Reading yesterdays bit on the attitude of John Boehner towards the Debt Panel: http://wapo.st/ng7yCC I find myself wondering.
Wondering just how reckless the GOP is going to be in it's chase for more power, and whether it's members are as ignorant of the realities of economics as they seem.
It's no surprise by now that the US is in a recession. You can put any spin on it you want, or try any definitonal trickeries you want but the truth of it is that in reality it is a depression. It's also not one that the economy is bouncing back from quickly, as it did in '58, '61, '75 and '82, which are the post-war recessions of similar severity to the current one. These were also the worst ones in this time period.
How do you get out of a depression? You grow the economy. How do you grow the economy? Elementary economics tell us that; you grow the GDP.
What is the GDP? The GDP is a measure of the value of all final goods and services produced in a country in a certain timespan. There are three ways to determine GDP, without going into the specifics of each here I will jsut mention that in none of these ways is government investment something that lowers GDP. There are many factors but in general they are: consumption, compensation of employees, corporate profits, government spending, investment (private/corporate and government), taxes (yes taxes grow GDP) and some others, which ones you use at any point is dependent on which model is being used, the outcome is supposed to be the same whichever model you use though.
So lets see here. Taxes increase GDP..Government spending and government investing increases GDP, employee salaries and wages improve GDP, consumption improves GDP...
And the GOP wants to cut government spending, cut government investments, cut taxes, cut the minimum wage cut regulations on corporations and so on.
Their mantra is that this is ok because all this will create more jobs.
WRONG!
The reason why so many people are unemployed in the US right now is because companies have no use for their labor. Why is this? Because the consumption is too low for the corporations to max out their production potential.
This means that as it is they are capable of producing more than people are willing to, or able to buy.
No private company is going to invest in further production capability when it has capability to spare already, unless it is expecting a massive rise in consumption in the near future. They are not expecting this...
So that means there are less salaries and wages to go around. There is also a higher supply of labor than there is a demand so wages will also sink, unless protected by say..oh a minimum amount of wages you must pay. Simple supply and demand.
So now corporate investments are gone, employee salaries and wages are down.. which means consumption is also down.
What is the likely outcome of this is something called a "Devil's Spiral" consumption goes down, corporate profit goes down..wages and salaries goes down..consumption goes down..etc..etc..etc.
What will corporate tax cuts and deregulations, the old GOP solution to everything, do to help this?
Nothing...
Why not? Seems corporate expenses will go down and then profits up right? Well, there is some logic to that. But then we forget the fact that at the moment corporations can produce more than they need to so those profits will not be funneled into new investments at all. They will simply pocket them.
There is no need to blame corporations for this, it's simply good business, and that is their reason to exist.
Let's see what's left? Ah yes..Government spending and investment and taxes...
See where this is going?
This problem needs to be solved from the bottom up. First you need to increase consumption. How do you do this? You put money into the hands of the common person so they can afford to raise their consumption again. This will increase demand and through that production. Then you increase demand further through government investment in big things like infrastructure, building, renovating and so on. This leads to a bigger need for labor again, which leads to more jobs, more salaries and what do you know, things are looking up again.
But what about the debt?
Well I am not going to deny that the US has put itself in a hole there. One that it should be ashamed of since there really is no way it couldn't be seen coming a long long ways off. years and decades really.
Thing is, that if you can restart the economy and get it going back up again. The US economy is substantially sound, at least in the short and medium run (Medium here meaning at least a decade or more).
Unlike a private household a country can, without problem, run on a deficit for a long period of time.
Now if the economy is sound again there is no reason why the US should not be able to talk to it's creditors and come to agreements on paying down debt, extending debt by rolling it over and so on and get some breathing-space there. Then with a moderate, well thought out plan for reforming and adjusting the economy over time, servicing that debt should be fairly undramatic and far from the excruciating pain the GOP policies are pushing towards.
Also there is no need to raise taxes really. The tax level in the US is perfectly fine. What needs to be done is close all the loopholes and the tax cuts for the mega rich and the corporations. These are what makes the effective tax level among the lowest in the world. Among..the..lowest..in..the..world.. Companies aren't going to go somewhere else over a few percentage points.. But the effect of those few percentage points on the economy as a whole, will be drastic.
So, how long will they let political ideology and dogma win out over science and common sense?
