By Tom Pallow of Third Way Progressives
Paul Krugman wrote a July 2010 article titled, “I’m Gonna Haul Out The Next Guy Who Calls Me “Crude” And Punch Him In The Kisser.” Seriously he did, and “Crude” refers to Crude Keynesianism.
Tonight before bed, I will pray very hard, that Krugman takes me up on his offer!
It’s not that I am a violent person. In fact, because I have broken up more fist fights than virtually any of you have ever personally witnessed, I can argue that I am much less violent than most. You see, I’m 6’2″, 300 lbs, a former college football player, pro-wrestler, national level natural bodybuilder, and less than just two years ago I was getting paid to throw people out of DC nightclubs so that I could lobby Capitol Hill during the day. If Krugman approached me he would quickly see that I could easily body slam him just like I used to do with much bigger wrestlers back in my pro-wrestling days in California.
But this is where it would get very interesting! I would never physically touch Krugman. But through intimidation of one kind or another, I would, just like in the good, old school, pro-wresting days, challenge him to a Loser Leaves Town Match! But in a macro-economic, throw-down, type of contest, of course.
OK, seriously now, Krugman is only 66.7% a Crude Keynesian. This is because there are four basic macro-economic questions that governments must answer: The amount of revenue a government spends, what a government spends that revenue on, how to administer that spending, and how a government raises revenue. Krugman is fantastic at answering this first question concerning the amount of funds a government should spend during various macro-economic circumstances given traditional tax and spending methods. He might even be the best at this, and for this he is obviously worthy of a Nobel Prize. The question of how governments administer spending, I have never seen Krugman address this question, so I will not judge him in this area. But as far as the other 66.7% of what macro-economists or political-economists should understand, he is surely the most prominent Crude Keynesian.
Krugman and Crude Keynesianism have had far too much influence on the Murray/Reid budget that just passed the Senate. I am now going to explain why it is so important to body slam and bounce these ideas out of Washington DC for good!
The use of the term Crude Keynesianism is most associated with the brilliant Columbia economist Jeffrey Sachs who recently has been using the term to criticize the thinking that is most associated with Paul Krugman.
(From just outside the ring: “Pallow, aka, Mr. Quality, from just outside the ring is watching Krugman, aka, The Crude Keynesian, and Jeff Sachs fight it out!!”)
Sachs describes Crude Keynesianism and Krugman thusly: To quote him, “There are four elements of Crude Keynesianism and, indeed, of Krugman’s position:”
“1) The belief that multipliers on tax cuts and transfers are stable, predictable, and large.
2) The belief that America’s employment and growth problems are overwhelmingly cyclical, not structural, and therefore remediable by short-term and aggregate demand management.
3) The belief that a growing debt burden is a minor nuisance as long as the economy is in recession.
4) The belief that for practical purposes, the most urgent need is to raise aggregate demand rather than to focus on the quality and type of public spending.”
These are indeed Paul Krugman’s Crude Keynesian positions, and they are very wrong for this time in US and world history!
Since the 1930s there has not been a better time than today for some type of classical Keynesian economic stimulus. That is, having the federal government borrow, then spend or transfer those funds to increase consumer demand, then as the economy has clearly picked up, increase progressive income taxes on the wealthy to pay for that stimulus. But Crude Keynesianism will continue to be very ineffective today because the world has changed very much since the 1930s!
I agree with the Crude Keynesians in that our economy today resembles very much that of the 1930’s in that it is very “top heavy”. That is, due to tax policies and other factors, there exists far too little consumer spending by the vast majority in the poor and middle classes relative to the amount of available capital and savings that is mostly owned by the wealthy. Due to Keynes’s Marginal Propensity to Save, where the wealthy, who now collect a larger portion of total income, save a higher proportion of their total income as they get wealthier, due to this, interest rates throughout most of the entire world are historically low because this supply of savings and capital is very high relative to the demand for it. The developed economies of the world are also slow primarily because consumer demand by the poor and middle classes are below the historic norm relative to total wealth. Of course, tax policy being much less progressive since the early 1980’s has played the biggest roll in this outcome, although that too is an outcome of the new, highly competitive global economy!
(“Sachs has just tagged Mr. Quality into the ring! This is the battle we have all been waiting for!!!”)
Let us focus first on the second element of Crude Keynesianism, because this is where that thinking really begins to fall completely apart in today’s world. What many economist fail to realize, especially those who spend far too long in isolated ivory towers, is that the US economy, and indeed the entire world economy, has drastically and permanently changed since Krugman’s favorite period of analysis, the 1930’s. This drastic change is the effective 8 to 12 fold increase in foreign trade and competition that has occurred for the US since 1967, and this change has been mirrored by virtually all other nations of the world along the near same time sequence.
When the communist Soviet economy began to slow in the early 1960’s, in a strategic Cold War response, the western democracies conceived of the Kennedy round of GATT. Finally signed in 1967, the Kennedy round created a quantum leap in foreign trade within the western developed economies, and for the first truly organized and collaborated time, trade with the developed west and the developing nations of the world. The next quantum leaps in global trade came with the Uruguay round of GATT in the mid 1980’s and with the WTO in the early 1990’s that fallowed the global fall and discreditation of the socialist and communist economic models. These are models that, unless a nation lives under a lot of oil wealth, quickly lead to repressive dictatorships.
The fall of the communist Soviet Union was of most significance. When virtually all of global communism fell in the late 1980’s, multinational businesses in the developed world no longer had to worry about their capital investments in the underdeveloped world ever being nationalized by some emerging socialist government. This change opened up a cheap labor market of nearly 4 billion people to the 2 billion in the western developed world, and with this the global economy truly began. This has been the largest political-economic change in our lifetimes, but we have yet to adjust our policies to it!
In 1965 US exports were 4.8% of US GDP and imports were 4.3%. But by 2010 they were 12.5% and 15.9% of US GDP, and the 15.9% was down from pre-recession levels of just above 17% (1). Meanwhile, accompanying this, in 1965 manufacturing as a percentage of US GDP was about 36%, and by 2011 it was only 12.2% (2). In reality this creates an effective 8 to 12 fold increase in global trade and foreign competition for the US given how substantial manufacturing is as a portion of all foreign trade and how much manufacturing is affected by it.
