Economics 101

Starving the Government Won't Work

Throughout this year’s campaign season, the Republican Party promised to reduce the nation’s rapidly growing debt by slashing federal spending for everything but the military. But permanent fiscal austerity of the kind embodied by the Ryan budget and the Romney/Ryan campaign platform would exacerbate the biggest economic problems facing the country—inequality and unemployment—while also depriving the federal government of the tools it needs to correct them. By denying the government’s responsibility for the overall health of the economy, the Republicans’ fiscal and monetary policies would expose Americans, rich and poor, to the dramatic swings of the business cycle. The U.S. economy used to be much more volatile. Before the New Deal and World War II, there were bigger crashes and longer recessions. The regulation of business (especially banks and financial markets), the creation of a safety net, and countercyclical fiscal and monetary policy have all dramatically improved economic outcomes, and have led to a long period of economic growth and shared prosperity. In the postwar period, a rising tide really did seem to lift all boats.

Starting with the Reagan Revolution of the 1980s, however, the Republican Party—too often with the support of some Democrats—began to dismantle the policies that had promoted greater equality and kept recessions short and shallow. As worker protections were removed, real wages stagnated. With the deregulation of banks and financial markets, the incomes of the top one percent began to skyrocket and financial markets became much more unstable. Unregulated financial innovations—which were said to reduce risk—turned Wall Street into a casino. Investment banks, whose primary function had been to direct capital to real businesses that could make productive use of it, grew fat on reckless speculation. Washington, meanwhile, looked the other way, persuaded that the only restraint the financial sector needed was provided by the market itself.

Just four years after the crisis on Wall Street, the GOP has succeeded in rehabilitating this dangerous illusion. The central argument of the Romney/Ryan campaign has been that the government is getting in the way of economic progress. Government spending, they say, is crowding out private investment. High taxes and regulation are discouraging entrepreneurs. On this view, the real cause of unemployment is unemployment compensation, which takes away the incentive to find work. Likewise, welfare programs don’t relieve poverty; they make it worse. And health-care costs are high mainly because of tax benefits for employer-provided health insurance. Whatever the problem, government intervention only compounds it, and the market is always the solution.

Paul Ryan has adopted an “originalist” interpretation of the U.S. Constitution as his guide for understanding the proper role of government in the economy. But our twenty-first-century economy has little in common with the economy our founding fathers knew. Back then, there wasn’t much the government could do to promote economic growth, besides enforcing property rights, providing law and order, ensuring a sufficient supply of (slave) labor for plantations, and taking land and natural resources from the Native Americans. Since then, the government has gradually taken a more active role in promoting the country’s economic development—from helping to develop Wall Street to subsidizing the railroads and the oil industry. With the New Deal, the federal government came to the assistance of workers, just as it had previously come to the assistance of rich industrialists. This eventually led to the middle-class majority that emerged after World War II.

Nearly every major technological development in the past seventy years can be traced back to government spending. It was research paid for by the government that led to computers and the internet, to the Green Revolution in agriculture, and to many other advances in science and technology that have greatly improved our standard of living. Of course, the government did not accomplish these things alone—businesses and universities were necessary partners—but few of the most important scientific discoveries and technological advances of the past century would have occurred without the government’s involvement.

One can obviously find examples of government interventions that were harmful to an economy, but no modern country has achieved economic success without a strong and active government leading the way. On page 42 of his most recent budget plan (.PDF), Ryan states that “no economic system in the history of mankind has done more to lift up the poor than America’s commitment to free enterprise.” In fact, most other developed countries have done a better job of lifting their citizens out of poverty. There is more upward mobility and less poverty in countries that make sure all their citizens have access to health care and higher education. So Ryan’s claims about the success of laissez-faire economic policy find no more support in other countries than they do in other periods of America’s own history. Whatever the intuitive appeal of his pet theory, it runs counter to the available evidence.

The central argument in Ryan’s budget is that we need to cut government “spending so the economy can grow.” Now, it is possible for government spending to crowd out private spending, but only when the economy is at or near full employment. In such cases—for example, during World War II—an increase in government spending will either come at the expense of the private sector or cause inflation. (During the war there were price controls and rationing to prevent inflation.) Today, however, when over 12 million Americans are still unemployed, there is no reason to think more government spending would inhibit private investment or lead to runaway inflation. And with so many people looking for work, it makes no sense to cut public-sector jobs hoping that will eventually lead to more private-sector jobs—as if only jobs that help an employer make a profit are acceptable. Jobs are jobs, public or private. A public-school teacher is no less employed—and no less well employed—than a banker or a sales clerk.

Ryan also claims that the poverty rate is increasing because of higher expenditures on programs like food stamps and that unemployment is high because so many people are receiving extended unemployment benefits. As with his argument that economic growth is low because of federal spending, Ryan is once again confusing effects with their causes. The high unemployment rate is due to insufficient aggregate demand, not to unemployment benefits spoiling potential workers. Making unemployed people more desperate for work by cutting their benefits will not create new job openings, and cutting benefits will only hurt the economy by further reducing demand. After all, the unemployed spend whatever money they get from the government, and spending is precisely what the economy needs more of right now. In fact, unemployment insurance is one of the most efficient forms of economic stimulus: according to the Congressional Budget Office, it has a 1.45 multiplier effect. By this measure, unemployment benefits are 3.65 times more effective at stimulating the economy than tax cuts for the wealthy and 7.25 times more effective than corporate-tax breaks. Just as important, most evidence shows that benefits to the poor are much too low to create a disincentive to work, and that tax rates on the rich are nowhere near high enough to discourage them from working more.

Ryan’s obsession, the deficit, is yet another area where he has confused cause and effect. The high deficits the government is now running are the effect of a weak economy and a lack of jobs, which together cause revenue to decline and expenditures to rise. The best way to reduce the deficit is to create jobs. Cutting spending now would cause the economy to shrink again, raising joblessness and thus increasing the deficit. The experience of European countries that have adopted austerity policies demonstrates what would happen here if the Ryan approach were followed. Of these countries, only Germany has seen any success—and this is because of growth in its export market. But not every country can improve its trade balance, for the simple reason that for every country running a trade surplus, there has to be a country with an equal trade deficit. Ironically, Greece’s economic problems have helped Germany’s exports by reducing the value of the euro. But as the economies of Brazil, Russia, India, and China slow down, Germany will run out of places to export its manufactured products. At that point it too will face rising unemployment rates, just like the rest of Europe.

While Ryan’s proposal to cut federal aid to the poor will cause an immediate increase in unemployment, his plan to transform the Supplemental Nutrition Assistance Program (SNAP) and Medicaid into block grants could end up being even more damaging. Ryan is worried that these programs are growing too fast; turning them into block-grant programs could limit this growth, but only by reducing eligibility or benefits. Such a move would also limit the government’s ability to stabilize a faltering economy. Entitlements are what economists call “automatic stabilizers”—changes in expenditure that kick in automatically to counter the boom and bust of the business cycle. While economists argue about the effectiveness of discretionary fiscal policy (when Congress votes to raise or reduce spending or taxes in order to slow the economy down or speed it up), few debate the effectiveness of automatic stabilizers. The problem with discretionary fiscal policy—for example, the stimulus package of 2009—is that it takes too long to work. It can take months to realize that you’re in a recession, months more to reach an agreement on what to do about it, and then another few months for the new spending to kick in. This is why there was so much emphasis in the 2009 stimulus package on “shovel-ready programs”: when the economy is in a steep decline, you want the spending increase to take effect as soon as possible. With automatic stabilizers, there are no lags. As soon as the unemployment rate starts to rise, spending on unemployment benefits increases without delay. Likwise, when the economy starts to grow again and the unemployment rate falls, spending on benefits falls off too. Most important, when the economy goes into recession the federal deficit goes up, providing stimulus to the economy and balancing the shaky portfolios of banks and corporations, as they move out of risky assets and into safe government bonds. And when the economy nears full employment, revenues increase, spending falls, and the supply of government bonds declines along with the demand for them.

This “portfolio effect” played a major role in stabilizing the financial system during the 2008 financial meltdown. Turning entitlement programs into block grants to the states would keep such programs from growing in response to greater need during a recession, or it would require special congressional action to increase the block grants. But even if Congress was willing to do this (which is far from certain these days), the economy would have to wait for months, if not years, for the adjustment to take effect. Thus, turning these federal entitlement programs into block grants would not only hurt the poor; it would make the entire economy significantly more unstable. Under the current system, the government is prepared for predictable downturns. Under the Romney/Ryan plan, the government would at best be playing catch-up.

The Republicans also claim that the tax system’s complexity is a major drag on the economy, and that simplifying it will lead to greater growth. History tells a different story. In the four years before Reagan simplified taxes (1983 to 1986), the economy grew at an average rate of 4.8 percent; in the four years following the simplification (1987 to 1990), the average growth rate fell by a third to 3.2 percent. While no one supports an unnecessarily complex tax code, there is no evidence that the current number of tax brackets is inhibiting economic growth. The charts in Ryan’s own budget show that high marginal tax rates on the wealthy are not a barrier to economic growth or job creation: the economy created more jobs in the 1970s, when top marginal rates were very high (between 70 and 90 percent) than it did in the 1980s, ’90s or 2000s, when rates were much lower. Over 20 million civilian jobs were added in the 1970s, compared with 18 million during the ’80s, 14 million during the ’90s, and just under 3 million from 2000 to 2009. Most economists who have studied the disincentive effects of marginal tax rates think they would have to be higher than 60 percent before they would become a disincentive to economic activity. (The top rate is now just 35 percent.) The fact is that when marginal rates go up, most people work more to keep their after-tax income from falling.

The Republicans’ use of the debt as an excuse for gutting entitlement programs they never liked in the first place is part of a long tradition of plutocrats taking advantage of the disastrous effects of their own policies to push through even more disastrous policies. As G. K. Chesterton noted long ago:

The key fact in the new development of plutocracy is that it will use its own blunder as an excuse for further crimes. Everywhere the very completeness of the impoverishment will be made a reason for the enslavement; though the men who impoverished were the same who enslaved. It is as if a highwayman not only took away a gentleman’s horse and all his money, but then handed him over to the police for tramping without visible means of subsistence.

