I gotta pass!

No posts til middle of next week...finals are coming! ahh!

Until then, I recommend reading the other blogs on my blog list!

Krugman on Taxes and Medicare "consumers"

Here are two very good reads from Paul Krugman. The first is a response to those who refer to Medicare patients as "consumers". His point, I think, falls in line with CST and the dignity of the human person. I think this line of thought should be extended to all "markets" because we are primarily persons and not primarily consumers and thus we should be treated as such.

Patients are not Consumers

The second asks what taxes are for. Those who have read my posts will know that taxes simply act as a drain on the economy by taking away our purchasing power. This is necessary to maintain the value of the dollar and regulate effective aggregate demand. Krugman is right in pointing out that state governments or any governments who are not sovereign in their own currency (Eurozone) must tax in order to remain solvent. Governments sovereign in their own currency do not have this constraint. The Fed doesn't so much PRINT money as it does change the number in our electronic bank accounts. The constraint on sovereign government debt is inflation, not solvency. Here he mentions MMTers which stands for Modern Money Theory (which is less theory and more operational description).

I don't think the effect taxes have on aggregate demand is a secondary issue. In fact, I'd say its primary when we're in a recession. His best observation is this: "We have lots of excess capacity in the economy; the government can easily buy more goods and services without requiring that the private sector buy less." But his next conclusion is wrong, there is no good reason to address the deficit now, and the only reason to address it later is out of concern for inflation and not solvency.

His last paragraph is sadly true. There are many Ph.D. economists who still hold to ideological economies that don't exist, but use lots of fancy jargon to indicate they know what's going on.

What are taxes for?

Do read Krugman's posts! They are short and easy reads.

Is Economics value-free?

A post from Doug Meador:

O Economics, From When Cometh Thee, upon what foundation art thou built?

Responses to Debt Rating Reduction

Standard and Poor recently downgraded the U.S.'s debt rating. Here are 7 responses from well-known economists about the downgrade:

Is anyone listening to the S&P?

I may be a bit biased, but I recommend L. Randall Wray's opinion. The rest can be found on the left near the top.

Taxes and Income

Some graphs on taxes and income:


















Posts will probably fewer and farther between in the next few weeks as finals are approaching...

Fraud

I try very hard not to get too worked up or emotional while posting on this blog because I don't feel that doing so effectively demonstrates the spirit of CST. But when I come across these stories, I find it extremely difficult not to get really upset.



My professors (most notably William Black, former Director of the Institute for Fraud Prevention, and Randall Wray) have been calling for prosecution of the perpetrators of this massive fraud for a while now yet there have been no arrests. Their reckless and fraudulent behavior has brought undue hardships to much of America (and throughout the world) and yet their punishment was higher bonuses.

The banks, regulatory comittees, and government deregulation are all to blame for this and they're still trying to get away with it. The injustice of it all really makes me mad.

Great New Catholic Blog

I was directed toward a new blog on Catholic Moral Theology via Vox Nova that was started by a group of Catholic theologians and professors from various parts of the United States. I am very impressed with their mission and believe it to be a very good source for Catholic perspectives on contemporary social issues. Check it out!

The Mission of Catholic Social Teaching

An essay from John Carr via USCCB Media Blog. (I pasted the essay because it isn't long).

The following is an essay by John Carr, Executive Director of the Department of Justice, Peace and Human Development at the United States Conference of Catholic Bishops:

Pope John Paul II effectively ended the debate about whether the social mission of the Church is integral or fringe, fundamental or marginal. According to Pope John Paul, “the ‘new evangelization’ which the modern world urgently needs …must include among its essential elements a proclamation of the Church's social doctrine.” Catholic social teaching has “permanent value” and is “genuine doctrine” which enables the Church to “analyze social realities, to make judgments about them and to indicate directions to be taken for the just resolution of the problems involved” (Centesimus Annus, 3, 5). By his words and witness, by his teaching and example, he demonstrated that the Church’s social teaching is at the core of what it is to be a Catholic community of faith.

