Jack Rasmus

COMMENTARY: After being assured by politicians that the economic ceiling would fall in if the deficit wasn’t cut by trillions in order to raise the debt ceiling, business and the markets yawned with the passage of the deal. Was it perhaps not such a pending crisis as we were led to believe? It had similarities to 2008 and then Treasury Secretary Paulson demanding a $700 billion blank check to bail out the banks, or economic armageddon would quickly happen. But business and markets didn’t yawn at reports this week indicating a collapse of global manufacturing; or the plunge in consumer spending. They choked and then screamed. The real economy is accelerating its slide toward double dip, as this blog post argues, which was written earlier this week and appeared on the public site, Truthout.

‘America’s 4-D Economy: From Debt Deals to Double Dip’, by Jack Rasmus, copyright August 2011

With the debt ceiling agreement almost a certainty this past Sunday evening, the expectation was the markets and the economy would rebound briskly the following day. After all, werent we all bombarded for weeks with the message that if the debt ceiling were not raised, the economic sky would fall in? The economy would tank? Economic Armageddon was coming? So if we raised the debt ceiling, the markets would rebound, right?

On Monday the stock market at first did rebound on the news of the imminent debt deal, but only briefly and modestly. It quickly turned around within hours on Monday, declining sharply by the end of the day. Why? The debt deal in the bag by Monday. The recalcitrant House and Teapublicans voted for it. Only the formality of the Senate voting on Tuesday remained. Why wouldn’t the markets, falling most of previous week, snap back with the conclusion of the debt deal?

Instead the markets slumped badly by the close of business on Monday, not because of the debt deal but in response to a report late that morning showing the July U.S. manufacturing activity index had fallen to 50.9% in July from 55.3% in Junethe largest collapse in years and to the lowest level since June 2009 which was the trough of the recent recession. 50% for the manufacturing index represents no growth. That’s stagnation. Even more serious, in the report future orders for manufactured goods fell to 49.2%–a clear contraction–the first such since June 2009 as well. In other words, in terms of manufacturing at least, the economy now was right back where it was two years ago.

No wonder the stock market shuddered on Monday, notwithstanding all the good news about the debt deal. The performance of the real economy was far more important and real than all the huff and puff about debt ceilings and defaults by the US government. The alleged good news of the debt agreement was overwhelmed by the indisputable real news the real economy was heading for a relapse.

And it was not just the US economy. Not reported by the US press on Monday was that the US manufacturing indexs nearly 5% points drop was being echoed at the same time by a decline in global manufacturing–in Europe, UK, Asia, even China. All reportedly had begun to slip.

On Tuesday the debt ceiling deal was voted up by the Senate and signed by Obama into law. But the New York Stock Exchange fell by another 265 points and the Nasdaq by a whopping 75. Wait a minute! The debt deal was officially done, wasn’t it? No chance of a reversal. So why did the markets finally respond so negatively? The real reason was a further report on Tuesday. Consumer spending–representing 70% of the economy–fell by 0.2%, the first drop since September 2009.

In the face of this evidence of immanent contraction of the US economy, Congress voted to cut deficits in the amount to $1 trillion for certain, with another minimum $1.2 trillion minimum in spending reductions due before the year end. Granted, much of that $2.2 trillion will be spread over ten years. But there will be about $30 billion in immediate cuts this year from the initial $1 trillion deficit reduction. Most of that will come from education. And still more, and bigger, first year spending cuts before year end.

The second round of $1.2 trillion in cuts will likely equal at least another $50-$100 billion in the short term, most of that from Medicare-Medicaid and a lesser, token amount from Defense, this writer predicts. That’s about $100 billion in total federal government spending cuts impacting the economy this coming year. Add to that the $38 billion cuts in spending enacted last spring in revisions to the 2011 budget, plus another $100 billion spending cuts forcasted by state and local governments the coming first year, and what you get is around $250 billion in spending reductions for the coming year.

But this $250 billions impact must be multiplied to get its true, final economic effect. Economists estimate the multiplier from government spending at about 1.5. That means for every $1 cut in government spending, about $1.5 dollars are taken out of the economy. The first year of cuts are therefore $375-$400 billion in terms of their economic effect. Ironically, that’s about equal to the spending increase from Obama’s 2009 initial stimulus package. In other words, we are about to extract from the economy, now showing multiple signs of weakening badly, the original spending stimulus of 2009!

As others have pointed out, that magnitude of spending contraction will result in 1.5 to 2 million more jobs lost. That’s also about all the jobs created since the trough of the recession in June 2009. In other words, the jobs markets will be thrown back two years as well.

With the debt ceiling deal, the US Congress and President have crossed the bridge into parched desert of austerity. This is an historic juncture, shifting from stimulus to grow the economy out of recession to austerity to thrust it back into recession! But the politicians of both parties are due for a rude surprise. Deficit cutting and austerity will result in worsening deficits and more debt, not reductions in deficits. An economy cannot cut its way out of a deficit and recession any more than a company can cut its way back to long run profitability. It can only grow its way out by generating more revenue. For a company, that means selling more products and sales revenue; for the economy that means creating more jobs and raising tax revenue.

Austerity solutions are a dead end. If anyone believes austerity solutions are the answer to recovery, they should simply look at Greece, Ireland, and the rest of the periphery of the Eurozone. Imposing austerity there has resulted in a further deepening recession, falling tax revenues, and still worsening deficits and debt. Ditto for the conservatives in the United Kingdom, whose recent deficit cutting is now thrusting that economy back into recession. The same is inevitable for the U.S. if it continues toward austerity, deficit and spending reductions, as a way to recovery. To employ a metaphor, austerity is like trying to win a race by shooting yourself in the foot at the starting block.

Nevertheless, it appears more austerity is on the agenda in the U: the next round in the 2012 budget negotiations due by October 1; further in the December cuts that will be mandated by the so-called Bipartisan Committee; and following that still more cuts, this writer predicts, in 2012, as the recession wipes out a good part of the prior spending cuts.

More cuts will follow because, despite the deficit cutting, the US budget deficit will now actually worsen and not improve. As the economy slides, tax revenues will fall below those officially projected, generating a call for even more cuts from those who believe deficit and debt reduction will restore business confidence and therefore investment and recovery.

All the talk about restoring business confidence is, in other words, simply a confidence game. Collapsing business confidence is a consequence not of deficit cutting but of consumers being unable to afford to buy their products. Want to change business confidence? Help consumers buy their products and see how fast that confidence returns. Adding 2 million more to the total jobless will only reduce consumers income further, exacerbate the decline in consumption already underway, and result in turn in a further deterioration of business confidence.

The past few days the US economy has been dealt several severe blows in the reports on manufacturing decline and consumers retreat. A one-two punch. Over time the realization will grow that the deficit cuts–$1 trillion now and another $1.2 trillion in a couple months will do great harm to the economy. The cuts represent another major body blow to the economy that is already rapidly weakening. The markets know this. Business confidence knows this. Apparently only the politicians don’t.

And more is yet to come. On Friday the jobs report for July is due for release. July and August employment reports will show even more clearly the serious extent of the economic slide now underway. The coming jobs reports could prove a knock-out blow to the economy. The big money investors are already betting on that outcome. Dump your stocks and stuff your closet with bonds! The recent debt ceiling debate, in retrospect, appears as just the opening act, with the amateurs (Congress and Obama) flailing at each other until finally exhausted and calling it a draw, returning to their respective corners to catch their breath. The main event is yet to come.

In early 2009 Obama implemented his economic stimulus and recovery plan. The Congress and US Treasury spent $2 trillion and the Federal Reserve more than $9 trillion to bail out the banks. What we got was the weakest and most lopsided recovery since 1940. After a brief twelve months the economy sagged again, last summer 2010. Followed by $600 billion more Fed stimulus, and $350 billion more tax stimulus at year end 2010, which included $250 billion in Bush tax cut extensions. The result? The economy slowed again, even more quickly, to less than 1.0% growth in GDP the first six months of 2011. The current third quarter, July-September 2011, will likely prove worse. Stepping into that ring are Congress and Obama. Double Dip recession will be their joint legacy. And if the banking system implodes in Europe, the outcomes will be even worse…much worse.

