This week during the Sunday news circuit Sen. Jim DeMint noted that the plan that the Republican caucus has proposed is an “American Plan”. Host Chris Wallace asked him, if only tax cuts could lift the American people out of the financial crisis of which we are faced. His answer was that all the economists that he spoke with advised that the best way to stimulate the economy was to put more money into American’s pockets by not taking money out of the private sector. All my comments will be in bold font.
“DEMINT: Well, I think all of us support the fact that we need to do something. And all of us believe that the way to move our economy forward and protect jobs is to infuse more money so that consumers have more to spend, businesses have more to invest, buy capital equipment.
But there are two ways to do that, George. One is for the government to take it out of the private sector through taxes and then decide where it’s going to go through political manipulation, as they’ve done in the House. The other is just to leave more money in the private sector for consumers to spend and businesses to invest.
And that’s the American way. And that’s — that’s the approach we’re pushing. Unemployment is…
STEPHANOPOULOS: All tax cuts? No increases of spending of any kind? Yet more economists say that investments — the right kind of investments create more jobs than tax cuts.
DEMINT: Well, I’m not sure what economists you’re talking to, but we’ve met with a lot of them over the last week. You can look back in history, and leaving more money in the economy through tax cuts is the way that works. And government spending is — you can see little bumps.
But this plan is a spending plan. It’s not a stimulus plan. It’s temporary, and it’s wasteful. And a lot of the spending is going to end up being permanent, George. So we have to decide if we want to be a free-market economy and let — and let the money stay there or if we want to be a government- directed economy, which is where we’re headed with this plan.
STEPHANOPOULOS: You voted for the package?
FRANK: I did. And the — I regret Senator DeMint saying that this is the American way. Let’s — let’s just agree that we’re all Americans here, Jim, and that nobody’s got the American way versus presumably the non-American way.
Republicans know all about labeling others as non-American or rather un-American. Just look up Sen. Joseph McCarthy. Funny thing about history everyone has an interpretation. Most Americans who study history know that the Senate voted to censure Sen. McCarthy in the 1950’s as a result of his being unable to substantiate accusations of communist spies in the government and Hollywood,
How does this American plan work? Let us take a closer look at the plan that the Heritage Foundation has developed and Sen. Jim DeMint calls The American Option. In Sen. DeMint’s own words here is the essence of the plan:
The idea is simple: first, make the temporary tax cuts of 2001 and 2003–now set to expire in 2011–permanent. Short-term tax relief, of the sort envisioned by the Democrats’ plan does not stimulate economic growth.
It’s the difference between a $1,000 gift one month, which you might put away or use to pay off some credit card debt, and a $1,000-a-month raise, which might get you thinking about buying a house or a new car or taking a summer vacation or starting a new business.
Sen. DeMint goes on to elaborate that:
…five years on, the 2001 and 2003 tax cuts have led to the creation of 4 million and 6 million jobs, respectively.
Every time the United States has cut marginal tax rates, millions of jobs have been created–jobs that lifted the unemployed into the workforce, the working poor into the middle class, and the middle class into long-term economic security.
Ok, make the tax cuts permanent, tax cuts according to Jim DeMint have created 10 new jobs, and lifted us all into greater prosperity. I have one question for Sen. DeMint what planet are you living one? Apparently an alternate universe Most Americans will not realize one thousand dollars in tax cuts each month only those in the highest income brackets. So why use a figure such as a $1,000-a-moth raise? Furthermore, if these tax cuts in 2001 and 2003 had really succeeded then why would we have such a need for an economic recovery act or an American Option?
The truth is that the income gap has increased since the tax cuts were enacted. The Wall Street Journal noted in Oct. 2007:
“The richest Americans’ share of national income has hit a postwar record, surpassing the highs reached in the 1990s bull market, and underlining the divergence of economic fortunes blamed for fueling anxiety among American workers.
The wealthiest 1% of Americans earned 21.2% of all income in 2005, according to new data from the Internal Revenue Service. That is up sharply from 19% in 2004, and surpasses the previous high of 20.8% set in 2000, at the peak of the previous bull market in stocks.
The bottom 50% earned 12.8% of all income, down from 13.4% in 2004 and a bit less than their 13% share in 2000.
The IRS data, based on a large sample of tax returns, are for “adjusted gross income,” which is income after some deductions, such as for alimony and contributions to individual retirement accounts. While dated, many scholars prefer it to timelier data from other agencies because it provides details of the very richest — for example, the top 0.1% and the top 1%, not just the top 10% — and includes capital gains, an important, though volatile, source of income for the affluent.
The IRS data go back only to 1986, but academic research suggests the rich last had this high a share of total income in the 1920s.”
Wasn’t that just before the Great Depression?
The Wall Street Journal article also noted: “The data highlight the political challenge facing Mr. Bush and the Republican contenders for president. They have sought to play up the strength of the economy since 2003 and low unemployment, and the role of Mr. Bush’s tax cuts in both. But many Americans think the economy is in or near a recession. The IRS data show that the median tax filer’s income — half earn less than the median, half earn more — fell 2% between 2000 and 2005 when adjusted for inflation, to $30,881. At the same time, the income level for the tax filer just inside the top 1% grew 3%, to $364,657.”