How much pain will they put the common person through in their chase for power?
I fear to consider..
Taxes are part of the GDP yes, but doesn't actually grow the GDP. Value creation is what drives the economy and grows GDP; Value creation is a corporation’s raison d’être, the ultimate measure by which it is judged.
ReplyDeleteIn a society with no taxes the GDP is 100% value creation. In a society with 30% taxes value creation accounts for 70% of GDP and taxes 30%, however... value creation is reduced by 30% because of taxation so the net result on GDP is the same.
So taxes reduce value creation in the private sector and diverts funds from growing the economy to other areas of society such as funding government agencies, welfare, the military etc. Unquestionably important functions of society, but nevertheless a drag on economy growth.
John S.
Yes, the net result is the same and and the taxation is mostly an adjustment. However with globalization and the possibility of sending that extra money out of the country, it can be debated that in reality those 30% if not collected in taxes might not go entirely towards that nations own GDP. This is why Net Exports is a factor in most GDP calculations.
ReplyDeleteAlso I have to call you on one thing. Funding government agencies, welfare, military etc.. do actually grow the economy. Why?
Money spent by government agencies go where? To pay salaries, to purchase services and products. The economy doesn't care who pays those salaries, or who purchases those services and products. As long as the money is circulating the economy is fine with it and grows.
Welfare..grows the economy. How? It puts purchasing power into the hands of those who currently don't have it. This raises demand, demand is filled by companies, companies make the money others got give in welfare..the economy grows.
Military?
Who builds those tanks? Those Ships? Do they do it for free? What do the servicemen spend their payroll on? Exactly..
What doesn't grow the economy is what we are seeing right now all over. Money that are pooling up and not being used. which leads to a lack of demand, which leads to a lack of investment, which leads to more lack of demand...
Who are the ones letting the money pool up?... It's us..private citizens and companies... The government is still spending money, putting them into circulation, keeping up it's share of demand. We're not..
Not to say companies and we are wrong to keep money back, from a point of self interest it'd be insane not to when you can expect low or no return on them at the moment.
It's called a "Liquidity trap"..there's money all over, but it's all stagnant, and money standing still does not grow the economy.
You can say "what about lowering taxes?"..well that's been tried, indirectly, by lowering the intrest rate. At the moment it's very low and in the US it's as low as it can get.
This hasn't worked, because they're in a liquidity trap. Even if money for investment could be gotten cheaply, or you could keep more of the money from your gross operating profit (through lower taxes), it still wouldn't help, since demand is below the level of supply.
There still could be investments and economic growth, if the industry thought demand would pick up and grow beyond current production capabilities. But right now they don't think it will in the short term.
Outsourcing is a problem primarily created by western labor being too expensive. Average wages in Europe and the US are rather ridiculously high compared to the value of their work.
ReplyDeleteGovernment employees rarely create value through their work. Building a tank for the military does not create any value in society; does not make the people richer. It does however increase national security and that is something we want to SPEND on. Police does not create any value, but provides an essential service to the public that we want to SPEND on. Government bureaucracy does not create any value, but provides an organisational framework that is necessary for a functioning society that we must SPEND on.
Most government employees are siphoning value off the workers actually creating value in the private sector. The same can be said for many corporate employees, like a security guard or an accountant; their work is not creating profits for the company, but their services are nevertheless necessary. Hiring more security guards is not going to increase profits; neither is employing more government employees unless they actually create value (like building roads etc.)
In short: Taking money (tax) from a worker in the private sector and giving it to an government employee so that he/she can give the money back to the private sector in exchange for goods and services is not... NOT ... creating value. Quite the opposite.
I did not say outsourcing as I did not intend to encompass only outsourcing when it comes to capital leaving the country. And whether it's the fault of western labor being too expensive or not, it still lowers GDP.
ReplyDeleteNow however you are changing from GDP to Value creation. Which is not what the post was about. It was about GDP and the Economy in general.
Since you quote "The Economist" (Nov 20th 2009
) so handily I guess you read that Value creation is difficult to nail down. GDP might be complicated to nail down, but it can be done accurately.
EVA is better at this, but even there you can run into inaccuracies or guesswork with the amortization of goodwill and the value of other intangible assets when you do your final adjustments. I am using EVA as that is what was mentioned as a tool at the end of the article in "The Economist" that was quoted in your first comment.