Further, although foreign trade as a percentage of GDP began at higher rates than in the US in most of the rest of the world, most of the rest of the world has mirrored the above change. Between just 1992 and 2005, beginning with the first new trade rules that came with the fall of communism, the OECD country average of total foreign trade in all goods and services as a percentage of GDP went from 32.3% to 45%. During the same years the EU 15 nation average went from 36.3% to 50.7%, Mexico went from 17.8% to 30.7%, Japan went from 8.8% to 13.6% (3), and total Chinese foreign trade went from $100 billion US dollars in 1988 to $2.4 trillion in 2008 (4). India’s total foreign trade as a percentage of GDP went from 16% in 1991 to 47% in 2008 (5).
Over this same period, manufacturing as a percentage of GDP has decreased for nearly the entire world, even often in the developing nations. Between 1970 and 2008, manufacturing went from 35% to 20% of GDP in Japan, 32% to 20% in Germany, and 27% to 16% for the world as a whole. Between 1980 and 2008 manufacturing went from 24% to 12% of GDP in the UK, 20% to 11% in France, and 34% to 33% in China, and between 1885 and 2008 it went from 31% to 15% of GDP in Brazil and 24% to 25% in Korea (6).
I have focused on the industrial and manufacturing sectors of foreign trade because they are generally much more affected by foreign competition than are the service and government sectors. In 2008, manufacturing alone as 57% of US exports (23). Manufacturing and industry are also the most “value added” of all economic sectors. That is, they generally pay their employees more and purchase more products from the rest of the economy than do most other sectors. Also, the larger foreign trade is as a percentage of a nation’s GDP, and the lower manufacturing and industry are as a percentage of that nation’s GDP, the greater generally will be that nations “effective” foreign trade rate, that is, the more it is affected by global competition. Furthermore, as you can see with the above data, US manufacturing and industry rate as having one of the highest levels of competitive pressure on earth!
Moreover, the above numbers do not in any way measure the threat of foreign outsourcing that has not yet occurred, but could now very easily occur due to all the numerous revolutionary telecommunications technologies that did not exist in 1965 or 1992. This effective 8 to 12 fold increase in global trade and competition is as significant an economic change as was the rapid movement from an agricultural to an industrial economy that occurred at the turn of the last century that then brought on the Progressive Era and the progressive income tax in 1913.
But this most significant economic change of our lifetimes has already had ramifications for our public policy. Since this highly competitive foreign trade has become an ever increasing and important portion of virtually all of the world’s economies, corporate tax rates and personal income tax rates on the wealthy, throughout virtually the entire globe, have greatly decreased over the last several decades so that the businesses of these nations can have needed capital to remain economically competitive and as a way for those nations to attract business capital.
Below are the top personal income tax rates of various developed nations in 1981 versus 2010 (7):
The US: 70%, 35%
Canada: 43%, 29%
France: 60%, 40%
Germany: 56%, 45%
Japan: 75%, 40%
The UK: 60%, 50%
Spain: 65.9%, 27.13%
Italy: 72%, 43%
Australia: 60%, 45%
New Zealand: 60%, 35.5%
The top corporate income tax rates were also cut by these nation’s central or federal governments between 1981 and 2010 (7):
The US: 46%, 35%
Canada: 37.6%, 16.5%
France: 50%, 34.4%
Germany: 56%, 16.5%
Japan: 42%, 30%
The UK: 52%, 26%
Spain: 33%, 30%
Italy: 40%, 27.5%
Australia: 46%, 30%
New Zealand: 45%, 28%
In 1981 the US’s top capital gains tax rate was 28% and its top tax rate on dividends was 70%. Until 2013 both of these rates were 15% (8, 9). Further, the OECD Centre for Tax and Policy Administration creates a complex amalgamation of effective top capital gains tax rates with effective top dividends tax rates, and these rates have also greatly decreased between 1981 and 2011 (7):
The US: 42.9%, 17.8%
Canada: 62.8%, 46.4%
France: 61%, 52%
Germany: 56%, 26.4%
The UK: 75%, 42.5%
Spain: 65.1%, 19%
Italy: 72%, 12.4%
New Zealand: 42.9%, 17.8%
Again, because with the wealthy we begin to greatly experience the Marginal Propensity to Save, and because of the above tax history, the supply of capital and savings has greatly exceeded the level of demand for that savings. This is due both to the fact that there exist too much of that savings relative to those who can afford to pay for those savings and due to the lack of those who can make money by borrowing that savings, this last lack due to a slow economy primarily due to lower consumer demand. Due to this demand/supply imbalance, interest rates throughout the world have reached historically low levels in most financial markets and for many historically long periods of time. An example of the Marginal Propensity to Save is that fact that, in the US, those in the top 1% of incomes on average save about 60% of their total income, while the top 2% saves on average about 35% of their income, the top 10% saves about 10%, and the numbers drop down precipitously after that (19).
Most everyone reading this paper knows the history of US interest rates over the last several decades and how they have progressively over each 10 year business cycle since the early 1980s dropped to historically low rates. But below is some international data that nearly parallels the exact US experience.
The Bank of England’s, Official Bank Rate, was 17% in 1979 and was gradually reduced to .5% by March 2009 (10). The rate was 14.9% in 1989, then 5.1% in 1994, 7.5% in 1998, 3.5% in 2003, 5.75% in 2007, and then finally .5%. The Reserve Bank of Australia’s, Target Cash Rate, went from 17% in 1990, to 5% in 1993, to 7.5% in 1996, to 4.25% in 2001, to 7% in 2008, to only 3% in 2009 (11). The Reserve Bank of New Zealand’s, Official Cash Rate, went from 32% in 1987, to 4.2% in 1990, to 10% in 1996, to 4.25% in 2001, to 7% in 2008, to 3% in 2009 (12). The Bank of Canada’s, Bank Rate, had a rate of 21% in 1981. By 1990 it was 14%. It then went to 3.9% in 1994, to 8.5% in 1995, to 3% in 1997, to 5.75% in 2000, to 2% in 2002, to 4.5% in 2007, and to .25% in 2009 (13). Go ahead and look up this data for all the other larger economies of the world, I have several times, and you will find that virtually all fit the same exact pattern except for those countries that have recently entered debt crises.
