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 Richmans' Trade and Taxes Blog

Bush and Obama's Economic Stimulus Attempts
Raymond Richman, 6/28/2010

The problem with the recovery and the reason we have 20 million unemployed is that the President and his economic advisors refuse to acknowledge the principal causes of the recession, the federal government’s policy of encouraging the banks and other lenders to make home loans on the basis of insufficient security and the federal government’s policy of tolerating the enormous trade deficits which have cost millions of good-paying factory jobs, caused wages to stagnate, and worsened the distribution of income.

The response of our economic planners in the Bush Administration was a $170 billion economic stimulus package which took the form of tax rebate checks of $500 per household. It had little or no stimulating effect. Nevertheless, the Obama administration came up with a similar gift to each householder with similar results. The Bush administration under Secretary of the Treasury Henry Paulson did come up with one successful program, the $700 billion fund, known by its initials TARP,    the Troubled Asset Relief Program, which saved the entire U.S. financial system from bankruptcy. The public thinks of it erroneously as a bailout. Instead of buying the troubled mortgages and derivatives from the banks, et. al., it lent enormous sums to the banks and insurance companies which urgently needed to raise cash or succumb to bankruptcy. Much of the money TARP lent has been paid back. But it did not create a single job except for new TARP bureaucracy. Unfortunately, the banks still have hundreds of billions of troubled mortgages. If the economy should dip again, TARP will once again have to come to the rescue.

The response of the incoming Obama administration to the recession was the $785 billion Recovery Act of 2009 (commonly referred to as Obama’s economic stimulus plan). Much of it consisted of grants to rescue a number of states that were facing budget deficits as a result of a spending “bubble” coupled with a general decline in tax revenues. No doubt, transfers to the states enabled them to continue existing programs. The bill allocated $288 billion to transfers to the states and tax cuts and rebates, $224 billion for education and health care and extended unemployment benefits, and made $275 billion available for federal contracts, grants and loans. It does not look like a program to create jobs, and it has created few jobs and none of them permanent. Some of the money went to road and transportation improvements, school buildings and stadia.  It created some jobs.  Perhaps this is the reason the administration claims it has created or “saved” millions of jobs. Unfortunately, the jobs will end as soon as the money runs out.

It was a Keynesian stimulus program and to Keynesian economists it does not matter much what the money is spent on. The recipients under the original Keynesian theory were expected spend most their increased incomes. The theory argued that depending on the marginal propensity to save, a multiplier effect could be expected. (If households spent 80 % of increased incomes and saved 20%,   the expected multiplier would be 5 (1/.20)  For some reason, the administration’s economists still believe in a multiplier effect notwithstanding the fact that only increases in permanent income have an expansionary effect. In 1936, the Roosevelt administration cut back its stimulus spending and the GDP  immediately collapsed.  That is why the U.S. warned the G-20 nations in Toronto this past week-end  that their deficits should not be cut back too soon or the recovery would be endangered. In our view, the reality is that deficits that create temporary jobs have no multiplier effects.

The Federal Reserve System has played an important role but as can been seen from the employment data, their policies have had little effect. They control the money supply and indirectly interest rates. To stimulate the economy, they reduced the Fed rate, the rate at which banks borrow from the Fed, to nearly zero. The banks have made money borrowing at the zero rate and investing in longer term government bonds, using their earnings to repay TARP. The Fed bought nearly a trillion dollars of troubled mortgages and is in the process of marketing them. Again, in our view, this has created no jobs.

It is the same with the rebates for purchasing a house, trading in a klunker, insulating your house, buying new appliances, etc. They temporarily increase demand but as soon as the incentive disappears demand returns to normal of falls lower than before the temporary rebates and credits.

The lack of economic recovery is illustrated by the decline in sales of single-family dwellings in May, 2010 which were nearly 10 percent below the April figure of 486,000. Housing starts in May likewise fell about 10 percent. Another is the fact that in the first four months of 2010, trade increased but unfortunately imports increased faster than exports. Increased trade deficits put a drag on the economy.

Nor have the Republicans come up with anything better. They recommend cutting  taxes which would be a good idea if our budget deficit this past year were not  $1,500 billions. Cutting taxes without cutting expenditures would simply widen the deficit. Like the Democratic proposals, they are treating the symptoms and not the causes. Newt Gingrich lauded the proposals of Congressmen Jim Jordan (R-Ohio) and Jason Chaffetz (R-Utah) have proposed legislation that would 1) reduce the payroll tax by half for 2010 to provide immediate liquidity for companies and employees; 2) eliminate the capital gains tax to encourage investment in new companies; 3) reduce the corporate tax rate to 12.5% to make us competitive globally, 4) permanently eliminating the death tax so small businesses and family farms can continue creating jobs for future generations; and 5) providing immediate business expensing of purchases of capital equipment and buildings in the U.S. As it turns out, we do not agree with the first four proposals.

