Wednesday, October 12, 2011

"Business Friendly": The Democratic Version vs. the Republican Version

The leaders of Fairfax County, Virginia, where I live, tout the county as being regarded as "Business Friendly."  The Chairmanship of the Board of Supervisors, which runs the County, has been held by a Democrat since 1995, while Democrats have also long been a majority of the nine supervisors who are also on the Board.  How does a government run by Democrats come to be Business Friendly, and is a Democratic Business Friendly different from a Republican Business Friendly?

Last month, I was at a meeting of the Northern Virginia Democratic Business Council, where the current Chairman of the County Board of Supervisors, Sharon Bulova, spoke about how they enticed Northrop Grumman to move its headquarters to Fairfax County.  They pointed out that Fairfax County has the best schools in the country, has a fine park system, and the residents are relatively well-off, with one of the highest per-capita incomes of any county.  OK, so roads can be congested, but other than that, it's a great place to raise a family.  Bulova said that Fairfax County did not offer any tax incentives. 

So, now there are 11 Fortune 500 companies that have their headquarters in Fairfax County.  That means that just over 2 percent of Fortune 500 companies are located in a county that has less than 0.4 percent of the U.S. population. 

"Business Friendly" for a Democrat should be offering a place where there is a good quality of life, where the business's employees would want to live.  The Republican version of "Business Friendly" would be few taxes and fewer regulations.  Oh, and workers get paid less as well.

The problem with state and local governments trying to entice a company to move its headquarters or facilities to that state or locality with tax breaks, more lax regulations, or lower wages is that, from the point of view of the United States as a whole, no new jobs are created.  They simply move from one part of the United States to another.  One group of potential employees gets "luckier," while another group is unluckier.  Even more pernicious, this process creates a "race to the bottom," where states compete to hollow out their tax bases, make the country more polluted, and keep up the pressure to suppress wages.  Corporate profits may improve, at least relative to the economy, but that's about it.

But don't corporate profits mean more money to invest in more jobs?  Republicans continue to push this line, but as we showed in a previous post, businesses are not going to hire more unless the demand justifies it.  And if wages have been suppressed (or cut), demand is also suppressed.  Businesses would have higher absolute profits if they were able to increase sales to meet increased demand, even if their labor costs were higher.

The Republican "Business Friendly" model, therefore, does not create wealth overall, it destroys overall wealth, even as it concentrates what wealth there is into the hands of the few.

The Democratic "Business Friendly" model, on the other hand, creates wealth.  It invests in education, creating the opportunity for more people to obtain higher-paying jobs.  It creates the infrastructure to improve the efficiency of an area, and it creates a more appealing environment in which people actually want to live.  It actually works out that "People Friendly" is also "Business Friendly."  A place where employees are well-paid, well-educated, and are happy to raise a family there, is a place where businesses will thrive.  They'll just have to settle for the fact that corporate profits will be a smaller percentage of a growing GDP, even if the absolute profits will continue to rise.

Sunday, September 11, 2011

Mitt Romney's Plan for the Economy and Jobs

As we have just discussed, the biggest problem holding back business hiring is low demand for what the businesses have to sell.  Given that, let's take a look at what Republicans have proposed to address the poor job market.

The most detailed Republican proposal to date comes from Mitt Romney, who recently released his Jobs Plan, which can be downloaded here.  Since there is very little in Romney's paper that did not come from mainstream Republican ideas, we can use it as a proxy for standard Republican "solutions."

First, some perspective, to see how well Republican solutions have worked in the past.  On job creation, Democratic administrations have tended to do much better than Republican administrations.  Only Reagan's second term, characterized by more tax increases than tax cuts, approached the typical Democratic administration jobs creation numbers.

Median family incomes have also tended to increase more during Democratic administrations.
While increases in income inequality have tended to take place during both Democratic and Republican administrations, it has tended to increase at a greater rate during Republican administrations, especially when one compares the Clinton and Bush 43 administrations:
As discussed before, this table examines whether the wages of each income group increased more than the overall increase in the economy.  If a group's percentage growth was less than the growth of the GDP as a whole, that group was "left behind."