Above is presented the “top heaviness” of not just the US economy but the economies of virtually the entire world. The world has experienced top heavy economies before, and they were easily corrected by traditional Keynesian stimuli and higher progressive income taxes that of course Keynes and Keynesians supported. It is important that the higher taxes come from higher income taxes on the wealthy because this is where the slowest velocity of money and the Marginal Propensity to Save generally exists in all modern economies. Yet, this is the first time in history that virtually all economies of the world are in a truly global, competitive, top heavy economy. So, not only does the US need some type of Keynesian stimulus and tax plan, but so does virtually the rest of the world!
What is one of the things that the US does best most often in this world? We lead! The truth is, the entire globe could use some kind of Keynesian stimulus and tax plan. But we are not all one government nor will be ever want to be in one. Almost equally suicidal would be entering a trade war by trying to go back in time to some pre-global economy of the past. Moreover, foreign trade is good for US and global peace and good for US and global economic prosperity, but it needs to be updated for the 21st century.
The US needs to lead with a Keynesian stimulus and tax program. But in this relatively new global economy, first Mr. Quality needs to kick the Crude Keynesian’s ass, and kick him out of Washington DC for good!
So now that I have established that our economy, and the economies of most of the rest of the world, have structurally transformed since 1967 and especially with the fall of communism and socialism, let’s examine how this relates to the four elements of Krugman’s Crude Keynesian model from the 1930’s, and how that relates to the three basic questions that political-economists must answer.
(“Mr. Quality has the Crude Keynesian locked in an arm bar!!”)
Let’s start with element two: “The belief that America’s employment and growth problems are overwhelmingly cyclical, not structural, and therefore remediable by short-term and aggregate demand management.”
Obviously we have established that the effective 8 to 12 fold increase in foreign trade and competition has fundamentally and structurally changed our economy. The new global economy is the primary reason that US economic growth rates in the 1990s were high even with higher income tax rates on the wealthy, and the global economy is the same reason why US economic growth would greatly slow over the next 14 years. In the late 1980s and early 90s, with the fall of communism, many of these new cheap labor markets like India, China, and Russia aggressively moved to free trade policies. One of the largest suppliers of the products that these nations needed to build their new industrial and manufacturing bases was the US because there were few other places to buy these capital expenditure goods. Therefore, our economy would have grown fast in the 1990s even with higher income taxes on the wealthy, the wealthy being more likely to be new jobs producers. Yet by the early 2000s, the new industrial and manufacturing basses of these developing nations were fully functioning and they were now economic competitors of the US. This was a major factor in slowing our economy in the 2000s and beyond. This is one of the reasons why it is foolish to compare tax policy in the 1990s to today. The world is in reality, much more competitive today than it was even as recently as the 1990s!
The global economy has also greatly affected element one of Crude Keynesianism.
“1) The belief that multipliers on tax cuts and transfers are stable, predictable, and large.”
Obviously, if the US is importing four times the amount of goods and services relative to GDP than it was in 1965, then this will mean that the multiplier effect of Keynesian stimuli will be greatly reduced. Especially given our trade deficits, our Keynesian stimuli are very often simply stimulating the economies of our major trading partners. Also, the smaller that these Crude Keynesian stimuli are relative to our mushrooming imports, the less stable and predictable they will be. This increased import leakage of our Keynesian stimuli is clearly one of the primary reasons why 2009’s stimulus bill had much less of a US growth effect than predicted.
Element three of Crude Keynesianism also is affected: “The belief that a growing debt burden is a minor nuisance as long as the economy is in recession.”
Every business today knows that someday someone relatively soon is going to have to pay for any Keynesian stimuli today, and the more government debt that already exists, the sooner and the more will need to be paid for. Under a Crude Keynesian stimulus today, higher personal income tax rates on wealthy job creators and corporations will likely soon be in order; meanwhile, the Keynesian stimuli will only be short term. In our new, highly competitive global economy, these soon to come higher taxes on our primary job creators will only take away capital they need to expand while making them less competitive with their competitors throughout the world. This reality will reduce the economic confidence of not only these primary job creators but our economy’s consumers as well. At the least, Krugman admits that these income tax increases on wealthy job creators has a secondary negative effect on economic growth. But even if it is only a secondary negative effect, it should be gotten rid of!
And this is where Mr. Quality needs to open up a can of whoop-ass, as they say, on the Crude Keynesian.
As I wrote earlier, Krugman is fantastic at analyzing how large Keynesian stimulus plans need to be, but he is terrible and crude at figuring out how to raise government revenues to pay for these stimulus plans and all government, and he is terrible and crude at figuring out how the stimuli and other government funds should be spent.
Let’s start first with the tax side and how it needs to be adjusted to the new, highly competitive global economy.
Many of you are already knowledgeable of personal income and investment income Employer Tax Carve-Outs, which are the most efficient form of taxation in our global economy. So, I won’t spend too much time on them here, although some numbers are very important to remember. Furthermore, personal and investment income ETCOs would likely be the most efficient form of taxation even in a self contained, non-foreign trading, economy, but in a global economy they are that much more efficient and important.
Personal income tax ETCOs are quite simply. When personal income taxes are raised, hopefully just on the wealthy given that this is where the lowest velocity (spending) of money exists, Employee Tax Credits are be used to create an Employer Tax Carve-Out for virtually all employers. Under the personal income ETCO plan that is in the Summary of Our Overall Tax Plan that can be found in this Weekly Blog section, 98% of those employed in the US by private pass-through employers would have their employers effective income tax go slightly down, 1% would stay about the same, and 1% would go up. Sow the ECTO is extremely universal. The tax credits are worth 7 cents on every dollar of w-2 1040 employee expenses, and even 1099 expenses if desired. A simple cap on how low the credits can be exercised for each income bracket is set. The greater the difference in effective tax rates between the non-employing wealthy and the employing wealthy, the greater will be the incentive for the non-employing wealthy and those who are destined to become wealthy to finds ways to become US employers, and also, the more government revenues will be raised! This is because, even in the highest income strata, very few Americans, and this is true for other nations, are employers. In the US, only about 21% of all of the top 1%’s income is the profits of any business that is taxes as personal income that has one or more employees in the US. The top 1% is about where this number peeks. For the top .05% it is about 18%, for the top 2% it is about 18%, for the top 5% about 16%, and for the top 10% about 12% (14,15,16). When stricter Active Income definitions are used, these numbers drop even further. The fantastic, Collins/McCaskill ETCO that was proposed last year for employing less than 500 employees and for incomes over $1,000,000 would only have cost, when statically scored, about 14% of what an exact same tax increase without the ETCO would have raised. Yet when dynamically scored, using the same assumptions as respected studies, it could be said that the Collins/McCaskill tax increase with the ETCO would have raised as much as four to five times the government revenues than an identical tax increase would have raised without the ETCO (17)! ETCOs would also greatly assist in immigration enforcement in that they create a tax incentive for businesses to pay FICA taxes for their employees and not paying their employees under the table.
