wikipedia:

"The WPA built traditional infrastructure of the New Deal such as roads, bridges, schools, courthouses, hospitals, sidewalks,
waterworks, and post-offices, but also constructed museums, swimming pools, parks, community centers, playgrounds, coliseums, markets, fairgrounds, tennis courts, zoos, botanical gardens, auditoriums, waterfronts, city halls, gyms, and university unions. Most of these are still in use today. The amount of infrastructure projects of the WPA included 40,000 new and 85,000 improved buildings. These new buildings included 5,900 new schools; 9,300 new auditoriums, gyms, and recreational buildings; 1,000 new libraries; 7,000 new dormitories; and 900 new armories."

Other Democratic administrations have also been successful with demand-side policies. The US saw strong economic growth during the Kennedy-Johnson years, remembered for the "New Frontier" and "Great Society" programs. Kennedy's New Frontier expanded unemployment benefits, aid to cities to improve housing and transportation, continued development of interstate highways, and passed a water pollution control act and an agricultural act to raise farmers’ incomes. It also passed a number of anti-poverty acts including increases in social security benefits and in the minimum wage, several housing bills, and aid to economically distressed areas along with expansions in rural electrification, soil conservation, crop insurance and farm credit. In the 1990s the Clinton administration inherited an economy in recession and a record $293 billion budget deficit. Clinton increased taxes on high incomes and invested in infrastructure, leading to sustained economic growth and job creation, and, by the time Clinton left office, a balanced federal budget.

For a current lesson on demand-side economics as compared to conservative supply-side policies, compare California to Kansas. In Kansas, Republican Governor Sam Brownback decided to embark on an "experiment," cutting taxes on businesses and high incomes, slashing spending on education, social services and the arts, and  privatizing the entire state Medicaid system. From Mark Benelli of Rolling Stone:

"Brownback himself went around the country telling anyone who'd listen that Kansas could be seen as a sort of test case, in which unfettered libertarian economic policy could be held up and compared right alongside the socialistic overreach of the Obama administration, and may the best theory of government win. "We'll see how it works," he bragged on Morning Joe in 2012. "We'll have a real live experiment."

That word, "experiment," has come to haunt Brownback as the data rolls in. The governor promised his "pro-growth tax policy" would act "like a shot of adrenaline in the heart of the Kansas economy," but, instead, state revenues plummeted by nearly $700 million in a single fiscal year, both Moody's and Standard & Poor's; Poor's downgraded the state's credit rating, and job growth sagged behind all four of Kansas' neighbors."

Contrast this with the administration of Governor Jerry Brown of California. In 2009, California had a $42 billion budget deficit. The Brown administration raised taxes on high incomes and rolled back some corporate tax breaks, while
dedicating new revenue to education and public safety. By 2013, California had a balanced budget. The unemployment rate there fell from 12.4% in the fall of 2010 to 7.3% in the fall of 2014.

Myth: Tax cuts will pay for themselves, because they stimulate the economy.
Fact: This myth is what Governor Brownback of Kansas was touting when he cooked up the his great "experiment" described above: lower taxes would encourage more investment, so that even as tax rates fall, total tax revenue increases. Known as supply-side or "trickle-down" this conservative economic theory has repeatedly been proven false. In 2012, the Congressional Research Service published a study analyzing the economics of tax rates since 1945. As discussed by Derek Thompson of The Atlantic:

"Analysis of six decades of data found that top tax rates "have had little association with saving, investment, or productivity growth." However, the study found that reductions of capital gains taxes and top marginal rate taxes have led to greater income inequality. Past studies cited in the report have suggested that a broad-based tax rate reduction can have "a small to modest, positive effect on economic growth" or "no effect on economic growth." 

Well into the 1950s, the top marginal tax rate was above 90%. Today it's 35%. But both real GDP and real per capita GDP were growing more than twice as fast in the 1950s as in the 2000s. At the same time, the average tax rate paid by the top tenth of a percent fell from about 50% to 25% in the last 60 years, while their share of income increased from 4.2% in 1945 to 12.3% before the recession."

Other studies have reached similar conclusions. In 2010, the non-partisan Congressional Budget Office analyzed the short-term effects of 11 policy options and found that extending the tax cuts would be the least effective way to spur the economy and reduce unemployment. In 2014, a Dartmouth College study also concluded that individual tax reform does not create significant economic growth

Myth: Federal revenue grew after the 1981 Reagan tax cuts, demonstrating the validity of trickle-down economic theory.
Fact: Federal revenue as a percentage of GDP rose under President Carter, reaching 21% in 1981. Under Reagan federal revenue as a percentage of GDP fell substantially, and did not reach 21% again until the Clinton years.

Myth: The Republican party is the more pro-business, pro-growth party.
Fact: The economy has consistently performed better under Democratic administrations rather than Republican in both GDP growth and job creation.