Like the Great Depression, the Great Recession had many causes, but the most important cause of both was income inequality. When too much money goes to the very top, not enough money circulates in the real economy, where it would create jobs and raise people’s standard of living. Compensating for this problem requires higher levels of private investment and more debt, public or private. Not coincidentally, these were the things that fueled the last economic boom, which came to an abrupt halt in 2007. When reality finally caught up with the real estate market, only government borrowing was left to keep the economy from imploding. The only real path to lasting prosperity is more economic equality—making sure the average American has enough money to pay for the things the economy produces. Only by addressing inequality will we be able to lift up the poor, create jobs, and raise standards of living without the help of another bubble. 

Topics: 

Comments

Commenting Guidelines

Pofessor Clark offers an interesting view and raises substantial concerns about the Ryan budget and the Romney/Ryan campaign platform. He anticipates a number of problems that he believes will arise if these proposals are adopted. These are legitimate questions. But Professor Clark bases his comments upon some very general statements that prompt the following observations. 

"Before the New Deal and World War II there were bigger crashes and longer recessions." (Underlining appears in the Professor's text). The Great Depression is widely accepted as the longest and deepest in the nation's history. While unemployment statistics were rare before the 1930s, there is anecdotal evidence that the 1930s Depression was more severe than that of 1873-75, or 1893-95, the Panic of 1907, or the recession of 1921, alll of which were during the country's "industrial era". See John D. Rockefeller's Reminiscences and several of Henry Ford's books. The 1930s Depression was certainly longer, with 14% unemployment even in 1939, after six years of New Deal, four years of Second New Deal and WPA, etc. In that same year, one third of American families had income below the poverty level. 

"In the post-war period, a rising tide really did lift all boats." Not really. White men and their families may recall the post-war decades as a golden age. But social and economic segregation barred African-Americans from all but menial jobs, and produced the urban riots of the late 1960s. White women, however intelligent and creative, had their career choices limited to housewife, nun, teacher, nurse, or secretary until well into the 1970s. So, a more accurate description of the post-war era might be: limited benefits, unequally distributed. Great for the haves, miserable for the have nots. 

"Nearly every major technological development in the past seventy years can be traced back to government spending." The historical data and anecdotal evidence contradict this. An inventor who has a new product, technology or method ready for commerce applies for a patent to protect his or her intellectual property. The US Patent Office has tracked patent applications since 1840. The trend of growth is more or less steady, with brief declines in years of recession or war, until 1931. In that year the number of applications falls sharply, and does not recover until fifty-five years later. Anecdotally, one of the first to notice the lack of innovation, and its impact on job growth, was the Catholic ethicist Monsignor Ryan, in 1935. Decades later, President John F. Kennedy noted it in several of his major speeches. The stimulus of the WPA, PWA, and other Depression era programs, the interstate highway program of Eisenhower and later administrations, and the space programs of JFK's & LBJ's terms did little to restore innovation, as the data makes clear and the anecdotal evidence supports. I refer to this half-century as the Dark Age of American Innovation. It's lessons are important to any discussion of the common good and economic social justice. 

I share Professor Clark's interest in promoting economic measures, including government  programs, that promote the common good. An accurate assessment of our history can and should inform our decisions. 

Joseph J. Dunn    Author of After One Hundred Years: Corporate Profits, Wealth, and American Society.

 

 

I thank Mr Dunn for his comments and I agree that an accurate assessment of our economic history should inform our decisions.  This I gave.

Mr Dun makes three "corrections":

1. he seems to be challanging my claim that the business cycles before the New Deal reforms and WWII were worse in terms of being longer and deeper than it has been since, and he uses the Great Depression has his evidence.  Certainly the New Deal reforms could not have prevented the Great Depression as they were a response to the Great Depression.  While it is true that the New Deal did not get us fully out of the Great Depression (it was at too small a scale, it was the massive spending on WWII that did that), the purpose of reform is prevent future crashes.  Had the New Deal been in place before 1929 I think we can safely say 1929 wouldn't be such a memorable year.  The fact the Mr Dunn can name so many well known crashes before these reforms and no financial crashes after -- that is untill deregulation started in the 1980s, proves my point.  As there are no easy ways out of a financial crisis, that is why you have to stongly regulate the financial sector to prevent them. 

2.  Mr Dunn correctly says that everyone did not benefit equally in the post war boom.  The saying that a rising tide lifts all boats generally means that all economic classes benefit from economic growth, not that each group or individual within benefits equally.  While I suspect that the economic well being of minorities and women increased during the post war boom, it is more difficult to measure this as the data for parts of this period (pre 1967) do not exist as far as I know.  Share of income going to the 20% poorest blacks went from 3.8% to 4.2% in the mid 1970s and has since fallen to under 3% now, following the same trend as all races.  I expect their rise from 1947 to 1967 was in the same direction as the general population.  I agree that discrimination has greatly influenced who benefits from economic growth.  And it is true, contrary to Milton Friedman, that economic growth (or market forces) cannot eliminate racism or sexism.  Legal reforms and changing social attitudes were and are still needed.  But it is also true that the bottom 80% of the population had their incomes grow faster than the top 20% from 1946 to 1973, and the bottom 20% grew faster than the top 20%, so the rising tide (economic growth) did raise the incomes of each population group. It was great for the halfs and greater for the halfnots in terms of % rise in income growth.   After the mid-late 70s economic growth has not had that effect, which is the issue of inequality. 

3.  Mr Dunn's third point seems to challange my contention that government spending in the past 70 years has been critical to the technological developments of this time period.  It is interesting that Mr Dunn uses patent applications as a measure of technological change.  Economists have long noted this is a particularly bad measure, for the simple reason that many (up to half by some estimates) do not apply for such patent protection, for varous reasons.   But it is a fact that the computer, the internet, most medical innovations etc can be traced back to investments in research by the government.  And while the space program might have not had the spin-offs that some expected (and more technological change probably came from our efforts to figure out more ways to kill our fellow humans in defense spending then to explore space), educating lots of PhDs in physics certainly did, and that would have never happened without government support. 

Professor Clark's responses are welcome, but I need to clarify some points.

I do not point to the Great Depression itself as refuting the professor's original statement that "Before the New Deal and World War II there were bigger crashes and longer rcessions." My assertion is that crashes and recessions before the Great Depression were shorter and/or less severe. I listed the recessions/panics/crashes that are widely acknowledged as serious, which occurred during America's industrial era, and which preceeded the Great Depression. There is plenty of historical evidence (diaries, commentries, etc.) which confirm that these were shorter and/or less severe than the Great Depression.  So, the evidence for my assertion is the contemporaneous records of those periods, not the Great Depression itself. I can name quite a few finacial crashes and recessions after World War II, four of which occurred between 1946 and 1961, then there are quite a few others, including the severe recession of 1974 (unemployment, and Dow average dropped 40+%). There is no lack of post-war recessions, in spite of regulations, and in spite of FDR's belief that the Social Security Act would serve to moderate future recessions (see his signing speech) and Eisenhower's belief that the Interstate Highway program would serve as an automatic adjustment in times of economic troubles. I cannot join the professor's speculation as to what would have happened in 1929 if the New Deal had already been in effect. No one knows. But we do know that all the full force of New Deal and other programs in effect in 1939 (ten years after the Crash, six years into FDR's terms), did not get the nation back to anything better than 14% unemployment and 30% living in poverty. Congressional testimonies, letters and between FDR and his associates, and commentary by First Lady Eleanor Roosevelt, all point to the conditions that held back America's recovery, long after Britain and others had recovered. It makes interesting reading, and it is vital to our understanding of promoting the common good. 

Professor Clark "suspect(s) that the economic well being of minorities and women increased during the postwar boom, it is more difficult to measure this as the data for parts of this period (pre-1967) do not exist as far as I know." If there is no data, then we must rely upon the contemporary human record. It speaks, without dissent, to a dismal existence and denial of opportunity, to blacks, and to a denial of opportunity to women. Again, my point is, that we must not confuse uneven distribution of limited blessings with some sort of golden age. 

Government spending, including massive spending on nuclear research during the war, and the space and arms programs over the decades, have produced innovations, some of which have found civilian applications. Patent applications are filed when an inventor has a new product, or method, and the intent to bring it to market. This means that he or she has the money to bring it into production, often involving investors. The historical record of many non-profits, university endowents, and many private investors, show the relative absence of equity investors from capital markets for decades after the Depression, corresponding to the period I note as the Dark Age of American Innovation. If economists regard patent applications as a bad measure, I cannot imagine why. It speaks, not to any lack of genius in any generation, but to a lack of investment in new civilian technologies. The data happens to concur with the human record on this, and we should not ignore it. 

We can learn much about promoting the common good, if we will take up the lessons of history. 

Joseph J. Dunn

There is a big difference between financial crisis/crash and recessions.  See Rogoff's "Apples and Oranges" on the difference.  Yes the New Deal reforms did not eliminate the business cycle, they just made it flatter.  This is a measurable proposition.  A look at the NBER dating of recessions shows this from 1850 to present.  The post WWII recessions were caused by either changes in government spending or actions by the Federal Reserve to fight inflation (such as the 1974 recession). We should remember I think Truman's comment that its a recession when other people lose their job and its a depression when you lose your job.  You cannot use personal letters to time business cycles, and most people who study business cycles and financial crisis do not claim to know of four or any financial crisis from 1946 to 1961 (in fact I don't know of anyone who does). 

Yes, many countries got out of the Great Depression before the USA, mostly because they started spending for WWII before us.  Germany was the most outstanding example of this.  The economic literature of the mid 1930s talk about Germany's success. 

As for the patent issue, many do not apply for patents because they do not want others to know of their innovations.  It is easier to duplicate when you have the design.  F. Scherer, who wrote the leading text in this field, and whose own research on these questions is well known, concluded that patents are not an important factor in firm innovation.

The three points you challenged are well established "stylized facts" which I expect all, or certainly almost all, economists who have looked at the data accept.  Sure they disagree on the role of government in this story, but not on the fact that business cycles were a lot milder from 1946 to 1980, that income grew more equal in this same time period, growing fastest on the bottom, and that government investments have made a major contribution to technological change in the past 70 years.

Firstly I would lilke to offer the opinion that when government does what it was meant to do: provide a safety net for the poor, elderly, and disabled,  protect us from enemines, fraud, unsafe food, drugs and toxins, subsequently, gets the heck out of the way, the country will always be at it's best, both socially and economically.

Unfortunately, the one thing government cannont protect us from is ourselves, especially the insatible need for greed and power.

First example:  Unregulated financial innovations—which were said to reduce risk—turned Wall Street into a casino.