Yet in our competitive global economy there are some other very important numbers to remember regarding ETCOs that make four to five times the revenues possible. Let’s examine just the top 2% of US income earners for now. Only 18% of all the income that is made by all of the top 2% of income earners in the US is the profits of any businesses that is taxed as personal income that has one or more employees in the US (14,15,16). Yet this 18% of income is extremely important. It comprises the immediately available capital for what are generally America’s fastest growing and most dynamic businesses, that are also generally of the greatest importance to America’s economic future. Businesses that are taxed as personal income are responsible for generally 60% to 90% of all new private sector jobs, and closer to 90% when coming out of a recession. Such businesses that are in the top 2% of incomes are America’s most successful, so they are responsible for as much as, and often near to, 55% of the above new jobs(18). Also very importantly, these same businesses typically become America’s most prolific exporters in the following business cycle a decade latter and well beyond!
One common misconception about growing businesses is that they are not adversely affected by high income tax rates and quarterly income taxes because they can write off as a tax deduction the profits they quickly plow into their expansions. But very few businesses ever expand this way. Most often they need to save for a few years before they can then make their next big expansion. This expansion savings would be reduced without ETCOs. Therefore we should not be reducing their immediately available capital in their most important stage of development when the availability of this capital is so very important to all of us, even if it is for needed government revenues! If you need to know more about ETCOs visit the website, ThirdWayProgressives.org, and go to the Weekly Blog section. My best papers there for a tutorial on ETCOs are “Why an ETCO is Much Better than Just Limiting Deductions for the Wealthy”, the No Labels blog written just before it, and the summary of the overall tax plan using 2010.
The investment income ETCO program works using a very similar tax incentive strategy as does the personal income tax ETCO. What the capital gains and dividends tax ETCO does is reduce capital gains and dividends tax rates on gains derived from the four financial market investments that are most responsible for facilitating private sector job investments, and with the ETCO’s domestic job qualifiers. These four financial investments are, and again with domestic job qualifiers: All venture capital funds and investments, all bonds bought at first issue, all stocks bought at IPO and secondary offering, and the underwriting of any of the above three investments or the investing in any of the three when working within the carried interest rule. As a matter of fact our capital gains and dividends tax ETCO is a great way to fix the carried interest rule.
Fortunately, these four investments constitute generally only about 5% to 12% of all financial market capital gains (19,20). With our domestic job qualifiers this employer tax carve out would cost even less while generating far more government revenues than would an equal sized capital gains and dividends tax increase without ETCOs. This revenue increase would exist due to the cheapening of the cost of capital for the expanding business that this new tax incentive would now be bringing more investor monies to, and then due to the economic growth and domestic labor demand that would increase wages and therefore tax revenues that the US employer carve out tax inventive would induce.
Generally speaking, mid-sized American businesses seek venture capital to expand, larger businesses launch IPOs, and America’s largest businesses float bonds. Again, just like with ETCOs and personal income tax increases, the larger the difference in effective tax rates between those engaged in the behaviors what most directly create jobs in the US and the wealthy who do not, that is, the lower the rate for the direct job creators and the higher the tax rate for the wealthy who do not, the more government revenues will be raised because for example in the case of capital gains the none job creating monies make up generally 88% to 95%, and also the more private sector jobs will be created due to the tax incentives to employ, and the more wages will be increased in the US due to the added demand for labor in the US!
Capital gains and dividends tax ETCOs would also greatly reduce the likelihood and severity of speculative investment bubbles that are severe enough to lead to a recession. They would achieve this by moving more of the financial market monies into the one area of the domestic economy that has the highest velocity of money, that is, here the fastest rate of spending occurs. With more money going to the one place in the economy where it is most often spent and on the largest range of goods and services, price fluctuations for the entire economy will naturally be more likely to be relatively smaller. This would make economic planing and investment for the economy as a whole, including the financial and investment markets, more predictable and stable. This greater economic certainty, and along with it greater economic confidence, will increase the likelihood of greater confidence and lesser volatility in the financial markets, while leaving less for financial market speculation and gyration. Moreover, capital gains taxes revenues are notoriously the most volatile of all forms of taxation because of the relatively high volatility of the financial markets relative to the rest of the economy. Therefore with the incentives inherent in capital gains and dividends tax ETCOs, capital gains and dividends tax ETCOs would not only greatly increase government tax revenues, but reduce the volatility of how much these tax revenues are collected, as well as create less volatility and more certainty for the financial markets and the US economy as a whole! The best place to learn more about capital gains and dividends tax ETCOs is in the 2010 Numbers, Summary of my overall tax plan that can be found at ThirdWayProgressives.org in the Weekly Blog section. Or please feel free to contact me directly at anytime.
With the personal income and investment income ETCOs just presented as ways to much more efficiently raise government revenues and in a progressive, New Keynesian manor:
(BAM!!! … Oh My!! The Crude Keynesian just got hit by an Atomic Elbow!! ……. He’s out!! .. And he aint gonna get up anytime soon!! …… Mr. Quality is lifting him on his shoulder! ….. And he’s taking him to the top rope!!!)
I know this whole wrestling thing is getting a bit juvenile, which is a fair assessment given that that is pro-wrestling’s target audience. But just give me a minute here.