In three powerful social encyclicals, Centesimus Annus (1991), Laborem Exercens (1981) and Sollicitudo Rei Socialis (1987) Pope John Paul II demonstrated that social teaching is not “a theory, but above all else a basis and motivation for action” (CA, 57). Over three decades, he affirmed, built upon, and advanced Catholic teaching on work and workers, war and peace, the role and limitations of markets and government and care for creation. The defense of human dignity and the call to solidarity were at the center of his papacy. He reminded us again and again that we are all members of one human family, sisters and brothers with undeniable dignity as children of God.

Throughout his papacy, John Paul worked persistently and consistently to defend life, promote justice and pursue peace and he applied Catholic moral principles to the pressing issues of his time: life and death, war and peace, economic justice and environment, debt and development. He led the Church’s opposition to abortion and euthanasia, cloning and capital punishment. He worked tirelessly for peace in the Middle East and religious freedom around the world.

Pope John Paul II made clear there were limitations and dangers in the application of Catholic social teaching. It cannot be used to justify violence or class struggle. It should not be misused for partisan political purposes or to justify some ideological agenda. However, he was absolutely clear that the Church is called to defend life, promote justice and pursue peace as an integral part of its vocation in the world.

Any believer who listened to the teaching of John Paul II or watched his leadership, saw and heard with new clarity and power that the defense of human life and dignity and the pursuit of justice and peace are at the heart of what it is to be a disciple of Jesus Christ and member of His Church.

The Dignity of Work and the Evils of Unemployment

Labor or work is very important in one's development as a person. Here is a snippet from a paper I am writing on labor, this particular piece is from CST's perspective:

The Catholic Social Thought view of labor centers on the nature of man. To CST, man is created in the image and likeness of God, the Creator. Man is placed in the visible world to subdue it, or in other words, to work. It is his work that distinguishes man from the rest of creatures. As Pope John Paul II puts it, “Only man is capable of work, and only man works” (LE Intro).

CST defines work as “any activity by man, whether manual or intellectual, whatever its nature or circumstances” (LE Intro). As we will see, it is both a right and a duty, personal and social, and has subjective and objective elements.

Pope John Paul II turned specifically to the concept of work in his encyclical “Laborem Exercens” to examine its meaning including the task of uncovering its new meanings in the context of societal developments. He places work at the center of the social question.

The Catholic understanding of work is rooted in the book of Genesis. It is in this source where man is said to be made in the image of God, including partly through the mandate to subdue the earth. Through this mandate given by God, humans reflect the Creative action of God by directing their activities toward dominion over external objects. This process of subduing the earth is universal and takes place within each human being.

Work may also be understood in an objective and subjective sense. Technology, widely defined as improvements in the uses of external objects, is the best example of the objective sense of work. The things that men produce and the technology that they develop to help them produce more things are the objective aims of work. This technology facilitates and accelerates his work, but may become an enemy if this technology supplants his incentive to creativity and responsibility. In some cases, the technology replaces the worker altogether and makes man, who is always the subject of work, the slave of the machine.

The subjective sense of work must always be primary to the objective sense of work. Persons are the subjects of work, as Pope John Paul II writes, “as a person he works, he performs various actions belong to the work process; independently of their objective content, these actions must all serve to realize his humanity, to fulfill the calling to be a person that is his by reason of his very humanity” (LE 6). The purpose of work is man, “work is for man and not man for work” (LE 6).

In opposition to this view of work, the modern trends of materialism and economism have treated work as a sort of merchandise. This error of treating man as a mere means of production or a commodity to be bought and sold distorts the purpose of work and subordinates the subject of work to the object of work. This error was especially prevalent in the 19th century, but continues today.

The irksomeness of labor described by mainstream economists is what CST refers to as the toil of work. This toil that accompanies much of our work is a result of breaking the original covenant with God, but it does not alter the fact that work is a good thing for man. It is good because it is useful, sometimes or even often enjoyable, but most importantly because it expresses man’s dignity and increases it. Through work man transforms nature and achieves fulfillment as a human being. Work enables man to increase the virtue of industriousness which enables a man to become “more a human being” for “virtue is something whereby man becomes good as man” (LE 9).