Jack Rasmus
August 2, 2011

Read Full Post »

COMMENTARY:

This evening, Sunday, July 31 an apparent ‘deal’ has been reached between Democrats and Republicans on raising the debt ceiling to avoid default, in exchange for $1 trillion in spending cuts. The spending-only cuts represent the long maintained Republican position. No tax hikes. This was essentially the positions reached by the two parties, Reid in the Senate and Boehner in the House last Friday, July 29. Only two other issues remained at that time: Reid’s additional provision for a further $1.044 trillion in defense spending cuts and the Obama demand that no more debt ceiling issues must interfere with the upcoming election season between now and November 2012. Tonight, Reid substituted his Defense cuts with a ‘face saving formula’, in exchange for which the Republicans agreed not to whip him and the Timidcrats again with the debt ceiling tactic before next elections. Both parties then kicked the debt reduction can down the road until November and a report by a new BiPartisan Debt commission submits their recommendations to Congress–for an up or down vote! So much for Democratic debates on what will prove to be massive cuts in social security, medicare and medicaid by year end.

‘The Trillion DOllar Debt Ceiling Deal of July 31’ by Jack Rasmus, copyright July 31, 2011

Sunday evening, July 31, President Obama and Senate Majority and Minority leaders, Harry Reid and Mitch McConnell, announced they had reached an agreement on cutting $1 trillion in spending in exchange for raising the debt ceiling. House Speaker, Boehner, indicated he was also in agreement, subject to voting to take place in the House on Monday.

This latest deal is essentially the same that was reached by Harry Reid in the Senate on July 29 and Boehner in the House on July 27, with two major changesone favored by the Republicans and another by Obama. These two changes were then traded off this weekend, bringing the parties to a deal.

Boehner and Reid essentially came to an agreement last Friday, July 29. Their respective July 29 (Reid) and July 27 (Boehner) positions called for $917 to $927 in spending cuts, only $10 billion apart. Both proposals contained no reference to tax loophole closings. The tax hikes idea was given up by Obama and the Democrats early last week, bringing the Democrats to essentially the Republican position on spending vs. tax hikes. The only substantive difference as of July 29 between the two was that Reid also proposed $1.044 trillion in additional cuts in Defense spending, as well as a measure that prohibited a re-opening of the debt ceiling issue before the 2012 November elections.

Todays Boehner-Reid final agreement effectively drops explicit cuts in Defense, another Republican position all along. Reid’s defense cuts are now replaced with triggers in defense spending reduction. The triggers concept has been a maneuver used by Congress on occasion in the past. It is designed to let one party save face, allowing it to appear that their provision is retained in the bill, when in reality it will never be implemented. In fact, triggers have never been implemented in any instance since 1980 in which they were included in a spending bill.

With Defense spending cuts taken effectively off the table this weekend, the only remaining substantive issue was whether the debt ceiling would be allowed to come up as an issue before the 2012 elections. Republicans now agree it will not.

This Republican shift means Reid’s previously proposed $1 trillion additional cuts in Defense appears, in retrospect, to have been a trading item and tactical maneuver all along to get the Republicans to agree not to revisit the debt ceiling issue again before the coming 2012 elections.

But the Republican leaders in the House and Senate don’t need a debt ceiling issue again to get further cuts. The 2012 budget deadline of October 1 will do just as well for a threat to shut down the government.

So, in summary, it appears the deal just negotiated means both parties agree on cutting $1 trillion in spending only, with no tax hikes. The Republicans will shift to the 2012 budget deadline for a new hammer to extract extra spending cuts. Defense will remain effectively untouched. And, in exchange for $1 trillion in cuts and no tax hikes and leaving defense spending untouched Obama gets an agreement not to raise the debt ceiling issue again before his next election. But don’t think that’s the end of the story. Its just the beginning.

The bigger attack on social security, Medicare, Medicaid is still to come. The next round in what amounts to as class economic warfare by legislation is the 2012 budget negotiations that are supposed to conclude up by September 23. Republicans will get another bite of the apple in spending only cuts at that time. And Obama and Democrats will likely cave in to those demands yet again, as they have repeatedly the past year.

But the even bigger bite will come as a result of another provision in today s agreement: the creation of a so-called Bipartisan Commission to reduce the debt and deficits by even greater magnitudes. That Commission will make still further major proposals for cuts by November of this year, to be voted on by Congress before year-end.

Following Senators Reid and McConnell, President Obama spoke on national TV tonight to endorse the tentative Boehner-Reid agreement and to announce the Bi-Partisan Debt Reduction Commission. In his brief comments this evening he employed an important phrase that TV commentators mostly overlooked. He said, The Commissions proposals will be submitted for an up or down vote only by members of Congress. That means some small group–no doubt appointed by him or Congressional leaders–will now decide solely between themselves composition and magnitude of cuts in Medicare, Social Security, Medicaid, how much tax loopholes will be closed, and how much Defense spending will be cut. The rest of Congress will then be limited to voting yea or nay and that’s it.

The conservative composition of such appointed commissions in the recent past are well known. There was the Simpson-Bowles deficit commission appointed by Obama in 2009 that was lopsidedly conservative. And Obama’s commission to recommend Health Care legislation that was composed of mostly conservative Republican and Democrats. The forthcoming Bipartisan Commission will almost certainly assume the same conservative-leaning composition. We can expect $2 in cuts in Medicare and Social Security for every $1 in tax loophole closing and Defense spending reductions…if were lucky.

This deal of the past weekend to raise the debt ceiling in exchange for $1 trillion in spending cuts–with no tax hikes or defense cuts–shows clearly that politicians in Washington are concerned first and foremost with their re-elections. Democrats don’t want to be confronted with another debt ceiling debacle during their re-election campaign. Both Republicans and Democrats are, furthermore, intent on protecting their Defense industry friends, and on ensuring their corporate campaign contributors don’t have to pay their fair share in taxes. The rest of America gets to pay the bills and pay the price.

Read Full Post »

COMMENTARY:

While everyone is focusing on the August 2 debt ceiling default deadline looming behind the current deficit cutting debates in Congress, the real blow to awareness how weak the US economy is today may come with the date of August 6 quickly to follow. That’s when the July jobs report is released. July and certainly August reports will reveal the depth of the deteriorating jobs crisis that this writer has been predicting since last January. While the August 2 deadline will certainly impact economic consciousness in a negative way, and already has begun to do so, the August 6 jobs report may just push it over the cliff. Businesses and consumers are already contracting spending and future plans for investment and consumption in the US in anticipation of August 2. But August 6 may have any even greater impact. The US economy has been weakening all year. The deficit cutting debates have added to the decline. The actual cuts forthcoming after the psychological impact of the deficit debates will exacerbate that decline still further. Meanwhile, manufacturing is stagnating as the global economy slows and housing construction remains in depression levels with no sign of any recovery whatsoever. If the deficit cutting is the body blow, ‘left hook’ to the economy, the ‘right cross’ of the jobs markets accelerating decline may just send the economy to the mat.

‘Deficit Debates vs. Jobs Report: ‘Left Hook’ and ‘Right Cross’ to the US Economy’ by Jack Rasmus, July 27, 2011

Why should the Teapublicans agree to Obama and Democrats (aka Timidcrats) offers to settle the debt ceiling issue? Any seasoned negotiator can see that by refusing to agree to all Democrat proposals since last spring Teapublicans have been able to get Obama and the Democrats to offer even more in spending cuts. They have succeeded as well in getting the Democrats to drop all demands for raising taxes on the rich and corporations. So why should they change that strategy?

Here’s a brief history of the past three months of the deficit reduction charade:

Last spring, Obama and the Democrats caved in on retroactive cuts in the 2011 budget. Boehner wanted $39 billion and he got $38. In June, in back door negotiations with Vice-President Biden, the Republicans demanded no tax increases in any package. Biden agreed to $2 trillion in spending cuts with no tax hikes at that point. After that, you could forget any tax hike idea. Republicans knew that the Democrats would drop it in the end.

Obama then jumped into negotiations in July, trying to resurrect the idea of some tax revenue and trying to extend the time limits past the 2012 election period. He upped the ante, trying to entice the Republicans with massive spending cuts and token tax hikes in exchange for taking the deficit cutting subject off the table until after the election. Obama’s July cuts amounted to 87% in a $4 trillion package with doubtful measures about closing tax loopholes for the remaining 13%.

But Boehner still refused and walked out. After all, the walking out tactic worked the month before with Biden. It would work again.

At this point, just a few weeks ago, the Gang of Six jumped in, proposing a package much like Obama’s. The President quickly endorsed it as a way to resurrect his original proposal. The Republicans refused again. Why should they. They already walked out on a similar deal. And Obama offered more.

And so Harry Reid, the lead Democrat in the Senate, has proposed $2.2 trillion in spending cuts, again with no tax hikes, not even loophole closings this time. Of course, the Reid proposal includes $1 trillion in cuts in war spending, which the latest Boehner-Teapublican proposal has adamantly ruled out. In their latest ‘cut, cap and balance’ proposal, Boehner and Teapublicans specifically exclude any cuts in war or Pentagon spending from their deficit spending cuts.

