Real American Tax Reform

Alan Harvey

Congress is setting up for Tax Reform this fall. President Trump is touring the country promoting a plan that has no specifics. No bill is likely forthcoming, so no change is apt to happen. But there is a new critical mind attending all things DC, and it might be useful to take a short look at the real pathologies of the tax system and some real remedies. The catchword is “difficult,” and all concede that competing interests block the way. Indeed, there are intractable differences between big campaign donors and the public welfare. Tax reform is contested much like the battle over health care, where the simple, cost-effective fix of single payer meets the political need to cut in Big Insurance and Big Pharma and reduce taxes for the wealthy. Indeed, tax “reform” is basically code for tax cuts. Tax cuts have traditionally been the focus. The last president to make a tax increase a point of policy was Lyndon Johnson. This focus, of course, misses the real point. After decades of bad tax policy there are real repairs needed to get the tax system back in sync with fairness and economic efficiency. Here are some issues and suggestions.

Repay and Repair Social Security

A strange situation exists in the conversation on social insurance. One side says the trust funds are in sound condition and no crisis is imminent. The other side says the demands of retiring Baby Boomers require “entitlement reform” because unbearable strain is just around the corner. The oddity here is that both sides are correct. The trust funds are internally fundamentally sound, but because the federal operating budget has been borrowing from them for 35 years without a plan on how to repay. Social Security is not an unfunded liability; it is funded by government bonds. But the cash flow to repay those bonds that is absent.

Before getting into how this came about, let’s look at another serious defect bound up in this: The current US tax system is overburdening working Americans. Labor, more than any other sector or activity, bears the burden of funding the federal government.

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Personal income taxes and payroll taxes comprise 80% of federal revenues. While income taxes also apply to unearned income (e.g., interest, dividends, profits and rents), the preponderance of revenues flow from earned income, that is, wages and salaries. And while the government is ruthless in itemizing and collecting this right on the paystub, the varieties of unearned income are diluted by a panoply of tax dodges and opportunities for avoidance and evasion.

It is a principle in economics that if you want less of something, you raise the price. Taxes effectively raise the price of labor. (Labor also bears the weight of financing much of the health care system.) Consequently good jobs are in short supply. When it comes to trade, for example, the establishment understands this principle. Tariffs are decried for their effect of reducing the free flow of trade and the benefits of comparative advantage, notwithstanding the fact that the major beneficiaries more often look like the Walton family than the average American. Financial transactions are another activity that is virtually untaxed. Consequently we have trillions of dollars of hot money rushing around the world creating instability for precious little benefit. A microscopic tax on financial transactions would generate enormous revenues with relatively little pain for the citizenry. An example more broadly supported by the establishment is consumption. One suspects the motives. In any event, there are alternatives to the obsession on earned income, i.e., jobs.

Payroll taxes comprise one-third of federal revenue. Nominally they are paid by both employers and employees. In fact, as is accepted by the great majority of economists, they fall almost entirely on labor. In the US system, this is predominantly on middle- and lower-class workers. Why? Because there is a cap on the earned income subject to the tax, currently just below $120,000. This is kind of an upside-down open-ended deduction available only to those who need it least. A professional in the top 5% of income often pays one-third or less the rate of a bus driver earning $50,000 per year. This overtly regressive taxation was concocted in the early 1980’s and is a con perpetrated on the working middle class.

At the beginning of his first term, Ronald Reagan pushed through the so-called Supply Side tax cuts, basically tax cuts for the rich, on the promise it would unleash a massive economic boom. That boom failed to materialize, and the economic recovery of the Reagan years stemmed from the deficit spending, largely as a result of a military build-up. At the same time, concern arose over Social Security. Even then it was apparent there were Baby Boomers and they were eventually going to retire and ask for their benefits. Prior to that time Social Security benefits had been funded on a pay-as-you-go basis. But the alarm was that the surge in retirees in the second decade of the 21st Century would make pay-as-you-go unworkable.

A commission headed by none other than Alan Greenspan, later chair of the Federal Reserve, set to work. Greenspan’s idea was to start setting aside excess amounts in trust funds. It seemed to make sense, and soon workers began paying sharply higher payroll taxes. The commission congratulated itself on its prudence and responsibility.

Unfortunately, and almost immediately, the funds were tapped by the operating budget, comingled in what was called the Unified Budget This was an exercise of sending special bonds to the trust funds and reducing the official deficit by that amount, essentially hiding the serious shortfall that attended the Reagan tax cut scheme.  Payroll tax revenues were, of course, registered in the accounts of the trust funds, and officials did not see any particular necessity of making it clear that official accounting of the deficit also included those funds, even though the bonds represented obligations that would require increased taxes. So the time did arrive and the Boomers did retire. The trust funds began paying out more than they took in, and rather than hiding the size of the deficit, the scheme now amplified it..

