Thursday, January 24, 2008

Will Congress go Wimpy with Economic Stimulus Legislation ?

The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'” – Ronald Reagan, U.S. President

"I will gladly pay you Tuesday for a hamburger today." -- J. Wellington Wimpy, a character in the old Popeye comic strip.

For those of you to young to know Wimpy, he was a habitual deadbeat mooch, so widespread was his reputation for continually deferring his financial obligations that he had difficulty borrowing enough for lunch.

Congress must have missed the news, but it looks like they may be offering a free lunch ... not for the needy, but for the protected masses.

Yesterday, The Wall Street Journal reported CBO [Congressional Budget Office] foresees a fiscal 2008 deficit of $219 billion, or about 1.5% of GDP. That's up from $163 billion last year, or 1.2% of GDP, and up about $65 billion from what the CBO projected as recently as last August. Most of the change from August is due to the one-year Alternative Minimum Tax fix passed in December -- the previous "baseline" assumed 23 million new AMT victims would be welcomed into the fold this year.”

This means that once again the deficit will increase from the prior year.

Now, that projection was before today’s news that economic stimulus package has been devised that would give most tax filers refunds of $600 to $1,200 and also provides tax incentives for businesses. Or as The Wall Street Journal reports “generous tax breaks” for business.

That’s the hook. Like a good game of switcheroo, the headline is tax rebates, but the tax give-aways get buried in the story. What should be a short term, temporary fix to address housing/energy consumer issues may be being used to apply significant changes to benefit business. At this stage, it may be too early to know the details but there was consideration of a number of changes including how long a business may carry forward losses. Some of these changes may have little to do with what caused the economic slowdown yet certain members of Congress have a propensity to exploit the situation.

In fact, under the guise of the economic climate, a number of bills have been introduced.
H.R. 5109 The Economic Growth Act of 2008 which is cosponsored Michele Bachmann and John Kline and has as one of its main points to lower the Corporate Tax Rate to 25% (effectively a 28% rate cut);
HR 5105 which besides the same Corporate Tax Rate cut also includes the elimination of the Estate Tax and makes the Bush Tax Cuts permanent.
HR 4995 which is cosponsored Michele Bachmann and John Kline and also includes the Corporate Tax Rate reduction.

It was just last year that President Bush was uttering the phrase "income inequality" acknowledging that corporate executives bonuses and golden parachutes have gotten out of hand.
Now, we have Republicans in Congress pushing to reduce Corporate taxes instead which I have previously discussed as illogical.

The proposed plan is that business will get 1/3rd, yet since the changes involve the tax code, there is no incentive for the business to take immediate action. Business may elect to wait until customer activity picks up before deciding to increase employment or investment in equipment/facilities.

The missing piece is the lack of extension of unemployment insurance and food-stamp benefits. These programs would have caused an immediate impact. That is a double-whammy. By not including these in this legislation while the problem grows means that there may be need to address this in a few months.

In my view, this plan will only add to the deficit without generating maximum benefits. If business needs incentives, Congress should consider waiving the Social Security matching portion for all new hires – this would encourage businesses that will increase employment levels as business picks up. (Since Social Security is currently “loaning” money to the government for other operations, this deficit will be increased based on true government spending – not being hidden by borrowing Social Security funds.)

This plan must be approved by Congress. Legislation that is passed in haste, can cause more harm than good. Let’s heed Reagan’s words, Government may not solve this problem, but could actually make things worse.

Congressman Tim Walz stood for fiscal responsibility in his AMT vote (and a survey of Republicans supported his vote ). Congressman Walz needs to exercise the same discipline … as certainly, Bachmann and Kline will reward business.

As those of us who remember the Popeye cartoons will recall, Wimpy was usually refused … and it’s time that Congress not be Wimpy.

4 comments:

SoftwareEng said...

Economic Malady – Stimulus Insufficient

The underlying problem with the economy is an extreme maldistribution of income between the working class and the capital owners. When a CEO can make 300 million dollars while an average worker's wages haven't even kept pace with inflation what results is a dysfunctional market economy starved for consumption spending. The average American has had to fuel his/her spending with debt obtained by borrowing on the equity within their home - that phantom equity has now evaporated.