Boehner’s most recent proposal of Monday, July 26, amounted to only $850 billion in spending cuts, according to the analysis of the Congressional Budget Office, while Reid’s was $2.2 trillion. That provided the opening for Teapublicans to demand Boehner up his proposed cuts. Boehner will now demand even more spending cuts.

The Republicans have won the debate over whether tax hikes will be in any spending package. Obama, Reid, and the Democrats have totally caved in on that issue at this point. The debate is now just over how much spending cuts, whether defense will be included or not, and how much will Social Security, Medicare, and Medicaid be cut.

But what do the Teapublicans and Obama really want?

The primary objective in these negotiations for Obama is now clearly his demand that these negotiations conclude further deficit cutting until after the 2012 elections. Obama is willing to cut social programs by massive amounts in order to gain what he perceives is a necessary election campaign period advantage of no more debates or cuts until December 2012.

Conversely, what the Teapublicans want is more. More spending cuts, now that they’ve won the tax hike issue. And no agreement to stop further demands for spending cuts until after the elections. They want to come back to the trough and demand additional spending cuts before the 2012 elections in three more bites: a demand for more cuts as the 2012 budget is concluded October 1; another reopener for cuts in February, and a third go at it in September 2012 as the 2013 budget is being debated by October 1, 2012.

So this is now largely about election year maneuvering. Either way, however, it will mean disastrous consequences for the US economy. The debates on deficit cutting are already producing a serious contraction in consumer and business spending. If business has been hoarding $2 trillion and not spending on investing in the US–which has in fact been the case over the past year–they will now hoard even more. Ditto for banks refusing to lend to small business for investing. And that’s just the impact on the real economy from the debates, not the actual cuts in government spending which, when enacted, will result in even deeper impacts on the economy.

These economic effects, moreover, come at a time when the US economy has been heading toward a double dip anyway due to causes independent of the deficit cutting debates. The jobs markets are entering a triple dip. Housing is declining again. Manufacturing has leveled off. Foreign demand for US goods is rapidly declining, as China, India, Europe periphery slow or sink into renewed recession. State and local governments accelerate their cuts in spending and raise fees. And the American consumer–70% of the economy–faces declining real income as prices for gasoline, food, healthcare, education all continue to escalate.

Everyone is focused on the deficit debate issue as the August 2 default deadline approaches. But that is the wrong date. August 2 will not result in a default, which technically means either the interest or principle on a loan is renegotiated. The US will not technically default. There may be some short delay in payments, but not a true default. That does not mean, however, the stock and bond markets will react negatively. They will. We are about to witness a major contraction of the stock markets and decline in the value of US bonds. That will contribute as well to an economic slowdown and double dip.

But readers should watch what will happen on Friday, August 6, when the jobs numbers for July come out.

The US economy is like a punched-out fighter in the 8th round. He’s been knocked down early in the bout (2008), sent to his knees again (summer 2010), and now the Teapublicans have dealt a left hook to the body (as Obama and Timidcrats dropped their guard) with the debt ceiling debates. But the knock out blow may prove to be the coming right-cross with the August and September jobs reports. The now staggering US economy will drop to its knees yet again, a third time. That’s called a double dip recession.

Jack Rasmus, July 27, 2011

Read Full Post »

COMMENTARY:

There has never been a recovery from the current recession, notwithstanding official declarations that the recent recession ended more than two years ago in June 2009. It all depends how one defines and measures recession, and GDP analysis and even the NBER’s broader analyses, are notoriously deficient in defining an end to recession. Since June 2009 the housing market has already experienced a double dip, as has the jobs market. The latter is now well on its way to a triple dip. The jobs, housing, and local government crises have together prevented any sustained recovery. And now Congress and the President, with their myopic fixation on deficit cutting, are all but guaranteeing a double dip. Add to that the progressive slippage of other economies like Japan, Australia, the UK, and Euro periphery deeper or into recession, and the rapid slowdown of growth in China, Brazil, India, plus the EUs slouching toward a banking implosion–and you get the overwhelming drift toward global double dip. Here s the hard, documented facts why the US and global economy are on the road to an inevitable official double dip.

For the full length 5,000 word feature article go to Jack’s
kyklosproductions website:

http://www.kyklosproductions.com./articles.html

Read Full Post »

COMMENTARY:

Today, July 22, the press is reporting an pending deal between Obama and Boehner to cut $3 trillion in spending programs only in exchange for raising the debt ceiling and averting default. If Boehner takes it to a House vote, this will represent the total capitulation of Obama to the Teapublicans’ long standing position of spending cuts only (mostly Medicare, Social Security, Education, etc.) with no accompanying tax increases. It appears Obama is about to do this. If he does, it will mean disaster for Democrats in Congress. Should the Teapublicans accept the ‘cuts only’ deal, then the Democrats in Congress will be placed in the untenable position of approving the cuts and ending forever their avowed opposition to cutting social security and medicare; or, they oppose the $3 trillion cuts and they then assume the blame for a debt ceiling default and take this charge from the Teapublicans onto themselves. For Congressional Democrats it’s a ‘lose-lose’ proposition, and they have their President to thank for it. Meanwhile, Obama gets more corporate campaign contributions and appeals to the independent-moderate Republican vote.

‘OBAMA vs. the DEMOCRATS’ by Jack Rasmus, July 22, 2011

Today, Friday July 22, Obama and House majority leader, Boehner, are reportedly about to agree to a $3 trillion spending cuts only deal. Their original agreement earlier this month, which blew up due to Teapublican radicals opposition, called for a $4 trillion combined package of $3 trillion in cuts with $1 trillion from tax loophole closing to raise revenues. Now Obama is about to drop raising tax revenues altogether to get an agreement with Boehner and the Teapublicans to raise the debt ceiling.

Last spring he caved in and gave the House radicals and Boehner $38 of the $39 billion in spending cuts in the 2011 budget they were demanding from a reopening of last years budget. Now it looks like Obama is about to give them exactly what they want yet again! Only now its 100 times as large.

This $3 trillion spending only proposal will likely be agreed to by the House radicals if Boehner takes it back for a vote. After all, it conforms to their central principle all along. Teapublicans and the House have consistently demanded spending only cuts and no tax revenues. Tax revenue discussions will be addressed after the $3 trillion in spending cuts and debt ceiling is raised, according to business press reports. That will require a major revision of the tax code to follow later this year.

But only the naïve can believe that when the tax code revisions are addressed that the House radicals wont demand even further spending cuts. Already some of the most extreme right-wingers in the House, and Senate, among their ranks have introduced proposals to cut spending by $5 and even $9 trillion.

Future tax code revisions will begin with the Gang of Six program that was raised earlier this week. The Gangs deal, by the way, is essentially the Simpson-Bowles Deficit Commissions recommendations on tax code revision published last November 2010. What are these Commission-Gang of Six tax proposals? They arent simply closing tax loopholes. The Simpson-Bowles, now Gang of Six, tax program calls for additional massive tax cuts for the rich and corporations.

For example, the Gangs plan reduces the top marginal personal income tax rate from its current 35% to 23%-29%. Thats hundreds of billions in more tax cuts for the rich, in addition to the roughly $500 billion in continuing tax cuts for the rich and corporations passed less than a year ago as a result of Obama’s two year extension of the Bush tax cuts last December 2010.

But that’s not all. The Gang of Six plan also calls for a similar cut in the corporate tax rate, from 35% to 23%-29%. That adds still more hundreds of billions added to the deficit. Then theres their proposed abolition of the Alternative Minimum Tax that requires those earning more than approximately $150,000 a year to pay some amount of tax despite credits, exemptions, and loopholes. That’s potentially worth another $1.7 trillion. These three measures alone account conservatively for another $2.5 trillion in tax cuts for the wealthiest over the next decade.

How does the Gang of Six plan propose to pay for these additional $2.5 trillion tax cuts for the rich and their corporations? By mostly cutting Medicare, Medicaid and Social Security, plus across the board cuts in virtually all government departments. How much does the Gangs plan call for in defense spending cuts? Only $8 billion a year.

And remember, that’s spending cuts in addition to the proposed $3 trillion in spending cuts that Obama and Boehner today are reportedly about to agree to.

So, after Obama agrees to cut $3 trillion in spending only and kicks the tax revenue can down the road, bargaining begins again on how to cut spending even more to pay for another $2.5 trillion in tax cuts.

By dropping all demands to raise tax revenues now and by agreeing with Boehner to cut $3 trillion in spending immediately, Obama is essentially adopting the Teaparty proposals. But he is also painting himself and the Democratic Party into an impossible corner.