It is no exaggeration to say that Social Security was always pay-as-you-go and that the Greenspan Commission effectively shifted the tax burden down. They were more willing than they might have been otherwise to pay the taxes because they assumed it was money they were going to get back later. In other words, it was a fraud. Reagan’s tax reductions for the upper end were financed by tax increases on the lower end. Alarm over the inability to pay benefits is alarm over having the fraud unravel. None of this can be admitted, of course, and as mentioned, it is addressed in a conversation about “entitlement reform.” But the situation is what it is, and we need a means of raising revenues to make good on the Social Security promises. Thus,  

1.      Eliminate the cap on payroll taxes.

Eliminating the cap recognizes the fraud of the Greenspan arrangement and begins to repair the damage to the system. It taxes those (at least the class of those) who benefited from the fraud. Unearned income still escapes the payroll tax, but it’s a start.

It is a shame that generations of workers got conned, but at least we can have some fiscal security and let the wealthy pay their fair share. The effect is to extend the payroll tax rates – about 15% -- to incomes over $120,000. The overall tax system will become progressive in fact as well as theory. And  and there would be no tax increase for those earning less than $120,000.

Stop Subsidizing Millionaires and Banks

The mortgage interest deduction is a sacred cow that is not likely to be sacrificed. Other, more reasonable methods can be imagined. Jerry Brown, now governor of California, ran for president in the 1992 primary and proposed the solution of a standard housing deduction, say $10,000 per year, in lieu of the mortgage deduction. This would accept the principle of a subsidy for basic shelter, but would stop well short of the immense subsidy in the current law. The great mass of the current payouts go not to basic shelter, but to lavish homes. The advantage of Brown’s proposal is that it would also have included renters, who get no subsidy for housing now. While Brown’s idea is likely not going to happen, the same idea can be approached by capping the current mortgage interest deduction at some reasonable limit, thus removing the absurdity of a benefit that gets bigger the more expensive the home.

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2.      Cap the mortgage interest deduction at level generous enough to cover most mortgages.

Such a change would need to be phased in to avoid complicating the plans of households. When fully implemented it would take another step toward making the theory of a progressive income tax true in practice as well.

End the complexity that hides favoritism to the rich

Many deductions and credits in both the personal income and corporate income taxes are payments for specific and often idiosyncratic activities. These are subsidies. They are in the tax system to avoid scrutiny. The code is then mined by creative and ambitious people, some of whom make enormous salaries for their imagination. These tax subsidies (the technical term) could continue outside the tax code as overt subsidies. The country would then avoid the completely unproductive accountancy and get the help to the intended activity with much less stress on the beleaguered IRS. Data on the effectiveness of the subsidy would be easily available, rather than buried in an obscure attachment. On the personal income tax, some subsidies, such as deductions for interest on college loans would be better included on financial aid forms. On the corporate tax, the opportunity to distort business activity or disguise one activity as another, or just manipulate and complicate, would be eliminated.

3.      Eliminate tax subsidy deductions and credits in favor of direct subsidies to useful enterprises.

If robots are going to take the jobs, let them pay the taxes.

As mentioned above, labor bears an inordinate share of the tax burden. Labor is also charged with the funding of most of American health care. This increases the cost of labor and reduces good jobs. At the present time, more and more middle-class jobs are lost to automation and robotics. When a business sheds a job in favor of a robot, the revenue that is the basis of the tax system is also lost. The tax code should be adjusted to reflect this fact. Ironically, in converting to automated processes, many businesses are in line for investment tax incentives.

The issue of double taxation elsewhere causes much gnashing of teeth when it comes to the corporate sector. It is seen as unfair when owners pay once with the corporate income tax and then again when they fill out their personal taxes. The move to reduce the rate of corporate income taxation advances behind this flimsy shield. Then it is pointed out that the corporate tax rate itself is among the highest in the world. The argument is rarely applied to earned income, but it is even more applicable. Both payroll and personal income taxes are assessed against the same gross amount of earned income, while the  unearned income of business owners and stockholders escapes the payroll tax altogether.  The claim of a high corporate tax rate wilts in the light of the facts. Since the code is riven with the wormholes of special interest favors, the actual effective tax rate is not high compared to other nations. The apparently high nominal rate is at best hypothetical. For evidence, look first at the share of revenues, and how it has deteriorated over time, even as corporate profits have ballooned.  

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The two most obvious issues in this chart are the expansion of the payroll tax and the shrinking of the corporate income tax. You can probably even make out an inflection point in the early 1980’s. Corporate profits are booming and stock markets are setting record highs. There is little evidence that the corporate tax is booming alongside.

Corroboration comes every day on the pages of the business section with a drumbeat of reports of one or another company paying little, none, or a negative amount.

4.      Establish a firm corporate tax rate.

5.      Eliminate special interest deductions and credits in favor of direct, public subsidies.

The US economy and its corporations did quite well in the 1950’s and 1960’s when the corporate tax was a more substantial revenue source, prior to the virtue of the corporate sector becoming so hallowed in the halls of Congress.

Level the playing field between Capitalists and working people

Income from capital gains is taxed at a lower rate than income, earned or unearned. Much economic policy, even outside the tax code, stems from this kind of back door Keynesianism. Taxpayers in the 10 and 15 percent tax brackets pay no tax on long-term gains on most assets; taxpayers in the 25-, 28-, 33-, or 35- percent income tax brackets face a 15 percent rate on long-term capital gains. For those in the top 39.6 percent bracket for ordinary income, the rate is 20 percent. This bias has little support from history. The theory that this encourages investment, grows the economy and creates jobs has little support from history.