Not quite.  What turned Wall Street into a casino was the elimination of the uptick rule in 2007 .  It has since been somewhat adjusted, but not nearly enough.  Wall Street for the most part operates on greed, not long term investments.

Next:  By denying the government’s responsibility for the overall health of the economy, the Republicans’ fiscal and monetary policies would expose Americans, rich and poor, to the dramatic swings of the business cycle

This is nonsense.  It is not and has never been the job of government to create jobs.  The overall health of the American Economy is served best when government stays out of the way, with minimal regulations as well as incentives to prosper (as in not over regulating and taxing small buisinesses to death, which create 80% of America's jobs).  Want proof?  Stay tuned for the biggest recovery ever in American History when Romney gets elected (no need to even wait for Jan, it will start on Nov 7th).

As for being lifted out of poverty, how about some common sense?  After almost 50 years of welfare, not only have the poor not been lifted, poverty has increased, especially in the last 4 years under Obama.   It's about time,  with the excpetion of the disabled, elderly, and those poor for reasons beyond not being able to work, to declare "welfare failure" and try a better way.

Perhaps the biggest hypocrisy is the "inequality" mantra.  Why?  Because it's as phoney as a $4 bill.

Examples:

The Billions of dollars spent on gambling in this country, allowed by government.  If Mr. Smith on welfare wins lotto, does that mean he needs to give his winnings away?  If so, why would people even want to play, let alone win?  The fact is, they DO, especially the poor.

How about the "equality of  everyone must go to college?  How silly is that?  There are tons of needed worthy professions (albeit many now stymied by government regulations )that do not require college.  Besides, if the goal of college is to better the individual and be successful, why would any reasaonable person want to do that under a current government who punishes success?

The real biggie, Obama Care:  The left has a meltdown over voting ID Laws yet thinks nothing of a O'care. passed without one Repbulican vote, and against the will of  over half ofthe  American people, including over half of the country's physicians (55% vs 45%).  So where is that "equality."

Let's be realistic, "equality" is another manipulative tactic of the left to keep the lesast among us dependent; consequently, politicians in power.  It's about time to get beyond the "every one gets a trophy and an A" mentality that unfortunatley does nothing but produce an entitled, dumbed dwon,  feelings based society, devoid of the skills necessary to navigate through the trials of life.

Life isn't "fair" and never will be, at least from a human perspective.  Even Jesus told us the poor will always be among us.  I have no doubt it's becasue we need them far more than they need us.  Consequently, what matters most is if we expolit them or truly help them.  Only when we can let go of our own self serving needs, especially greed and power, does that have any chance of happening.

The government does have a purpose, but as I pointed out, will work best when we vote in representatives who understand its proper role.  For goodness sakes, government can't even sell a $9.00 hamburger on Amtrack without losing $80 million dollars!  Unemployment will take care of itself when government gets out of the way. 

As for "inequality", well, providing everyone is treated with human dignity, which is currently not the case,  the only issue of concern is "quality."  Everyone doesn't need to be rich or even want to be rich, only have sufficient basic needs.  Some of the happiest people in the world are those with the least,  providing of course, they aren't exploited. 

The solution is alway the same.  When and if we become a country of God-fearing people, more concerned with those among us than our on selfish needs, we will all be the "wealthiest of the wealthiest." 

 It's the spiritual poverty of America that is killing us, clearly represented by those whom we put into office.

 

 

 

 

 

My wife and I just returned from Florida back to our home in California. While we were there, we witnessed the most vicious and deceptive TV and billboard advertising by the well heeled GOP forces I have ever seen. We also visited Disney World and were treated to a beautiful tribute to our country's founders and succession of presidents. What a contrast in attitudes. Finally we visited the Kennedy Space Center. What a marvelous retelling of the accomplishments of manned space ventures and the Hubbel Telescope. Tell me again, why we have decided to kill off the Shuttle program? It is a sure sign of minimal vision, certainly not the vision that built America from sea to shining sea. The "austerity approach" so strongly advocated by Ryan and Romney would take us further backward, back to the days of union busting, of decimated public work forces, of zero assistance for infrastructure, education, employment, old age security and minimal health care. Do we really want that??

Two random thoughts"

Innovation is an overworked word that requires specification.  One could argue a cause of the near collapse of our financial system was "financial" innovation; see Michael Lewis, "The Big Short;" another cause was greed.  Even the term technical innovation needs further specification as the comments by Profs Clark and Dunn would suggest.  What might be described as "fundamental" innovation---computers, the laser, transitors, the world wide web, MRI ---are game changes that are hard to imagine being achieved without resources supplied by the federal government.  What might be described as "patentable" innovation---the computer mouse, the iphone, etc---can, and probably should, be achieved with only private sector resources.

What a government should do depends, of course, on who answers the question.  One answer that would probably draw a consensus among Americans is that government should have a role in limiting "inequality" across our citizens and in assuring a level of "upward mobility" for everyone, two concepts that are easily given quantitative measure; see Joseph Stiglitz, "The Cost of Inequality." There appears to be a growing tendency among those who accept as a fundamental premise that government should do little if anything to deny the existence of a problem that cries out for a government solution.  There is no man-made climate change; there is no inequality among Americans; the free market based American health care system is the best in the world; all Americans have access to some level of health care, etc.     

 

Once more, I would like to respond to Professor Clark, because the points being explored are vital. The professor and I agree that "Starving The Government Won't Work". Subsatantial revenue increases will be needed, along with spending cuts. The choices we make about how to raise the added revenue will be at least as important to the common good, including those most in need, as any decisions about spending cuts. So we must take full advantage of our national experience as we make policy choices. 

Professor Clark relies, as any economist should, upon the NBER's dating of an economic trough at March 1933, the month of FDR's first inauguration and the introduction of much New Deal legislation. Economic growth resumed, continued for fifty months, and then fell for thirteen months (a new recession) and began recoverng again in June 1938. So, for the economists, March 1933 to May 1937 was a period of recovery, followed by a recession, followed by a recovery starting in June 1938. That's the official record, and it is entirely proper for economists to rely upon it in their studies. When we consider the human conditions of the era, and look at economic measures as part of history, but not the entire story, we get another dimension. That is what Monsignor Ryan saw when he wrote in 1935 about the need for just one great innovation, such as the automobile, that might help lift the "depression." Obviously the Monsignor did not see much recovery, in spite of the NBER assessment. Nor did Father Coughlin, Senator Huey Long, or others who found millions still in dire circumstances. Conditions were still bad enough that FDR was seriously concerned about his election prospects for 1936. By 1939, with FDR's "soak the rich" tax programs and four years into the WPA, etc., unemployment was still 14% and one third of the nation's households had below-poverty incomes. In NBER's technical terms, the period 1929-39 is recognized as a recession followed by a recovery, then another recession followed by a recovery. But looking at the whole story, most people call it simply "The Great Depression."

My statement about "quite a few finacial crashes and recessions after WW II, four of which occurred between 1946 and 1961" refers to the four recessions recognized by the NBER in those years. None of these are accompanied by financial crashes. The recession of 1974 (in NBER terms, Nov 1973-March 1975) was accompanied by a stock market decline of more than 40%, ("crash" is not an NBER-defined term). That recession was significantly affected by the oil embargo of October '73-March '74. Gas at $4/gallon is painful; "No Gas Today" was debiliating. 

The economists tell us, as Professor Clark writes, that "incomes...of the bottom 20% grew faster than the top 20%, so the rising tide (economic growth) did raise the incomes of each population group." But below that surface is a deeper story of economic segregation, that kept the better-paying jobs for white males, at the expense of others. Fortunately, the social policies that preserved that inequality have changed. But if we forget those facts, and look only at the limited, aggregated economic numbers of that era, we lose its most important lessons.

I agree that some inventors do not file patent applications out of fear that their work will be duplicated without authorization. However, we should expect the percentage of inventors who have that concern to be fairly stable over decades. So, why the severe drop in patent applications starting in 1931, and the lack of substantial recovery for more than fifty years? Assuming that every generation has bright, innovative people, and that inventors' fears are fairly constant, then we must look elsewhere--beyond the behavior of inventors--for the cause of the Dark Age of American Innovation. Most inventors need investors to get started bringing their new product or method into commerce. When large numbers of investors turn away from risk, many inventors do not bother to file applications, and their innovation never appears, and never creates new jobs. The flight of investors out of equities and business risk, starting in the Great Depression and continuing for decades after WW II, is well documented. Individuals, college endowments, charitable foundations, and other investors preferred government bonds even over established stocks, and surely over the risks of new technologies. For the same reasons, many corporations left their money idle in cash or bonds, rather than expand their product line or modernize their facilities. Warren Buffett started his investment career buying the stock of such companies in the 1950s and -60s. It was lack of investors, not lack of inventors (and surely not fear of duplication) that caused the Dark Age of American Innovation. The reasons for this multi-decade investor flight to safety are explained at length in After One Hundred Years, but briefly stated they are high tax rates on investment returns, and anti-business, anti-competitive policies of both Republican and Democratic administrations. As investors returned to equity investments, the pace of patent applications rose. Post-war Government programs included a lot of scientific research. But the depressed level of job-creating private-sector innovation was a lost opportunity for advancing the common good.

I share professor Clark's interest in restoring a lasting prosperity and raising the economic condition of all. The story of America's experience includes the human aspects as well as the economists' studies. Our understanding of the story should influence our thinking about energy, the environment, education, wealth and income, innovation and jobs, poverty, and our other current issues. Let's learn from a century of experence.

Joseph J. Dunn

 

 

The basic jobs of government is to protect the weak from the strong and to manage [and equitably fund] tasks beyond the ability of smaller social organizations to do fairly and effectively.

The most obvious cases of protection are physical -- protecting against invasion and criminals who use violence or its threats to control others -- yet there is also protection against sneak thieves and other forms of deception, including deceptive packaging and guarantees or lack thereof.  This is the level where protection of the economically weak from the economically strong becomes the interest of government in requiring such things as transparency and certified accounting.  When the rich are driving the majority into further poverty, it is the proper role of good government to stop them whether it is the Sherrif of Nottingham or Bain Capitol. 

I agree that it is not a basic role of government to create jobs and that having everybody employed by the government is a bad idea, but when things have become so bad that one percent are driving down the majority and 47% need aid for lack of jobs, then job creation, preferably indirectly through spending with private businesses rather than through direct federal employment in the military or a Civilian Conservation Corps, becomes a top priority.