Work is not just a good for man, but also a duty. It is an obligation on the part of man because “the Creator has commanded it” and because of the necessity to obtain the means of subsistence. Work is a foundation for the formation of family life, a natural right and vocation for man, for it is through his work that man obtains the means required to found and maintain a family. It is also intimately connected with education, for the main purpose of education is exactly that of work, to fulfill one’s humanity. Indeed, it may be described as the intellectual side of work. Because the family is the basic unit of society, work also “concerns the great society to which man belongs” (LE 10). Man must work out of regard for the entire society “since he is the heir to the work of generations and at the same time a sharer in building the future of those who will come after him in the succession of history” (LE 16). Work is personal because it is how man expresses and fulfills himself but it is also social because it is the primary means of obtaining the necessities to provide for one’s family and the entire society.

Pope Jon Paul II adds to his analysis on work in the encyclical Centesimus Annus by commemorating the 100th anniversary of Rerum Novarum, an encyclical written on the conditions of the working class. In Centesimus Annus, John Paul II observes that work has become increasingly important as a factor of wealth and that the interconnectedness of the labor process has grown substantially since the end of the 19th century making it more and more “a matter of doing something for someone else” (CA 31). He also observed that alienation, a reversal of means and ends as defined by CST in its most general sense, is rampant in today’s society of consumerism because labor is often organized “so as to ensure maximum returns and profits with no concern whether the worker, grows or diminishes as a person…in which he is considered only a means and not an end” (CA 41).

More recently, Pope Benedict XVI noted in Caritas in Veritate that poverty often results “from a violation of the dignity of human work, either because work opportunities are limited or because a low value is put on work and the rights that flow from it, especially the right to a just wage and to the personal security of the worker and his or her family” (CV 63). He called for a greater effort to provide decent work for all members of society the characteristics of which are that it is freely chosen, expresses the dignity of man, develops the community, is free from discrimination, enables the provision of the physical needs of one’s family and all of society, permits the workers to organize freely, and to receive a decent standard of living upon retirement.

These are the reasons why it is so important and necessary to make sure those who want or need work can find it. Unemployment is a much greater evil than the material poverty it causes, because it also hinders our development as persons and as an entire human family.

Instability of Investment and the need for counter-cyclical Gov't Spending

Here is a good explanation of why we need government spending in general (that is, at all times) and why it would not be a good idea to cut back now. From Randy Wray:

Modern Budget Cutting Hooverians Want a Return to the 1930s

Response to "It's NOT the Deficit, Stupid" Questions

I was asked a few questions by a reader regarding my post "It's NOT the Deficit, Stupid".

Here are the questions and my responses:

Reader:

I read your blog post about the deficit, and I have a few questions. I get what you are saying about taxes and government spending. I also understand how politics play a hand in this. What I don't quite understand is how we got in this mess in the first place. I would assume that we have our current national debt because we spent more than we issued taxes for, correct? My next question is how does the government go about alleviating the debt it has? I know that the Clinton Administration had the government in the black for the first time since the depression. How would they have done it?

Me:

1) You say how we got in this "mess". The mess that we are in is not government debt, but a failing economy. and what I mean by that is that the economy is underproducing what it could produce. There is unemployment and underutilized capital resources.

2) We have what many think is HIGH government debt because of the deficits run over the preceding years. Clinton did indeed run a surplus which proved to be detrimental to the economy by in part causing the recession in 2001. Bush ran really high deficits to pay for wars and help the economy. Spending was increased on wars mainly and taxes were decreased, mainly to the rich. Before that, Reagan ran the highest deficits since World War II and increased the overall debt substantially. It is also noteworthy that during these high deficits, the economy did pretty well, even though I would argue Reagan's economics were very flawed, but that is for other reasons I won't get into right now.

Then the Great Recession hit. When that happened government “revenues” (again, a misleading term) plummeted because business and personal incomes plummeted. Spending also increased because of automatic stabilizers kicking in such as unemployment insurance. So in this case, a lot of the federal deficit was an automatic symptom of the downturn.

