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The America They Believe In? Part II

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Should Uncle Sam Tighten His Purse Strings?

Republicans operate under the assumption that the root cause of the slow economic recovery is the increase in federal spending after 2008, which has increased the debt, and that reducing this spending will speed the recovery. However, the realities of federal spending are almost the exact opposite; as data from the Bureau of Labor Statistics shows increases in job openings, positive overall job gain, and a reduction in overall employment.

While the federal government is not the sole driving force, consider that the majority of the govenrment’s discretionary spending after 2008 was dedicated to unemployment relief, recapitalizing ailing financial institutions, and economic stimulus. Between TARP (2007-2008) and ARRA (2009), the federal government spent nearly $1.5 trillion to keep the U.S. economy from falling into depression and largely succeeded in that effort. However the Federal Reserve has continued to expand the money supply largely to compensate for sluggish hiring rates and private sector job growth, as private sector industries use the additional cash flowing into economy to line their balance sheets instead of investing it into the economy. Take a look at the following chart that compares growth in employment rates and changes in job openings for all private sector industries. 

Notice that after the height of the crisis in 2009, changes in employment have outpaced changes in job openings, signaling that private sector industries have only increased hiring rates enough to restore themselves to their 2008 staffing levels. Essentially, the private sector is being given excessively favorable conditions for hiring, (low interest rates on loans, tax incentives etc) but simply aren’t doing it. Remember, the federal government can aid in the creation of jobs, but without increases to revenue it would need to accrue more debt to take on larger payrolls, which would be damaging to the recovery. As long as private sector hiring rates remain unimpressive, the federal government will have to continue to inject capital into the general economy.

Secondly, the proposed spending reductions would basically move costs from the government’s balance sheet to consumers’ pockets. For example, the potential reform to the Medicare system would institute a voucher program providing a specific amount of money to purchase private health insurance. From the government’s perspective the costs per beneficiary would be more stable and it would save money simply by offering a fixed amount per qualified individual. However, such a plan doesnt account for the ability of private health insurers to inflate their premiums, which are currently unregulated. This means that any difference between the voucher amount and the insurance coverage purchased would be borne by the purchaser, forcing consumers to choose plans that are more cost effective, instead of plans that have the components they need. 

The Taxation Question

The Republican position on taxation is that taxes on individuals, corporations and capital gains are too high. High taxes help to inhibit economic activity, because businesses and consumers don’t have as much expendable income to put back into the general economy through spending and investment. However, such a view assumes that lowering the existing rates will generate substantial increases in income which will be invested into the general economy and fuel growth. In the U.S. economy, the effective tax rates paid by entities with the greatest wealth are already low and most major corporations have billions in cash sitting in reserves while the Federal Reserve provides the economy with cash flow.  Take at look at the comparison of the effective tax rates paid by individuals at different income levels:

Keep in mind that for gross incomes over $388,350, the top tax rate should be 35%, but while the lowest, second, middle, and fourth quintiiles pay an effective rate more proportionate to their income, the upper extremes do not. This is linked closely to the amount of income that comes from capital gains which are taxed at lower rates, 15% for the highest regular income tax bracket. Based on the data, the highest extreme of incomes actually pay around the same amount in tax as those on the opposing side of the spectrum, and yet the Republican position is that these individuals should pay even less in tax, further shifting the tax burden onto middle and lower income individuals. 

A Last Word On Gold

A key portion of the Republican economic agenda is concerned with restricting the ability of the Federal Reserve to increase the money supply, as it deems appropriate, as part of their larger plan to curb the growth of the national debt and lower inflation. Their plan calls for reconsideration of a gold standard for The U.S. dollar, which would apply a fixed weight of gold to a specific value of paper currency, effectively limiting the amount of money that could circulate to the total weight of gold in U.S Treasury Reserves. The thought here is that by limiting the Federal Reserve’s ability to increase the money supply, the U.S dollar will be less susceptible to inflation, giving it greater strength against foreign currencies. 

However, this line of argument fails to take into account a basic point: the total quantity of gold ever mined throughout the world is estimated to be around 142,000 metric tons. At the current market price per ounce this quantity of gold is worth around 8.689 trillion dollars. 2011 estimates for U.S. GDP value the U.S economy around 15 trillion dollars, nearly twice the market value of all the gold ever mined worldwide, not to mention that the U.S ranks third in gold production in the world (behind China and Australia who holds the largest reserves in the world). Also, backing the currency using gold actually limits economic growth. With fiat money the central bank can expand the money supply in relation to the demand for money as the economy grows, but with a gold standard there’s an exact limit to how high the money supply can climb thus restricting growth. 