The desirable objective is a full employment economy with only the severely ill unable to work and with the unemployment rate accounted for by those transitioning between jobs.   Then you might see the bureaucracy dropping as the private sector offers better deals and efficiency becomes important to keep the bureaus running.  Until then, there is no reason to criticize the government having an interest in increasing the number of jobs to match the number of job seekers.

Patricia raises an important point, especially from a Catholic perspective.  She states that the economy will magically grow once Romney is elected (or Obama is defeated).  In his infamous 47% speech, Romney also states that he doesn't need an economic plan, things will magically get better once he is elected.  Paul Krugman has called this the "confidence frairy".  In fact, Romney has no plan, all that needs to be done is vote for him and 12 million jobs will magically appear.  One should hope for more evidence based analysis than this.

 

But there night be something here.  Large Corporations are sitting on 1-2 trillion dollars (some offer even higher estimates) of cash on their balance sheets, money that is sitting on the side waiting to be spent in some way. If this money were spent unemployment would drop significantly. Many will say that they are hoarding this money because they are uncertain about the future threats to the economy (the euro situation being the biggest concern), that they are just being prudent business men and women. 

But others, mostly from the right, argue that they are sitting out the Obama administration and that once he is defeated they will start to spend (effectively what Patricia is suggesting).  Like the Republicans in Congress, they are doing their best to make sure the economy does poorly to help defeat Obama.  Keep the masses poor so that they know their place. 

If this is the case, this is offensive on so many levels.  When Aquinas defended private property he emphasized that all property has to be used for the common good, and hoarding a large share of social output is certainly contrary to the common good.  When  John Paul II and other popes talked about the universal destination of goods they were building on Aquinas and many Church Fathers who made this same point.  The economic argument for giving the rich a larger share of social output (supply side economcis) is that the rich will use it more productively (invest) than the common folk spending it on food, clothing and other necessities.  While the economic evidence does not support this theory, I cannot think of any economic theory that would support giving the rich a larger share of social output and not have it circulate in the economy.  

 

Is this what has prompted Obama to call for economic patriotism? 

This is why economic inequality is such an important issue, because more equality means more money is circulating in the economy.  It is a threat to a free economy and a free society to have the economic health of a country being subject to the will and self interest of plutocrats.

 

 

 

Wow Mr. Clark, talk about a straw man, you just created a straw monster!  You are partly correct in that there is a lot of money on the sidelines, but only partly.  The other part is the "unknown" of Obama Care and all related expenses.  CEO's are very concerned how or if they will be able to afford the additional costs, or fines,  per employee associated wtih Obama Care.  Also factor in just the price of doing business when the price of gas increases. 

Next factor in the real engine of economic growth, small business.  Between health care, increasing regulations and taxes under Obama, in addition to the double employment (additioinal 10%), taxes the self employed are obligated to pay, a self employed person under Obama can't stay in business being average, considering the high profits one needs to make to make self employment worthwhile.

Any intelligent business person will tell you that President Obama has been the biggest job and small business killer in American History.  And, if he get's re elected, it will be a business wipe out.

Please, spare us the Aquinas and JP II misinterpretations, being the  Catholic left hardly has any credibility when it comes to "Church Teachings."  When you guys get the teaching on abortion, birth control and same sex marriage right, well, then maybe we can start an intelligent discussion instead of wasting time blowing up straw monsters!

I already wrote in my first post why "getting out the way" is the best thing government can do to facilitate job creation.  We don't need a President to do anything other than remove the agenda driven regulations and excess taxes, all with a stroke of a pen.  The American People will do the rest, I assure you, all while government does its job of keeping us safe.

And for the record, who do you think pays for all of those "government salaries?"  Econ 101: starve business, consequently you starve the government and all of America; everyone loses.

 

 

Thank you wholeheartedly, Joseph J. Dunn. I find your posts far more persuasive.

Patricia, your heated analysis leaves many questions unanswered. 

First, you claim that the country will be at its best, both socially and economically, when government "gets out of the way". In saying this, you ignore the fact that our nation experienced major growth in the post-WWII years when taxes were at their highest levels. The rate of growth after 1980, when goverment began "getting out of the way", was slower than the rate of growth of 70's.

Second, you claim that it is non-sense to say that deregulation further exposes Americans to the dramatic swings of the business cycle, and that the overall health of the economy is best served when government "gets out of the way". How is it "healthy" to unnecessarily expose Americans to boom/bust cycles? How is that better than providing stability through government intervention and stimulus in economic downturns? How is an unregulated economy better for all of America when 90+% of the growth is achieved by th top 1% of income earners? All the statistics are there, but you make your claims without addressing any of them. Seriously, your analysis seems to be more of a political rant.

Third, you claim that it's time to end welfare for everyone but the elderly, disabled and those not able to work for other reasons. The system is already structured that way. It's called "welfare to work". Those on welfare who are able to work have a time limit for which they can receive benefits.

Charles Clark, I never considered the thought of corporations sitting on money until after the election, but I suppose it's a possibility. We know the stock market has nearly regained all its losses since the crash and corporate profits have skyrocketed. I've wondered for a while why they're sitting on the money. I know that they are demanding more from a smaller workforce, but why? It's obviously not because they are overtaxed. My worry has been that Romney might be elected and pass his tax plan. It might create some level of stimulus, and it will definitely short change the federal government of future revenue. It will leave America in more debt, and more vulnerable for the inevitable crash. Of course, that crash will come when Romney is long gone.

Large corporations are indeed sitting with trillions in cash (and short-term securities including government bonds). The same phenomenon occurred during the Great Depression. That history allows us to understand the phenomenon, if we want to. As Professor Clark writes, "If this money were spent unemployment would drop significantly."   

First, we need to bring facts into the discussion. For example, Apple, Inc., is one corporation with a very sizeable amount of cash on hand. With high demand for its products, Apple spends large sums on manufacturing, and large sums on research and development of new products. Apple certainly does not seem to be stinting on spending, which creates jobs, but the cash reserve remains large. Now, if Apple is to disburse some of that cash which exceeds its forseeable needs, that cash will be distributed as dividends to Apple shareholders, or used to buy back shares from shareholders who want to sell. The shareholders can then take their dividends or capital gains (after paying income taxes) and spend, re-invest, or donate that cash as they decide best. Some of those shareholders are charitable foundations, union pension funds, university endowments, etc., who would make similar decisions about the cash they receive. We might cosider what policies might encourage Apple's board of directors to decide that increasing the dividends or buybacks is in the best interest of shareholders, consistent with their fiduciary duty as directors.

Why might other corporations with less robust sales and profits hold large cash reserves, instead of investing in product research, or buying a small company with a promising new technology, thus opening a path to hiring more people? Professor Clark points to one possible explanation, that business leaders may be concerned about threats to the economy, such as the uncertainty about Europe's economic health (i.e., if we build it, will they be able to buy it?). America's current innability to address the January 1 fiscal cliff is a similar concern (how much after-tax, disposable income will households at all income levels have when higher income taxes kick in?)

Ultimately, the board of each corporation will decide, based on the circumstances of their individual company, what disposition of capital porvides the best long-term, after-tax benefit to the shareholders (middle-class savers, institutions, and wealthy individuals). So, if we resolve the fiscal cliff questions, will the resolution involve higher taxes on corporations and investors (which includes 47% of American households)? Or will we adopt some reforms that encourage investment?

FDR addressed the build-up of cash, which he viewed as a societal evil, by enacting an "excess surplus" tax as part of the 1936 Revenue Act. His intent was to flush out cash, by forcing corporations to pay out larger dividends, which could then be taxed a second time as personal income. It quickly became known popularly as the "Devil tax" for its many unintended damaging consequences, and it was repealed a year later. Clearly, a more enlightened view of cash surpluses would have been more productive.

The statement that "Like the Republicans in Congress, they (leaders of corporations wih cash?) are doing their best to make sure the economy does poorly to help defeat Obama. Keep the masses poor so that they know their place."  That statement is illogical. Corporate execs, who get paid mainly in stock shares, are intentionally sabotaging the economy, which has a negative impact on share prices? Board members, who are exposed to personal liability if they sabotage their shareholders, are conspiring to weaken the economy? That statement is also slanderous, as it accuses entire classes of people of unethical, immoral, and probably criminal actions, with no foundation or in disregard of easily discoverable truth. We should be offended by such statements, and reject them as loudly as we would reject any statement that "the poor are lazy" or "the unemployed won't help themselves." Beyond the statement that all men are sinners, general pronouncements of guilt upon any class of people have no place in the realm of civil discourse.

We have a century of knowledge that can help show a path forward, and ways to advance the common good, and avoid mistakes that, in the past, have caused misery to so many.

Guglielmo Marconi, who's innovative thinking made radio a practical technology, and who's work anticipated, as early as 1933, the modern cell phone, had worthwhile advice:

"Science demands a flexible mind. It's no use interrogating the universe with a formula. You've got to observe it, take what it gives you and then reflect upon it with the aid of reason and experience...I like to be out in he open looking at the universe, asking it questions, letting the mystery of it soak right into the mind, admitting the wonderful beauty of it all, and then think my way to the truth of things." We might well do the same to find the best ways to promote the common good.

Joseph J. Dunn

To Jeff Keller:

Jeff I will only briefly answer your questions, mostly for the reasons that it won't serve any of us to get into a lengthy economic debate.  Most are common left talking points consequently have already been addressed in just about every conservative blog out there. 

 For example, trying to convince me or any other conservative that the Carter Years were better for America than the Reagan Years, good luck with that! 

As for 90% of the growth only benefiting the top 1%, it's simply outlandish.  I could give you a million reasons why that isn't true, but as I said, it's all been debated a zillion times, and a zillion and one isn't going to change anyone.  Funny though how no one on the left ever seems to be concerned about the wealth of the democrats, especially the ones who have become insanely millionaire-rich while in congress, started with Harry Reid and Nancy Pelosi. 

As for the "Welfare to work", sorry, but Obama gutted that a few months ago.  .That being said, I'm referring to  ALL "welfare", from  hughly profitable Sesame Street (actually got a million dollars in stimulus money even their CEO admits they didn't need), to the plethora of green energy, crony "Obama Campaign Donors" who  pretty much got the rest of it, with the majority, in addition to Solyndra, already having gone bankrupt.