You can not use "Value creation" and "GDP" interchangeably. They are two different thing. A company can contribute greatly towards GDP, but have no EVA at all.
Do government employees create EVA? That depends.. Some government agencies operate with a profit/deficit at the end of the year, some don't. So you can't generalize.
Does a government employee contribute to GDP? Yes, his salary directly contributes towards GDP as does the value of the service he performs, if any price is assigned to it.
Building a tank for the military does indeed make people richer, what about the salary of all the ones that are employed to build it? The profit of the company that builds it and sells it to the military? That is both GDP growth and for the company EVA growth, as long as it's not mismanaged into a deficit.
Now a hypothetical. A 100% government owned firm sponsored by taxes develops and builds a large piece of infrastructure..for instance oh.. a cellular telephone grid. Has it created value?
To close, Value Creation and GDP is not the same thing and can not be used interchangeably. The measure of economic activity is the GDP.
Value Creation, or EVA if you want to use one of the models that have been developed for measuring one possible aspect of it, is a reasonably good indicator for a single company, but woefully inadequate for a nation. EVA was designed to be a measure of a firms economic profit, Nothing else.
"Now a hypothetical. A 100% government owned firm sponsored by taxes develops and builds a large piece of infrastructure..for instance oh.. a cellular telephone grid. Has it created value?"
ReplyDeleteYes... As I said in my previous post: "Hiring more security guards is not going to increase profits; neither is employing more government employees unless they actually create value (like building roads etc.)"
Most government employees do not.
Growing the economy trough taxation is equal to ordering the private sector to increase its production and give it to the government employees free of charge. Sure, it creates more work and more jobs, but at the expense of profitability and the companies' ability to compete against foreign companies not burdened in the same way.
Thing to remember is that National economic activity comes from many sources, not just private corporate profits.
ReplyDeleteAlso in a liquidity trap, you can not get out of it again by top down aka "trickle down" economics.
It has to start from the bottom, it has to start with demand-side, not supply-side.
May do a post some other time about international competition, if I find something about it that irks me.
Yes it does have to start with demand. However artificially increasing demand through taxation is just a short term fix for a long term problem. Increasing debt is another short term fix that comes back to bite you in the keester later. Americans have been living above their means for far too long.
ReplyDeleteTaxes are only one factor in the equation and raising taxes was not what the piece was about either, so this will be my last post on it.
ReplyDeleteI do not propose raising taxes, but instead letting the temporary tax cuts expire and also plugging up some holes to make their tax code be a bit less of a tuna net. (Which actually catches no tuna but plenty of small fish, must be a strange net).
This to help the government get in some revenue, which can be used for stimulus to get the economic engine going again, and to help with less of a deficit in the budget.
The thing is..you can cut the economy to the bone now..stall it even more and watch it crash completely into a hole where it will loose all momentum and be difficult as hell to get up to speed again.
Thing is, it's cutting spending now that is the short term fix that will bite you in the ass right away and then hang on like a terrier for decades.
Have the US been living over it's means though? Yes. It needs to do some rather drastic cuts. But the wrong places to go about it is to cut the things that keep demand and keep the average person with plenty of purchasing power.
They need to redo their entire medical system.. Not just medicaid and medicare but the entire thing from the top down. As it is now it really resembles nothing as much as a cartel or an oligarchy, both are models that do not even come close to maximizing economic benefit. They also need to make their systems for social care more efficent. Then some rather major cuts to the defense budget, which is a behemoth of a spender.
Then get the legislators off of the pork barrel buffet.
Some drastic cuts can also be made to the prison system with some legislative changes, keeping such an amount of people locked up is expensive. Better to put non-violent offenders more into community service programs or other programs where they can generate value instead of draining it.
Now cut a bit of that..and close off tax loopholes and tax cuts for the wealthy (which were only meant to be temporary. They came to be as the fact that the budget was making a surplus didn't sit well with Bush and his friends.. (which one might want to remind them of now..) )
And you might get some way towards paying down that debt..but if you stall the economy right now by draconian cuts instead... It's going to get much, much worse before it gets better and that will take a long long time.
Unfortunately a balanced approach is unlikely, especially with the Tea Party people around, who seem to have the opinion that a compromise means you do it their way, and be grateful about it. (Unfortunately in the current climate the GOP need these people more than they need their moderates...oy vey)