Tag: Concord Coalition

–How to cure federal tax loopholes

An alternative to popular faith

The March 15, 2010 New Yorker Magazine contained a piece by Mr. James Suroweicki titled “Special Interest.” The article described a quirk of federal tax law in which private-equity fund managers pay taxes on their share of profits (also known as “carried interest”) at the capital gains rate. Mr. Surowiecki says, “If you manage money for a mutual fund or a public company, you pay regular income taxes; do it for a private fund and you pay capital gains.”

Because capital gains are taxed at a lower rate than regular income, Mr. Suroweicki feels this “loophole” is unfair and should be closed. He probably is right, though his solution is maddeningly typical and wholly wrong. He would close this “loophole” by doing away with the tax break, i.e. increasing the tax on carried interest.

Nowhere does Mr. Suroweicki suggest decreasing the regular income tax, though that step equally would close his hated “loophole,” while additionally providing a tax-relief benefit to the public. Instead he follows the popular faith that all our money really belongs to the government, and should any group find a way to send less than others to the government, the solution is to make them pay more, rather than allowing us to pay less.

The very word “loophole” has pejorative connotations: something that begs to be sealed up. Why can’t the carried interest tax rate be considered the “normal” tax, while the regular tax rates are considered the anomaly. Why must every perceived unfairness in taxes be cured by raising a tax rather than by lowering one?

The federal government does not use tax money to pay its bills. It, in fact, destroys all the tax money sent to it, and it creates new money when it credits the bank accounts of creditors. Federal spending is not limited by federal taxes. When your neighbor finds a way to pay less, this does not increase your own tax burden (though the same cannot be said for state and local taxes, as these entities do not have the unlimited ability to create money).

Yes, there is the pathological, human jealousy the have-nots hold for the haves. But, something more harmful exists: The false beliefs that we are the government, anything taken from the government comes from us, and anything given to the government benefits us.

We are not the government. We pay taxes; the government receives taxes. We are limited in our ability to spend; the government is not. We live, lust, feel, fight, work, worry, conceive and care for children. We dream of the future, but eventually we die. The government does none of these things.

It is a giant machine, a remorseless, monster grinder, only more powerful, because it has the unlimited ability to create its own fuel. Some of us fall into the grinder and lose an arm or a leg. Others escape. Mr. Surowiecki would call that escape a “loophole.” His solution: Close that “loophole” by making sure everyone loses and arm and a leg.

How about making sure no one loses and arm and a leg. How about cutting taxes to address unfairness. Has anyone ever thought of that?

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

–Federal Debt: A “ticking time bomb”

An alternative to popular faith

Popular faith holds that the federal debt is a ticking “time bomb,” ready to explode into inflation and high interest rates, and destroy our economy. Here are a few references, beginning 70 years ago. Note that the language remains the same, down through the years — repeated predictions of a disaster that never seems to come.

Even with the end of the gold standard in 1971, arguably the most significant economic event since the Great Depression, the debt-hawk language never changes — as though 1971 were a non-event.

Sept 26, 1940, New York Times: Deficit Financing is Hit by Hanes: ” . . . unless an end is put to deficit financing, to profligate spending and to indifference as to the nature and extent of governmental borrowing, the nation will surely take the road to dictatorship, Robert M. Hanes, president of the American Bankers Association asserted today. He said, “insolvency is the time-bomb which can eventually destroy the American system . . . the Federal debt . . . threatens the solvency of the entire economy.”

Feb 11, 1960, New York Times: Mueller Assails Rise in Spending: The enormous cost of various Federal programs is a time bomb, threatening the country’s fiscal future, Secretary of Commerce, Frederick H. Mueller warned here today “. . . the accrued liability is a ticking time bomb. Some day someone will have to pay.”

Oct 4, 1983 Evening Independent – The United States and the developed world face a “ticking time bomb” because of the huge foreign debt involving loans to Third World nations

Oct 26, 1983, David Ibata: “ . . . home-building officials called for a commission to propose ways to trim the $200 billion federal deficit. The deficit is a ‘ticking time bomb‘ that probably will explode in the third quarter of 1984,’ said Fred Napolitano, former president of the National Association of Home Builders.

