Don't apply business economics to government.

Today on CNBC, a "business analyst," Dick Bove, said the US credit rating would be junk if it were evaluated as a business.  The point is, government is not a business and it is a huge mistake to apply business financial thinking to government finances.  Governments collect taxes the amount of which is strongly dependent on economic activity. Businesses do not.  When the government spends less it receives less revenue.  When a government spend more it's revenue increases as that spending goes into salaries of the lower and middle classes where it generates growth. When business spends less, at least in the short term, it's revenue does not decrease so it's balance sheet will improve.  Conversely when business spends more, often it's revenue does not increase, particularly in the short term and it's balance sheet looks worse. If that spending is for expansion to meet expanded demand then in the longer term revenue will increase.

I think that the mistake of applying business and "kitchen table" economic thinking one's position on government policy is pervasive today.  We see it in Congress, particularly now, and surprisingly among those who should know better, like this Mr. Dick Bove. For Mr. Bove to make such a statement is harmful as some people will actually think he is right.

Clarity on use of the word "Taxes" - Please

I hear on Meet the Press today, Greenspan saying that increasing taxes depresses the economy more than reducing spending.  Of course both do.  This is but one example where using the phrase, Increase Taxes or Decrease Taxes WITHOUT being specific on which segment of the population or what is being taxed, misleads the listener - usually intentionally by the speaker.

Lets be clear.  Increasing tax revenue on the income or assets of the wealthy would not depress the economy and in fact it would stimulate it.  All but a very few in the group would in fact approve of their being taxed more.  They understand the moral and ethical obligation to do their fare share in running the government of the country that made it possible for them to become wealthy.  The few dollars they would pay would hardly be noticed by them. Collecting more from the wealthy would be viewed positively in economic circles world wide as it is the single most effective way to bring the deficit under control and as it would demonstrate a commitment to stand by our national values of fairness and integrity. By not putting the burden on the middle and lower classes it would be stimulative and at the same time the increased revenue to the treasury would reduce the need to borrow.

However a broad based tax increase, at this time, would add a depressing effect on the economy as the middle and lower classes would spend even less.  Their spending is the driver of the economy.

An obvious fact once one thinks about it is that giving money to the wealthy must reduce economic activity. That money is not spent, instead goes into stocks or funds or cash.  Much excess money today goes into Chinese or other foreign company stocks  That does not create a single job. There are about 3 Trillion Dollars (by most estimates) of cash sitting around in private and corporate accounts looking for some place to be put to work.  To add to this pool does not employ a single person

A frequently heard argument is that if business had confidence in the government and its management of fiscal matters, then they would expand and increase the need for employees. There may be a bit of truth to this but only to the extent that a company must have confidence in a projected increased demand before they would do that.  Right now, demand is not there.  That is not because of political nonsense in DC but because people don't have the money to spend. Many companies are not running at capacity and until they are they are not going to build more plants or increase the number of employees.

However, restoring the tax rates (at least on the wealthy) to where they were when Clinton was President, would  generate the funds to drive infrastructure repair work which is desperately needed and would be very stimulative to the economy.  Outside of that small group of about 400 people and the small group of Republicans they put into congress,  there is very little objection to doing just that.

Psychopaths in Congress?

Paul Babiak, Ph.D. and Robert D. Hare, Ph.D. , noted psychologists, tell us in their book:  "Snakes In Suits: When Psychopaths Go To Work," that 6% of the general population has some degree of psychopathic personality disorder as do 12% of those in the Board Room & C Suite.  Very few psychopathic personalities are murderers but all are very manipulative and care nothing about the consequences of their actions or feel responsible for them. Most have no capacity for empathy or guilt. They are skilled at manipulating their way into positions of power where they lack the knowledge or values to exercise the power responsibly.  They bring down corporations and are destructive wherever we find them.

Observing  Eric Cantor's body language, smirk, and obvious joy he has when expounding, on killing social security and medicare as well as blocking extension of unemployment benefits despite his actions putting people out of work, it is hard to not see how much he would enjoy accomplishing those feats. It is hard to not conclude from this that Eric Cantor is of the that 6% of the population with psychopathic personality. Further it appears a concentration of psychopathic personalities make up the freshman Republicans in the House. Many are just ignorant of economics but others appear to know what they are doing and want to destroy, cause pain and misery and diminish the United States.  Some, no doubt, are following orders in exchange for a future career promised by wealth benefactors whose biding they are serving..
 
This bunch of extreme Republicans have been emboldened by their small success in putting the President of the United States into a box, where he had no choice but to approve bad legislation in order to get the debt ceiling raised. The spectral of this will likely drive a loss in confidence in the US around the world. It has now become clear that a small group of radicals can actually defeat the will of the majority of Congress and the People who sent them there.   The world sees that our system of government is not working and nations will begin looking to others for global leadership.

Are we in an Austerity Bubble?

All we hear now from Washington and from the EU is budget cutting and austerity as if that somehow will fix deficits.  Well it won't of course and all economists know that.  Government economics is not Kitchen Table economics.  When the Government reduces spending it increases unemployment and reduces tax revenue.  This is just the opposite of what is needed.  What is needed of course is to increase revenue to the Treasury. In the US much could be done to fix our budget problem by simply undoing the tax cuts on the wealthy that Bush put in place and which were the prime driver, along with Iraq war, of the deficit.  According to economists, only about 1/2 of the money transferred to the wealthy in tax breaks actually comes back into the economy so such actions depress not expand the economy. We see that from the charts in an earlier post.

It seems that now it has become a matter of faith, a religion really, that giving more money to those who have the most will increase employment and grow the economy.  That has never happened.  There is no evidence that it will or ever has. It does not make sense.  Trillions of dollars are sitting in banks, hedge funds, venture capitalists and accounts of large investors waiting for a place to be invested.  The problem is finding a place to invest those funds where they will get a good return.

It appears that we have three groups in Congress.

1. Those who act on blind faith in the austerity ethic
2. Those who know the austerity solution is bunk profess it anyway to intentionally depress the economy with hopes that voters will blame the Obama Administration
3. Those who simply are doing what their wealthy benefactors want them to do without regard to the consequences. 

The public hears the mantra on the TV, radio, and in print that "we must cut spending and cut taxes on the wealthy."   The have heard it so much that many have come to assume it is true.  That is what I call a bubble.  Not unlike the tulip bulb mania in 16th century Holland when a single bulb at the peak sold for what would be a million dollars today. "Extraordinary Popular Delusions & the Madness of Crowds," Charles Mackay, republished by Three Rivers Press, NY.

Is this a bubble?