You must realize that when I was in graduate school in California in the very late 1980’s, I was not allowed to talk about my ideas at all!! This was before New Keynesianism was popularized by David Romer and Gregory Mankiw in 1991, and before the related Endogenous Growth Economics arose in the early and mid 1990s. I wanted to become the best possible political-economist/macro-economists I could possibly become. Yet I ran into trouble when I made a presentation to my graduate school class about how a global economy was about to explode, and with it would be a need for a new egalitarian economic model, and a redefinition and reform of what was deemed to be liberating, similar to what occurred in the early 1900s with the Progressive Era, and four generations earlier than that with the Second Great Awakening of the early 1800s, and with the Great Awakening of the early 1700s, and the Puritan Awakening of the early 1600s, and the Protestant Reformation of the early 1500’s, and frankly, Awakenings following this same four generation, 100 year cycle dating back as far back as I and others could study history, and that other extremely respected scholars had written about this same cycle.
When I made a presentation about these ideas to my graduate school class, the professor who was the head of my masters program told the entire class, with me present that, “Tom’s ideas are … evil, and we will not be talking about them in this class and program, and it would be in the best interest of the other students in this program to not talk to Tom about his ideas either in class or out of class!” Through graduate school I was hated by both the liberal and conservative professors for disagreeing with them, and these groups together made up nearly all of the professors. In the end I was told that I was not allowed to discuss or write about my ideas because I was “not working within any existing school of social science thought.”
I have to forgive the head of my program in that he was mostly a psychologist, and he seemed to study little macro-economic data, so he was simply most ignorant in the areas that I was strongest. But, heck yeah, I was very bitter at the time! And the experience turned me against academia as the route for me to help redefine and reform liberalism for the 21st century. And the truth is that I can still become a bit bitter even at times in these years.
But the larger truth is that it was a blessing in disguise. As it turned out, most of the time I was always able to have jobs where much of the time I was either studying some type of economic data or I had the opportunity to study economics and history, and all the extremely diverse range of things you need to be aware of to be a great political economist today. Traditionally, most people have seen someone experiencing many, many jobs as a primary indicator for measuring poor work ability. But not becoming a college professor meant that I have been able to work more jobs than any single person I know, and across the entire job market, on the high paying end and especially on the low paying end, and in virtually every sector of the economy, including sub-sectors like pro-wrestling. No experience at any college or university would have prepared me better to be a political economist than what I have experienced!
But on the other hand, I have yet to earn a single dollar from any of my political economic work, and Paul Krugman has earned a whole lot! And Krugman with his influence is now slowing down the economic and the egalitarian and environmental progress of the US, whether he knows it or not! Krugman probably is not even aware of the ETCO, which is something that some of you can probably change easier than I can.
So yeah, in this paper, Mr. Quality has a bit of a chip of his shoulder, so this beat down of the Crude Keynesian has just begun!!
Crude Keynesianism has influenced the Murray/Reid budget far too much for the good of our nation. Regarding revenue raisers, the Senate budget is an improvement over traditional Crude Keynesianism in that it is a little more pro-economic grow oriented than personal income and investment income tax increases without ETCOs. If we were to reduce tax deductions and credits for the wealthy, given that wealthy growing employers are less likely to be using these deductions and credits than are wealthy non-employers, then the burden of this tax increase would fall less on wealthy employers than it would on wealthy non-employers. Of course personal and investment income tax increases on the wealthy with ETCOs would create a much more economically efficient tax increase than this, but it is a slight improvement over traditionally crude progressive tax increases.
Further, in reality, both for political reasons but even more so for economic reasons, relatively little new tax revenues will be able to be raised by reducing tax deductions and credits for the wealthy. Most itemized tax deductions are already very limited for the wealthy. Moreover, the most costly to the federal government itemized deduction for the wealthy is the charitable deduction. It would not make political, economic, social, or moral sense to limit charitable deductions in any way, perhaps with the exception of reducing for the wealthy the value of non-cash donations. For the wealthy, medical expense deductions could also be cut to some degree, as could mortgage payments for second homes for those with extremely high incomes, as well as could be cut the home business deduction for the wealthy regarding actual living spaces. Savings deductions are already greatly restricted for the wealthy, but where they do exist they should be cut. Moreover, means testing these deductions and credits, as well as means testing Social Security and other entitlements, is very complicated and bureaucratic. All of the above are reasons for an ETCO tax strategy.
ETCOs and Employee Tax Credits can also be used within the C Corporation tax code where they can be used to incentivize businesses with more than 500 employees, and those with less, to employ more often in the US and with higher pay and benefits. Other ETCO tax strategies and innovative environmental tax strategies can also be found at ThirdWayProgressives.org in the Weekly Blog section.
So now that I have established a much less crude, New Keynesian method of raising government revenues, let us move on to the spending side where the Crude Keynesian can take even more of a justifiable beating.
The fourth element of Crude Keynesianism is: “The belief that for practical purposes, the most urgent need is to raise aggregate demand rather than to focus on the quality and type of public spending.”
The Crude Keynesian’s thinking is flawed in that he does not realize that the sooner that we make our entitlement programs more efficient, and particularly in healthcare in that we derive more actual healthcare per dollar spent, the more we can bank that future savings for economic stimulus today! And for more effective economic stimulus at that!
There exist five primary reforms that will make Medicare, Medicaid, Obamacare, and our overall healthcare system much more efficient. In “My Proposed Fiscal Cliff Avoidance Compromise Plan” of the first week of December 2012 that can be found at ThirdWayProgressive.org, I go into much more detail regarding four of these five reforms, and in my last paper I discuss the fifth. The five are: Allowing Medicare and Medicaid to be able to use their bulk purchasing power to buy prescription drugs, allowing anyone to be able to purchase any kind of health insurance across state lines, tort reform in Obamacare, Paul Ryan’s private option in Medicare and Medicaid, and President Obama’s bundling of Medicare payments. Some studies have shown that the first four of the above five reforms alone could save as much as $9.95 trillion over 10 years (21). Very importantly also, the above reforms are not budget cuts, they are in reality, new communications and protections that allow for the same work to be done with significantly less money! Monies that could then be used to reduce the deficit and stimulate the economy now!