I'll tell you where another large chunk of "welfare" money is going, albeit rightly, is to the age 50 and over unemployed, the too young to retire, get SS, or medicare, but too old to get hired.  Where do you think this group of baby boomers  are going after their unemployment runs dry?  To disability/welfare!  God forbid we ever raise the retirement age, the country will  for sure be bankrupt.  The only hope for folks in that age group is to start a small business.  Unfortunately, in the "Obama business economy", it's simply too expensive and risky for most.  Many people, men and women, still raising families, have been downsized and unable to get rehired. People are seriously hurting out there, and that's one group that is hardly ever discussed.

This is where I would like to take the discussion to a different level, beyond "economics."  I know it's a long shot, and FWIW, none of it is personal.  I don't doubt for a minute that most or all of you are decent and intelligent people. 

I would like to challange all who disagree with me, especially Catholics, to perhaps consider that maybe it's the policies of the president that is the major problem.  And maybe, ask youself, who do you answer to at the highest level, your ideology, your President, or God?  For the first time, even Christian African Amercian Democrats are starting to think voting democrate. 

http://dailycaller.com/2012/10/20/bishop-jackson-black-churchgoers-shaken-by-obama-backing-gay-marriage-video/

I don't claim  to know or judge anyone's heart, but I know what the democratic platfrom stands for:  Same sex marriage, abortion, birth control, and no God (Oh wait, maybe God got put back in after not polling well).  For all the faults of the Republicans, at least they don't have a platform that supports intrinsic evils (social issues and wars are prudential judgements, not intrinsic evils).

My point again, (which  btw, yes I've noticed it's always ignored), is perhaps it's time to consider asking how as a Catholic if you plan to vote democrate, you can do that?  There is no dispute that it's primarily an anti-Christian platform.

Either we are Catholics or we aren't.  If we are, then we all need to walk the walk, and vote "Catholic", not race, ideologoy,  or party.  I'm not saying that economic priciples don't matter, only that most economic problems aren't a matter of bad economics, merely the obvious consequences of removiong God.

Even if  voting Republican isn't an option, moral theology teaches that "doing nothing" is the better choice than the wrong choice.   

Mother Teresa often remarked that the "poorest" country in the world is the US, referring to our "spiritual poverty", obviously so "starved" most can't recognize the only food that will feed and heal.

 

 

 

 

 

 

 

 

To Patricia:

Why is it that conservatives are anti abortion yet have no problem sending young Americans to illegal war at the drop of a hat to kill hundreds of thousands of innocents half way around the world? Do you not recognize a glaring inconsistency or down right hypocrisy on their part?

As for the roots of the 2007/2008 finacial crisis it can be traced directly back to as you would have it for "government getting out of the way". The argument from Wall street was rescind Glass / Steagal so banks become more competitive. After the unprecedented economic melt down the same fraudsters who packaged up the junk mortgages and sold them as AAA investments to unsuspecting foreign investors continue to insist on no government regulations not even watered down Frank / Dodd.

Romney and Co. are on the same wavelength. What they want is continued tax payer bank bailouts when they experience catastrophic losses i.e. socialism for the rich. Do these crooks ever get enough? If the US government caves in to their demands we'll see a repeat in our future. Had the government been in the way we would certainly not be in this predicament.

One final point you should be asking yourself. Why is it that Canada which has tight government bank regulations came out of this crisis totally unscathed. Why has the Canadian financial industry suddenly become the envy of the world. Remember it was Jamie Diamon as well as other bank fraudsters who brow beat the head of the Bank of Canada to loosen up the Canadian banking regulations prior to and after the collapse. Go figure! Canadians thank their lucky stars that Diamon's advice was rejected outright.

But then I'm sure the tin hat right wing nuts in the US will scoff and claim nothing but socialists north of the border. In their reality no country can possibly have universal health care for its citizenry and also practice pure capitalist free enterprise. Government after all has no business in the health care business as this is the road that leads to socialism. Perhaps they are right. After all Romney a week ago promised that no one needs to die because they are uninsured. They only need to show up at the ER. Naturally the uninsured plebian will be forced to wait 5 hours before being treated unless he bleeds all over the floor. It demonstrates once more what world he and Paul Ryan live in.

Patricia:

Prudential judgement starts with understanding, in this case economics and CST.  An exchange of ideas and perspectives is one way to do that.  However, merely insulting anyone who disagrees with you, or saying things like "Please, spare us the Aquinas and JP II misinterpretations, being the  Catholic left hardly has any credibility when it comes to "Church Teachings" makes any dialogue impossible.  I thought that was the point of these comment sections.  If you want to trade insults or try to score economic debating points then its just another video game without the graphics. 

BTW, I have given talks numerous talks on JPII economic writings (including at the Vatican) and never had anyone suggest that I misirepresented him or anyone else in the CST tradition.  Certainly many disagree with my analysis of the economy, which is fair game, but your response should be based on sound reasoning and evidence based analysis.  At least this is what I try to teach my students.  I would certainly fail anyone who's critique consisted of ad hominem attacks and unsupported assertions (zillions, really).  You seem to have the time and energy to write long posts, why not have an actual exchange of ideas (I won't call it a debate, as I have no interest in scoring debating points).  As my vocation is teaching, I think it would be a service to many readers to have a serious dialogue.

My statement on Aquinas' views on property are either right or they are wrong (or they can be partically right or wrong) and I don't see what the Catholic left, or Nancy Polesi has to do with it. 

Hi Charles:

 

Firstly, I was very careful, at least I thought, not to attack you personally.  If you took it that way my sincere apologies.

Being that it was obvious you are on the side of the left, I made a  general statement that trying to proclaim a church teaching, even if it was in context, (which I still argue was not), has no merit when you are supporting an anti-God Party Platform that disents on at least 3 dogmatic church teachings.  You should know more than most, that no single church teaching can ever stand alone; it's all or nothing.  You should also know that more than one Pope, most recently Pope Benedict in his first encyclical, stated (parapharased), that if we don't respect life in the womb, all other social justice issues  one proclaims to embarce are phony. 

The fail proof bellwether for anyone sincere on social justice is the way they treat the unborn.

In fariness to you, we didn't discuss the other issues, but as a teacher, even if you do happen to be aganist abortion, birth control, and or same-sex marriage, you have an obligation by your faith  to speak out against them.  The fact that you didn't, and clearly are not on the side of Romney, leave a reasonable deduction that you are at least OK with them.

As for an economic discussion, perhaps you missed my point that I tried several times to make: maybe the issue isn't the economy as much as it current presidential policies combined with a plethora of American spiritual poverty.

I made the statment that when Romeny wins, Nov. 7th will be the start of the biggest economic recovery in American History.  I even agreed with you that yes, there certainly is plenty of money on the sidelines, but not driven by avarice but fear and caution.   There is nothing in church teaching that would requrie any company, or person,  to go for broke against a potential 2nd term wildcard president with a 4 year record of financial disaster, a self admitted "re distributor" (not just to the US, but worldwide), and, totally "non transparent" on how or what he plans to do in then next 4 years if re elected.  Who in their right mind wouldn't be cautious?

Not too long ago on another post on CW, I posted this tape, where Obama in his own words, is seen race baiting a group of Africian American Preachers, in outright deceit and hypocrisy.  I hope you watch the whole 7 minutes, consequently, ask yourself, why couldn't he be deceiving me?

http://www.foxnews.com/on-air/the-five/index.html#/v/1875964675001/does-2007-tape-catch-then-sen-obama-in-a-lie/?playlist_id=1040983441001

All said, with all due respect to you, to debate "ecnomic theory", which I realize is the topic of your post, is from my point of view, a non-sequitur.  Again, not because ecnomic theory doesn't matter, only that it's not the root of our current problem nor will our current problem be solved simply by "good economics."  It's we the people who need the fixin'!

 

To Paul and abortion, war and Canada:

For the record, I hate war as much as I hate abortion and capital punishment.  That said, I'm sorry you can't see the distinction between an American Citizen who volunteers, and an innocent unborn who has his/her life sucked away by anothers' "choice."

As for Canada, I suggest you try out some "free speech" up there and let us know how that works for you!  Last time I checked it was the "American Revolution" not the French, from which we won our American Values of life, liberty, and the pursuit of happiness, not "equality" to be like our non-exceptional neighbors and Europe. 

Only in freedom can any person or country be exceptional,  no price is too high and no fight not worth fighting to keep it.  

 

 

Patricia:

1st:  I think Paul's point was all the innocent lives lost due to Bush's immoral invasion of Iraq.  Their babies are as precious to our Lord as ours.  And it was our tax dollars being used, with the bombs being dropped in our name.

 

2.  I did not write the article to support Obama, even though I will grant you that pointing out the complete nonsense of the Romney/Ryan proposals and rhetoric isn't being neutral.  There are good reasons to vote against Obama, but these are not because Romney has a better economic strategy, for Romney is just Bush all over again.  The advisors for Romney on domestic and foreign policy are the same as Bush, and since Romney seems to have no firm convictions, I feel that they will take over again.  It will be tax cuts for the rich and financial deregulation.  While no politican will ever say this outload (because it makes politicans look weak) it takes 5-10 years to get out of a financial crisis, thus everything needs to be done to prevent one. We should not go back to the policies that caused the last one.

Outside a few issues, Obama's policies have been consistently moderate Republican, and for Romney to attack Obama's health care reform is the height of hypocracy, as his healthcare reform (as well as other Republican proposals) were the model of Obamacare.  No president has been better for Wall Street.  I would have supported putting the lot on trial, as we did with the S and L fraud of the 1980s when 1000 people were convicted. 

 

And if you are upset with race baiting then the behavior of the Republican party over the past four years should cause you outrage, especially their efforts to restrict the vote for minorities and the poor.

And I know it is difficult for a Catholic voter when one party core issue is keeping abortion safe and legal and the others core policy is helping the rich get richer and punishing the poor.  As Catholics we are called to defend human life from conception to natural death, which means we have to call out bothsides when we disagree with them and I think work with those who agree with us on particular issues on those issues.  We should also be honest:  it is not that the Democratic party will do much to help the poor, they just aren't going to declare a war on them; and it is not that the Republican Party is going to defend life; they are just not going to have tax dollars go to pay for abortions.  Expecting either party to do more is "irrational exuberance".