There are also international considerations with a gold standard. In years past, the gold standard was used internationally to faciltate currency exchange by establishing set rates of exchange, but this has changed as modern economies have become larger, grow faster, and the demand for money requires more flexible currency. The Republican proposals for a gold standard seem to assume that if the United States were to return to a gold standard so would other nations, but this may not be the case. A gold standard would leave the U.S. dollar vulnerable to manipulation by other nations, who could simply purchase gold bullion from the U.S. treasury or Federal Reserve Banks, thus lowering its value (since less gold = less weight = less value). 

Finally, use of a gold standard has wide-reaching, negative complications for the U.S economy. First, the issue of quantity presents a problem since the U.S doesn’t actually have enough gold to represent the value of its economy. Therefore, either the money supply would have to be contracted to coincide with this quantity, or the market price per gold would need to be inflated to compensate. The former would lower inflation, but then could lead to deflation, especially when the demands for money are higher in this period of recession. The latter could prompt another speculative bubble in the gold commodities market, which could pose more systemic dangers to the financial system and the general economy. Its also good to note that using a gold standard allows consumers to convert their paper money into gold, putting an even greater strain on Federal reserves and the overall money supply, particularly in times of economic uncertainly. 

http://en.wikipedia.org/wiki/Fiat_money
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About Alexander J Smith III

  • The Obnoxious American

    “Republicans operate under the assumption that the root cause of the slow economic recovery is the increase in federal spending after 2008, which has increased the debt, and that reducing this spending will speed the recovery. ”

    As a Republican, I have never heard anyone make such a claim. I assume you felt that actually watching the GOP convention and hearing what the other side had to say on the matter was too much research for this poorly thought out piece of strawmanism, eh?

  • Glenn Contrarian

    OA –

    Really? Perhaps you should read what the quite conservative magazine Forbes said:

    Critics of President Obama argue that the sluggish recovery is due to economic policies he pursued, such as bailouts, extended unemployment insurance, healthcare reform and reform of financial regulation, which was part of the Dodd-Frank Act…

    …One source of uncertainty is rapidly increasing government debt and concern about how the debt will be financed. Both parties share blame for rapidly rising government spending and debt, since spending also grew faster than the economy under President Bush.

    I hope that helps you understand Republican viewpoints when it comes to the economy.

  • Alexander J Smith III

    Obnoxious,

    That phrase point to a clearly established line of thinking from mainstream Republicans. The claims over federal spending, and the claims over needing to reduce this spending demonstrate their conviction that federal spending is antithetical to economic recovery. However, if you have evidence to the contrary I am always happy to review it and reconsider my positioning.

    Feel free to present any substantive line of argument in contrast at your leisure.

  • The Obnoxious American

    Sorry Glen and Alexander but wrong. To once again quote Alexander:

    “Republicans operate under the assumption that the root cause of the slow economic recovery is the increase in federal spending after 2008″

    No Republican has suggested that this is a “root cause” – it contributes, most assuredly, but plenty of other bits of Obama’s policies as well as his ideology are equally or MORE responsible for the sluggish economy than spending. Thanks again though for trying to create strawmen and endlessly spin for this failed president.

  • Alexander J Smith III

    Obnoxious,

    It’s interesting then, how much of the argumentation from that side of the aisle comes around Obama’s policies centers on how much things cost to federal government and/or to consumers. Not to mention its clear that the centerpiece of the election is undoubtedly the economy and the course it should take in the future.

    In addition, you incorrectly assume that the purpose of this piece is to spin things for Obama. Notice that I only point out what I think are flaws in their strategy, not once do I argue that Obama Administration has a better plan, or would be more successful in the context of the scenarios presented.

    Lastly, to draw a “Straw Man” there would have be a stark contrast in argumentation between what’s been presented and what’s argued and there isn’t. It’s a fair conclusion to draw, further evidenced by your lack of substantial evidence to the contrary. It would seem, that the burden of proof is in your hands but i’m always happy to wait until something comes!

  • Alexander J Smith III

    Its almost laughable to argue that because someone doesn’t explicitly tell you about the elephant in the room that it suddenly doesn’t exist lol.

  • Glenn Contrarian

    OA –

    You want to know the real root cause of our sluggish economy? It’s right here where you can see how the GOP planned to block every piece of legislation Obama wanted whether or not it was good for the country, and even though said legislation was co-sponsored by Republican congressmen!