The above five healthcare reforms are all interrelated, and they would need to coincide with a public/private catastrophic care association. We can all easily envision 50 state exchanges with Paul Ryan’s private insurance option, but where people can buy across state lines so that bureaucratic savings are accrued due to the uniformity of operations, and where traditional Medicare and Medicaid plans are sold, but with President Obama’s payment bundling, and where all those in Obamacare can purchase insurance because it is simply an extension of the whole system. Medicare, together with the private plans, could use their bulk purchasing power with prescription drugs, and sensible tort reform would exist only in Obamacare where, as long as a healthcare provider used progressively the procedures that epidemiological studies showed to be the most probable for success, those health providers would be legally protected, and within Obamacare only there should at least for some time be a sensible tort cap, of perhaps 10 years. After all, these are people who right now do not have any health insurance, and in reality we have not yet figured out how to pay for their new health insurance. The above system would especially work more efficiently and creatively if we encouraged healthcare insurers to at the same time also be major healthcare providers.
This would be a great base for an extremely efficient and creative healthcare system; one that would be the best in the world! Almost immediately Medicare and Medicaid would begin so save money on prescription drugs. Within a few years there would be less insurance paper pushers working for insurance companies and in hospitals and medical offices. But many of them would quickly, actually, be working with patients, and private insurers would save a lot of money that could then be “cost shifted” and/or the price of private insurance would go down. With cost shifting, Medicare and Medicaid could pay healthcare provider less, and because the private insurers now have more money, they can pay the healthcare providers more thereby make up the difference and/or they will have less expensive insurance for their patients. That Medicare and Medicaid savings would be more money that could equally be spent on deficit reduction and economic stimulus today!
One of my brothers is one of our nation’s top cancer/nuclear radiological specialists, and he thinks that no other factor in medicine creates more waist than the extra medical tests that are made for fear of unjust lawsuits. Certainly we can make some headway here, and certainly Obamacare would not cost as much with some type of tort reform. We are already beginning to save money with the pilot programs in Obamacare that are bundling Medicare payments to health providers. And I know that a lot of Democrats, progressives, and liberals do not want to hear this, but Paul Ryan’s plan of having private healthcare options for Medicare and Medicaid that, via choice and competition, would over time improve the quality and reduce the price of healthcare is absolutely fundamentally sound!! And even before 2013 we would begin to save money under this aspect of the Ryan’s plan.
One of the lessons that most of us learned with the global fall of communism and socialism is that nearly all private, competitive markets, even with a profit margin, are more efficient and creative, especially over the long run, than are government run markets without a profit margin. This is even true with healthcare, and it will be even more so true if we allow people to buy insurance across state lines thereby making the market more competitive. A great recent study that explains in just one way why this is all so is, “Can’t We All Be More Like Scandinavians?” by Daron Acemoglu, James A. Robinson, and Thierry Verdier.
A very vibrant private healthcare market is extremely important if we want to lead the world in healthcare, and healthcare will continue to become an ever larger percentage of the economies of all nations of the world as the world becomes more affluent. Above is not just an amalgamation of the hottest new healthcare reform ideas around today, they are the most prominent bipartisan healthcare reforms that most people have long known would make our healthcare system much more efficient and capable. Together, they would truly reform our healthcare system and bring it into the competitive global economy of the 21st century so it was not such a burden on our employers and overall economy!
Yes, this is a grand bargain that I am proposing, and it is best for our nation! Further, the sooner we make this grand bargain, the sooner we can enact some kind of economic stimulus, and the bigger the bargain, the bigger the stimulus!
This grand bargain should have “spending cuts” (the above healthcare efficiency improvements) and total tax increases that are nearly equal in size to those in the Murray/Reid Budget. At the very least the total debt reduction should equal $1.85 trillion over ten years, but anything else above that saved or raised should equally be split between debt reduction and a new economic stimulus that should occur over the next few years. The tax increases should consist of more personal and investment income tax increases on the wealthy but with ETCOs than they should be tax deduction reductions for the wealthy, and they should equal the amount in the Senate budget. In order to make the tax increases in this bargain more palatable for Republicans, ETCOs should be enacted immediately so that there will be certainty that all future personal and investment income tax increases will have ETCOs, and so that Jan 1 2013’s income tax increases can have ETCOs. In fact for tax reform in 2013, whatever tax expenditure deductions for the wealthy are cut, that amount should be used immediately for a Collins-McCaskill style ETCO for all businesses with less than 500 employees against Jan 1, 2013’s personal income tax increase. The new income tax increases on the non-employing wealthy should not be scheduled to increase until April 15, 2017 for 2016’s tax year. It should also be written in this grand bargain legislation that these 2017 tax increases could be vetoed by any new president and that that veto would have to be overwritten by Congress. In this way the Republicans can present to their base that they are not actually voting for tax increases because a Republican president can always repeal those tax increases after the 2016 election, and they can with pride explain that Republicans are voting for tax reductions that will occur this year for most of American’s most proficient job creators by enacting the ETCOs. For voting for ETCOs and potential tax increases the Republicans should also get Paul Ryan’s, private option for Medicare, healthcare reform, but with Obamacare set to live strong and long.
We can bank now many of the reform savings that we will incur over the next 10 years and use half of all deficit reduction above $1.85 trillion over 10 years (this is the amount of savings and new revenues in the Senate budget) towards a new economic stimulus plan this year! Furthermore, we can iron out all of this between now and September 1 of this year! We can and should do this! The confirmation of a great political compromise is that no one is certain which political party came out best, but everyone one is certain that the American people came out the best! The above grand bargain would achieve this!
Juan Williams recently wrote an article stating that most Washington DC politicians were already looking only to the 2014 election, and that no grand bargain would be possible with the 113th Congress. If I had just one message I could give to every American politician it would be, “YOU ARE NOT PAID BY THE AMERICAN PEOPLE TO CAMPAIGN!” The American economy is still quite bad, and waiting for the next election is willful neglect of the American people!!!
Paul Krugman recently in an interview with Fareed Zakaria said that the 113th Congress could never come up with a grand bargain, but that by 2023 our federal government, even with the Murray/Reid budget, will have had to make reforms to our entitlement programs, especially Medicare and Medicaid, or we will begin to enter a period where budget wise, something will have to give, either cuts in entitlements or a potential debt spiral. At the same time the Crude Keynesian makes fun of those who worry about today’s deficit and debt, and he is emphatic in his belief that it is illogical to think that securing the budget problem today would improve economic confidence for business and consumers (read his paper on The Confidence Fairy).