Feb 21, 1984, James Warren: “‘We now hear from them (the Reagan administration) that deficits don’t cause high interest rates and inflation,’ AFL-CIO President Lane Kirkland said. ‘If that’s the case, we’ve suddenly discovered the horn of plenty and should stop worrying and keep borrowing and spending. But I don’t believe it. It’s a time bomb ticking away.”

January 12, 1985, Lexington Herald-Leader (KY):The federal deficit is “a ticking time bomb, and it’s about to blow up,” U.S. Sen. Mitch McConnell, a Louisville Republican, said yesterday.

Feb 17, 1985, Los Angeles Times: We labeled the deficit a `ticking time bomb‘ that threatens to permanently undermine the strength and vitality of the American economy.”

Jan 5, 1987, Richmond Times – Dispatch – Richmond, VA: 100TH CONGRESS FACING U.S. DEFICIT ‘TIME BOMB‘

November 28, 1987, The Dallas Morning News: THE TICKING TIME BOMB OF LONG-TERM HEALTH CARE COSTS A fiscal time bomb is slowly ticking that, if not defused, could explode into a financial crisis within the next few years for the federal government and our nation’s elderly. The ticking bomb is the growing cost of long-term care.

October 23, 1989, FORTUNE Magazine: A TIME BOMB FOR U.S. TAXPAYERS The government guarantees millions of mortgages, bonds, deposits, and student loans. These liabilities, now twice the national debt, are growing fast.

May 1, 1992, The Pantagraph – Bloomington, Illinois: I have seen where politicians in Washington have expressed little or no concern about this ticking time bomb they have helped to create, that being the enormous federal budget deficit, approaching $4 trillion and growing now at an annual rate of $400 billion per year.

October 28, 1992: Ross Perot: “Our great nation is sitting right on top of a ticking time bomb. We have a national debt of $4 trillion. Seventy-five percent of this debt is due and payable in the next five years. This is a bomb that’s set to go off and devastate our economy and destroy thousands of jobs.

Dec 3, 1995, Kansas City Star: Deficit is sapping America’s strength. Concerned citizens. . . regard the national debt as a ticking time bomb poised to explode with devastating consequences at some future date.

April 14, 2003: Porter Stansberry, for the Daily Reckoning: The baby boomers are heading into retirement with no savings and no productive companies to support them in old age. Generation debt is a ticking time bomb…with about ten years left on the clock.

October 1, 2004, Bradenton Herald: A NATION AT RISK: TWIN DEFICIT A TICKING TIME BOMB: Lawmakers approved Bush’s request without cutting federal spending by a penny, thereby fattening the country’s projected record deficit of $422 billion by another $145 billion next year.

May 31, 2005, Providence Journal, Defusing the Medicare time bomb, Some lawmakers see the Medicare drug benefit for what it is: a ticking time bomb, set to wreak havoc on the budget and shoot future tax rates sky-high.

April 5, 2006, NewsMax.com, “We have to worry about the deficit . . . when we combine it with the trade deficit we have a real ticking time bomb in our economy,” said Mrs. Clinton.

Dec 3, 2007, USA Today: US debt: $30,000 per American. WASHINGTON (AP): Like a ticking time bomb, the national debt is an explosion waiting to happen.

*September 24, 2010, Email from the Reason Alert: ” . . . the time bomb that’s ticking under the federal budget like a Guy Fawkes’ powder keg.”

*July 7, 2011, Washington Post, Lori Montgomery: ” . . . defuse the biggest budgetary time bombs that are set to explode as the cost of health care rises and the nation’s population ages.

[*Added subsequently]

And on and on and on. You get the idea. That time bomb has been on the verge of explosion at least since 1940. Even today, the media, the politicians and sensationalist economists refer to the debt as a ticking time bomb. Please look at the following graph and see if you can find any relationship between deficit spending vs inflation and/or interest rates.

This graph shows there is no predictable relationship between federal deficits vs. inflation and or interest rates.