    Or do you think it’s merely coincidence that the past three years have seen record numbers of filibusters far out of proportion to anything ever seen before?

  • Clav

    Glenn, is there any wrong, any evil in the world you don’t lay at the feet of the amerikan republicans? I suppose they had bin Laden on their payroll?

    The reps are so eevil, so bent on destroying amerika, why do we allow them to nominate candidates for president? Didn’t we learn our lesson after GWB? And why hasn’t he and all the other former republican presidents been indicted yet? Do they control the courts that well?

    The sky is falling! We’re doomed — doomed I tell ya…

  • Glenn Contrarian

    Clav –

    Glenn, is there any wrong, any evil in the world you don’t lay at the feet of the amerikan republicans?

    If you’ll recall, I laid the blame for the exodus of American factories and the repeal of Glass-Steagal squarely at Clinton’s feet (he signed it, he owns it), I’ve repeatedly called Reagan one of our five greatest presidents ever, and have had nothing but good to say about Bush 41.

    But today’s Republican party is not the party of Reagan or of Bush 41.

    – 30% of Republicans believe that Obama’s Muslim,
    – the last poll I saw on the subject showed that half of them still don’t believe (or aren’t sure whether) Obama is actually a U.S. citizen,
    – most Republicans (including you) think AGW is false despite the vast, overwhelming evidence for it (and the near-total consensus of the scientific community),
    – Republicans keep voting for politicians who would outlaw abortion even in cases of rape or incest (like Paul Ryan who would be one heartbeat away from the presidency),
    – Many Republicans still think it is okay to torture people we suspect of being terrorists
    – Many Republicans still think the Iraq invasion was a good thing, never mind Dubya’s admission that no WMD’s were there,
    – a nationwide campaign of voter suppression, ostensibly to stop in-person voter fraud (since it can’t stop voter fraud by mail), but in-person voter fraud is demonstrated to be far less common than people getting struck by lightning. Remember that sweep of the voting rolls in your state of Florida? They found one – ONE – non-citizen out of the hundreds of thousands they examined…and he was a Canadian!
    – a poll last year showed nearly half of Republicans in MS believed interracial marriage should be illegal,
    – a poll yesterday showed that 14% of Republicans believed that Romney deserved MORE credit than Obama for bin Laden’s death, and that another 40-odd percent believed Romney deserved at least as much credit for it, and
    – let’s not forget that Citizens United now applies to ALL elections, federal, state, and local. Thanks to your guys, any corporation can spend as much as they want to buy even local judges.

    In other words, Clavos, today’s Republican party is NOT the party of Reagan or Bush 41. Today’s Republican party is the party of stupid. The Dems are by no means perfect – you’ll find many progressives (myself included) who have lots of complaints about the Dems (see Emmanuel, Rahm, grand idiot in charge of Chicago). BUT to claim that both parties are just as bad is a false equivalency.

    All you should need to realize the relevancy of that last sentence is to look who it is that wants creationism taught in schools, and which side doesn’t. The Republican Party has become the Party of Stupid, all because they insist that whatever the Dems want must be wrong, all the time, all the way…whereas the Dems have had zero problem accepting some plainly Republican positions – see ‘individual mandate’ and ‘cap-and-trade’.

    Would that the GOP were still the party of Reagan and Bush 41…but they aren’t. Stop buying into the false equivalency, Clav, for having a government run by ideology uber alles is almost never a good idea.

  • Clav

    look who it is that wants creationism taught in schools

    Last I heard I heard, it was religious nuts (oops, sorry for the tautology!), NOT the party (To which, as I’ve told you before, I don’t belong) that wants that, and well you know, it ain’t gonna happen on a national level; they won’t be teaching creationism, nor reading, ‘riting and ‘rithmetic, either, they haven’t done so in decades..

  • Clav

    The Dems are by no means perfect…

    REALLY??? Not even with Obama leading???

    Sigh. I get so disillusioned sometimes.

  • Glenn Contrarian

    Clav –

    Last I heard I heard, it was religious nuts (oops, sorry for the tautology!), NOT the party (To which, as I’ve told you before, I don’t belong) that wants that, and well you know, it ain’t gonna happen on a national level; they won’t be teaching creationism, nor reading, ‘riting and ‘rithmetic, either, they haven’t done so in decades..

    No, it’s NOT the party… but the party certainly welcomes with open arms those politicians who DO want it. Just like racism is not part of the GOP official platform either…but they certainly tolerate rank-and-file members – and quite a few conservative pundits – who ARE racist.