A couple of stimulus plans were also passed, one being mainly a bailout of big banks to save the financial system from ruin and causing a much worse recession. This too added to the deficit; and, remember, all the deficit is is “revenues” minus “expenditures” where revenues are paid taxes and expenditures are what the government buys. It is NOT a LACK or SHORTAGE of funds.

It is also important to note that when the federal deficit increased automatically and because of the stimulus state and local government spending decreased because they CANNOT spend more than they collect in tax revenues because they do not control the currency like the federal government does.

3) The reason our economy is failing is NOT because of deficits or federal debt. It is for many other reasons that I can’t get into now, but a lot of it has to do with the housing bubble , deregulation of banks, and even illegal actions or fraudulent loans by the banks.

4) the total federal debt reflects the amount of bonds that the private sector holds. This gets tricky to say in an easy to understand way but when the government spends the Fed changes numbers in bank accounts. The net result is an injection of reserves into the economy. The Fed, in order to keep the federal funds rate (that’s the interest rate that the news is always talking about when Bernanke and crew change or keep it the same) at the level they set, must sell bonds to the nongovernment sector in order to deplete the reserves that the government puts in. In other words, they sell bonds to prevent inflation and zero interest rates. So right now, the total outstanding debt is what the government promises to pay the bond holders at a future date. The government will have NO PROBLEM paying these debts. They are not insolvent. Paying these debts off puts reserves back into the economy as it is a form of government spending. To bring down the overall level of debt, the government would have to run a surplus as they did during Clinton’s administration. In other words, they would have to pay off more bonds than they sold. THIS WOULD NOT BE A GOOD THING TO DO IN OUR CURRENT STATE. We need higher deficits to get the economy back to full employment. Then we can talk about bringing down the deficits.

As a side note, it is also important to know that the federal debt IS the amount of savings (held in bonds) in the nongovernment sector. If we want to have a net savings in the nongovernment sector, the government necessarily has to have debt, it’s an accounting identity. Note, however, that part of this savings is held abroad, notably by the Chinese government. This isn’t a bad thing, it’s just the way it is. China cannot exercise any power over us because they hold a sizable portion of our debt. In part, it is their way of holding down their currency so that they can grow their exports further.

Ryan's Budget Plan: A Path to Greater Income Inequality

Our society is convinced that government cuts must be made or at least that is our politicians' perception of what society is demanding (or mandating). I disagree that high debt or deficits are something to worry about right now. We cannot go bankrupt without voluntarily declaring it and deficits are too low to sustain a full employment economy.

Here is one person's take on the direction that Ryan's budget plan will take us:
Ryan's "Path to Prosperity" is a "Cruel Joke"

Inequality and The Great Stagnation

A good read from Jonathan Chait:

Inequality and The Great Stagnation

Are things improving?

Good insight from Brad DeLong and Mark Thoma:

Are Things Improving?

Dangers of Income Inequality

Here is a good article on income inequality from Joseph Stiglitz. It's only coincidence that I am posting so much from Stiglitz lately, I stumbled across this today looking at other blogs.

I think the dangers he presents are real and the arguments he makes valid. Some highlights:

It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent.

While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride.

Economists long ago tried to justify the vast inequalities that seemed so troubling in the mid-19th century—inequalities that are but a pale shadow of what we are seeing in America today. The justification they came up with was called “marginal-productivity theory.” In a nutshell, this theory associated higher incomes with higher productivity and a greater contribution to society. It is a theory that has always been cherished by the rich. Evidence for its validity, however, remains thin.

Those who have contributed great positive innovations to our society, from the pioneers of genetic understanding to the pioneers of the Information Age, have received a pittance compared with those responsible for the financial innovations that brought our global economy to the brink of ruin.

An economy in which most citizens are doing worse year after year—an economy like America’s—is not likely to do well over the long haul. There are several reasons for this.

First, growing inequality is the flip side of something else: shrinking opportunity.

Second, many of the distortions that lead to inequality—such as those associated with monopoly power and preferential tax treatment for special interests—undermine the efficiency of the economy.