Thus, when assessing Romney's Jobs Plan, it is a fair question to ask what, if anything, is different than what Republicans have always proposed, regardless of the economic situation, and what they have always implemented when given the power.

On this question, the answer has to be that, with the exception of China bashing, Romney's Plan contains absolutely nothing new.  One could therefore rightfully expect that were Romney, or another Republican, were to become President, the most likely results would be a repeat of the Bush 43 years, with perhaps worse results in that the effects of the horrible policies during those years continue to linger.

While Romney's Plan does a fine job of describing the current mess we're in, it does not do very well in describing why we got into this mess, and how Obama has made it worse.

He characterized Obama's Stimulus as "more than $775 billion in new government spending," without bothering to mention that a third of the Stimulus was in the form of tax cuts.  This is an inconvenient fact for someone who wants to argue that tax cuts are the cure for any ailment.  Another third of that amount was for state aid, to prevent layoffs of state employees, so it was not "new" spending so much as "replacement" spending.

Romney then complained about all the things that were either blocked or have not taken effect yet in any meaningful way, such as Cap & Trade for emissions control, Dodd-Frank Wall Street Reform, and the "uncertainty" that would be created by the Consumer Financial Protection Bureau.  Obamacare, of course, most of which has not taken effect yet, gets blamed for many of the current problems.

So what are Romney's solutions?  First, keep tax rates where they currently are.  Never mind that the economy has performed dismally in the decade since those tax cuts were initiated, compared to how well the economy performed in the almost eight years following the tax increases of 1993.

Then he proposes that taxes on capital gains, interest, and dividends be eliminated for taxpayers making less than $200,000.  Most taxpayers making less than $200,000 have little, if any, capital gains, interest, and dividends, of course.  Romney says this will encourage savings, and will free up capital for investment.  This goes back to the Republican conviction that the problem is not enough money for investment, when in fact there is considerable amounts of cash sitting in corporate books that could be invested, if only there was the demand to justify the investment.

Romney proposes eliminating the Estate Tax (which he of course calls the Death Tax), saying that "small family-owned" businesses risk having to be split up to deal with tax liabilities, ignoring the fact that the family-owned business that would most face such taxes is WalMart. Genuinely small businesses have no such problem.

He proposes to lower the corporate tax rate to 25%, following the typical Republican tactic of referring to the U.S. high corporate tax rate, as opposed to the U.S. actual corporate tax liability.  The real truth, which Romney should be confronted with, is the United States has the lowest corporate tax burden, relative to GDP, of any country in the OECD.  If lower tax burdens would help spur hiring in the United States, why hasn't GE, which had large profits but paid very little in corporate taxes for 2010 (and in fact pays a higher tax rate for income generated outside of the United States), gone on an orgy of hiring?  Instead, in the last several years GE's U.S. employment has declined as its overseas employments has grown.

Romney next attacks regulation.  He ignores the poor regulation and enforcement that helped lead to the huge housing bubble that destroyed the U.S. economy when it popped (and in fact claims that there was instead "mis- and over-regulation").  He singles out Dodd-Frank and Obamacare, and says he'll repeal Obamacare, as if that will create jobs.  He'll replace Dodd-Frank with "a streamlined regulatory framework," which has worked so well in the past.

This posting is already too long, so I'll cover the other proposals in less detail.  Romney would also gut environmental regulations.  Never mind the costs that would be incurred because of global warming, never mind the benefits that cleaner air and water bring.  It's just the costs.

Romney also would pass the stalled trade agreements with Columbia, Panama, and South Korea, and he would designate China a currency manipulator and impose countervailing duties (the one part of his Plan that would probably arouse the opposition of U.S. multinationals and be counter to what Bush 43 and all other presidents have concluded).  On energy policy, it would be "drill, baby, drill."