So Krugman’s logic is: American businesses and consumers should not worry in any way at all about a problem that will sabotage the economy in less than 10 years, even though nobody but perhaps me here is offering a compromise solution, and there exists no possibility for a solution at least until 2014, and that it is extremely unlikely that one party will be able to run DC and/or get their entire way in DC over the next ten years. We dont’t need to review this logic to see how crude and wrong it is. This logical failure completely exposes the failure of Crude Keynesian element three: “The belief that a growing debt burden is a minor nuisance as long as the economy is in recession.”
Yet Krugman’s influence is all over the Murray/Reid budget, and that budget is simply far too little too late for the American people. But it is not so much that Krugman is illogical. It is that Crude Keynesianism is illogical in today’s highly competitive global economy, and Krugman only knows Crude Keynesianism. This particular illogic is exposed by element four of Crude Keynesianism: “The belief that for practical purposes, the most urgent need is to raise aggregate demand rather than to focus on the quality and type of public spending.”
Crude Keynesianism was developed in the 1930’s when John Maynard Keynes, in an effort to just convince the US Congress that some kind, any kind, of government transfer and spending to increase consumer demand should be made and right away, would often joke, something like, “It would be better for economic growth for the government to pay people to dig holes, put bags of money in those holes, pay them to bury the bags of money, then pay them to dig them up, and then let them have that money, than it would be to simply do nothing!” The problem is, Keynes thought of this statement as a joking exaggeration to make a greater point, but others took it seriously. In the 1930s and prior to 1967, with so much less foreign trade throughout the globe, that degree of “Keynesian waist” if you will, could exist without adversely affecting the entire economy. But today, this is no longer true.
As an aside, quickly back to taxes. Frankly, the above experience for Keynes is a lot like the experience for me with you folks and with the Employer Tax Carve-Out, except I’m not joking. Do I actually believe that personal and investment income tax increases with ECTOs will actually raise four to five times the government revenues than would an exactly equal tax increases without ETCOs? The answer is, yes, I do actually believe that sometime in this century, if most of the ideas on my website were fully enacted, the ETCOs would increase what our current progressive income taxes generate by as much as four to five times the government revenues. But what about today, say if we were going to enact the fantastic, Collins/Mc Caskill ETCO; this is the more important question? And the answer to that question is, I think that with the very talented staff we now have in Congress and how they understand that ECTO, I honestly believe that we would double the personal income tax revenues that would otherwise be generated without an ETCO! And remember, the greater the difference in effective tax rates between employers and non-employer, the greater any increase will be! So let’s get on with this ETCO stuff!!
Back to spending. We are at least for much time to come going to be in a world with this level of foreign economic competition, whether we like it or not. So we need to spend our government dollars in more efficient ways, whether it is in areas where we currently spend, or in popular and effective new programs. So with this attitude, and the ETCO tax strategies, and some labor rights legislation that I have yet to blog about, and of course with all the other great ideas we already have and will have, the US should lead the way in making this new global economic order much more prosperous, egalitarian, environmentally sustainable, and peaceful than it is today!
To start with, making these healthcare reforms and enacting an ETCO tax strategy as fast as we can will allow us to bank future savings today that we can us for more debt security and economic stimulus today! But remember, upon kicking the Crude Keynesian’s ass I taught you that spending really matters. Look at all the wasted Keynesian stimulus that occurred in 2009’s stimulus plan! The worst culprit there was securing the pensions of state government employees when reforms would have sufficed. If you had to develop an economic stimulus project that stimulated the economy the least, it would be securing a pension plan. The government is borrowing savings to then put it in savings. As an economic stimulus it could not get worse.
So what are good projects for future spending over the next few years? I’m sure there are plenty of shovel ready projects that are by now, truly, shovel ready. Plus, there is always the Hanford Nuclear Reservation in Washington State that needs to be cleaned up, and we cannot let college interest rates double, and Democrats and the nation should not have to worry about chained CPI!
But related to education, and to increasing our manufacturing and industrial base (which you remember how important that is given the foreign trade data above, and how it is value added, and how much our manufacturing and industrial bases have depleted relative to the rest of the world over the last 40 years), and related to creating a much more environmentally sustainable economy, I would hope that you would read the below proposals that were in one of my older papers if you have not already:
President Obama’s newly proposed National Network for Manufacturing Innovation at first glance looks to be the right step in the right direction, as has long been the Brookings Institute’s, Energy Discovery – Innovation Institutes. However, with only $500 million to $1 billion proposed to be spent over four years with the new NNMI, this is a baby step when an Olympic long jump is needed. Nonetheless, if structured properly it will take relatively little time before it is found that this program more than pays for itself. I dont’t mean “pays for itself” using some times too typical squishy Washington DC accounting, so the monies earned through the program could be plowed back into it!
What is suspected that the NNMI would do, because it is reported to be modeled after Germany’s Fraunhofer Institute, is to invite as many private business participants as possible to come together along with governments to brainstorm over what possible technological developments they would like to collaborate in developing that they would all find benefit in using once developed. Those ideas that attract the most private sector R&D investment commitments would then also receive government R&D funds and other basic and applied research support. With the right government incentives the intellectual property developed would then be produced and used in the US.
At present there is a debate within the Obama administration as to whether the NNMI should be structured with incentives for businesses to manufacture in the US those products that arise using the NNMI government funds. Unless China and India offer to pay, and I dont’t mean lend the NNMI funding, the answer to this question should be yes. More specifically what should happen is that as federal, state, and local funds begin to rise on a particular project, so too must correspondingly rise the percentage of payroll that a business has in each jurisdiction relative to its global payroll in order for it to have a right to the intellectual property developed. Failure to do so would mandate very high royalties and fees in order to use the intellectual property. Further, the best way to calculate payroll increases would be to measure them through the amount of Employee Tax Credits earned. Given that our ETCs as part of our personal income and corporate tax plans allow for ever greater ETC rewards that can be given to businesses that compensate their employees at ever greater amounts above the norm, the NNMI would then maintain, create, and attract higher paying jobs in the US. Germany’s Fraunhofer Institute provides 70% of its funding via its own internal profits, with only 30% of its funding coming from German governments. With the right incentives and tax structure the NNMI would more than pay for itself!