Third, and perhaps most important, a modern economy requires “collective action”—it needs government to invest in infrastructure, education, and technology.

The top 1 percent may complain about the kind of government we have in America, but in truth they like it just fine: too gridlocked to re-distribute, too divided to do anything but lower taxes.

But one big part of the reason we have so much inequality is that the top 1 percent want it that way. The most obvious example involves tax policy. Lowering tax rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride.

Much of today’s inequality is due to manipulation of the financial system, enabled by changes in the rules that have been bought and paid for by the financial industry itself—one of its best investments ever.

Wealth begets power, which begets more wealth.

The personal and the political are today in perfect alignment. Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office.

With youth unemployment in America at around 20 percent (and in some locations, and among some socio-demographic groups, at twice that); with one out of six Americans desiring a full-time job not able to get one; with one out of seven Americans on food stamps (and about the same number suffering from “food insecurity”)—given all this, there is ample evidence that something has blocked the vaunted “trickling down” from the top 1 percent to everyone else. All of this is having the predictable effect of creating alienation.

Alexis de Tocqueville once described what he saw as a chief part of the peculiar genius of American society—something he called “self-interest properly understood.” The last two words were the key. Everyone possesses self-interest in a narrow sense: I want what’s good for me right now! Self-interest “properly understood” is different. It means appreciating that paying attention to everyone else’s self-interest—in other words, the common welfare—is in fact a precondition for one’s own ultimate well-being. Tocqueville was not suggesting that there was anything noble or idealistic about this outlook—in fact, he was suggesting the opposite. It was a mark of American pragmatism. Those canny Americans understood a basic fact: looking out for the other guy isn’t just good for the soul—it’s good for business.

The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.

The economy and the society as a whole become more and more unstable as income inequality gets worse and worse. I can't stress enough how important it is that this issue be addressed, yet I get the feeling that nothing will be done and that it may already be too late.

The government's role in society is to pursue and provide for the common good of the society for which it serves. Yet, lately, the government has served the pockets of the rich very well, while the common good is suffering.

Good Policy Suggestions

Here are some are good policy ideas to improve the efficiency and equity of our economy from Joseph Stiglitz, a Nobel prize economist, professor at Columbia University, and former chief economist of the World Bank.

Below are some selected quotes and paraphrases from this paper by Stiglitz published on December 2, 2010 through the Roosevelt Institute, which was focused on the political problem of reducing the deficit. I do not believe that the deficit is the issue, but rather the long term overall situation of the economy and Stiglitz seems to agree though this paper has as its explicit goal improving the economy through reducing the deficit, though I believe his implicit goal is not so much concerned with deficits as it is with overall economic well-being. I hope the quotes and paraphrases will illustrate what I mean. I added emphasis to the points I thought were most striking or important and I believe these ideas are largely in accord with Catholic Social Teaching, particularly the goals of social justice and economic welfare for the society as a whole.

Politically the task of deficit reduction is enormously difficult.

At the head of the list of reforms are measures which increase both efficiency and equity.

Given the enormous increase in inequality that has occurred in the U.S. over the past three decades, any measure that harms those at the bottom should also be unacceptable.

What matters is not the deficit itself or the short-run national debt, but long-run levels of the national debt. The single-minded focus on deficits and short-run debt is thus fundamentally misguided.

There is no magic number that represents the appropriate size of the federal government.

A larger government, but one focused on investments, could be associated with a smaller deficit.

This paper is not about political compromises, [but about] principles of efficiency and equity.

These first ideas in particular are based on the premise that what is important is the long-run national debt, not the short-run deficit. Just like it may pay for a business to borrow in order to increase long-run profitability.

Public investment can yield high returns.

Three factors contributing to opportune investments today: 1) there has been underinvestment for years, 2) the borrowing interest rate is at record low levels, and 3) the economy is operating significantly below capacity.

Historically, public investments in education, technology, and infrastructure have yielded returns that are in excess of 7.5%.