By proposing $3 trillion in spending cuts only, should the House radicals agree to the deal, Obama maneuvers his own Democrats in Congress into a lose-lose position. They either agree immediately to massive $trillion dollar spending cuts (including Medicare, Medicaid, education, etc.), or they oppose the cuts and consequently take the blame for holding up the debt ceiling increase. Instead of Republicans getting blamed for debt ceiling default, now the Democrats will appear to be the cause of holding up a deal and for a possible default.

Obama’s latest move strategically means he has put his own party in a box. Democrats in Congress will take the heat and suffer the losses in the next election if they agree to massive spending cuts that include Medicare and other programs. Democrats will also no longer appear as the defenders of social security and medicare against mercenary Republicans bent on destroying those programs. But Obama by this move gets to appear as the big spending cutter. That will no doubt translate into more corporate campaign contributions. It is a move designed to appeal to the independents and moderate Republican vote in the next election, at the expense of his own base. Obama and his advisers are no doubt betting his own Democratic voter base will stick with him against some crazy right wing opponent in the presidential elections. But the Republicans will not prove so stupid to run a Bachmann type. And Obama’s base, which already last year showed serious signs of being demoralized by the Presidents constant concessions, and stayed home in last years midterm elections, will once again not come out to vote in 2012. They will stay home.

This is 1978-1980 redux and Obama should change his first name from Barack to Jimmy. Or perhaps to Jimmy Bill Obama. That gives him an acronym of JBO, which is jobs misspelled and backwards. But that’s another problem with his administration, as next months jobs data will continue to show.

Jack Rasmus
July 22, 2011

Read Full Post »

COMMENTARY:

In the latest twist of the on-going debt ceiling maneuvers between Timidcrats and Teapublicans today, July 19, the Senate’s ‘Gang of Six’ resurrected their proposals for resolving the current debates. Obama quickly embraced their views. What is not generally known is that he, Obama, the ‘Gang of Six’, and even House Teaparty radical, Paul Ryan, have all proposed a $4 trillion package deficit reduction! The only difference is how the amount will be distributed between spending cuts and tax hikes. In the post that follows, I predict the short term, immediate cuts in spending only being negotiated by Reid and McConnell in the Senate will go forward, and the resurrected $4 trillion Obama-Gang of Six proposals will quickly follow or be appended. The likely mix of spending to tax hikes will be 75%-87% in spending cuts and 13%-25% in tax hikes. The tax hikes will be loophole closings, but will be offset by more than corporate tax cuts in top corporate rates. Ditto for personal income tax loopholes and top rate reductions.

What Do Obama, the ‘Gang of Six’, and House Radical, Paul Ryan, All Have in Common?
by Jack Rasmus, copyright 2011

What do Obama, the Gang of Six, and House radical Teapublican, Paul Ryan, all have in common? They’ve all proposed a $4 trillion deficit reduction package. Does anyone think that is pure coincidence?

Obama’s tactical move today, July 19, along with the Senate Gang of Six, is to hitch his (and the gang’s) proposed $4 trillion proposed cuts to the current negotiations simultaneously going on between Reid and McConnell in the Senate to immediately cut spending by $1-$2 trillion in exchange for raising the debt ceiling.

Obama’s move shows clearly he does not want to take on deficit cutting piecemeal. He wants to get it all over at once and behind him before campaigning for 2012 begins in earnest. And he’s willing to offer big cuts in spending to get it done now, before the 2012 election cycle gets seriously underway after this summer.

The likely outcome of this ‘rush to get it done’ will be that the immediate, short term $1-$2 trillion in spending cuts being worked out by Reid-McConnell will still pass, while the longer term $4 trillion, now resurrected grand deal by Obama-Gang of Six will quickly follow. It may even be appended to the short term package.

While the short term package will be all spending cuts, the now revived $4 trillion grand deal package will contain some tax revenue raising. However, as previously noted, the tax revenues will be primarily tax loophole closings that are often difficult to collect and verify, while the tax code revision will include major reductions in the top personal and top corporate tax rates, both currently at 35%.

What might the likely relative proportion between spending cuts vs. tax loophole hikes look like in the final package? If Obama’s previous grand deal is any indication, it could look similar to that prior deal’s 87% spending cuts to 13% tax hikes. Certainly no less than a 75% to 25% mix.

It is no accident that the Gang of Six package is not available to the public yet. It is being kept under close wraps in the Senate. But already it has leaked out that the gang’s proposal includes a reduction in the top personal income tax rate from 35% to 29%. (The House Republicans have been calling for a 25% rate from the beginning. So that’s more than half way there before bargaining even begins.)

Of course, even at the current 35% top personal tax rate, that’s not what the wealthiest 1% taxpayers actual pay in federal taxes. In 2007 their effective income tax rate–i.e. what they really paid–was only 16.6%. This compares to a top rate of 24.2% for the same wealthiest 1% in 2000. Reducing the current 35% to 29%, as proposed by the Gang of Six, will likely therefore reduce that effective top rate even further, to the 12%-14% range.

Its not yet reported what the Gang proposal is for the corporate tax. But it is highly likely it proposes to reduce the top corporate tax rate by at least as much as the top personal income tax rate–i.e. from the current corporate top rate of 35% to a 29% rate; perhaps even lower in stages over several years. Business interests have been consistently calling for a 20% top corporate rate for the past year. If the top corporate rate is reduced to 29%, the net gain in after tax income realized by corporations will exceed the loophole closing measures. And if its reduced to less than 29%, to a low of 20%, it will far exceed the loophole closings.

The Obama-Gang of Six package also closely resembles the original proposals of the Simpson-Bowles Commission made public last November. Obama has always been comfortable with much of their recommendations. The Gang of Six’s original proposals were worked out last December, in an attempt to legislatively operationalize the Bowles-Simpson recommendations in the Senate. But the Gang did not press forward with their proposals while the House radicals were preoccupied with cutting the 2011 budget last spring by $38 billion.

It is likely the intent was to wait until after the debt ceiling was raised to reintroduce the Gangs proposals. But events became telescoped with the House radicals intent on provoking a near-default by playing chicken with the debt ceiling, and both Biden and Obama failing to get a deal with Boehner-McConnell last week.

So now we see the real plan once again emerging. All the House radical, teaparty huff and puff has been mostly theater, from the beginning up to the latest version of their  ‘cut, cap, and balance’ proposal and balanced budget nonsense. That’s been just playing to audience at home. But all the radical theater did conveniently provide excellent ‘crazy rightwing’ cover to Simpson-Bowles-Obama-Gang of Six proposals now once again coming to the fore. It has made the latter’s draconian $4 trillion package that is about to drive through Congress appear rational and reasonable.

In the end, however, the $4 trillion, mostly spending cuts, will devastate the economy. And when combined with the other three still unresolved mini-crises preventing sustained recovery of the US economy–i.e. jobs, housing-foreclosures-fiscal crisis of local government–will all but ensure a double dip recession on the horizon.

Jack Rasmus

Read Full Post »

COMMENTARY:

Since submitting to this blog last week the first version of this piece, fast developing events over this past weekend have confirmed some of the speculative points made in the original submission. Obama has reverted back to the original ‘Biden Proposal’ of last June, in which the Vice President agreed with the Teapublicans (new name for the now Teaparty-driven Republican party)to cut $2 trillion in spending–with no accompanying tax increases on the wealthy. Several respected news sources last weekend, like Reuters, report the discussions now underway between McConnell and Reid in the Senate involve a deal to cut spending only, perhaps equal to the size of this year’s budget deficit of about $1.6 trillion. Other spending only cuts may occur over the next year as the debt ceiling may need to be raised further. This represents the complete congruence of Obama and Democrat (now called the ‘Timidcrat’ party)on the budget question. The Teapublican position has always been spending cuts only and no tax hikes. The debt ceiling will be raised no doubt. Never was any that it would. What’s next? Obama thereafter will resurrect his $4 trillion ‘grand deal’, the next front on the budget wars. By the way, did anyone notice the $4 trillion is the same amount as Ryan’s proposed budget-deficit cutting plan last April? Now that Obama will cave in on the debt ceiling issue, the next crisis will be the passage of the 2012 budget due October 1. Meanwhile, the Teapublicans up the ante further, with Coburn proposing a $9 trillion spending only cuts package today.

Reading the Debt Ceiling Debate Tealeaves REVISITED
by Jack Rasmus, copyright 2011

This past June it leaked out that Vice-President Biden had secretly agreed with Republicans to $1 trillion in spending cuts in an effort to get them to agree to raise the debt ceiling. That was soon upgraded in rumors to Biden agreeing to $2 trillion. And there was no agreement by Biden from Republicans in exchange for equal tax hikes on the rich and corporations. It raised political eyebrows. It disconcerted the Democrat political base. Most did not believe it. It must not be correct, many mused. President Obama will straighten this out by taking over negotiations, the presidents supporters retorted.