Myth: The 2009 Troubled Asset Relief Program bailout of banks and automakers was a disaster. The government lost a great deal of money on it. The auto industry did not need federal bailout money.
Fact: The government bailout of bankrupt General Motors and Chrysler saved 2.6 million jobs and $284.4 billion in personal income. Regarding the bailout of the financial industry, Jonathan Yip of the Harvard Political Review said, "TARP was a hastily executed effort of unprecedented size to rescue the US financial system from collapse. In that regard, TARP succeeded; without the immense government intervention, the recession would have been deeper, longer-lasting, and far more serious."

The TARP program returned a $15.3 billion profit to the taxpayers. General Motors could not, as suggested by Mitt Romney, have found private sector refinancing.

Myth: President Obama's 2009 economic stimulus plan didn't work.
Fact: A 2012 survey of economists showed widespread agreement among economists that the American Recovery and Reinvestment Act of 2009 lowered unemployment and brought net economic benefit to the country. Subsequent studies have shown this agreement as nearly universal among experts. In terms of specifics, the Congressional Budget Office, for example, said the stimulus boosted real GDP in the second quarter of 2010 alone by between 1.7 percent and 4.5 percent, adding at least $200 billion in economic activity.

Myth: President Obama promised that unemployment would not go above 8% if the Stimulus was passed.
Fact: In early January 2009, the President's economic team released a report noting that unemployment was projected to hit about 8.5% in 2009 and then continue rising to a peak of about 9% in 2010. With the stimulus, they predicted the unemployment rate would peak at just under 8% in 2009.

When the report was released, unemployment stood at 7.1%. By the first full month of Obama's Presidency, February 2009, the same month the Stimulus was passed, unemployment stood at 8.9%, already above the much-discussed 8% threshold. As previously noted, the Stimulus lowered unemployment as designed.

Myth: Lower unemployment statistics are a fraud. Unemployment only appears to be going down because (I.) more workers have stopped looking for work and thus are no longer counted as unemployed or (II.) more workers are accepting part-time work even though they want full-time work.
I. Go to this page, check "Discouraged workers" and get the results: "Includes those who did not actively look for work in the prior 4 weeks for reasons such as thinks no work available, could not find work, lacks schooling or training, employer thinks too young or old, and other types of discrimination."
And the results are, in thousands:
9/2010: 1,209.
9/2012: 802.
9/2014: 698.
In other words, a 42% drop in the number of 
"discouraged workers" over a four-year period.
II. The percentage of jobs that are full-time rather than part-time is rising.

Myth: The United States taxes corporations at a rate higher than other leading industrialized nations.
Fact: While the Federal corporate tax rate of 35% appears high when compared to other nations, U.S. corporations pay an average effective tax rate of 12.6%. U.S. corporate tax collection totaled 2.6% of GDP in 2011, according to the Organization for Economic Cooperation and Development. That was the eleventh lowest in a ranking of 27 wealthy nations. Many of America's largest and most profitable corporations pay no income tax at all. General Electric, for example, made $5 billion in profits in the US in 2010 and another $9 billion worldwide while paying no US income taxes.

Myth: President Obama is responsible for the unpopular "sequester" of government spending.
Fact: The 2011 Budget Control Act specified that the federal government would make automatic spending cuts in 2013 if a bipartisan congressional group failed to reach a larger resolution to reduce the federal deficit. In early 2013, Republicans widely embraced the sequester cuts. Then they quickly flip-flopped and blamed the President for the cuts when the sequester proved unpopular with the public. Turns out those spending cuts would mean the loss of jobs, and, among other things, longer security lines at airports. Eventually, House Republican leaders Eric Cantor and Paul Ryan admitted that they were in fact responsible for derailing a "Grand Bargain" with President Obama over the federal budget, resulting in the sequestration cuts.

Myth: President Obama is an enemy of the oil industry.
Fact: In 2013, the US became the world's largest producer of oil and natural gas. That same year, the Interior Department’s Bureau of Land Management (BLM) held 30 separate oil and gas lease sales, offering 5.7 million acres for lease by industry, the most in a decade. It also opened up of an additional 59 million acres for oil and gas drilling in the Gulf of Mexico, the site of a disastrous BP oil spill in April 2010.

Myth: The taxpayers lost money on President Obama's renewable-energy loan program.
Fact: The U.S. government expects to earn $5 billion to $6 billion from the program, supporting the President's goal of backing low-carbon technologies.

So, four posts on conservative myths and I still haven't touched minimum wage, welfare and a lot of other things. I'll try to wrap it all up next time. Good night, and good luck.


Lei Chen said...

Very in depth stuff Joe. Thanks for sharing

Lei Chen said...

Very in depth stuff, thanks for sharing Joe