On labor policy, his proposals essentially amount to weakening unions.  Weakened labor unions have been a major factor the in the reduction of worker's wages, even if non-union, and have contributed to income inequality.  For Republicans, this is not a bug, but a feature.  For Democrats, workers are people, whose well-being contributes to the well-being of the United States.  For Republicans, workers are a cost, to be lowered to increase profits.  Romney goes along with this thinking, trying to convince voters that there will be more jobs if only we paid everyone less.

Finally, he would reduce federal spending and cap it at 20% of GDP.  Then he would push for a balanced budget amendment.  Romney adopts the "crowding out" claim, that "for every dollar that the government borrows for its operations is a dollar that cannot be invested in productive private-sector activity."  Romney utterly ignores the fact that when we're in a situation like the current Recession (or very slow Recovery), crowding out just does not apply.

Romney's Appendix lists all 59 specific proposals.  At best, they won't create jobs.  At worst, they will make the economy worse, except for perhaps the very upper levels of income earners (top 1 percent, and even more, top 0.1 percent).  Romney would qualify as in the top 0.1, or perhaps even 0.01 percent, of wealthiest Americans.  He at least would be helped by his proposals.

Monday, September 5, 2011

Is it Demand or is it Uncertainty?

The first step in addressing a problem is to correctly identify what caused the problem, or what has prevented the problem from being solved.

Why aren't we creating more jobs?

Republicans argue that the problem is either that businesses have uncertainty, or that they have insufficient money to invest in jobs (or both).

The alternative position is that the problem is a lack of demand, and that businesses won't hire anyone unless their sales increase.

Obviously, which diagnosis of the problem is right has a huge impact on which solutions would actually work.  The Republican  solutions center around removing that uncertainty, or providing more money to businesses (or both).  Those concluding that lack of demand is the problem propose increasing the buying power of consumers.

Play this mind game: Imagine Company A and Company B, both in the business of making and selling widgets.  Like a great many U.S. corporations, their sales have not increased greatly, but both have cut costs in recent years and have made record profits, and furthermore are sitting on record amounts of cash.  They don't know if the regulations that affect their businesses are going to change, and they don't know if their tax rates are going to change.

Now imagine that demand for widgets increases dramatically, as more consumers begin having more money to spend on widgets.  Company A responds by hiring more workers and stepping up its production line.  Company B continues to hold back, because it still doesn't know if the regulations that affect its business are going to change, and it doesn't know if its tax rates are going to change.  Which of these two companies is more likely to prosper?

Now imagine that demand for widgets remains depressed, but regulations are removed and tax rates are lowered.  Company A sees no growth in sales, and doesn't hire additional workers (although its after-tax profits go up).  Company B says that since uncertainty has been removed, it hires more workers.  But since it can't sell any more widgets, its labor cost per widget goes up, and its profits go down.  It thereupon fires the new workers it had just hired.

OK, a little simple, I admit.  The idea beyond the uncertainty theory is that if businesses suddenly became optimistic about the future, they would take the hit of hiring people before sales actually increased, and the act of hiring and paying those people (if a whole lot of businesses do the same) increases demand in the economy, thereby increasing sales, thereby requiring more employees, etc., in a virtuous cycle.  But the problem is that right now, businesses are looking at each other, saying, "you go first."  "I'm not going first, you go first."  Somebody has to take the first step.

That somebody, unfortunately, needs to be someone whose first goal is not self-profit, but rather a concern for the overall well-being of the nation.  Which business is going to be patriotic, by hiring more people when demand does not justify it?

When actual business people, as opposed to propaganda organs such as the U.S. Chamber of Commerce, are asked what the single biggest problem is, for most common answer for the last couple of years has been "sales."  More than taxes, more than regulations.

Source: National Federation of Independent Business, "Small Business Economic Trends, August 2011."  The preparer of this report is certainly not biased towards a progressive view, since he devotes his commentary to complaining about Paul Krugman.

Small business owners, who used to complain mostly about taxes, have singled out sales since the middle of 2008.

One way to test whether the problem is lack of sales (i.e., lack of demand) on the one hand, or taxes and regulations on the other hand, is to look at job creation  in the past compared to what business said was the problem at the time.  Unfortunately, I do not have the raw data that went into the NFIB charts, so I can't make one simple chart that superimposes the data.  Instead, we need to look at several charts at once.