President Obama did step in and take over negotiations with the Republicans directly. Many assumed when he did so that he did not agree with Biden’s massive concessions. There would be no agreement on cuts in social security and medicare, the Party faithful argued.

However, this assumption proved incorrect. Obama met Boehner on the golf course, and then over a weekend. It leaked a second time that Obama had himself in fact agreed with Boehner, not to $1 or $2 trillion but to a $4 trillion dollar grand deal. $3 trillion of that total was spending cuts, with at minimum $400 billion in cuts in social security and medicare front-loaded. Apparently, House Republican leader Boehner agreed in exchange for the $3 trillion cuts to $1 trillion in tax hikes in the form of closing the most egregious tax loopholes for corporations, investors, and corporate CEOs.

The $4 trillion grand deal blew up in both Boehners and Obamas faces. Both bases rose up. First the Republican and then more slowly the Democrat when the latter began to discover their $3 trillion was heavily social security and medicare cuts. It set off a firestorm within the Democratic party base and even lit some campfires within the moderates in the party in the House. Representing the Democratic mainstream within the House, Nancy Pelosi came out publicly rejecting any cuts in social security and medicare, adding she and her colleagues were not even in the loop as to the Obama-Boehner negotiations.

The Obama team then began back-tracking off its position, hurrying to find formulations that denied its $3 trillion, social security-medicare cuts position in the negotiations.

Enter the weekend of July 9-10 the real power behind the Republican Party–the moneybag campaign contributors–i.e. the powerful big bankers, Chamber of Commerce, Business Roundtable, big corporations and institutional investors. They had most to lose should the debt ceiling not be raised. We re talking real money here if bond prices collapsed and the stock market, already in decline, accelerated. Or if the banks in Europe collapse due to deepening debt problems in Greece, Spain, and now Italy. Pressure on Republican Senate, and to some extent House Republican leadership, intensified this past weekend. House leader Boehner and Senate leader McConnell blinked. In so many words, they today agreed to allow the debt ceiling to be raised and will no longer hold the raising as a tactic to extract no tax hike concessions from Obama.

Over the weekend of July 9-10 Democratic Party spin-doctors also went into action. The explanation over the cable shows and talk radio on Tuesday, July 12–now that the Republicans de facto had backed off their no debt ceiling increase position–was: See, this was all a clever tactic by the President, a real bargaining ploy, a maneuver all the time. President Obama never really meant or proposed to cut spending, social security and medicare in particular, by $3 trillion. The president knew all along the Republicans would not agree to any tax hike as part of the deal. That’s why he offered to cut $3 trillion in spending cuts. Now the Republicans gave up. The President won. Hooray!

As ex-Democratic Senate operative, Larry O’Donnell, now TV political talk show host, declared on his show Tuesday, July 12: Nothing was ever agreed to by Obama. O’Donnells explanation intended to absolve the Presidents offering draconian cuts in social security and medicare in exchange for a debt agreement. As O’Donnell repeated the spin-message: Nothings agreed to unless everything is agreed. And since everything was not agreed to by the Republicans, ipso facto O’Donnell’s contorted logic meant Obama never agreed to sacrifice social security and medicare to get a deal.

Following the collapse of the grand deal over the weekend of July 9-10, McConnell proposed a new solution–i.e. an escape window out of which Obama and the Republicans might scramble to avoid a debt default. McConnell proposed Congress authorize Obama to raise the debt ceiling and then take responsibility unilaterally for doing so. According to the McConnell proposal of last week, if Obama raised the debt ceiling unilaterally, the Republicans would vote against it knowing they could not over-ride a veto by Obama to sustain the ceiling increase. That way, the debt ceiling is raised and the Republicans can campaign they opposed it. Both parties jockeyed back and forth for the remainder of last week over this proposal, with point negotations now undertaken by Reid and McConnell in the Senate.

This weekend, July 16-17, it is becoming clear a deal along the lines of the McConnell proposal is now being crafted by Reid and McConnell. But the deal will have an historic twist, this writer predicts. Obama will try to one up the Republicans by appearing more Republican than the Republicans. He will unilaterally agree to cut the deficit by cutting spending by an amount roughly equal to the debt ceiling increase. The likely range of the spending cuts are $1 to $2 trillion. That’s just about what Vice President Biden had agreed to back in June. Biden’s June deal also proposed all spending cuts and no tax hikes.

Notice that’s all spending cuts with no closing of tax loopholes. This possible scenario–i.e. trillions in spending cuts with no tax hikes in exchange for Republicans allowing the debt ceiling increase–is in the process of confirmation just hours ago. Today, Sunday July 17, a report by the Reuters news agency stated that Reid wants up to $1.5 trillion in mandatory spending cuts, along the lines of those identified by a deficit-reduction group headed by Vice President Joe Biden.

By abandoning tax hikes, Obama in effect positions himself politically as a bigger spending cutter than the Republicans, that is more Republican than Republicans themselves. If this occurs, his policy will have thus shifted so far rightward that it becomes virtually indistinguishable from traditional Republican policy–i.e. no tax hikes and all spending cuts to reduce the deficit.

This will undoubtedly appeal to center-right Republicans and conservative leaning independent voters, as Obama’s current stable of corporate advisors are no doubt recommending. It will also likely result in more corporate campaign contributions. But it will further demoralize his Democratic voter base, who already showed signs of sitting home in the 2010 midterm elections.

Obama will undoubtedly justify this Republican fiscal policy by arguing if he hadn’t done this, a default would mean the economic sky would fall in and send the US into renewed recession. But we’ve heard the sky will fall in scare tactic before, in 2008 when then Treasury Secretary Paulson warned economic Armageddon if he didn’t get a $700 billion blank check from Congress to bail out the banks. Paulson got his check, and then didn’t spend it since the banks would not sell him their bad assets at their collapsed market values. Now the amount is at least double the $700 billion.

Obama’s pending deal to cut spending only by trillions of dollars is only the beginning. It is but the first tranche of more cuts to come between August 2 and the October 1 deadline date for concluding next years 2012 budget. The day after the debt ceiling is raised on August 2 the real negotiations will begin. Those real negotiations will pick up where Obama-Biden will have left off. On the table once again will be the Presidents proposals to cut $3 trillion more in spending.

Moreover, the Obama-Biden deal now in development to cut spending by $1-$2 trillion in exchange for Republicans not opposing the debt ceiling increase conclusively disproves the O’Donnell and Obama apologists spin last week that Obama’s $4 trillion grand deal proposal–including $3 trillion spending cuts including social security, medicare and Medicaid–was only tactical, a maneuver, and that he really never meant to propose to cut social security and medicare. But, yes, he did mean it. Yes, he did propose it. And yes he will propose it again once the debt ceiling is raised.

This writer predicts the coming cuts in social security and medicare between August 2 and October 1 will take the form of raising the retirement age to 70 and sharply reducing social security disability benefit payments as well. For medicare, it will mean retirees will have to absorb all future medicare cost increases for Part B (doctors costs) and pay substantially more deductibles for Part D (prescription drugs). The current monthly fee for Part B will initially double, from the current $95-$115 to more than $200-$250 a month per person. That way Obama can say he never cut medicare benefits and yet get massive reductions in medicare and social security spending ranging from $200 to 400 billion a year for the next decade.

In exchange for these cuts in medicare-social security, this writer predicts the Republicans will eventually agree in the 2012 budget to some token tax loophole closing for the rich and corporations. But the loophole closing will be more than offset in an agreement post-budget to a major overhaul of the general tax code. Tax code revisions are what Corporate America really wants, and they and Republican politicians have been calling for since 2010 as a priority. The tax code revisions, I further predict, will include reducing the corporate tax rate from 35% to 20%, lowering rates for foreign profits tax to placate the multinational corporations, and institutionalizing most of the Bush era tax cuts for investors for the next decade. What the politicians take from corporate interests with one hand, they will give back twice with the other.

This trading tax loopholes for tax rates and vice-versa has been the decades long tax shell game. Eliminate loopholes when they become bad public PR and thereby raise some tax revenue. Then give the tax revenue back to corporations, and then some, by lowering the corporate tax rate. Conversely, when public discontent grows with corporations not paying their fair share in tax rates, raise the rates but open up more tax loopholes. That’s how the net federal revenue from the corporate income tax has been reduced over recent decades from 20% of total revenue to barely 10%.