In fact, the level of capital gains tax has no correlation with investment and growth. And there is certainly no moral justification to favor the buying and selling of assets over wages, salaries, interest income and dividends. Standardizing rates would also eliminate various tax dodges such as the much-publicized carried interest that is the income of hedge fund managers.

6.      Standardize all forms of income on the same schedule.

Investment is important. This has been understood by economists since the time of Keynes. But investment is undertaken for the prospect of profit, not for reasons of the tax code. The prospect of profit is a function of demand, which is mostly a matter of working class incomes. Again, it is official that Supply Side, trickle-down economics does not work. The economics profession has moved on. It is time politicians and the tax code caught up.

Begin to deflate the private debt bubble

Equity capital is not the favored instrument for business investment. Debt financing does not dilute ownership andinterest expense is deductible. Banks have been empowered to create money in exchange for debt instruments. Their business model is to create as much debt as possible in order to collect as much rent, or interest, as possible. Banks’ creation of debt is incentivized all the more for the fact that – like mortgage debt, but unlike personal or household debt – the interest on business loans is tax deductible. The result is that an ocean of non-government private sector debt has flooded the economy, suffocating the present and the future.

Debt bubbles are dangerous. Witness the 2008 financial crisis and compare it to the Dot Com bust of 2000. The latter was indeed dramatic, and devastating for some, but it did not threaten the entire economic system. The reason is the difference between equity and debt. With stocks, the loss is more or less limited to the amount of investment. Loans and mortgages are a different matter. Putting 10% down on a house would have been thought to be prudent, absolutely Puritan, during the housing bubble of the 2000’s. But even that down payment was wiped out overnight, and millions of homeowners found themselves on the hook for many times their out-of-pocket investment. An additional level of debt was added by mortgage providers, who leveraged their side up to 40-to-one. The matter became systemic because loans were spread and interlocked throughout the international financial system. Derivatives floated on top. When one section of mortgage holders defaulted, the dominoes began to fall.

Rather than clean out the debt and create a sturdy foundation for the economy, the financial authorities decided to bail out the lenders and leave the mass of debt in place. The Federal Reserve bought literally trillions of bad paper to support debt markets. The Fed created trillions of dollars and became the only buyer of toxic mortgage securities. As Fed chairman in the early 2000’s, Alan Greenspan arguably created, or at least abetted, the housing boom by dropping the federal funds rate to an historically low one percent. Ben Bernanke “solved” the problem by reducing that rate to zero and holding it there for six-plus years. Since zero was deemed not enough, the Fed devised “quantitative easing” to lower the real interest rate even more. This operation was great for financial markets, which were buoyant throughout the Obama years. But it was precious little help for the real economy. Too big and too interconnected banks were made bigger and more interconnected. There is now more than 30% more debt in the world. And we sit again uneasily atop an ocean of private arrangements, each interlinked with another, an interdependent stack of cards.

Furthermore, tax-deductible interest was not typically used to actually invest in tangible, physical capital. There has been only tepid capital investment since the crisis. Instead new, cheap debt was used, as it has often been historically, to take over companies and financially engineer them, loading the new entity up with these obligations and often leaving the workers begging for their pensions. Companies have also borrowed  to enrich their owners by buying back stock or increasing dividends, all with tax-exempt interest.

To be clear, the serious debt situation for citizens and the economy can only be resolved by reducing the debt itself, as was done in the New Deal – restructuring loans, closing banks and writing off the bad debts. Instead the debt has been increased, households have been left with the load, and the economy continues to suffer.

7.      Eliminate the deductibility of interest on corporate taxes.

While this will not rectify the mattercompletely and much more needs to be done, the tax code should at least not incentivize another crisis. It bears repeating that the major issue with the current sluggish and fragile economy is the immense private debt.

Taxes and Climate

“Externalities” is the term in economics that designates costs that are not born by the buyer or seller in a business transaction. What is external to the transaction, however, is often very intimate to the experience of people. A fine example is the purchase and use of fossil fuels. All the ecological costs of mining, transporting and burning of oil, coal and natural gas are outside the price paid. Enormous costs are left for the society at large, and the future, to pay. One way to bring these costs into the price, to make the price reflect actual costs and thus make the market actually work, is to tax the product.

Revenue from such a tax is not the main benefit. It is the action on supply and demand and use. In fact, the revenue could be rebated entirely to consumers. A brilliant example of this applied to the oil market was proposed by Senators Susan Collins and Maria Cantwell in what they called “cap and dividend.” The revenues collected would be returned in their entirety, divided equally among all households. So the cost of gasoline and heating oil would go up as a result of the tax, but the average household would be given the money to pay that amount. The heavy user would feel the pain and be encouraged to reduce his use. The light user would actually realize a net gain and rewarded for his conservation. The point is that the costs in pollution and climate change are reflected in the price and the world gets to live a little longer.