So first is a chart that I made that counts the number of jobs added during each presidential term, by comparing the number of jobs reported by the Bureau of Labor Statistics in the first January of a president's term to the number reported in the last December of that term.  Here is what that looks like:

We note that the lowest terms of job creation--George HW Bush's one term and George W Bush's first term, correspond to the two previous humps in the NFIB chart above when businesses identified lack of sales as a growing problem.

Now note that the line in the NFIB chart identifying taxes as the major problem tended to be the highest during Clinton's two terms, when job creation was the best it ever was, and that job creation plummeted at the same time that complaints about taxes declined, during George W. Bush's first term.

Now we'll look at one more chart from the NFIB, which shows other factors that have been identified as the single more important problem, including government regulation:
Identification of "regulation" as the most important problem was highest during Clinton's first term, which did not prevent the best job creation record ever.  Concern about regulation was considerably lower during George W. Bush's two terms, but job creation was horrible.  Today, small business owners say that regulation is not choking their business.

So whenever you hear someone claim that all we need to do to create jobs is cut taxes and cut regulations, point out that these remedies have been tried before, with very poor results.  On the other hand, when sales have increased in the past, job creation is robust.

In a subsequent post, we'll look at ways to increase demand.

Ninety-Five Percent Left Behind?

What does it mean to be "left behind?"  By one simple definition, you have been left behind if the economy as a whole is growing faster than your own income.  A discussion of the actual numbers is after the jump.  But by that measure, those people in the 95th percentile income bracket easily qualify (as a quick definition, if you are in the 95th percentile, you made more money than about 94 percent of the population), at least in the period 2001 - 2008 (during the George W. Bush administration).

What has been happening is that the lion's share of the growth in the U.S. economy has been captured by a very small percentage of the population, leaving no benefits of growth for anyone else.

It was not always this way, and it is not this way in other advanced countries.  Most income groups did better during the Clinton Administration (1993-2000), for example, as will be discussed after the jump.  Thus, claims that this is a natural consequence of how economies work, or that it has to be that way because of international competition, do not withstand scrutiny.

It is quite possible to quibble with the numbers, but if you are left with resorting to quibbling (as in, "Ha!  You're completely wrong!  Only 94 percent of us have been left behind!"), then you must concede the basic thrust.

How often are we told that there is very little that the government can do for the economy, by the very people who are simultaneously working furiously to get the government to benefit them (and succeeding in a spectacular fashion)?  There are in fact many policy choices that a government makes that can have profound impacts on how the economy does, and how equitably growth is distributed.

That is what this blog will explore.

What this blog is about

No, it's not a blog about the Rapture.

It's a blog about policy, more specifically economic policy.  In particular, it will be looking at policies that benefit the overwhelmingly vast majority of Americans, as opposed to just a tiny percentage, or a special interest.  While this country as a whole has grown and prospered for many years (until the last few years, beginning around 2007), when one drills down past the Gross Domestic Product (GDP), we find that most Americans have not shared in that growth.  This blog will discuss policies that will reverse that trend, and will critically examine policies that only make this trend worse.  It will in particular examine policies put forth by Republicans that claim to produce growth and jobs, looking at their track record and rationale.

Independents often characterize Democrats as people who want to take their money and give it to the undeserving.  They have been thus distracted away from others who have have taken their money and kept it for themselves.

We will look at policies that are not just meant to benefit the poor, but are meant to benefit almost everybody.  It seems appropriate to launch this blog on Labor Day.

The Format

Unlike some other blogs, we will probably not post every day.  We will probably post about once a week or so.  The idea is to encourage a lengthy comment period.

Comments are very encouraged.  You are especially encouraged to comment if you disagree with the posting.  But here are the rules.  Comments will be moderated.  A comment that is simply a flame or an ad hominem attack will not be published.  A comment that offers a critique of the posting will be responded to, at least by me.  I expect you to respond to my (or other's) response.  We want to create a dialogue.  Perhaps we'll all learn something.