Corporate Welfare

Corporate welfare consists of billions of dollars to enrich the coffers of corporations.

The net beneficiaries of such corporate welfare are by and large wealthy Americans.

Two categories in general need to be addressed: subsidies to agriculture and agribusiness and subsidies to producers of fossil fuels.

Most of the money of agricultural programs goes to corporations and Americans who are better off than average.

There are easy fixes, e.g., by limiting the benefits to those whose income is below $100,000 and limiting payments to, say, at most $100,000 per farm.

[Particularly bad are] the excessive payments to the pharmaceutical companies under the provisions of the Medicare bill, which restricted the government’s ability to bargain with them on prices.

Efficient auctioning of the rights to use natural resources can lead to greater efficiency.

Taxation

Our tax system is neither fair nor efficient.

Much corporate welfare takes the form of special treatment within the tax code.

A small increase in the tax rate on the top 1%, say 5% of their income, would generate revenues equal to between $1 and $1.5 trillion. Currently, most of these individuals pay effective tax rates that are far below the “official” rates because of their ability to take advantage of tax preferences and loopholes. Eliminating these tax preferences and loopholes would go a long way towards achieving this limited increase in taxation.

One proposal that has been widely discussed is to tax all forms of income the same, i.e., eliminate the preferential treatment of dividends and capital gains, the benefits of which go disproportionately to upper income Americans.

In the end, the special treatment afforded to dividends and capital gains did not have the benefits promised: instead of household savings increasing, the savings rate plummeted to new lows after the enactment of the Bush tax cuts.

There is moreover no justification for taxing those who work hard to earn a living at a higher rate than those who derive their income from speculation.

Rather than an across the board reduction in the corporate income tax, far better would be a tax reform that would encourage investments in jobs in the United States, and that would encourage investment in research and development.

There is a class of taxes that actually increases economic efficiency—taxes which discourage activities which generate negative externalities sometimes referred to as Pigouvian taxes.

The repeated bailouts of banks have led to a distorted and inefficient economy. Taxes can be used both to undo these distortions and contribute to deficit reduction.

Probably nothing did more to enhance the sense of injustice around the world than the receipt of huge bonuses by those responsible for the economic crisis, even as the banks were being bailed out by taxpayers who bore the brunt of the costs of the banks’ misdeeds.

A well-designed bonus tax could thus encourage incentive structures that align behavior of those in the financial sector with the long term interest of society, contribute to a broader sense of societal fairness, and simultaneously contribute to deficit reduction.

Among economists there is a broad agreement that the repeated bailouts have led to a problem of moral hazard with excessive risk taking and an excessively large financial sector.

The Obama administration at one point talked about a tax based on leverage and size, designed to discourage excessive leverage and size.

More Efficient Expenditure

There are some areas of public expenditures where the objectives of the government programs could almost surely be achieved at lower costs.

The single most important area of discretionary expenditures is military. Americans could obtain more security at lower cost.

We spend billions on weapons systems that don’t work against enemies that don’t exist. With America’s military spending approximately equal to that of the rest of the world combined, it is clear that there is a lack of balance.

America’s moral authority is more important than its military power.

Military expenditures do not contribute to our economic strength.

Direct conflicts impose costs that extend decades into the future, through health care and disability costs for the returning vets.

Final Points

Deficit reduction, it should be remembered, is not an end in itself, but a means to other objectives. If done the wrong way, our growth can be impaired, our society can become more divided, and the capacity of both our country and our government to deal with the challenges facing it can be impaired.

The reason that we have the myriad of the distortions and inequities that we have identified is because of the influence of special interest groups who so far at least, have been willing to sacrifice the national interest to their own.

Other data:

The effective tax rate was 23% for the top 1% and 21% for the top 5%, markedly lower than the legislated rate of 35%.

Median income has declined by some 5% over the past decade and was in decline before the recession.

Poverty has increased from 11.9% in 1999 to 14.3% in 2009.

The upper 1% of Americans accounted for an average of some 22% of the nation’s taxed income during 2004-08.

65% of the income growth during the Bush expansion was captured by the top 1% of families.