 

Arguing for economic policies that center on defending human dignity and promoting the common good means raising issues that usually get ignored.  Here is an example of an attempt (in a different context, at the United Nations): http://www.zenit.org/article-31967?l=english

 

We believe that the truth will set us free, and Jesus is that truth.  Tonight Romney said America is "the hope for the world".  Well, this is a statement no Christian could accept.  Whitewashing of American history is not the truth.   (Romney saying that America doesn't dictate to countries, America frees countries from Dictators.  Seriously, Iran had a democratically elected government in the 1950s and the CIA working wiith the British overthrew him and set up a dictator.  Chile, Guatamala, Dominican Republic, Ghana, etc) looks like to me that we have put into place more dictators than we have removed, and some we did both).  Romeny (and many others) idealization of America looks like idolotry.  A truely great country could admit their mistakes (like invading Iraq) and learn from them.

 

Patricia.

Feel free express any factual data you think you've obtained from conservative blogs. I usually learn more from these discussions than I express, and I don't usually read conservative blog posts. I've honestly never seen anyone debate whether more than 90% of the income gains in America over the last 20+ years went to top income earners. It is a statistical fact. I suppose some might debate the causes of the occurrence, but not that it has occurred. I've debated with some conservatives that claim that if we tax top income earners at 100%, it will only cover the federal budget for 6 months. However, that only supports the need for some cuts. It doesn't dispute that we need new sources of revenue.

Also, instead of disputing the statistics that show the American economy grew at a higher rate throughout the 70's than 80's, you reduce your argument to partisan comparison between Reagan and Carter. You completely dodged the point of the statistic. Professor Clarke's original claim was that the 70's saw greater economic growth than the 80's, 90's, and 2000's. That includes 8 years of democratic presidency under Clinton, and the 70's had 4 years of Republican rule. The point was that taxes were much higher back then, and it didn't inhibit economic growth. Clark also states that wealth was distributed more evenly. Again, this is widely accepted by economists. Of course, as Mr. Dunn points out, racism was much more prevalent during those years, and average white incomes were much higher than average minority incomes. Still, the gap between the top 1% and average Americans is exponentially higher today.

As for welfare to work, I don't consider Obama's proposition to amend welfare to work rules for states that submit better alternative plans to be “gutting” welfare to work. That is a proposition Romney once supported before his bid for the presidency. Another claim you make is that the economy will improve if the government just “gets out of the way”, but you do not provide any support for that claim other than the proof we will see when Romney is elected. Obama already got the economy on the right track, and even if

I am glad to hear that you despise war as much as abortion and capital punishment. I was beginning to think you equated Republican ideology with Catholicism. Believe me, I am well aware that the Democratic party is not consistent with Catholicism. However, I reject your statement that it would be better not to vote at all if I could not vote for a Republican. I believe we need to weigh the policies and proposals of candidates in accordance with our faith. The Church encourages Catholics to vote. Yes, the Church also informs voters of the “intrinsic evils” which we should concern ourselves when voting. The Church also recognizes that Catholics may have limited options in which all candidates support some intrinsic evil. Years ago, Cardinal Ratzinger informed a bishop that Catholics could indeed vote for a candidate that supports some intrinsic evil so long as the Catholic did not vote for that candidate for her specific position on that intrinsic evil and the reasons were proportionate. Romney wants this campaign to be about the economy, and I have no doubt that he will make his destructive economic policies top priority if he wins. As for his pro-life views, Romney has already made it clear that he will not pursue any abortion related legislation if he is elected. Why should I give any weight to his pro-life views if he claims he has no intention of pursuing any pro-life policy?

You say that as Catholics we must speak out against the evils of the democratic party. I associate myself with Democrats for Life of America, I make my position on abortion very clear, and I have sent a petition to the president asking for an accommodation to the HHS mandate. Yet, you seem to defend the Randian Social Darwinist economic philosophies present in your party. You don't challenge it, or even claim to view it as an evil that is lesser than the others you make your top priority. You embrace it. Here's a link to On All our Shoulders. More than 150 Catholic theologians and scholars collaborated to produce this document challenging the Tea Party economic libertarianism you propose. We need a consistent ethic of life, and as they wrote in this article, “Our concern is that Ryan and his Catholic supporters, must be informed—as prochoice candidates and Catholics who vote for them are perennially and appropriately reminded—that some of his positions are fundamentally at odds with the teachings of the Catholic Church.”

http://www.onourshoulders.org/?fb_action_ids=3925305016691&fb_action_types=og.likes&fb_source=aggregation&fb_aggregation_id=288381481237582

Here is also a link to Democrats for Life of America. Most members are Catholic, and DFLA takes stances that are much more in accordance with Church teaching than either party as a whole.

http://democratsforlife.org

Joseph Dunn

Let me make myself clear. I am not challenging you, but questioning you. You speak a lot about patents, inventions, and Apple. You also seem to slant yourself towards the position that taxes are not the solution to our current problem. "So, if we resolve the fiscal cliff questions, will the resolution involve higher taxes on corporations and investors (which includes 47% of American households)? Or will we adopt some reforms that encourage investment?" I your previous post, you appear to accept the fact that America's economy grew at a greater rate during a higher period of taxation, and that growth was more equally distributed. You also know that corporations are currently sitting on a large sum of cash. So, I ask you, how do you propose that we encourage investment? Considering that these profits and stock market gains were made at the current level of taxation, it is obvious that taxation is not what is preventing investment. Three current tax proposals have been: The Buffett Tax (increase on the tax rate of millionaires), the Robin Hood Tax (a tax on speculative trading that the Vatican has endorsed), and a tax on capital gains (the most lucrative loophole for millionaire/billionaires). Do you support any of them? The Republican Party has vowed to oppose any new taxes. Also, if you don't, do you have any non-tax proposals as to how to encourage investment in a revenue neutral, or preferably revenue generative way? I guarantee you, if the money is taxed, it will get spent. The only idea I have yet to hear comes from Paul Krugman. He suggests that the Fed ramp up inflation to at least 4% to make that money corporations are sitting on become a liability. They will spend it quicker if it is losing value. However, I am unsure about this option. Although corporations may be encouraged to invest with a higher rate of inflation, I don't know if average wages will keep up.

Dear Charles, Jeff, and Paul:

Thank you for all the time you put into this discussion.  As I stated earlier, I have little doubt that you all are not decent and intelligent people, and hopefully, good hearted Catholics. 

I never had any intention of getting involved in back and forth party accusations, any more than I  had intentions of getting into a deep discussion on economic theory.  If you see it as a cop out on my part, my apologies, but I just can't do these types of disucssions any more, as they serve none of us in the final analysis. 

 For the record, I'm not a fan of either party, nor am I a Repbulican (or an Objectivist).  I'm a registered Independent, ex Democrat,  but prefer to ID myself politically, as simply, "Catholic." Consequently, I will be voting R as the best of the less than ideal, and hopefully  enough to at least stop the bleeding and avoid the church taught intrinsic evils.  Like you Charles, I don't write to "win", or even to have the last word.  If  one reader at least "prayfully" sees more Christ and less "politics",  then the discussion and  time invested was worthwhile.

Again, I don't discount the importance of the discussed issues, but quite frankly, none of them are the "fix" anymore than an aspirin is going to save an end stage cancer patient.

One thing that we probably all could agree upon is that as Catholics, we have failed our country.  For that, we will all be held accountable, self included.  Not only have we been "given much", but we are also the majority  voting block, if, we truly voted as Catholics. 

As Ron Paul said in one of the debates when asked about abortion, (parapharased), "When we change (meaning hearts), so will the people we elect and the laws governing our society."  All that we see out there is simply a reflecetion of "us."

And the sight ain't pretty:  Abortions  on demand, same sex marriage, a contracepton mentality, useless wars, race baiting politics, idolatry, massive pornography addiction, attack on religious freedom, massive sexual abuse, drug addiction, single parent 'families' by choice, racial divide, and the list goes on, and on and on...

Dr. Peter Kreeft once said in one his many great  lectures (again paraphrasing a bit), that "if we fail as Catholics, to whom much has been given, especially the Eucharist, God will send someone else to do the job." Who but God knows, but hey, maybe he's sending a Morman!

In the meantime, our main job is to "be Catholic" and the light, to those among us, allowing the Holy Spirit to use us to change one heart at a time.  When and if we become "real Catholics", those around us will "want what we have", subsequently, the "politics", and the economics,  will follow.

After all, the fight might be long and hard, but in the end, we already know who wins!

I have no idea whether the Congress and President will avoid the fiscal cliff, or how they might finally agree to do that.

The economic growth of AMerica's high tax era can accrues out of many forms of economic activity, including WW II, Korea, Vietnam, orders for capital goods as Europe was rebuilt after the war, and stimulative spending for highways, housing, nuclear arms and a space program at home. Let's not forget that this period ended in a bout of inflation that was particularly devastating to those on fixed incomes, and that (as I wrote earlier) this was an era of limited blessings unevenly distributed. I believe Professor Clark wrote that race-specific data on income- and wealth-sharing was not available until 1967, but there is little dispute that (1) blacks were economically segregated throughout that era, which produced the urban riots of the late 1960s, and (2) white women were limited in their career options in that era. The lack of detailed economic data does not permit discounting of the abundant historical records.

The ways to encourage investment in business and private-sector innovation are self-evident when we consider our own behaviors. Some part of a person's (or a corporation's, or an institution's) savings are usually kept in cash for near-term needs or emergencies. Beyond that, an individual, treasurer, or trustee, seeks a higher reward by committing some savings : opening a new business, to higher-risk ventures. The coporarte board and executives will commit the available cash (buy new equipment, hire more people, etc) if/when they believe there is an opportunity to grow the coporation's profits. An individual or institution decides to commit the available cash on the same basis, buying shares of corporations that are likely to increase their profits and thereby raise their share price. The tax treatment of corporate profits is an issue even for tax-exempt institutions, since only the after-tax profits can flow through to the investor or cause the share price to rise.

Warren Buffett is one of the century's most successful investors. He made much of his money in the public stock market that so many like to think is rigged, and all the while he was disclosing his methods annually in the Berkshire Hathaway Chairman's Letter. Mr. Buffett recommends a higher marginal income tax rate on higher incomes, and higher estate taxes, at least on large estates, to help ease the government's annual revenue shortfall and so to keep heirs, who might be poor stewards, from mismanaging large sums of money. But in The Snowball, a biography in which he was much involved, Buffett is reported to have given each of his children multi millions in birthday gifts, spread over many years, clearly leaving them able to live far beyond middle-class lifestyles, even if they never inherit a penny at his death. Mr. Buffett also has generously donated billions of dollars worth of stock to several foundations, including the Bill and Melinda Gates Foundation. It would seem that Mr. Buffett finds these foundations to be more likely better stewards of his legacy, (more likely to promote the common good?) than the federal government, to which he could have left these same billions. So, I read Mr. Buffett's tax-code prescriptions with some question about his core beliefs. Fortunately, his generosity is doing good work, and will do good for many decades, in the non-profit sector, whatever the rationale.