How can Sen. DeMint make such outrageous claims, simple it’s his motto repeat it often enough and people will believe you. The only problem is that most of us know that our lives have not improved under the tax cuts. We pay more for healthcare, energy and food costs, and, college tuition than we did before the tax cuts were enacted. Are we really to believe that more tax cuts are the answer?
Second in an earlier post that I’d written, “Whitehouse Follies: Progress at a Snails Pace” I noted that job growth under the Bush administration had been the slowest in many decades. The Washington post wrote: “The number of jobs in the nation increased by about 2 percent during Bush’s tenure, the most tepid growth over any eight-year span since data collection began seven decades ago.” This data even takes into account the economic collapse of late 2008. I am not sure how Sen. DeMint managed to determine that the tax cuts created four and six million jobs after the 2001 and 2003 tax cuts.
In Sen. DeMint’s world the Economic collapse occurred because of non-conservatives interfering with the free market. Essentially Sen. DeMint wants Americans to focus on everyone but conservatives:
“That point is very simple, and we must repeat it every day on the floor of the Senate, from the well of the House, around household dinner tables and office water coolers. Any time a pundit, a politician, or anyone else says that this recession is the fault of the free market, that President Obama has inherited the problems of a conservative ideology, conservatives of every stripe can answer with force and facts:
Conservatism has nothing to apologize for.
It was not conservatism that foisted Fannie Mae and Freddie Mac onto the national credit market. It was not conservatism that shook down the nation’s banking system with the Community Reinvestment Act.
Every problem now plaguing our economy can be directly traced to some government policy that was passed over the vehement objections and prescient warnings of principled conservatives.”
Note that nowhere in the last statement does Sen. DeMint note that the absence of regulation of the bond market contributed to the market collapse. The actually reason for the collapse was more broad then the narrow cause championed by Sen. DeMint and conservatives. First, there were the reckless lending practices such as not checking applicants’ credit scores or their ability to pay. Next, Rating BBB bonds made up of risky loans as AAA bonds. Finally, the, the creation synthetic products such as collateralized debt obligations and credit default swaps that were based on these bonds over leveraged the investment houses. This led to the collapse of economy not lending to poor people, rather irresponsible lending and selling of mortgages to generate fees. Read Michael Lewis’ account in Conde Naste Porfolio
The New York Times ran an editorial written by former vice chairperson of the Federal Reserve Alan Blinder. Blinder notes six avoidable errors that if attended to at the time would have lessened the economic crisis.
“Our capitalist system did not condemn us to this fate. Instead, it was largely a series of avoidable — yes, avoidable — human errors. Recognizing and understanding these errors will help us fix the system so that it doesn’t malfunction so badly again. And we can do so without ending capitalism as we know it.”
The following are the six errors that have been committed that largely contributed to the economic fallout:
· WILD DERIVATIVES In 1998, when Brooksley E. Born, then chairwoman of the Commodity Futures Trading Commission, sought to extend its regulatory reach into the derivatives world, top officials of the Treasury Department, the Federal Reserve and the Securities and Exchange Commission squelched the idea.
· SKY-HIGH LEVERAGE The second error came in 2004, when the S.E.C. let securities firms raise their leverage sharply. Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the S.E.C. and the heads of the firms thinking? Remember, under 33-to-1 leverage, a mere 3 percent decline in asset values wipes out a company. Had leverage stayed at 12 to 1, these firms wouldn’t have grown as big or been as fragile.
· A SUBPRIME SURGE The next error came in stages, from 2004 to 2007, as subprime lending grew from a small corner of the mortgage market into a large, dangerous one. Lending standards fell disgracefully, and dubious transactions became common.
· Why wasn’t this insanity stopped? There are two answers, and each holds a lesson. One is that bank regulators were asleep at the switch. Entranced by laissez faire-y tales, they ignored warnings from those like Edward M. Gramlich, then a Fed governor, who saw the problem brewing years before the fall.
· The other answer is that many of the worst subprime mortgages originated outside the banking system, beyond the reach of any federal regulator. That regulatory hole needs to be plugged.
· FIDDLING ON FORECLOSURES The government’s continuing failure to do anything large and serious to limit foreclosures is tragic. The broad contours of the foreclosure tsunami were clear more than a year ago — and people like Representative Barney Frank, Democrat of Massachusetts, and Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, were sounding alarms.
· Yet the Treasury and Congress fiddled while homes burned. Why? Free-market ideology, denial and an unwillingness to commit taxpayer funds all played roles. Sadly, the problem should now be much smaller than it is.
· LETTING LEHMAN GO The next whopper came in September, when Lehman Brothers, unlike Bear Stearns before it, was allowed to fail. Perhaps it was a case of misjudgment by officials who deemed Lehman neither too big nor too entangled — with other financial institutions — to fail. Or perhaps they wanted to make an offering to the moral-hazard gods. Regardless, everything fell apart after Lehman.
· TARP’S DETOUR The final major error is mismanagement of the Troubled Asset Relief Program, the $700 billion bailout fund. As I wrote here last month, decisions of Henry M. Paulson Jr., the former Treasury secretary, about using the TARP’s first $350 billion were an inconsistent mess. Instead of pursuing the TARP’s intended purposes, he used most of the funds to inject capital into banks — which he did poorly.
In the final analysis, the conservative belief that the markets are always self-correcting or that tax cuts and smaller government are the solution to the nation’s ills needs rethinking.
Conservatives such as Sen. DeMint need to stop trying to drive on the same old retreads!