The first would reduce the social security trust fund which is already in trouble and expand the deficit. It is like giving money away; both Bush’s tax rebate and Obama’s tax credit tried it with zero effect on growth or employment.

The second displays a lack of understanding of the economic effects of special treatment of capital gain. A lower capital gains rate than the tax rate on dividends encourages taxpayers to sell and consume capital assets (stock, real estate, etc.) that have increased in value. If he holds on to the asset, dividends will be taxed at ordinary rates. If he sells the asset, he realizes the present value of future income but is taxed at a lower rate. The appropriate treatment of capital gains as we showed in our book, Trading Away Our Future (Ideal Taxes Assn., 2008) is to exempt from income taxation capital gains that are reinvested and to tax capital gains that are consumed at the same rate as ordinary income.

Third, instead of reducing the corporate income tax, the tax ought to be abolished. There is no reason why corporations should be treated as an entities distinct from the shareholders that own them. The corporate and personal income taxes should be integrated. But another reason for eliminating the corporate income tax is that it cannot be rebated whereas a value-added tax which nearly all other countries levy can be rebated to exporters. Our exporters are placed at a great disadvantage. If we do not integrate corporate and personal income for tax purposes, we should at the least abolish the corporate income tax and substitute a value-added tax that would yield the same revenue. There is an additional reason. Corporations that sell domestically are able to pass the corporate income tax on to consumers while corporations that export cannot pass the tax on because the prices of internationally traded goods are determined by competition of a number of countries.

Fourth, A simple reform would obviate the alleged defect that it forces the sale of the business or family farm. The reform consists of the heirs paying no estate tax so long as the farm or business is not sold. The estate tax rate would apply if and when they are sold. Under current law, an estate pays no tax on accumulated capital gains and heirs take the value at time of death of the decedent as the basis for capital gains. In the absence of the estate tax, heirs have an incentive to sell the farm or business and pay no tax, not even on capital gains.

What then should the government do to get the economy’s recovery going? Encourage private investment in factories and capital equipment to produce new goods and services. How can we do this? Like the ads on TV that offer you bargains for $19.95 and throw in a low of extras free, we’ll publish our prescription for economic recovery in a day or two and won’t even charge you $19.95. Tell your friends and acquaintances of this bargain. Stay posted.

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Post a Comment:

Comment by graybell, 6/29/2010:

You guys should stop complaining cuz one the health care we have now isnt as good as it was supposed to be. also the law has just been signed give it a try u guys are too hard on democrats they went to college and we voted for most of these if u want to say u have the right to choose tell that to ur congress men or state official. as for obama people are just tryin to make it look like america made a mistake he has done things to help us and we had a full 8 years of a terrible president and i will be so as happy as ever when a obama fixes bush's mistakes. You can find full medical coverage at the lowest price from obama has to put up with the wo0rld judging his every move and trying to fix the mess we are in we are lucky anyone wants to be our president. STOP COMPLAINING AND GIVE HIM A BREAK. i wanna see one of yall do what he sas done. some people are just so ignorant.

Response to this comment by perception, 8/25/2012:
the dems were in control when Bush was pres and Obama started these problems long before he was elected.You cant say Obama is fixing Bushs mistakes, and yes I or anybody could do as good a job as this guy. Watch how the Qualitiy of our health care is going to go right down the drain.

Comment by Juli, 6/30/2010:

This is the most succinct description of recent economic policies I have seen. I wait with baited breath to see the promised "solution". Like the TV ads which offer the world for $19.95...and, but wait,there's more!, the rub is you pay almost as much in postage and handling. Let's see what the postage and handling will be on this, because the cost of "encouraging private investment in capital goods" is bound to be breathtaking when a no-growth economy discourages even the business from investing.

Comment by Lloyd, 12/6/2010:

Sounds interesting; waiting to read more. 

Comment by Kurtis Derow, 12/5/2011:

I think the federal government should create a trade system with other countries and only purchase and trade necessities which the US cannot acquire on its soil. Mean whie the state governents get more authority over the respective states system, funds, and payroll. Create local jobs because thats where the money is going to come from the community not the fed.

Comment by, 1/4/2017:

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]