All these maneuvers are unfortunate and deceitful by both parties. For all it takes to resolve social security issue for the next 75 years is to raise the cap on the 12.4% payroll tax rate to cover all forms of income, capital forms and earned wages. That will not only cover all shortfalls but enable the lowering of the retirement eligibility age. And as for Medicare, all it takes to cover its shortfall is a mere 0.25% increase in the Medicare share of the payroll tax for the next ten years and another 0.25% starting in the eleventh year. But you wont hear that discussed in the upcoming negotiations to make seniors and retirees pay for the deficits they did not create.

To conclude, after agreeing to cut $38 billion from the 2011 budget mid-way in the fiscal year last April, cutting another $1-$2 trillion all but ensures there will be a double dip recession in the US in the next 12-24 months. We are witnessing the almost total morphing and congruence of Obama s fiscal policies with that of the Republican opposition. This shift to classic Republican policy positions is similar to what another Democrat president undertook when facing an earlier economic crisis. Im talking about Jimmy Carter. 1978. And we know what happened to him.

Jack Rasmus
July 17, 2011

Read Full Post »

COMMENTARY: Today, Tuesday July 12, with great fanfare the Obama administration and its spin doctors are trumpeting the cave in of House and Senate Republican leaders on the on-going debt ceiling debates. The latter have been holding up raising the debt ceiling, to extract trillion dollar cuts from Obama without any tax increases. In recent weeks in an attempt to move them off this position the Obama administration–first VP Biden and then Obama himself–have been making deep concessions, including offering trillion dollar cuts in social security and medicare spending, to get a debt ceiling deal. However, not wanting to risk a default that would cost them billions in bond losses, big capitalists have now straightened out their political minions in Congress and moved them off holding the debt ceiling hostage. Perhaps the rapidly deepening debt crisis in Europe now accelerating has moved the Republican corporate moneybags off their duffs to get the debt ceiling issue out of the way ‘just in case things get worse fast’ in the Eurozone, leading to a bank crisis that spills over unpredictably to the US? Whatever, the following is my analysis of what’s going on behind the scenes with the latest on the debt ceiling matter in the US, and my predictions where it’s all headed from today to October 1–the real drop dead date.

READING THE DEBT CEILING DEBATE TEALEAVES TO PREDICT THE FUTURE’ by Jack Rasmus, July 12, 2011

A few weeks ago in late June it leaked out that Vice-President Biden had secretly agreed with Republicans to $1 trillion in spending cuts in an effort to get them to agree to raise the debt ceiling. That was soon upgraded in rumors to Biden agreeing to $2 trillion. And there was no agreement by Biden from Republicans in exchange for equal tax hikes on the rich and corporations. It raised political eyebrows. It disconcerted the Democrat political base. Most did not believe it. It must not be correct. President Obama will straighten this out by taking over negotiations.

President Obama did step in and take over negotiations with the Republicans directly. Many assumed when he did so that he did not agree with Biden’s massive concessions. There would be no agreement on cuts in social security and medicare, the Party faithful argued.

However, this assumption proved incorrect. Obama met Boehner on the golf course, and then over a weekend. It leaked a second time that Obama had himself in fact agreed with Boehner, not to $1 or $2 trillion but to a $4 trillion dollar grand deal. $3 trillion of that total was spending cuts, with at minimum $400 billion in cuts in social security and medicare frontloaded in the first few years. Apparently, House Republican leader Boehner agreed in exchange for the $3 trillion cuts to $1 trillion in tax hikes in the form of closing the most egregious tax loopholes for corporations, investors, and corporate CEOs.

The grand deal blew up in both Boehner’s and Obama’s faces. Both bases rose up. First the Republican and then progressively the Democrat, when the latter began to discover their $3 trillion was predominantly social security and medicare cuts. It set off a firestorm within the Democratic party base and even lit some campfires within the moderates in the party in the House. Representing the Democratic mainstream within the House, Nancy Pelosi came out publicly rejecting any cuts in social security and medicare, adding she and her colleagues were not even in the loop as to the Obama-Boehner negotiations.

The Obama team then began back-tracking off its position, hurrying to find formulations that denied its $3 trillion, social security-medicare cuts position in the negotiations.

Enter now the past weekend the real power behind the Republican Party–the moneybag campaign contributors–i.e. the powerful big bankers, Chamber of Commerce, Business Roundtable, big corporations and institutional investors. They had most to lose should the debt ceiling not be raised. Were talking real money here if bond prices collapsed and the stock market, already in decline, accelerated. Or if the banks in Europe collapse due to deepening debt problems in Greece, Spain, and now Italy. Pressure on Republican Senate, and to some extent House Republican leadership, intensified this past weekend. House leader Boehner and Senate leader McConnell blinked. In so many words, they today agreed to allow the debt ceiling to be raised and will no longer hold the raising as a tactic to extract no tax hike concessions from Obama.

Today Democratic Party spin-doctors also went into action. The explanation over the cable shows and talk radio on Tuesday, July 12–now that the Republicans de facto had backed off their no debt ceiling increase position–was: See, this was all a clever tactic by the President, a real bargaining ploy, a maneuver all the time. President Obama never really meant or proposed to cut spending, social security and medicare in particular, by $3 trillion. The president knew all along the Republicans would not agree to any tax hike as part of the deal. That’s why he offered to cut $3 trillion in spending cuts. Now the Republicans gave up. The President won. Hooray!

As ex-Democratic Senate operative, Larry O’Donnell, now TV political talk show host, declared on his show Tuesday night:  “Nothing was ever agreed to by Obama”.  O’Donnell’s explanation was intended to absolve the President offering draconian cuts in social security and medicare in exchange for a debt agreement. As O’Donnell repeated the spin-message: “Nothing’s agreed to unless everything is agreed”.  And since everything was not agreed to by the Republicans, ipso facto O’Donnell’s contorted logic meant Obama never agreed to sacrifice social security and medicare to get a deal.

But the gutting of social security and medicare is not over. The negotiations have just begun anew. All that’s changed is that big money bag corporate campaign contributors arm-twisted their Republican politicians to drop the debt ceiling as hostage factor in the debt debate and negotiations.

The day after the ceiling is raised, and it soon will be, the real negotiations will begin. Those real negotiations will pick up where Obama-Biden left off. On the table once again will be the President’s proposals to cut $3 trillion in entitlements. That will be the start point for negotiations, not the end point.

Once that $3 trillion in cuts and the evisceration of social security and medicare is back on the table, that will conclusively disprove O’Donnell’s and Obama administrations spin message that Obama’s proposals to cut social security and medicare was only tactical, a maneuver, and that he really never meant to propose to cut social security and medicare. But, yes, he did mean it. Yes, he did propose it. And yes he will propose it again. And once its back on the table, that means it was never a mere maneuver, that it was fully intended.

The next act in the cut the deficit follies will begin the day after the debt ceiling is passed. The new deadline will be the deadline for passing the federal budget for 2012, which begins October 1.

This writer predicts the coming cuts in social security and medicare will take the form of raising the retirement age to 70 and sharply reducing social security disability benefit payments as well. For medicare, it will mean retirees will have to absorb all future medicare cost increases for Part B (doctors costs) and pay substantially more deductibles for Part D (prescription drugs). The current monthly fee for Part B will initially double, from the current $95-$115 to more than $200-$250 a month per person. That way Obama can say he never cut medicare benefits and yet get massive reductions in medicare and social security spending ranging from $200 to 400 billion a year for the next decade.

In exchange for these cuts in medicare-social security, this writer predicts the Republicans will eventually agree in the 2012 budget to some token tax loophole closing for the rich and corporations. But the loophole closing will be more than offset in an agreement post-budget to a major overhaul of the general tax code. Tax code revisions are what Corporate America really wants, and they and Republican politicians have been calling for since 2010 as a priority. The tax code revisions, I further predict, will include reducing the corporate tax rate from 35% to 20%, lowering rates for foreign profits tax to placate the multinational corporations, and institutionalizing most of the Bush era tax cuts for investors for the next decade. What the politicians take from corporate interests with one hand, they will give back twice with the other.

This trading tax loopholes for tax rates and vice-versa has been the decades long tax shell game. Eliminate loopholes when they become bad public PR and thereby raise some tax revenue. Then give the tax revenue back to corporations, and then some, by lowering the corporate tax rate. Conversely, when public discontent grows with corporations not paying their fair share in tax rates, raise the rates but open up more tax loopholes. That’s how the net federal revenue from the corporate income tax has been reduced over recent decades from 20% of total revenue to barely 10%.

All these maneuvers are unfortunate and deceitful by both parties. For all it takes to resolve social security’s issue for the next 75 years is to raise the cap on the 12.4% payroll tax rate to cover all forms of income, capital forms and earned wages. That will not only cover all shortfalls but enable the lowering of the retirement eligibility age. And as for Medicare, all it takes to cover its shortfall is a mere 0.25% increase in the Medicare share of the payroll tax for the next ten years and another 0.25% starting in the eleventh year. But you wont hear that discussed in the upcoming negotiations to make seniors and retirees pay for the deficits they did not create.