8.      Tax Carbon

Whether on the Cantwell-Collins model or in another form, it is absolutely essential to rectify the market failure of externalities in carbon production and use. Not doing this is an immense subsidy to producers. The future is in the balance. This is one proposal upon which virtually all economists agree.


If “pragmatic” is defined as economically sound, fiscally responsible and useful to the citizenry, the above proposals are imminently pragmatic. If “pragmatic” means “what can get through the Congress,” these are bordering on tinfoil hat. What is practical and desirable for the public is not what is practical and desirable for a political establishment, since campaigns are often funded by bidders for corporate welfare. The arguments are dressed up in myths of trickle down, of economic growth, of “job creators,” of “unleashing the power of the market,” but those tropes are becoming tired and weak, no matter how closely held by prominent members of Congress. Paul Ryan, Speaker of the House, is a veritable factory of them. And though the best that might be hoped for is another iteration of error, debate on true tax reform is amusing, if only as preparation. Real change can make a real difference.




CEA Chair’s Critique of Sanders Economics Is Well Wide of the Mark

Alan Harvey

On February 17, Christina Romer and three other former Council of Economic Advisers (CEA) chairs joined in a letter in panning economist Gerald Friedman's analysis of Bernie Sanders' economic plan. In the letter and elsewhere, in hyperbolic language they ridiculed his findings and by implication Sanders' economics. Where Friedman found substantial positive impacts from the substantial initiatives in the plan, the four former chief economists to the president found fairy tales and flying puppies.

In less than twenty-four hours there was pushback, from James K. Galbraith, among others. Galbraith's letter criticized the CEA chairs for using high position rather than reasoned examination, and excoriating their lesser-known colleague without foundation. Indeed, detail was conspicuously absent. Galbraith described the model used by Friedman, saying it was not out of line with what the CBO and CEA themselves employ and the results were consistent with historical precedent. Thus challenged, a few days later one of the four, Romer and her economist husband David Romer provided detail.

Conceptual Frameworks: Static vs. Dynamic

We had a chance to review the Friedman report, the Romers' paper, and Friedman's rebuttal. It turns out the devil is not so much in the details as in the conceptual framework. We found that the Romers' basic critique is weak, and Friedman is correct in saying it is based on a brittle understanding of how the economy works.

Friedman's model imagines a dynamic economy, the Romers a very static economy. The view that government investment and spending can expand the economy is explicit in Friedman's view. The Romers suggest that things may get better while the spending is going on, but will contract to the previous state, or even below, once it's over, kind of like taking a big breath, where you look bigger for a moment, but when you exhale you revert to the 98-pound weakling, worse off for the exercise.

The Romers appeal to a higher law, a "standard economics" as if it were a universally accepted and validated norm that Friedman does not understand. They define error as deviation from this standard economics. Their inability to admit, or perhaps even recognize, that this is a conceptual difference is troubling. While it may be that the static equilibrium view they hold is the flavor of the moment in Academia, it is far from being universally accepted, nor has it always been the norm. Friedman points out in his rebuttal that his is closer to the economics of Keynes. (The "standard economics' of the moment comes under the title "New Keynesian", but much like the program of Neoliberalism is not liberal as most use the term, nor are Neoclassical economists very close to Classicals, New Keynesians owe more to John Hicks and Paul Samuelson and earlier 20th century economists than they do to John Maynard Keynes.)

Establishment Economics

A term more appropriate than "standard" would be "Establishment" economics, and more narrowly, the establishment of the past thirty or thirty-five years. To illustrate how things have changed, one is reminded of Michal Kalecki, a major economist in the middle of the 20th century. (The Keynes' model was once referred to as the Keynes-Kalecki model.) Kalecki once characterized another "standard" economics when he once observed [from "Political Aspects of Full Employment"]:

"A solid majority of economists is now of the opinion that, even in a capitalist system, full employment may be secured by a government spending programme ... If the government undertakes public investment (e.g., builds schools, hospitals and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if this expenditure is financed by borrowing and not by taxation ... the effective demand for goods and services may be increased up to a point where full employment is achieved.)"

A Failed Establishment

Another, more appropriate term for the Romers' "standard" economics would be "failed," since economists of this school universally failed to see the Great Financial Crisis coming, to understand it when it happened, and to effectively mitigate many of its impacts. It failed Christina Romer herself, as we noted in our previous piece, when as CEA chair during the Obama stimulus period she predicted an immediate turnaround in employment, as the stimulus accelerated the natural return to equilibrium.

When the effects failed to materialize as she predicted, the policy of government spending as a corrective was discredited, at least in political circles, and so it remains to this day.

One might have expected a more charitable tone from her toward Gerald Friedman' rather than doubling down on her past failure.

It is also worth noting that even central bankers are by not averse to the kind of fiscal measures embodied in the Sanders plan, and are in fact wringing their hands for the absence of such.

The Inflation Expectation Bogey Man and Interest Rates

The most telling point in the Romers' weak, if strident, paper is that interest rates are sure to rise and this may very well prevent the kind of outcomes Friedman projects. Of course, monetary policy needs to accommodate the expansion, and the Federal Reserve - itself in the grip of another major fallacy of standard economics - is almost sure to squelch recovery, once it begins, for fear of inflation.