In order to correct this out of balance condition there needs to be laws in place (similar to the anti-Trust legislation) that caps the annual income of all capital owners and their surrogates (CEOs, CFOs, etc.) at a specific federal percentage above that of the highest paid worker within their respective firm. Also, we need to eliminate labor arbitrage by canceling all Temporary Worker Visa programs (L-1, H1-B, etc.), and establish tax penalties for firms that expand their workforce above some threshold through outsourcing, or replacement hiring in foreign locations.

Essentially, FDR was accurate when he characterized the Great Depression as an out-of-balance Economic malady. Rural income prior to the Great Depression was significantly lower than urban income, now (overvalued home equity) as then there was unlimited amounts of overvalued phantom equity flowing into the stock market, the income differential between labor and capital while nowhere near the current astronomical level was still much higher than sustainable. There in lies the root cause of the out-of-balance condition that precipitated the Great Depression. Any system including the market economy that gets to far out balance does not function properly. Certain constraints need to exist to keep the market economy from slipping into a dysfunctional state. Balance is the essence of stability nothing short of this will guarantee permanence.

John Maynard Keynes –
 If fiscal policy is used as a deliberate instrument for the more equal distribution of incomes its effects in increasing the propensity to consume is, of course, all the greater.
Aggregate consumption depends mainly on the amount of aggregate income.
Consumption – to repeat the obvious is the sole end and object of all economic activity.
 We cannot, as a community, provide for future consumption by financial expediants [stocks, bonds, 2nd mortgages on home loans, etc] but only by current output.
Capital is not a self-subsistent entity existing apart from consumption.
Consumption is directly tied to the level of employment.

My Proposed Program
• 2 year 800 billion emergency Infrastructure Investment Jobs Creation Program (IIJCP) aimed at building new interstate highways, mass transit systems, schools, bridges, public hospitals, libraries, and assorted public buildings.
• Eliminate labor arbitrage by canceling all Temporary Worker Visa programs (L-1, H1-B, etc.), and establish tax penalties for firms that expand their workforce above some threshold through outsourcing, or replacement hiring in foreign locations.
• Taxation of corporate profits in the amount of 95% for firms that exceed a threshold level of jobs outsourced to a foreign country.
• Taxation at the rate of 80% on individual yearly income received from any corporation, not-for-profit organization, or any form of legal entity where the total income exceeds the U.S. average yearly median individual income by 200%.
• Fair trade agreements that ensure nations will offer decent wages, humane working conditions, and sound environmental policies.
• A nationalized health care system for all U.S. citizens.
• An effective federally funded tuition assistance program for U.S. citizens targeted at professions in demand.
• Repeal all legislation that inhibits the right’s of individuals to organize under labor unions regardless of position or any other currently disqualifying classification.

My Observations:
• An economy can only function when a large proportion of the populace is engaged in the economy thus able to purchase what is produced.
• If price is inelastic and labor remuneration static demand will fall due to reductions by industries in their capital base (the most important being labor).
• Firms forced to compete (those that are not oligopolies) in an economic environment where demand is declining will still compete on price but efficiency gains and operating cost reductions by nature have marginal declining utility whereby a point is reached when the firm's factors of production (land, labor, or capital) must be slashed. These cuts in factors of production will have a multiplicative effect throughout an economy resulting in an ever building 'wave' of economic decline.
• It is important to keep in mind that an economy cannot continue to grow when long-term consumption continues to decline. This in turn ties directly to reductions in the factors of production to accommodate continual long-term reductions in consumption.
• When geographical barriers, constraints to the free flow of labor resources, underemployed resource utilization, similar knowledge distribution across all nation state’s, and nation state governmental inconsistency exists no global free market can exist and thereby at the nation state level no significant corresponding opportunity cost for engaging in one form of economic endeavor over another.

Arron said...

Found this article today, September 30, 2008. Strange how things never change. What's the phrase... "those who fail to study the past are doomed to repeat it." Listening to the news today you'd think none of this had ever happened before, or that the current crisis just appeared last week.

Thanks for the blog entry.

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