Jack Rasmus
July 12, 2011

Jack is the author of Epic Recession: Prelude to Global Depression, Pluto Press and Palgrave-Macmillan, May 2010; and the forthcoming Obamas Economy: Recovery for the Few, same publishers, late 2011. His blog is jackrasmus.com and website: http://www.kyklosproductions.com.

Read Full Post »

COMMENTARY: Last April this writer wrote a blog piece entitled, ‘Why the March-April Jobs Numbers Will Collapse This Summer. In it, an in-depth analysis was made of a serious problem in the Labor Department’s methods for estimating jobs in the spring quarter every year. (see that piece below this blog). Today’s dismal job numbers for June showing only 18,000 jobs created and hundreds of thousands of jobs lost in the public sector, confirms my prior analysis and prediction. More worrisome, there is no light at the end of the job tunnel whatsoever. Meanwhile, Obama and the Republicans move closer to cut a deal on deficit spending that will gouge social security, medicare, medicaid and education in the US while tinkering with raising taxes on corporations. What we are witnessing as part of the deficit discussions is another repeat of the ‘corporate tax loopholes vs. corporate tax rate’ shell game. Token increases in corporate tax from loophole closing will be followed, this writer predicts, by a reduction in the corporate tax rate from current 35% to 20%. Let’s see if that prediction proves correct as well.

The Predicted Job Collapse Now In Progress
By Jack Rasmus, copyright July 2011

While politicians and business press pundits last March-April were proclaiming the jobs crisis was over, this writer predicted that March-Aprils Job Gains Will Collapse This Summer (May 22, Truthout). That prediction is now underway with the latest June jobs numbers from the US Department of Labor reported today, July 8, showing only 18,000 new hires occurring in June. The preceding May jobs report showed an almost as dismal 54,000 jobs created. Thus, this writers May 22 predicted summer 2011 jobs collapse is well under way.

The predicted summer 2011 jobs collapse was based upon an analysis showing that for the last four years every spring quarter, April-June, job numbers are distorted and inflated as a result of certain statistical methods employed by the Labor Departments Bureau of Labor Statistics that artificially boost second quarter job numbers. The cause of the distortion and artificial boost in jobs involves what is called the New Business Birth-Death model. The updated Table 1 from May that follows shows how second quarter numbers are once again typically inflated this year, as in previous years. The May and June jobs reports showing a dramatic decline in job creation in turn strongly suggests a coming jobs relapse this summer and third quarter

TABLE 1
Employment Gains/Losses First Through Third Quarters 2007-2011 (in thousands of jobs created per quarter)
U.S. Bureau of Labor Statistics, CES Database

Years           Quarter 1          Quarter 2          Quarter 3

(Jan.-March)   (April-June)     (July-Sept.)

2007         -2,310               +2,620                -643

2008         -2,033              +1,636                 -1,427

2009         -4,122                  +663                 -1,092

2010          -1,677             +2,517                     -174

2011          -2,385             +2,173                       TBD

Since 2008, the first quarter of the year has shown a significant loss of jobs. Every second, or spring quarter, a falsely inflated job growth is then reported. That inflated reporting does not continue in the summer and third quarter. Over the summer months job creation declines.

The longer term trend behind the annual spring-summer inflation then decline in jobs is a continuing stagnation in terms of job creation that has been going on for at least the past three years. As the economy enters the summer 2011, it is now in effect entering a triple dip in the jobs market–having already experienced a second, or double dip, last summer in 2010 when a net 600,000 additional jobs were lost.

The fundamental reason for three years of job stagnation is not statistical. The statistical problem only falsely obscures the long run job stagnation in the spring, which then reappears in the summer once again.

The fundamental reasons for the Obama job stagnation is the administrations total reliance on the private sector to create jobs and its corresponding refusal in turn to engage in any program of direct government job creation.

As has been pointed out many times by this writer and others, big business America today sit on record $2 trillion in cash and refuse to invest and create jobs in the US. The picture, unfortunately, is not much different concerning job creation for small business, but for different reasons.

Small businesses typically create about half the jobs in the US. But small businesses rely on bank loans for expansion, whereas big businesses finance investment out of issuing corporate bonds or from internal cash (i.e. the $2 trillion hoard on hand). Small businesses aren’t sitting on $2 trillion in cash. In fact, most have been struggling along with workers and consumer households in general. Small business is unable to invest today and create jobs because it is dependent on bank commercial and industrial loans to finance investment and job creation. And the problem is big banks have been reducing lending to small businesses for almost every month since 2009.

As recently reported in a survey by the National Federation of Independent Business (NFIB), a small business trade group, more small business plan to reduce their hiring than say they want to expand them. The NFIBs May report showed the worst hiring plans in eight months, trending down since last year and now turning negative–meaning more layoffs planned than hiring. A recent separate small business survey and report by US Bancorp reveals 78% of small businesses still think the US economy is in a recession and expect it to continue for another year.

In short, neither big business is investing at sufficient levels to increase hiring, nor are banks lending to small businesses to expand and hire. And there is no indication either of these conditions are about to significantly change. The only alternative is for the government to introduce direct government job creation programs.

But government is one of the areas where job cutting has been the strongest in recent months. As the June job reports shows, last month government employers cut 464,000 jobs. Those cuts came at all levels of government. States cut 266,000 jobs. Local governments cut 203,000. And all this before the real budget cutting comes in federal and state governments this coming fall.

Of course, given the total preoccupation of Republicans and Democrats with deficit and debt cutting today, there is little evidence of any interest in government direct job creation programs. So the jobs picture will continue at best to stagnate, and more likely will result in significant more joblessness as government at all levels continue to cut spending. It is not unlikely that as many as 500,000 state-local government workers, and perhaps as many federal government workers, will lose jobs this coming 2011-12 year. That’s a million more net unemployed.

Add that fact to the already loss of nearly 700,000 government jobs over the past year, June 2010 to June 2011. And to the related fact that the private sector over the past has been able to create only a feeble 1,171,000 total jobs–a rate of around 95,000 jobs a month which is about 50,000 less than needed to absorb new entrants into the work force.

The deficit-debt debates now totally preoccupying both parties in Washington not only mean there will be no new stimulus. They mean even the insufficient and ill-composed and poorly targeted stimulus of 2009-11 will be reversed. We are entering an era of negative stimulus.

The Obama-Republican deficit cutting deal now underway will shock people when they see its true dimensions. For every tax dollar raised there will be $3 dollars in spending cuts, mostly targeting social security, medicare, Medicaid, and government aid to education. It appears, according to some reports in the business press, that Vice-President Biden and the Republicans are already agreed on the magnitude of the spending cuts. Whats at issue is only how much (little?) will tax loopholes be closed to raise revenue.

But this is the same old tax rate-tax loophole shell game that’s been going on since the 1980s. Some loopholes will be closed, raising a little revenue, but once the smoke clears on the budget deal the tax code will be revised and the top corporate tax rate will be reduced from the current 35% top rate to 20%, this writer predicts. So a $dollar in tax revenue will be raised and $2 in revenue given back to Corporate America. This political shell game over the past 30 years has resulted in a reduction in the corporate income tax share of total federal revenues from around 20% to today’s average of 10% or less.

Meanwhile, the still bigger reductions in government jobs about to occur will be matched, its beginning to appear, by reductions in private sector job creation as well. U.S. consumer spending by the bottom 90% income households in the US is clearly slowing. Global trade and thus US exports are beginning to level off as China, Brazil and other emerging market economies that were the driving source of trade, and thus US exports, have all taken action to dramatically slow their economies by at least half. Japan, Australia and a good part of the European Union are already in, or heading for recession again. All these developments will result in a slowing of US manufacturing and job creation in that sector. In short, there is no light at the end of the economic growth tunnel for renewed economic growth or significant job creation from the private sector in the U.S. And this comes at a time when the public sector is accelerating its withdrawal from the economy due to its myopic and erroneous preoccupation with deficit cutting.