The Romers say "interest rates will rise". But in fact, as they admit elsewhere, rates will rise not for any natural or market-driven reason, but because the Fed will raise them. Is this a shortcoming of Friedman's analysis? It is not. He makes the explicit assumption of accommodative monetary policy, and for his purposes it would not be proper to assume otherwise, or to try to anticipate when and how the Fed will act.

Informing, if that is the word, the Fed's raising rates is the doctrine of NAIRU. NAIRU, the Non-Accelerating Inflation Rate of Unemployment, is a fallacy that contends that at some indistinct and moving rate of unemployment the inflation genie will get out of the bottle and run amok. NAIRU survived both the stagflation of the 1970s and the high employment/low inflation of the 1990s as well as the era previous to 1963, and became a favorite of Alan Greenspan. It is highly likely the Fed will act from its belief in NAIRU following the belief it is preventing a runaway inflation.

Inflationary Pressures and Productivity

Some temporary inflation would naturally accompany implementation of the Sanders plan, since rather than being stuck in financial markets like the QE's and zero interest rates, money would be flowing into the real economy. Most components of the plan would generate increased demand for consumer goods.

The great likelihood is that - as in the past - production will expand, imports will increase, and productivity will adjust to counteract inflation.

The opposite is implicit in NAIRU, which predicts an acceleration of inflation. So the Fed will likely abort any expansion by raising interest rates and inciting a slowdown, and history shows that the Fed does much better in crushing expansions by raising rates than it does in instigating recoveries by reducing them.

The ineffectiveness of unprecedented zero percent for the past six years is evidence enough at one end.

At the other, we remember the Greenspan and Bernanke hikes in Fed rates prior to the last two recessions. But in common with other tenets of standard economics that have not proven out, NAIRU survives as a major driver of policy.

Money and Debt

We find Friedman's analysis completely coherent and without major flaws, as far as it goes. Had we done the analysis we would have added an examination of money and debt, which are absent in the orthodox standard economics (as odd as that may seem to the layman), aside from the investment multiplier itself, which is basically a monetary phenomenon.

We see the injection of debt-free (to the private sector) money into the real economy as income to workers and the mitigation of the student debt time bomb as significantly therapeutic. As we noted last time, multipliers are lower today than they have been in the past, and this is likely due to the paying down of debt rather than spending on into the economy. But even as debt reduces the multiplier, insofar as it is paid down, the economy becomes more stable.

Even inflation is not without its benefits. As Hyman Minsky pointed out. Inflation reduces the real burden of debt. An excellent example is the deep double-dip recession at the beginning of the 1980s. Absent the mitigation of inflation - however messy - that recovery could not have taken place.

Alas, The Romers are Found Wanting

So, to conclude, there are problems with the Romers' conceptual framework as well as their stridently dismissive tone. There are also mistakes in the detail of their paper, problems to which we may return. Suffice it to say, our judgement is quite contrary to theirs. A full accounting of the debate is available from Dave Johnson at "The Sanders Economic Plan Controversy".

Standard Fare or Fantasy Economics?

A look at the critique of Gerald Friedman’s analysis of the Sanders economic program.

Alan Harvey

Gerald Friedman has taken a hit from the national press and four former chairs of the President’s Council of Economic Advisers. Friedman’s analysis of the economic effects of Bernie Sanders’ economic proposals projected five-plus percent growth rates in the first three years of the program. The CEA chairs lambasted the projections as fantastic. Austan Goolsbee caricatured them as “flying puppies.” The CEA’s attack was immediately challenged by James K. Galbraith and others, who pointed out that Friedman was using standard economic models and concepts, similar to those used at the Congressional Budget Office (CBO) and the CEA itself.

What is it then, standard fare or fantasy economics?

First, a bit of speculation  The timing of and absence of detail in the attacks suggest the four CEA chairs responded to the headline numbers without having studied the detail. A second consideration is that Friedman personally supports Hillary Clinton, so the motive for bias is not clear. A third piece of context is the historical record, which shows that five-plus growth is not unprecedented. It was – as Galbraith pointed out – last seen in the mid-1980s during Ronald Reagan’s military build-up accompanied by federal budget deficits far exceeding any in the post-war era prior to Reagan. Note also that the average growth rate under Democratic presidents prior to Barack Obama was 4.2 percent.

Subsequent to Galbraith’s challenge, at least one of the CEA chairs responded with a more detailed view, picking apart Friedman’s methodology. Christina Romer’s review was featured in the New York Times in a piece by Justin Wolfers, though it is not clear that she went as far as Wolfers in her disparagement of Friedman’s methods. Romer criticized Friedman for confusing stocks and flows, suggesting – as I understand it – that the Friedman analysis projected multipliers too far into the future. The multiplier is the increment of new activity produced by an investment or government spending program. The stimulus money spent is income to workers and businesses, who each save some, but spend most, which becomes income to other workers and businesses and results in further spending.

