Stockman’s End Of World Scenario

David A. Stockman is a former Republican congressman from Michigan, President Ronald Reagan’s budget director from 1981 to 1985 and the author, most recently, of “The Great Deformation: The Corruption of Capitalism in America.” has an editorial in the April 1, 2013 issue of the New York Times concluding that our economy is about to collapse. It is worth reading. I do not agree with him, although action is needed now, and here are some of my thoughts.

1. We were at a near depression in 2008 and are still crippled by chronic unemployment. Congress refuses to do anything about this and therefore the only tools left to combat this near depression are controlled by the Fed.

2. Our debt problem is getting closer to being solved with both Congress and Senate finally passing budgets that need to be reconciled. We can control our debt in an orderly fashion over a 15-20 year period.

3. Stockman mentions little about the larger threat of emerging middle classes in the world including China and India. We need to invest now in education and infrastructure if we are to keep up.

4. Keynesian economics has been misapplied and this must change. We should be reducing debt during good times that was built up during bad times. The time is not now.

5. Mr. Stockman forgets that the good times of the 1950’s was manly brought about by being the last industrialized country standing after World War II. It was not the great policies of Eisenhower; however, he did seize the opportunity.

6. Stockman was right, we did allow ourselves to become intoxicated with cheap Asian money that contributed to our current economic crisis. One has to wonder whether Nixon and Kissinger were out witted by the propensity of the Chinese to be long-term thinkers.

7. Stockman is wrong that we should have let the financial sector collapse in 2008. That would have resulted in a worldwide depreciation. We made errors before and after, but the bailouts were correct decisions.

8. Stockman is wrong about the inability to reach a grand bargain on the debt. It will happen, especially with both the senate and congress finally passing budgets. Obama needs to step up and take the lead. He needs to put a plan on the table and explain it, in fireside chat fashion, to the American people. It is not time for grandiose speeches it is time for detailed discussion done in increments.

9. The end of the world is not at hand. However, there is much to do.

Debt Crisis Follies!

The problem is one of communication and President Obama is the one who needs to communicate. He needs to speak up. He is our leader and he should wait no longer to put his plan on the table. Waiting for Congress to speak first is not what a leader does. If he does not do this now he has failed in his job.

The plan indeed should call for more taxes on the wealthy and long term cuts in spending including defense, social security, medicare and other entitlement programs. The plan must also call for investment in education, infrastructure, research and development to create jobs and enhance our future.

I agree with his “balanced approach” concept; however no one has seen the details and it is past the time to disclose them. He has traveled the country and given the American people an overview of his vision to solve the country’s debt problem; now he must go across the lawn to the Congress, roll up his sleeves and go line by line over his plan to get our long term debt problem under control over a 15 to 20 year time period.

Obama: Lead and Communicate

Obama is our leader and it is up to him to address and solve our many problems including our long-term debt problem and our sputtering current economy. To do this he must communicate; communicate with congress and the citizens. The Republican congress will resist and this is where “The People” come into play. While interacting with Congress he needs to have an ongoing honest conversation with the people of this country concerning our future. The voter will bring congress around.

The discussion needed is not one or two speeches from the White House or some runway tarmac. He needs to compile a professional team to help with this communications campaign to the public so they can grasp the complexities and the long term importance of the economic issues we face.

The good news is he has worked with such a team. This includes David Plouffe, Jim Messina, Dan Axelrod and the many others who are responsible for Obama’s reelection. Without them he would not be President. Put them back to work….

President’s Economic Plan

The President is doing a poor job of explaining our economic problems, and the solution, to others in Washington and the public. Those who disagree with him that we need further government stimulus now, when private spending has declined, say these are not ordinary times.

These economists and politicians say an error was made when the country continued to run up deficits in times when the private sector was doing well.  The last decade was a good example. While the boom in the housing bubble was growing the government continued to run deficits and refused to pay down any debt. Two wars were draining our treasury while our President encouraged us to continue buying ice cream at Cold Stone.

As a result, when this near depression hit we had very little to spend. The proponents of austerity point out that we have put ourselves in a corner where increasing our debt further could result in a total collapse of the economy. I am convinced we are not there yet. However, there is a large portion of politicians and the general public who need convincing.

The President needs to take on the role of explaining his position. This will not be accomplished with one grand speech. It will take an F.D.R. type campaign where the President, with assistance from professionals,  talks directly to the public about the problems and solutions.

The President needs to explain why we still have room to borrow, how government spending on infrastructure, education, research and development will not only spur the present economy but allow us to be more competitive in the future.

The President also must describe the future, stating how our debt will be paid down over time and running deficits by the government during times of growth and prosperity can no longer be allowed. The President’s economic plan has not been accepted because he has done a poor job of explaining it. He needs to use his excellent campaign staff to run this campaign to convince the public.

This will define his presidency.

Income Fairness or Tax Fairness

There is much debate about whether the tax rates should be kept low or raised. This is the wrong debate. Instead we should be deliberating whether we need to reform our economic system. If our markets were free of oligopolistic control we would have a wider distribution of income and income taxes with the result of more tax revenue going to the government with lower rates.

The republicans speak with pride how the free market system is the best economic model for increasing the living standards of the nation and the citizens of the country. They resolutely  proclaim that government needs to cut back on regulation and allow the free market to work. This is hard to argue against.

Below is a chart comparing tax rates and percent of taxes collected in 1979 to what Congress passed during the “Fiscal Cliff” crisis. As a result of these changes 99.3% of households will not experience any changes in their income taxes. The top 20% will be paying 68% of the federal taxes collected, compared to 55% in 1979.

I do not understand why most free market advocates are not up in arms over industries being taken over and controlled by a small group of firms. 

The founder of the concept of free markets said:

‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices”, Adam Smith, The Wealth of Nations, 1776

The quote below is from the book Capitalism and Freedom written by Milton and Rose Friedman. Dr. Friedman is the economist who is quoted most often when conservatives are praising free markets and capitalism.

“But we cannot rely on custom or conscious alone to interpret and enforce the rules; we need an umpire.These then are the basic role of government in a free society; to provide a means where we can modify rules, to mediate differences among us on the meaning of rules, and to enforce compliance with the rules on the part of those few who otherwise would not play the game.”

For whatever reason, this part of  Dr. Friedman’s philosophy is never mentioned when it comes to making “free markets” work.
Lack of freedom in the markets corrupts markets. It makes them inefficient. This lack of freedom causes prices to rise, less innovation, egregious salaries at the top and skewed income distribution, less competitiveness in markets and last but not least, consolidation of political power.
This is a major part of the income equality problem that is seldom discussed.