If the debt is a time bomb, it surely has the slowest fuse in history. The pundits have been wrong, wrong, wrong, all these years. We should understand federal deficits, even large federal deficits, have not caused inflation or any other negative economic effect, and the debt is not a ticking time bomb? It’s an economic necessity. Let us turn away from faith and start to rely on facts.

The faith healers* are killing our economy by restricting money growth. See: The damage done by deficit cuts.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

*Faith is belief without evidence. Science is belief from evidence.

-To: Diane Lim Rogers of Concord Coalition


An alternative to popular faith

        Here is copy of an Email sent to Diane Lim Rogers, the chief economist of the Concord Coalition. We been trying to discover what she does, other than to parrot the Concord, debt-hawk party line. We decided to ask her for some information a real economist would know and, considering her position, want to share.
        (Frankly, we didn’t expect an answer, and as of October 30th, have not received one. Instead, she removed our comments from her blog.)

October 7, 2009

“Hello Diane,
        For the past 17 years, the Concord Coalition has been “dedicated to educating the public about the causes and consequences of federal budget deficits (and) the long-term challenges facing America’s unsustainable entitlement programs.”
        By now, you must have assembled vast amounts of evidence supporting your mission. Can you share some of your evidence showing that our admittedly large and growing deficit has adverse economic consequences and cannot support entitlement programs?
        Thank you for any enlightenment you can provide.”

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

-When is a recession?


An alternative to popular faith

        Readers of this blog and of the summary are familiar with the fact that all six depressions in U.S. history immediately were preceded by extreme reductions in federal deficits (aka “surpluses”):

1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.

        You also are familiar with the following graph showing that the last nine recessions began with reductions in federal debt growth and were cured with increases in federal debt growth.
Fed debt private investors 50-09

Note how debt growth declines before recessions and increases to cure recessions

In 1996, the prelude to Free Money, titled “The Ultimate America” predicted future recessions would follow decreases in debt growth. Since then it happened again, twice.

        Six depressions and nine recessions — a total of fifteen out of fifteen times at which federal debt growth declined and the economy fell — is an amazing, almost unheard of, correlation in a complex science like economics.
        Even more startling, the first edition of Free Money was published in 1996, and it predicted future recessions would be precipitated by decreases in debt growth. This would be akin to finding it has rained all day in Chicago every June 1st, following sunshine all day every May 30th, for the past fifteen years, and accurately predicting it would happen, again — twice more.
        A sharp-eyed reader, who may be associated with the Concord Coalition, (the group claiming federal debt must be reduced, but which never provides evidence) pointed out two recessions, in 1981 and in 1991, where federal debt growth seemed to move up in advance.
        While even thirteen out of fifteen is a remarkable correlation in a science that seldom sees such correlations, the reader’s concern was understandable.
        As you can see on close inspection, federal debt growth did decline in advance of the 1981 recession – not terribly significant, but a decline nonetheless. (The 1981 recession should be considered a continuation of the recession twelve months earlier — caused by the Iranian Revolution which took place in 1979, with its increased oil prices — from which we didn’t fully recover.)

Debt growth declines in advance of 1981 recession

        With regard to the 1991 recession, we come up against the definition of the word “recession.” The media arbitrarily say a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters, which means you can’t identify a recession until it is more than six months along . Look at the following graph:

        GDP growth (blue line) turned down in 1989, while debt growth was falling. Why did the government say the recession began in 1991? Hard to say. Perhaps it was due to the very slight bump at the end of 1989.
        This graph indicates the increase in federal debt growth was beginning to cure the 1989 recession, and the momentum of continuing increased debt growth finally cured the recession in 1991.
        A strong correlation between federal debt growth and GDP growth seems to exist.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com
P.S. You might try this experiment. Ask Diane Lim Rogers (drogers@concordcoalition.org), the Concord Coalition economist, for evidence to support her claim the debt is too large. I predict she either will not answer you, or she will tell you the debt is too large and “everyone knows” it should be reduced. “Everyone knows” is what passes for evidence at Concord.