The nature of multipliers is a fascinating and neglected area of economics which we could happily explore at a length not appropriate to this piece. A study done by mainstream economists Mark Zandi and Alan Blinder (conservatively) estimated multipliers that vary from very low – in the .33 area, implying a dollar’s worth of spending produces only thirty-three cents of GDP (for corporate tax cuts) to 1.57 (for infrastructure spending) and 1.74 (for increases in food stamps).

There is additional evidence that multipliers have degraded over time, having been much higher in the 1950s and 1960s. [The role of private debt in eroding multipliers should not be ignored, as it seems to have grown as multipliers declined. The 2008 Bush stimulus plan projected much higher multipliers for tax cuts than was experienced. It is likely that many recipients used the tax cuts to pay down debt rather than spend on into the economy.]

Christina Romer is uniquely qualified to discuss overreach in projections, since she was chair of the CEA during the Obama stimulus period and famously forecast an immediate reduction in unemployment that did not materialize. This failure was seized upon by Republicans to discredit government stimulus entirely. We can, of course, look back and see the economic effects, which were substantial. But because they did not match the projection, the theory of the projectors suffered.

The Obama stimulus (ARRA – American Redevelopment and Recovery Act) was poorly designed, as Joseph Stiglitz pointed out. It was essentially divided in three: (1) Tax breaks for business investment, which has always had a low multiplier, since businesses invest when they see profit, not when they get tax breaks, (2) Subsidies to households, who used them as often for paying down debt as for spending, and (3) Infrastructure spending, which DID have a substantial effect, but with only $200 billion in effective stimulus, the Act fell far short of its promise.

Stimulus also suffered a Larry Summers moment, or moments. “Timely, targeted and temporary” was Summers' mantra in support of the ineffective Bush effort. As an Obama administration official, Summers was implicated in keeping the ARRA too low. Both Romer and Summers seem to have conflated all multipliers into one.

All of this argues for substantial, strategic and sustained. This point was made repeatedly in the aftermath by academics and public policy analysts in the period after the stimulus. But it was too late, and the political will had been used up.

Romer appears to suggest in the Wolfers piece that multipliers act only during the period of stimulus spending, and she faults Friedman for misunderstanding stocks and flows. It should be obvious, however, that a measure which provokes additional private investment can claim credit for economic activity induced by that additional investment. If Ms. Romer is suggesting otherwise, she is wrong. Investment in equipment and facilities by government contractors and investment in housing by newly employed workers would be among the most likely sources of induced stimulus. Consumer goods producers would have less incentive to invest, since there is large unused capacity already extant, and new investment in the consumer goods sector is as likely to happen in China as in the US, shipping the stimulus offshore.

The Sanders plan IS substantial, strategic and sustained. Infrastructure spending is included, at $200 billion per year (the American Society of Civil Engineers estimates $3.6 trillion is needed by 2020). The health insurance and higher education initiatives benefit for spending that is not offshore-able.

In the end, whether Friedman over-promises as Romer did is open to question. At a minimum his analysis is not fantastic or too far outside the orbit of the mainstream. The political will to get programs of this scale through Congress likely would require the motivation of another crisis like that of 2008. The political nature of the critique is for the reader to decide.

Donald Trump - Stooge of ISIS

In its strategy to position itself as the defender of Islam and the champion of the oppressed against Western Crusaders, ISIS has a willing stooge in Donald Trump. No better accomplice can be imagined. Trump has marshaled the hysterical and ignorant, largely for his own political advantage, no doubt to the extreme satisfaction of the so-called Caliphate. Trump’s spasmodic tirades and its echoes in Europe validate ISIS strategy. Identifying Islam as the enemy validates a program of brutality that has no political, theological, historical or social root without it, and sets a conflict that was never part of even George W. Bush’s agenda. 

Like the emperor without clothes, Trump trumpets the magnificence of his competence, managerial skill, prudence and common sense. He sets off a stampede of elephants that elevates the ISIS mouse that caused it to demonic grandeur. To be candid, Trump is patently incompetent, stupid, bullying, reckless and apparently totally ignorant. That Islam should be cast as the enemy rather than the ally in this battle is beyond ridiculous. Muslims know that the so-called Jihadists of ISIS face a soul-rending shock in their appointment with the afterlife, when they discover not the promises of virgins and glory, but the just reward for their grisly actions. But on Earth, ISIS knows itself that far more will be radicalized by bombing of innocents than by reading its feeble doctrines.

None of this needs special knowledge, only a direct look at what is going on outside the circus tent. And I do not want to minimize the danger that Trump’s fever for short-term political gain, combined with the inability of our media- and money-based democracy to clarify things, will drive us over a precipice. The Constitution and the Bill of Rights, the tradition of religious freedom and fair play, the preference for truth and reason seem to be easily discarded when convenient lies and absurd stereotyping offer a road to power. Truly he is the Mussolini of America.

As I mentioned last time, ISIS terrorists will not be secreting themselves among desperate refugees when they can fly first class from Turkey or can just sit at home because they are already here. To build a wall against the victims because we are shocked by the gore of their victimizers is rational only in a bizarre video game, but it is the reality Trump and ISIS threaten to bring into the world.