Jack Rasmus

Read Full Post »

COMMENTARY: In his July 4 New York Times column, liberal economist Paul Krugman takes up the matter of pending legislation in Congress that, if passed, will grant US multinational corporations hundreds of billions in additional tax cuts on the more than $1 trillion they are hoarding in offshore subsidiaries and refusing to pay the legal 35% corporate tax rate. Krugman is commended for raising this matter. However, it is strange that he provides no number details on the amount of the potential tax cuts. He correctly raises doubt whether more tax cuts for multinationals, or business in general, will create jobs. He then closes with a vague reference that government direct job creation is the answer. But he provides no details what he means by that. Like most liberal economists, Krugman is pretty good on the facts of what is happening but then comes up short on recommending real solutions to the crisis. Perhaps it’s his New York Times corporate editors who will not allow him to take his analysis to its logical conclusion, and proscribe what is necessary. Or perhaps it is out of concern of not alienating the Democratic party too strongly. Whichever, or whatever, at the top of the agenda today is the need to provide concrete, specific proposals for ending the economic crisis and the once again faltering economic recovery. And to provide details as to how a direct government job creation program or programs might work. Paul has come a long way in recent months, as he sees the folly of current deficit cutting policies in Washington and fears that worst times economically are ahead. He has made the trip from the wilderness to the far side of the economic rubicon, but has yet to cross it and explain what he means by government direct job creation.

PAUL KRUGMAN AT THE ECONOMIC RUBICON?
by
Jack Rasmus
Copyright July 2011

In his July 4 editorial New York Times in-house economist, Paul Krugman, identifies two important facts about jobs and taxes in the U.S. The first is that big corporations are sitting on a record hoard of cash and refusing to use it to invest in the US to create jobs. The second is that the biggest of the big, the multinational corporations, are sitting on the largest tranche of that corporate cash hoard, demanding even more tax cuts while they continue to shift jobs offshore.

U.S. multinational corporations lobbyists the past year have been engaged in a priority effort to lobby Congress and the Obama administration to dramatically reduce their corporate tax rate as a precondition for them bringing back some of their offshore cash which they have been refusing to do at the current 35% corporate tax rate. They want a much lower corporate tax rate, they threaten, or they’ll just keep the money offshore.

Krugman correctly points out this is not the first time this kind of blackmail and shakedown of the public purse has occurred. It happened before, in 2004. The multinationals got away with it then, creating the incentive to do it once again today.

But Krugman ought to have put some flesh on his skeletal argument exposing the multinationals current repeat today of their 2004 tax cut maneuvers. How much are the big corporations hoarding today? How much are the big U.S. multinationals refusing to repatriate to the US and pay taxes on?

In 2004-05 the Bush administration pushed through big corporate tax cuts in a bill misleadingly called The American Jobs Creation Act of 2004, after having passed three packages of cuts in personal income taxes for wealthy investors in 2001, 2002, and 2003 (which were all similarly mis-labled job creation acts). The two sets of tax cuts–Bush’s 2001-03 personal tax cuts and the 2004 corporate tax cut–are linked. Most of the former personal tax cuts were concentrated in capital gains, dividends, inheritance and the like. Capital gains and dividends between 2001-03 were cut to 15%, down from a rate of 77% in the 1960s, a decade which witnessed one of the fasted job creation rates in the U.S. But in order for wealthy investors and households to realize the full benefit of the 2001-03 personal tax cuts, it was necessary to cut corporate taxes in 2004 as well. That would ensure that more corporate cash would be available to pass through to investors in the form of capital gains and dividends. Both were necessary then, as they are again today, if the wealthy were to maximize their tax windfalls.

Three major business lobbying groups drove the 2004 corporate tax cuts. Leading the charge for the multinationals was the Coalition for Fair International Taxation, led by General Electric Corp.whose CEO, Jeff Immelt, now heads up the Obama administrations efforts to curry favor with the multinationals crowd. Multinational corporations lobbyists succeeded in getting Congress to lower the corporate foreign profits tax rate from the normal 35% to only 5.25%. The tax cut was sold with the argument that if the rate was lowered to 5.25%, the multinationals would bring the money back and invest in job creation in the U.S. As Krugman points out, they brought it back, but then used the money for stock buybacks (driving up the value of their stock and rewarding investors with sweet capital gains for which they now paid only 15%) as well as for dividends payout increases (which resulted in similar windfall for investors). The rest that was repatriated was used for buying up competitors through mergers and acquisitions, which usually resulted in corporate consolidations and lost jobs, not new jobs created.

Krugman’s pointing out of this scam that happened, and is about to happen again, is commendable. But he should have put some flesh on these corporate offshore tax avoidance bones. And explain in more detail why those cuts didn’t lead to jobs. So here’s the flesh for those bones.

Back in 2004-05, the amount of cash hoarded offshore by the multinationals was estimated by the investment bank, J.P. Morgan, at about $650 billion. About half that was brought back at the 5.25% rate in early 2005 and invested in stock buybacks, dividend payouts, and mergers and acquisitions. The business press at the time even reported the company by company details for a couple months, identifying how much per company was being repatriated and spent on stock buybacks and dividends. That reporting quickly disappeared in the press as it became apparent what was happening. The immediate tax windfall for the corporations was $193 billion, with another $50 billion per year as long as the 5.25% provisions continued.

In his July 4 editorial Krugman should have also provided data to show how much is at stake today as this corporate scheme is about to be repeated. Big business in general is sitting on a cash hoard of about $2 trillion and multinationals are hoarding between $1 and $1.4 trillion offshore. The latter even admit to $1 trillion, so its undoubtedly somewhat higher. These are the big multinational corporations who blew right past the recent recession hardly experiencing an impact. The stock value of the S&P 500 companies, of which the big US multinationals are the largest segment, rose from $6 trillion to $12.3 trillion between 2007 and 2011. That’s a lot of capital gains income passing through at a mere 15% tax rate to wealthy investors!

Krugman correctly also argues growing corporate calls for more tax cuts has little to do with jobs. To quote him, “claims that a corporate tax holiday would create jobs… are nonsense”. Why corporations would finally begin to create jobs if we gave them still more trillions in tax cuts, when they haven’t done so with their current $2 trillion hoard of cash on hand, is today an exercize in illogic that is totally contradicted by historical facts. But why not report the numbers, and then show there has been a total lack of correlation for more than a decade now between corporate-investor tax cuts and job creation?
Krugman should have put some flesh on the bones of his no tax cuts-jobs link argument. What was the job creation record of the past investor and corporate tax cuts under Bush between 2001-2004? The facts are it took 46 months after the tax cuts began in 2001 just to get back to the level of jobs in the US that existed before the cuts began. That’s roughly the end of 2004. And what happened once the multinationals corporate tax rate was reduced from 35% to 5.25% in 2005? As his own paper, the New York Times, recently reported, multinational corporations over the past decade reduced the number of jobs in the U.S. by 2.9 million, as they hired 2.4 million offshore. Most of the jobs created after 2004 were in housing, commercial property construction, and finance, which had little to do with the multinationals sweet deal reducing their tax rate from 35% to 5.25%.

Yet another proof there is no linkage between business tax cuts and job creation is the recent extension of the Bush tax cuts by the Obama administration last December 2010. Since then, job creation has progressively deteriorated. The private sector has created only about 75,000 jobs a month on average since the June 2009 low point of the recession. That s about half of new entrants into the labor force. US Department of Labor data show that only a net 14,000 full time jobs were created from December 2010 through May of this year. The extension of those Bush cuts cost the U.S. Treasury $270 billion this year, producing only 14,000 full time jobs? Now the multinationals want another multi-billion dollar handout! Meanwhile, the Obama administration is about to cut businesses payroll taxes, and has all but agreed with Republicans to cut all corporations tax rates as part of a comprehensive revision of the US tax code thats coming next year.

Krugman concludes his July 4 editorial with the statement What our economy needs is direct job creation by the government–a proposal this writer has been declaring as necessary for any hope of economic recovery for the past two years. But what does Krugman mean exactly by that direct job creation by the government? That is the key question. And its time he spells it out.

Liberal economists like Krugman have been moving reluctantly and slowly toward this inevitable conclusion slowly over the past two years, as it has become increasing apparent there is no sustained recovery in the US economy happening as a result of failed Obama administration economic policies of the past two years. Krugman and fellow liberal economists like Robert Reich, George Stiglitz and others who know better, see what has happened the past two years as well as what is coming–a possible double dip and a debacle for Obama and the Democrats in the 2012 elections. But Krugman and friends still refuse to cross the economic Rubicon and boldly define and explain in detail what is necessary for recovery, or what they mean specifically by direct government job creation.

To his credit, Krugman at least has now arrived at the bridge even though he still lingers on the other side of the river. Time to cross it, Paul, and explain in detail the direct government job creation programs that are necessary if further economic catastrophe is to be avoided.

Jack Rasmus
Jack is the author of Epic Recesssion: Prelude to Global Depression, Palgrave-Macmillan and Pluto Press, May 2010; and the forthcoming 2011 book, Obamas Economy: Recovery for the Few, same publishers. His blog is jackrasmus.com and website, http://www.kyklosproductions.com

Read Full Post »