The Robin Hood tax (known years ago as a Townsend tax) raises the question: what is a "speculative" trade? There are many variations in this proposal, so it is hard to predict the outcome, but most verisons claim that "this would be so minor as to be of immeasureable effect--couldn't possibly have any negative implications--think of the fabulous sums of money to be raised." One lesson from history: When Woodrow Wilson signed the Underwood Act in 1913, as the nation's new federal income tax, it enacted a tax of one percent against only that income that exceeded a very generous exemption that excused most individuals and families from any income tax. In other words, it was a one percent tax on upper incomes. Sounds like so minor as to be of immeasuraable effect--couldn't possibly have any negative implications--think of he fabulous sums of money to be raised). Wow, how far we've come!

There already is a tax on capital gains, so I'm not sure exactly what your question is. I do find it strange that we give "long-term" treatment to any investment held for one year plus one day, although few business people would agree that one year constitutes a real, long term commitment. Why not one rate for an investment lasting 366 days, another lower rate for an investment held 5 yrs, and a super-low rate for an investment held 10 yrs? That would promote investment over speculation, encourage savings and investment (a core of middle-class prosperity).

Mr. Bernake probably prays nightly for even 2-3% inflation, and seems to be doing everything possible to accomplish that, so I am not sure what Paul Krugman is proposing. 

Let's think carefully about all these issues. Since non-profits take care of, ny definition, those who fall through the cracks of government programs, (thereby exercising a preferential option for the poor) we need to be very careful about limiting corporate profits or investment gains, as numerous studies have shown these to be the biggest determinates of charitable giving, and of the income that supports endowments, foundations, etc.

Joseph J. Dunn

 

.

Joseph Dunn

Krugman and Bernanke disagree about the Feds current target for inflation.

http://news.yahoo.com/blogs/daniel-gross/krugman-fed-tolerate-higher-inflation-reduce-unemployment-131023690.html

You are correct in saying that there is a already a tax on capital gains, but the rate is much lower than the rate for ordinary income. It is the most lucrative loophole for top income earners who take a majority of their income in capital gains. So, I am talking about closing that loophole, which would imply raising the capital gains tax rate.

I think you an I agree that non-profits and charities serve the common good more efficiently than government. However, they rely on the generosity of donors, and I think it is unrealistic to assume that charities will "fill the void" of the proposed cuts to the safety net. Bread for the World estimated that every church in America would have to raise an additional $50k to offset Paul Ryan's proposed cuts to nutritional assistance. To compund the situation, the church's that serve the communities that will be hardest hit are the church's that will have the toughest time raising revenues. I don't see it happening. 

The capital gains rate is the same for high and mid-income earners (there is actually an exemption for lowest income brackets, but that could go away if the "cliff" occurs). Let's also remember that the money that is invested (in stocks, bonds, etc.) has already been taxed once if it was earned as wages, salary or cash bonus, all at the applicable ordinary income rates. If the current investment was bought with money obtained as dividends or capital gains from earlier investment, then that money was already taxed multiple times (dividends are taxed once as profits on the corporation's income tax, again on the recipient's individual income tax). So, taxes paid on capital gains or dividends are funds paid to the Treasury for having saved and invested, rather than spent. I'm not arguing against taxes on dividends or capital gains, but this is a strong argument to be made for discounting these rates to something less than the rates on ordinary income. There is a strong social benefit derived from having businesses that can employ people, launch innovative products, and otherwise serve customers. Business formation does not happen without investment, and investment does not happen without opportunity for profit (after taxes) that persuade the investor to take the risk. This cycle of investment, its role in society, and its motivations, are a major topic of After One Hundred Years: Corporate Profits, Wealth, and American Society, because I realize it is little understood. 

There is a noticeable tendency for many people to regard all wealth as suspect and to regard taxing it as vital to convert it to the common good. I think many people would be interested to read about the wealth that funded the work of Mother (now Saint) Katharine Drexel among blacks and Native Americans (probably the poorest of the poor, in her era), and the impact that the Depression had on her work. Her correspondence of the New Deal years is part of the historical record we need to consider. The work of John J. Raskob, who made a fortune as an executive of DuPont and GM, and who contributed vast sums to the work of the Church globally, and to his home diocese in Wilmington, DE, is also instructive. His letters of 1937 are part of the Depression story that is too little known, as are accounts of the Rockefeller, Carnegie, and other fortunes. We ought to be aware of these stories as we consider how best to restore our economy, especially with a preferential option for the poor. Those also are covered in my book. We will be a sadder society, by far, if we neglect these lessons of history, and as always the poor, or the least educated, will suffer the worst of it, as they did in the 1930s.

I don't assume that charities will fill the void left by cutting government funds to social programs. I do believe that some government funded programs spend inneficiently and I point to some examples. I also point to studies of the wealth and income gap that correlate these very closely with gaps in functional literacy. All of us have obligations to stewardship, as well as to charity and justice. To get to the whole story, I did six years of research. It is a fascinating human interest story, and I wrote it to point clearly to the most powerful levers of social justice, and how we might use them.

Joe Dunn

 

Thank you for your time and input Mr. Dunn. I'm not sure I can stand with your position on capital gains. The rate is the same for middle and upper income earners, but middle income earners never can and never will take the majority of their income in capital gains as do top income earners. The tax rate on capital gains is less than the income tax rate for middle income earners, and that is what allows top income earners to pay an overall lower rate than the middle class. I do not think that greater investment alone is sufficient justification for this. If we are going to allow this loophole to continue, then I would think that at least the Buffett Tax is decent option. The debt crisis, budget cuts, and the fiscal cliff make these options all the more urgent. However, I realize I am not an expert, and I could definitely learn much from your research.

Voodoo economics is the gift which keeps on giving.

Prior to voodoo economics, we paid down the debt to GDP ratio from a post WWII high of 1.25, clear down to close to 0.3, at the end of the Carter administraiton.  This happened during both GOP and Democratic administrations.  It happened despite Great Society spending, Vietnam War spending, despite recessions, and despite stagflation. 

We also had reasonable ratios of CEO pay to worker pay. We also were in no danger of developing a British-style, to-the-manner-born class system.  We lived in a great country.

Then came voodoo economics.  The idea that massive tax cuts would generate massive economic growth and, as if by magic, the economic growth would be so great that more revenues would come flowing into government, despite the lower tax rates, and that the tax cuts would actually pay for themselves.

This argument proved irresistable.  What politician ever got into trouble by cutting taxes? What politician ever got into trouble by suggesting a tax increase? Mondale.  What politician ever got into trouble by actually agreeing to a tax increase?  George  HW Bush.

Fast forward. Even conservative economists agree.  Tax cuts don't pay for themselves. They bleed revenue from the government. They don't grow business as much as is claimed. Part of this is just common sense.  When tax rates are cut, there is more incentive to take money out of a small business and invest it in real estate, secondary equities and securities, precious metals, foreign currency, art, and plain old creature comforts.  With higher tax rates, there's more incentive to put profits back into the business (where they won't be taxed).

So what is the result?  During and immediately after Reagan, the debt ratio exploded, back up above 0.6.  With tax increases, the debt ratio came back down.  With the Bush tax cuts, the debt ratio again exploded.  With the Obama tax cuts, the deficit continued to soar. 

With all those minimally-taxed profits, money was taken out of businesses and invested not in growing old or building new businesses, but in creating a stock market bubble and a real estate bubble.  CEOs took home more money and got ever more greedy.

Rather then reward employees with raises (thereby avoiding taxes on profits), with low tax rates it increasingly made sense to keep wages low and maximize profits to be taken out of companies.  With the gutting of the inheritance tax, we are watching the emergence of an American to-the-manor-born "scion class."  The Waltons and Larry Ellison are endowing their progeny in perpetuity. It's going to change the fabric of the nation. 

If a poor person wants to aspire to the American dream, he'd have a better chance in Denmark and a dozen other nations than he/she would have here in the USA.

I hate voodoo economics.  It's a cancer.   It's the worst thing which has happened to the USA during my Baby Boomer lifetime.  And no one has the guts to do the right thing, which is to do the conservative thing, which is to pay our bills in real time, rather than borrowing money and digging ourselves into an ever deepening hole.

- Larry Weisenthal/Huntington Beach CA

Both Messrs. Keller and Weisenthal raise interesting points. But I submit that a "war economy", which is what prevailed almost continuously in the years 1940 (some might start at 1939) to the early 1990s is very different from a "peace economy." From 1940 to 1990, defense/military spending consistently exceeded 5% of GNP, and in the 1950s and -60s was often at or close to 10% of GNP. Most noticeably during WW II years, when most GNP was devoted to military purposes (national survival was the priority social need), much of those investments in plant and equipment were paid out of government funds. After the war, buildings and equipment originally funded by the government were auctioned off to civilian buyers, at market prices. War suppliers had little investment risk, as their contracts with the government assured full payment--no credit risk, and no risk that a competitor will suddenly produce a product that renders yours less desireable or obsolete. As long as the product meets specifications, payment is due. This is a model completely unlike a marketplace of sales to civilian customers where all of these risks are continuous. In a war economy, with relatively little risk to an investment, and relatively little up-front capital investment required, investors did not have any need for investment returns greater than that afforded  by US Treasury bonds (at the time, known as War Bonds). So, the economy worked with high income tax rates. Quite simply, little risk required little reward. It did not, however, create new jobs as quickly as possible (see JFK speeches on this). The large numbers of active-duty military personnel were, by definition, out of the civilian workforce. In 1955, military personnel totalled 3 million; in 1965, 2.7 million, in 1975, 2.1 million, in 2010, 1.4 million. A smaller military means more civilian jobs, producing peacetime civilian products, are needed. That means more civilian, peacetime investment is needed.

As we raise taxes on investment returns through either the corporate or personal income tax systems, we reduce the incentive to take investment risk. In a peacetime economy (perhaps not universal peace, but in which military spending is less than 5%, as from 1990 to today), the amount of investment needs to grow. Promoting demand, perhaps through unemployment insurance and other economic stabilizers aimed at stimulating demand, still prompts less investment as we ratchet down the potential rewards for that investment risk. We cannot save our way to a sound economy (Professor Clark's point in this article, and he is correct) but we cannot tax our way to a sound economy either.