    Oh, but I forgot – every political party is automatically just as bad as every other political party, so no matter how stupid one party acts, the other party must be assumed to be every bit as stupid, just like every other political party in the Weimar Republic was just as stupid (and dangerous) as the National Socialists were….

  • Clav

    but they certainly tolerate rank-and-file members – and quite a few conservative pundits – who ARE racist.

    You’re right, Glenn. They should be killing those pesky racists — not tolerating them.

    WTF?

  • Glenn Contrarian

    Starting with the most influential conservative in the nation, Rush Limbaugh. But the GOP has to be a Big Tent party, I guess, welcoming creationists and anti-abortionists and racists and everyone else (no matter how stupid) as long as they hate libruls.

  • Clav

    as long as they hate libruls.

    Well, they do have to counter the scorn libruls have for the non-librul rest of the population…

  • Glenn Contrarian

    Clavos –

    In one party but not the other, Muslims are welcome. Same thing for LGBT’s. And let’s not forget how during the RNC, the cameras always seemed to come back to the same three or four people of color because they were the only nonwhites there. And then there were the Hispanic speakers the RNC trotted out who dared not address the immigration issue.

    One side doesn’t like those who are different, Clavos, and the other side celebrates those who are different…and whether you like it or not, that has a lot to do with the difference between conservative and liberal than between GOP and Dem. One side by definition hates change, while the other side eagerly embraces change. Never before have our political parties been so polarized as far as one being so conservative and the other being so liberal – and the abortion debate alone should show you the very real danger to our freedoms that results from too great an adherence to political dogma.

  • The Obnoxious American

    All this chat, but the bottom line is, no Republican believes spending is the ROOT CAUSE, and thus far, no one has even addressed my initial point.

    This article, like so many from the left, just constructs strawmen, like the idea that we feel spending is the root cause of our issues, only to knock it down. Well, you were successful doing that, but to what end?

    Unlike Obama and the leftist sycophants that adore him, the Republicans don’t want to slay strawmen, they want to fix the economy.

  • The Obnoxious American

    “One side doesn’t like those who are different, Clavos, and the other side celebrates those who are different..”

    Pandering isn’t celebrating. Liberals practice Clientellism. Nothing more. What you call celebrating is really just a disgusting practice of buying votes for government favors. And to what end? Affirmative action? Hate Crime legislation? Ever heard of equal treatment under the law? No, because you are a liberal and agree with weighting the scales in favor of special interests. This isn’t what America is about.

  • Igor

    @17-Obnoxious: The republicans have not said what they would do to improve the economy (aside from the expensive tax gifts they plan to give to their rich friends, and even to themselves, as the Ryan family oil scandals show).

    Ryan family oil scandal


    Republican vice presidential candidate Paul Ryan and his wife hold stakes in family companies that indirectly benefit from oil and gas tax breaks his budget proposal would retain, his tax returns and financial disclosure statements show.

    Ryan, a congressman from Wisconsin, and his wife, Janna, are part owners of four family companies in her native Oklahoma that lease land or oil, gas, mineral or timber rights.

    The Ryans reported taxable income of $20,300 from two of the mineral rights firms last year, a fairly small share of the couple’s adjusted gross income of $323,416 in 2011. According to tax returns released Friday by the Romney-Ryan presidential campaign, the Ryans listed tax losses for the other two firms. Those hold gravel and timber rights.

    The Ryans receive no direct benefit from a $40 billion package of tax breaks and subsidies that Ryan has voted to preserve, but the energy companies that pay the family firms for land and resource rights do profit from them.

    The Ryans’ share of the four firms at issue is worth a combined $300,000 to $700,000, according to Ryan’s latest congressional financial disclosure statement. The couple own 1 percent to 10 percent of the companies, which are run by Janna Ryan’s father, Oklahoma oil and gas lawyer Daniel Little.

    Little did not respond to a telephone message and an ­e-mail from The Washington Post requesting comment Saturday.

    Last year, Little told the Daily Beast that the firms were leasing land for mining and drilling to energy firms such as Chesapeake Energy, Devon Energy and Exxon Mobil subsidiary XTO Energy.

    The four firms are Ava O, which holds mining and mineral rights; Blondie & Brownie, which holds gravel rights; Little Land, which holds mineral rights, real estate and other investments; and Red River Pine, which holds timber rights.