The way to peace and stability in the region lies in the opposite direction, of course. Note in particular the formation of a political assembly in Northern Syria that builds on a democratic, inclusive movement with legitimacy among its population. Look for that to succeed. And congratulations to the enlightened faction within the American political establishment that broke with the Neoliberals to give the meager but essential support to this movement, perhaps realizing that effective boots on the ground are best filled by patriots. In the end, however, we must realize that whatever it looks like, political control must be theirs, not ours.

Meanwhile, look for ISIS and its chief stooge Donald Trump to push the world to chaos for their own political gain.

R.T. Stone

[R.T. Stone is a pseudonym for a long-time observer of the Middle East and American politics, from both inside and outside government. We are grateful for this contribution. Republication is encouraged.]

Syria, Bombing, Economics and Reality

[R.T. Stone is the pseudonym for a long-time observer of the Middle East and American politics, from both inside and outside government. We are grateful for this contribution. Republication is encouraged.]

To listen to Western leaders in the aftermath of the Paris bombings, you would think the civilized world was now ready to do "what is necessary" to end the run of Daesh (ISIS) in Syria. Now, by implication, ready to take on the final difficult and dangerous deed necessary to bring peace to the Middle East. In fact, the blind reaction is now producing just another fear-induced blunder in a series that does not diminish Daesh, but inflates it.

The course to peace and stability lies in exactly the opposite direction. It was charted as far back as 2006 by George McGovern and William R. Polk. Peace and stability in the region must rely on building the political fabric of the nations economically, socially and politically, as opposed to Kissinger-style finding the guy with the most guns and backing him with more. 

Before re-framing the situation in terms of society and peace, let me take a moment to make a few points on the hysteria. First, the murders of hundreds in Paris was a brutal tragedy. But it is an illusion that attacks in Syria are anywhere close to the right thing to do, no matter how good they may feel. bombing Raqqa by the French may be a feel-good moment, and David Cameron may think he is being strong by saber-rattling, but the threat is not now in Syria or from the desperate Syrian refugees.The killers were not in Raqqa, they were in Paris and Brussels. The police action in those countries has been exemplary and addresses Daesh as what it is, a criminal gang recruiting cannon fodder on the pretext of religion.

As many are aware, the attack in Paris was carried out precisely because Daesh is failing in Syria and Iraq and needs a new display of brutality to keep their internal morale alive. Recruiting into its home territory is down from a one-time 500 to 1,000 per day to now less than 50 or 60 per day, which is not enough to make up for casualties. Daesh have suffered immense losses to their seeming invincibility. So their recruits are now being urged to stay where they are, develop sleeper cells, and concoct as gruesome displays of gore in the name of God as they can imagine.

And here we see the absurdity of American governors trying to close the borders on Syrian refugees. Daesh is not manned by Syrians, but by radicalized men and women from around the world. Are terrorists likely to come in by boat from Syria, concealed among widows and orphans, when Daesh can fly them in first class from any one of a hundred countries? If it needed to. Thanks to social media and bleak prospects around the world, the recruits are likely already in those states. To focus attention on desperate asylum-seekers is laughable.

But the larger point remains. Daesh's move into the West is necessary because Daesh is suffering defeat where it is. First, the Syrian Kurds under the YPG and YPJ defeated Daesh in the city of Kobani, pushed them across the Euphrates to the west, below a major supply line to the south, and cut them off from their supply lines from Turkey in the east. Now these Kurdish fighters are looking south to the "capital" Raqqa. American air power has been essential in their operations, and new American logistics assistance -- not fighting assistance -- makes a move on Raqqa by the Kurds a real threat to Daesh. These Kurds are not just another heavily armed self-interested group. They are politically sophisticated, gender equal, democratic, inclusionary, and motivated. They have alliances with Assyrians, Yezedis, Arabs, Christians and others who recognize what is up. 

Within Iraq and Syria, the unwelcome influx of mercenaries recruited from elsewhere in the world and its strategy of rule by terror is eroding whatever support Daesh has among the locals. Much more could be said. The region is complicated and in turmoil. A basic first step would be to eliminate funding from the Mideast potentates. But standing up to the Saudis and others is outside the courage of Versailles and Downing Street, and it is much easier to bomb. Voters might believe that more bombs in Syria that kill civilians show something is being done, but it only replicates past blunders. Again, Daesh is not a legitimate religious, historical or political force; it is no more than a criminal gang. It relies on Westerners reactivity to give it credibility. And if bombing Raqqa were to be effective, it would have produced results by now. 

One always gets the feeling from Western reactionism that history started from today. We don't look back at what failed and what worked, we just go with what our impulse of virtue is at the moment. There at hand are the convenient explanations -- neat, plausible and wrong -- that would never be tried again if we only tested them with reality. And just as with economics, the orthodox Neoliberalism escapes accountability and rides on hysteria to the benefit -- short-term -- of the established power elites.