To Mr. Weisenthal's point, both the Kennedy tax cuts (passed after his death) and the Reagan tax cuts did grow federal income tax revenue. The revenue gains from Reagan's 1986 cuts were outrun by increased non-defense spending, thus the deficit growth. All of this can be confirmed with quick reference to the Statistical Abstracts of the US.

For me, the strongest indictment of the Buffett Rule as a guide to taxing is that in a peacetime economy we need both demand for civilian, peacetime goods and servoces, and we need returns on investment that are commensurate for the risk. ("We" includes the non-profits that benefit greatly in times of economic growth, and that see their incomes, as well as donations, decline in times of declining or anemic economic growth, and the poor who are the last to get a job, a raise, etc in such times). But the other indictment against the Buffett Rule is that Buffett does not follow it, as made clear in the biography, The Snowball, in which he actively participated. He has done much for his shareholders at Berkshire Hathaway, and contributed much to philanthropy, but the Buffett Rule he proposes (higher taxes on capital gains, and high estate taxes) contradicts the patterns he has followed throughout his own career.

We need to think carefully about what is truly effective promoting the common good.

Joseph J. Dunn

Mr. Dunn

In Buffett's defense, he admits to paying a lower tax rate than his secretary, and has never blamed the rich for not voluntarily paying more in taxes. He has always claimed the problem is systemic. The system that allows billionaires to pay less in taxes than their secretaries is the problem. He has never claimed that the problem is that the rich do not voluntarily donote to the federal budget.

You say that you are interested in Catholic Social Teaching, the common good, and maintaining revenues needed to continue federal programs aimed at promoting the common good. Yet, you appear to be opposed to all measures aimed at increasing revenue in order to reduce the severity of the cuts to those programs. You do mention that federal revenue increased following the Reagan tax cuts. Interesting for you to say. I think I know where you are going with this. Would you propose that another tax cut will lead to increased revenue?

First, I would say that it is debatable whether the Reagan tax cuts are what actually "caused" the gains in revenue. But, let us assume that they were the cause. I haven't heard any serious economist or policy center purport that we would see the same result now. Where on the Laffer Curve do you think our current tax rates fall? During the Reagan era, the top tax rate was 70%. One could reasonably argue that a tax cut will lead to a revenue gain. However, at 35%, that's a tough one to sell. The Bush tax cuts are widely viewed to have contributed to the deficit through the billions in lost revenue. I don't see how another tax cut would be any different. I might add that the top tax rate was raised by 5% at the begining of the Clinton administration without negatively affecting the economy. Also, in a recent survey of economists, the majority of them stated that we need to raise taxes in addition to cutting spending. http://economywatch.nbcnews.com/_news/2012/09/24/14048116-raise-taxes-and-cut-spending-business-economists-say?lite

You speak of the Reagan era as a golden age for innovation. I don't deny that the number of patents increased during that time period, or that it was caused by increased funds available to investors. Yet, you cannot deny the immediate and lingering consequences attributable to the deep cuts to the safety net. A dramatic rise in homelessness and violent crime were among some of the immediate effects. Also, as Professor Clark pointed out, wealth has shifted to the top. The top 1% of income earners have seen their wealth increase exponentially, while average worker wages have remained stagnant or declined. Politifact recently confirmed that the wealthiest 400 people in America own more than the bottom 50%. These are serious issues to consider in our search for the "common" good.

 

"Therefore, it must be borne in mind that grave imbalances are produced when economic action, conceived merely as an engine for wealth creation, is detached from political action, conceived as a means for pursuing justice through redistribution." - Pope Benedict XVI

 

Mr. Keller

Mr. Buffett needs no defense, and I commend, as I wrote earlier, his generosity and his leadership in business and philanthropy. I simply point to several inconsistencies between the "Buffett Rule" and his actions over many years. 

I am opposed to proposals which are well-intended, and which the proposers may honestly believe would benefit the common good, when the clear lessons of history (including the work of economists) show that the proposals would actually be detrimental to the common good. The historical experience, and the economic studies, are described in human-interest style in 414 pages in After One Hundred Years, and are therefore hard to summarize here. Similarly, it is difficult to point to one or a few quotes from an encyclical or scripture to capture the full scope of CST. All of the information in After One Hundred Years is carefully footnoted, so a reader can have confidence in it. I wrote it to provide information that would advance the goals of CST, as set forth in the encyclicals and episcopal letters. 

To your questions: Would I propose that another tax cut would lead to increased revenue? Dr. Christina Romer, chair of President Obama's Council of Economic Advisors, has studied every change in federal taxation since the end of WW II. Her study concluded that every tax increase (by definition, including the Clinton tax increase) caused a significant, negative impact on GDP, and every tax reduction caused a significant positive impact on GDP. Those interested in promoting employment and service to the poor (often accomplished by non-profits) need to be aware of that, as do our legislators. Similarly, federal tax revenues rose after the Kennedy tax cuts, just as they did after the Reaan tax cuts, especially the massive 1986 cuts. In each event, the change in tax revenue between pre-cut an post-cut are documented in federal records: lower tax rates did produce rise in revenue growth. There is also the urban legend that Reagan cut non-defense spending as he cut taxes. But the record (see Statistical Abstract of the US, 1993, Tables 509-512) shows that non-defense spending (also known as human resources spending) increased 10% annually in the fiscal years 1986-91. So, "deep cuts to the safety net" did not happen, and if there was a "rise in homelessness and violent crime" (I don't have any statistics, so I cannot agree or disagree) they did not come from "deep cuts in the safet net." Urban legends can distort our thinking about tax policy and how best to rebuild prosperity for the middle class and security for those in need. We need to work from facts. This is important, not just because right moves aid the middle class and the poor, but also because wrong moves cause real misery. 

Where on the Laffer cuve do I think we are, and would another tax cut work the same as earlier ones have? The Laffer curve is a valuable graphic for making an important conceptual point, essentially the point that Dr. Romer's research confirmed. It is not calibrated to any particular rates between 1% and 100%. It was originally drawn on a napkin at a dinner discussion. If we are looking for innovation to boost new job growth (as President Obama urges), tax changes that in the past have boosted innovation would seem logical, and changes that suppress innovation would seem illogical and, by the way, harmful to the unemployed.

I don't argue with a statement that says we need more revenue as part of getting, at some point, to a balanced budget. I do argue with any statement that says higher tax rates will produce more revenue. Too much history and too many economic studies argue against that broad statement. 

Something to ponder: Pennsylvania's income tax has long been a simple affair. One rate, 3.07%, is charged against all income except pension income. No deduction for home mortgage interest, local taxes, blindness, number of children, etc. The only deductions are for work expenses required by law or by the employer (uniforms, safety equipment, etc). Dividends and capital gains net of losses are taxed at the same 3.07% rate. Simple, direct, everybody gets the same deal. Would that approach (I don't presume to know what the rate should be) be better for the common good than the current federal income tax approach?

The wealth gap has indeed shifted in the past 30 years. Let's look closely at the factors involved, as a guide to how we might address the causes. Several studies have documented simultaneous growth of a literacy gap, and importantly, an increase in the percent of adult Americans who are functionaly illiterate. There is also a very visible correlation between literacy levels, income, and wealth. The findings of these studies are so compelling that I believe we need to formally acknowledge a new disenfranchised minority: those who are functionally illiterate. If we define our underpriviledged in that way (rather than by race, ethnicity, zip code, etc) we might design programs that directly address causes of low employment prospects, high reliance on public welfare, etc. We might very well start to address a leading cause of the income and wealth gaps, and our rapidly growing life-expectancy gap, in a very constructive way, and possibly by using current expense dollars more effectively. A longer discussion of this issue and the studies involved is in After One Hundred Years.  

Bottom line: redistribution has been with us in the form of charity since Biblical times, and as part of public tax policy since the late 1800s. Sometimes it has produced benefits to the common good, but not always. At times it has caused real suffering. We can learn much from our history, and I believe that stewardship requires us to do so.

Joe Dunn

 

Mr. Dunn

Your statement about Mr. Buffett is exactly what I was defending him from. There are no such inconsistencies for the reasons I listed. I agree that the fullness of CST cannot be reached through one quote. I merely listed that one to make sure we understand that the wage gap is an issue that needs to be addressed. I am also aware that the Laffer curve has no specific scale of 1-100. I mentioned it to illustrate the point that taxes that are already at low levels do not produce revenue gains when they are reduced even further.

I realize that you cannot clarify all the points you made in your book in this discussion. I agree with you that education is an effective tool to lift people out of poverty, and that it deserves much investment. However, the wealth earned by the top 1% has far outpaced even that of educated and skilled workers. I wonder if the causes are deeper than just literacy levels.

Lastly, I would like to say that I am also concerned with the truth. You say that Reagan's cuts to the safety net are an urban legend. You offer proof of that by citing that non-defense expenditures rose between the years of 1986 and 1991. I wonder why you would ignore the years of 1981-1985. I think that you are aware of the Omnibus Budget Reconciliation Acts, that non-defense expenditures dropped during those years, and that non-defense spending cuts were a specific goal of the Reagan administration. You even go on to blame Reagan's deficit on non-defense expenditures, when it is defense expenditures that particularly rose during his administration. So, please, let us stick to the truth.

The inconsistencies between Buffett's tax guidance of recent years and his own actions over several decades are documented in "The Snowball", a biography in which he participated. I simply point them out.

In the studies I pointed to about literacy, the authors of the studies point to correlations between literacy levels and income and household net worth. None claimed any correlation of anything to the incomes of the highest one percent pf incomes, so your comment is not related to anything in the studies I relied upon. My concern is heavily woth the 20 percent of American adults who are functionally illiterate as defined in the studies. If we are concerned with a preferential option for the poor, recognizing this correlation is important.

I pointed specifically to 1986-1991 because the Reagan tax cuts of 1986 were far larger than the 1981 cuts, because the economy in 1980-83 was suffering from a severe hangover from the inflationary 1970s, and--most importantly for this discussion--because in 1981 patent applications responded positively to tax cuts, but in 1086 they started to rise much more dramatically. Briefly, if we are to remember the "Reagan tax cuts" the 1986 cuts were the more significant, by far. You are most welcome to check my numbers, facts and references. I think numbers tell an important story.

Joe Dunn

Share

About the Author

Charles Michael Andres Clark is a senior fellow at the Vincentian Center for Church and Society and professor of economics at St. John’s University in New York.