Such institutes in the US will need to expand far beyond what is being proposed above. A very extensive NNMI along with robust state involvement and connected institutes through business incubators and our universities will be a must. One of the missions of our universities should now be to be their own business incubators with manufacturing institutes. Large “patent pools” and networks should be formed within and among them. Students, private groups, and perhaps even non-affiliated individuals would give up exclusive intellectual property rights in exchange for a predetermined percentage of royalties. The exclusivity of each patent pool would be determined by the university, each program coordinator, and the programs intellectual property contributors. Private investors, existing businesses, and those within the business incubators would then be able to license any such patents with similar payroll, ETC, and/or royalty commitments as would exist above with the NNMI. Further, universities should stop using not always relevant math courses, that are taught through very irrelevant practices, as “weeder” courses into many science and engineering degrees. Albert Einstein, perhaps the greatest physicist of all time, was a well below average mathematician. It is safe to say that many of the futures greatest inventors and scientists may be the same.
All of this will be part of a transformation of our universities that is typical for a time period that has experienced an even more profound economic transformation, that being our rapid movement into the global economy. After the Civil War and around the turn of the last century the mission of America’s universities was greatly broadened. Prior to the Civil War, American college students could typically only receive degrees in one of five subjects: law, medicine, theology, philosophy, or science. But as our economy was rapidly transformed from agricultural to industrial during this period, within our colleges and universities the subjects of philosophy and science splintered and became specialized, eventually into what we know them to be today. During this period higher education became much more relevant to the needs of society. A similar revolution is now upon us, and reluctant schools will only suffer.
Given these reforms to higher education along with the NNMI, it would not take long until our economy’s scientific and technological output would be taken to a more desired level. Recent testimony in Congress stated that the US’s technological and scientific output is only about half of what it could potentially be (22). Along with various environmental tax incentives and programs, the possibility of maintaining a pristine and safe environment for the US and the rest of the world would greatly increase. On the purchasing end, the federal, state, and even local governments could enact an Environmental Fair Tax. For states and local governments this would simply mean that they would structure their sales taxes such that products with a great environmental rating would receive a very low to no sales tax, while products with low environmental ratings would make up for this cost by having much higher sales tax rates. This tax would be revenue neutral. A federal Environmental Fair Tax would piggy back on the state and local sales tax system, thereby lowering sales taxes even further for products with great environmental ratings while raising sales taxes even further on those with poor ratings.
Our other environmental tax proposal would reward tax credits for the production of products using best practices. Just like with an Environmental Fair Tax on the federal level, the EPA could designate, and then Congress and the president could OK, best, standard, and poor practices, and then award a lower income tax rate via this designation. Also just like with an EFT, these practices could be judged for what is generated for the production of a product, for when a product is in use, and for when a product is discarded. Another very positive proposal for the environment is to have the federal government announce that the first some odd amount of the production of a certain best practice could be produced tax free. All of these tax incentives would slowly but inevitably create a cleaner environment as new best practices are invented and standard practices become old practices and so on. With these tax policies understood as being permanent, given multiple potential technologies being even close to equal, engineers will always default to employing the more environmentally friendly technology. Furthermore, given that the overall output of environmentally friendly technologies will increase under qualityism, if the free market with these tax incentives alone is not enough for a given sector to move away from certain less environmentally friendly products and procedures, it will then be easier for governments to mandate the use of cleaner technologies without adversely affecting the economy.
(Mr. Quality has the Crude Keynesian up on the top rope!! …… No he couldn’t! … No he shouldn’t!(“Yes do it!!”) ….. Oh no! He is going to suplex the Cure Keynesian off of the top rope!! ……………………. BAMM!!! The Crude Keynesian is not gonna get up from that! …….. 1..2..3!! Ding!Ding!Ding! This match is over!! The Crude Keynesian must stay out of Washington DC forever!!!)
Hopefully the President will come out with a budget that is more influenced by New Keynesian ideas than Crude Keynesian ones!
If not, it is likely that I will be moving to Washington DC this summer to make certain that the Crude Keynesian stays out of Washington DC for good. I will soon be starting a 501 C4, and I’m sure I will be asking for help. I think that a coalition now has the chance of being put together that can make much of the grand bargain that is in this paper become law by September 1 of this year! We shall see, and maybe I will see you in DC!
PS: Paul Krugman is probably a very nice guy, and I hope to have a good laugh with him someday in Washington DC as we celebrate the passage of good egalitarian legislation. And if you are or were a pro-wrestling fan, I wrestled as C.I.A. in the California independent pro-wrestling circuit back in the 90s, and I was co-owner and co-operator of Southern California Championship Wrestling, a minor league pro-wrestling school and promotion, while also wrestling for SCCW. Most of this took place before the internet, so there is not a whole lot that can be found on the web about it.
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2. Bureau of Economic Analysis, Industry-by-Industry Total Requirements Table
3. OCED 2006, National Accounts of OCED countries.
4. National Bureau of Statistics of China
5. Trade Profiles – India, World Trade Organization
6. United Nations: Manufacturing Share of GDP
7. OECD – Centre for Tax Policy and Administration: OECD Tax Database
8. Tax Policy Center, Brookings Institute Tax Facts, Capital Gains and Taxes Paid on Capital Gains 1954-2008
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11. Reserve Bank of Australia: International Official Interest Rates, Target Cash Rate.
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13. Bank of Canada, Canada Target Rate History.
14. Emmanual Saez and Thomas Piketty, “The Evolution of the Top Incomes: A Historical and International Perspective,” National Bureau of Economic Research, working paper no. 11955, January 2006.
15. The World Top Incomes Database, Facudo Alvaredo, Tony Atkinson, Thomas Piketty, January 2011.
16. US Census Bureau, Statistics of US Businesses: 2008 : All industries US.
17. 1. Obama Tax Hikes: The Economic and Fiscal Effects, Published on September 20, 2010 by William Beach , Rea Hederman, Jr. , John Ligon, Guinevere Nelland Karen Campbell, Ph.D. Center for Data Analysis Report #10-07.
18. Bureau of Labor Statistics
19. “Recent Changes in US Family Finances” Federal Reserve Bulletin.
20. Jay R Ritter, University of Florida, “Initial Public Offerings.”
21. State Health Insurance Regulations and the Price of High-Deductable Policies, Kowalski, Congdon, and Showalter, 2008.
22. US Senate Committee on Finance: Full Committee Hearing 9/20/11
23. US Bureau of the Census, 2008