The greatest American foreign policy blunder of the modern era rode on similar hysteria and was executed for the benefit of the same interests. The invasion phase in Iraq under cover of lies was only step one of the methodical blundering. Step Two, equally if not more destructive, was the botched "rebuilding" of the country via sweetheart deals with Halliburton and other mega corporations, with the administration of the effort by naive Neocon apparatchiks in the occupier's Green Zone. There was no counsel with history. No listening to those who were right. No check on what had worked in similar instances before. The Bush Administration simply fanned the flames of fear and sent in more bombs, while American-based multinationals profited and did not produce. When that run was over, the Americans erected a cardboard prop of a government, fed them billions and pretended that would work. Extend and pretend.

What might have been done? The McGovern Plan.

Proposed by former Senator George McGovern and William R. Polk in 2006. It was founded on the principles of the Marshall Plan and the experience of rapprochement with Vietnam. The bare outlines of the plan (a promo for the book "Out of Iraq") reveal both why it would have worked and why it was not adopted: 

Former senator George McGovern and William R. Polk, a leading authority on the Middle East, offer a detailed plan for a speedy troop withdrawal from Iraq. 
During the phased withdrawal, to begin on December 31, 2006, and to be completed by June 30, 2007, they recommend that the Iraq government engage the temporary services of an international stabilization force to police the country. Other elements in the withdrawal plan include an independent accounting of American expenditures of Iraqi funds, reparations to Iraqi civilians for lives lost and property destroyed, immediate release of all prisoners of war, the closing of American detention centers, and offering to void all contracts for petroleum exploration, development, and marketing made during the American occupation. 

A link to the proposal brought to Congress by Rep. James McGovern is here

Essentially the plan involved rebuilding the country by rebuilding it, not by occupying it for the benefit of multinational oil and industrial interests. That meant rebuilding public services and the health care system (damaged by the first Gulf War and demolished by the Iraq invasion) and enabling (not supplanting) the domestic business and public interests. The indigenous resources, skills and systems were to be strengthened from the inside to become the pillars of the new nation. Instead a game of warlords was played. Jobs for the people came only as labor for the occupiers.

What is working now?

Americans have no interest, it seems, in what is actually working in Iraq and Syria, in terms of security, inclusion and viable political structure. Americans prefer to move on to the next war, the next blunder. Part of this is because what is working is not Neoliberalism.

Of course the situation is complicated. Turkey under Erdogan is becoming a police state, covertly supporting Daesh itself, overtly suppressing its own Kurdish population. (It is alarming that as a NATO nation, Turkey is shooting down Russian planes.) The fall of Assad is being delayed by its alliance with Russia, but even when the fall occurs, it will not end the chaos any more than did the fall of Saddam Hussein. A century of arbitrary national boundaries and the corruption of the resource curse have now combined with a religious rivalry to make the only answer a complete answer.

But something is working, particularly in the Northern Syrian region of Rojava, the Kurdish region, a political stability, a robust security for its population, an ethnic and religious inclusion and gender equality that is deep and widely accepted have been established. This is a far cry from the model of the rest of the region. We suspect the radical democracy there is one reason the West does NOT support is as they ought. Nearby, in the Kurdish region of Iraq, in spite of its blustering and corrupt leadership under Masoud Barzani, a certain security also exists.

The Syrian Kurds of the YPG and YPJ (women s fighting force) dealt Daesh its first and still most major defeat when they defended Kobani, and they were victorious in spite of their being cut off from supply by Turkey (while Daesh men and material flowed freely through Turkish borders). Thousands of Daesh recruits were sent to Kobani to die, cannon fodder to the determined Kurds and American planes. Not wasting a moment after victory, the YPG moved Daesh out of the region, taking back thousands of villages, west across the Euphrates, south cutting a major east-west supply line, and east cutting a major north-south supply line from Turkey. With the fall of Sinjar, another supply route to Raqqa has been cut. This has come with substantial American help from the air. The Kurds are the "boots on the ground" that have been effective. (Any fall of Raqqa will be the direct accomplishment of these activities, not the macho blind bombing of post-Paris.) The model of the Syrian Kurds is already being embraced by some Arabs and Yezidis.

What can work?

The Syrian refugee crisis in Europe is, of course, the direct outcome of American blundering, and 12 years of stirring the quagmire ever deeper. It has created an impossible situation for millions of people and is generating the migration we are now witnessing. The ultimate and only answer is not wholesale resettling of the victims, but the return of their prospects in their own nations -- at our expense.

We can begin by supporting with all resources nations like Jordan. Food, health services, anything they would like. Those regions which have shown they have the domestic integrity of political and social systems should be empowered, just as with the Marshall Plan. That is, indigenous actors who come up with viable plans ought to be bankrolled. No Halliburtons. No Totals. Reconstruction, rebuilding, reinvention, sovereignty. Corruption ought not to be rewarded, as in Iraqi Kurdistan, simply because they are "our bad guys." The Kissinger model has failed along with Neoliberalism.

And those who were right before ought to be listened to now. Not the hysterics of the moment. Not the feel-good bombing. Aircraft carriers make the voter think something is being done, when it is simply a gruesome business as usual.

R.T. Stone