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Wednesday, July 21, 2010

The Bizzarro World of Economic Policy in Washington

“If we don’t get aide to state and local governments…we stand to lose by the fall 1 million people. That’s one million back in the pool of unemployment. So that figure will stay up. The American people get upset when the unemployment figure is up. These people will lose jobs; they’ll receive unemployment compensation. I mean it’s a bad deal all around. And if the federal government would pass some money for state aide, local government aide then we’d get out of this mess, at least for a while and start to build back. We’ve done it before.”

That's the reality facing the economy. Any help for state and local governments is off the table thanks to 40 Republican Senators and a few moderate Democrat deficit hawks. Any potential job creation will be snuffed out by this for the remainder of the year.

House Minority Leader John Boehner outlined the top three measures for the GOP's job creation plan today. They are to repeal the health care reform bill, stop any and all climate legislation and renew the Bush tax cuts. How this will help create jobs is beyond me or any sane person.

The health care industry is one of the few industries where there is job growth, reform or not. How stopping climate legislation will create jobs remains a complete mystery to me. I would like someone to explain this to me.

Then there are the Bush tax cuts. They are set to expire at the end of the year. The Democrats want to keep the tax cuts for all but the top two tax brackets. The GOP want to extend all tax cuts. Renewing the tax cuts for the top tier will add about $700 billion to the deficit over the next 10 years. This is from the party that thinks cutting the deficit is far more important than creating jobs.

Republicans believe, or at least they say they believe that tax cuts for the wealthy actually increase tax revenue because that additional money gets invested in creating tons of jobs. All empirical evidence contradicts that. Both the Reagan and Bush tax cuts increased the deficit. Studies have also shown that the rich invest a significant proportion of the increase in tax cuts in stocks or other financial investments. That helps the markets but does squat for creating jobs.

In short, the GOP job creation plan is incoherent but their job elimination program in refusing to consider aid for states and local governments is doing great.

Job creation, as any economist knows, can only come from spending, either from the government or from the private sector. Policy determines government spending and the fear about the deficit is restricting the ability to do that. Private sector investment generally comes from tax incentives or increasing demand. There are tax incentives aplenty available but that alone is not enough to stimulate an economy as moribund as the current situation.

The top 500 non-financial industry companies in America are currently sitting on $1.8 trillion in cash or cash equivalents. At no time in America's economic history has that much corporate cash been sitting idle. If you believe the U.S. Chamber of Commerce and the GOP the reason that money is not being invested is because of uncertainty about possible tax increases and the fear of more regulation. There is one word for that: BULLSHIT!

With a high percentage of companies operating at less than full capacity their leaders would rather sit around and complain than invest or use their supposed excellence to innovate. Look at Apple and Google by contrast. Innovation is driving the company to new heights where they are now worth more than Microsoft.

When demand rises they will at least start thinking about investing and expanding. Sadly, most large corporations have become so moribund as their top executives sit counting their stock options and their salaries which are at historic highs while the rest of us struggle. Government spending, whether it's in saving a million local government jobs, extending unemployment benefits or more stimulus spending are three ways to sustain or grow demand. We can always deal with the deficit later.

After World War II when debt was proportionately far higher to GDP than it is today, spending on the GI Bill, the Interstate highway system and other things helped lift the economy which grew tax revenues and the deficit was reduced. Cutting spending now will only shrink the economy further, reducing tax revenues even more which will negate the effect of spending cuts on the deficit.

Come November, when the GOP will inevitably have enough votes to filibuster everything it will only get worse while they continue to believe in their panglossian economic theories.

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