  • Glenn Contrarian

    OA –

    “Clientelism”?
    “buying votes for government favors”?
    “Ever heard of equal treatment under the law”?
    “Weighing the scales in favor of special interests”?

    Talk about the pot calling the kettle black! OA, In a democracy, almost ALL politics is by definition “clientelism”.

    Speaking of buying votes for government favors and weighing the scales in favor of special interests, have you paid attention at all to what Big Oil and Wall Street have been doing for decades? Have you been paying attention at all to the race-baiting and dog-whistling by conservative politicians and pundits?

    Speaking of special interests, under the Romney tax ‘plan’, Romney would have paid something like 0.2 percent tax rate, and billionaire Adelson would get a $2B dollar tax break! For him, it’s simply good business to spend $400M to get Romney elected so he can get a $2B tax break!

    OA, do you not see how opening the Citizens United decision up to ALL elections – federal, state, and local – ensured that any corporation could buy politicians to serve the corporation’s – and not the people’s – interests.

    Oh, but I forget – “corporations are people, my friend”, never mind that no corporation goes to jail when they defraud or kill people and no corporation serves in the military, much less has to worry about raising kids and sending them to college. “Equal treatment under the law” – HA! How many hedge fund managers and Wall Streeters went to jail for almost crashing the nation’s – and the world’s – economy? ZERO.

    OA, remember that in America, government is supposed to be OF the people, FOR the people, BY the people…and not of, for, and by corporations. The practice of running a government is not the same as the practice of running a business – and when the corporations run the government, if you’ll look it up, that’s pretty much the definition of something called ‘fascism’, Mussolini style.

  • Igor

    @18-Obnox: everything you say in this post can be said with equal vigor about conservatives. That’s politics.

    Grow up and show a little maturity.

  • Alexander J Smith III

    -Obnoxious

    Speaking of constructing strawmen, notice that I didn’t argue that Republicans claim that federal spending is the root cause of sluggish economic growth, my position is that they “operate” under that assumption. Again, you’re only claiming that I misrepresented their argument but don’t have any way to substantiate it other than your opinion that no politician has ever used those words verbatim, a weak position at best.

    Now lets just see exactly how Republicans plan to fix the economy, using the same source I got the policies I cited from part I, Mitt Romney’s official website:

    On taxes: “Reducing and stabilizing federal spending is essential, but breathing life into the present anemic recovery will also require fixing the nation’s tax code to focus on jobs and growth.”

    On Spending: “Getting our fiscal house in order has become more than just an economic issue; it’s a moral imperative”

    “After three years of President Obama, many now question whether we can ever return to fiscal sanity, let alone fiscal strength. A point of no return may well be approaching — a decade of huge deficits could drive our principal payments and interest rates beyond our reach while starving the economy of the capital it needs to grow.”

    On Regulation: “President Obama’s expansive agenda has brought the costs of excessive regulation into high-resolution focus. A number of his major initiatives like Dodd-Frank and Obamacare represent a quantum increase in the scale of the regulatory burden on the American economy”

    On Healthcare: “Unfortunately, the transformation in American health care set in motion by Obamacare will take us in precisely the wrong direction…The costs are commensurate: Obamacare added a trillion dollars in new health care spending”

    On Social Security: “He proposes that Social Security should be adjusted in a couple of commonsense ways that will put it on the path of solvency and ensure that it is preserved for future generations”

    From “Key Elements of Medicare Reform: ““Traditional” fee-for-service Medicare will be offered by the government as an insurance plan, meaning that seniors can purchase that form of coverage if they prefer it; however, if it costs the government more to provide that service than it costs private plans to offer their versions, then the premiums charged by the government will have to be higher and seniors will have to pay the difference to enroll in the traditional Medicare option”

    Now all of this comes straight from the official website of the Republican frontrunner, Mitt Romney, the same place I gathered the information to construct the Republican positions I stated in Part I. Notice that in all these issues there’s a common link, what the federal government is spending! Problem with regulation? The costs. Problem with Healthcare Reform? the costs. And even on reducing federal spending, the importance is elevated from just a need, to a moral imperative. Now if that doesn’t demonstrate that spending is at the core of their agenda, then this discussion is moot because you’ll be operating from an unreasonable dense point of view.

  • Clav

    remember that in America, government is supposed to be OF the people, FOR the people, BY the people…

    “Supposed to be,” yes. But it isn’t, unless you define “the people” as only the members of Congress and all the worthless bureaucrats on the payroll of the nation’s largest employer.

    The taxpayers are just used by the above classless classes.