The President’s re-election (Discussion)

I posted my last commentary "The President’s re-election" on November 18.

As coincidence would have it, I received an inquiry from one of my subscribers that relates to it even before I posted my commentary, so allow me to share that exchange with you.

The inquiry came from Barbara Valentino Crowley Baptiste Moreus, of Port St. Lucie, Florida, who asked:

How does one rebut Senator Marco Rubio’s comment that: there isn't much point in raising taxes on the wealthy because they have the money to hire people who would help them get out of paying taxes. The billionaires and millionaires that are going to be impacted by higher rates, they can afford to hire the best lawyers, lobbyists and accountants in America to figure out how NOT TO PAY those higher taxes. Obama's approach will fail and therefore the problem of the huge annual deficit still remains. The President doesn't seem to understand that he is not going to get the "Bang for the Buck" by taxing the wealthy.

To which I responded:

“This is true as long as we have a tax system that has a million loopholes that clever lawyers can exploit. We really do need to close the many loopholes that are now in the tax system, e.g. look at my post "Romney is worse than I thought!" and look at the loopholes that Romney exploited. These need to be closed. Republicans are right that this kind of tax reform probably would raise more revenue than raising tax rates. But are they really prepared to eliminate them. I don't think so. The biggest loophole is that taxes on capital gains are taxed much lower than ordinary income. This needs to be changed. There is absolutely no reason why income from working should be taxed higher than income derived from investment. If we believe in the work ethic then we shouldn't punish people who work and reward those who get passive income by investing. But Republicans are adamant against this change.

But look at the many other loopholes that Romney exploited. When he gave assets to charity, he got a deduction for the value of the assets at the time of the contribution, rather than the price he paid for them, thus avoiding even the smaller capital gains tax. That is wrong. He should have to pay the capital gains tax when he gives to charity, as though he had sold the asset.

Inheritance tax. Aside from being too low under the Bush tax rates they allow a decedent to escape capital gains taxes altogether, since the law now says that assets of a deceased are exempt even from the very low capital gains taxes.

I can go on and on. Yes, Republicans are right that there is more money there than in increased tax rates, but they are phony when they suggest that they really favor tax reform. They will not support any of these reforms.

Extending the Bush tax cuts on the wealthy on the basis that at some time in the future we will have real tax reform is offering a bird in the bush. (No pun intended.) They will never let it happen. But if they have specific ideas along this line, I would like to hear them, and so would the President.

However Rubio is right about how much simply extending the Bush tax cuts for the wealthy will bring. 

To make a real dent in the deficit we would have to extend The Bush tax cuts for all, as Allan Greenspan has been advocating. If none of the Bush tax cuts were extended the deficit would be reduced by approximately $3 trillion over a decade, but extending them, in accordance with Obama's plan, only for those making more than $250,000 per couple, $200,000 for singles, would increase revenue by only 3/4 of a trillion over ten years, not nearly enough. But politically Obama can't be for extending all because he has made a pledge not to do so, and at this point in the recovery, it is not desirable. After we have recovered it would make sense. See here.

The amount that Obama is seeking in additional revenues is 1.6 trillion. See here. The 3/4 trillion achieved by the proposed elimination of the cuts is less than half of what we need in additional revenues. So not extending the Bush cuts for the wealthy gets us less than halfway there. Additional revenue beyond that must be found. The article, which I referenced in US News, is not realistic as to other sources.

This addresses the point made by Rubio.

The other points generally made are that taxing the rich will hurt job creation because it hits small businesses. This is not true. Small businesses and the wealthy are not the same. Please read the article which you can find here.

Finally the argument that taxing business at all will hurt job creation is also nonsense. There is a super abundance of cash in businesses, large and small, that is not being invested. Having more is not going to make a difference. There is only one reason businesses are not hiring, and that is that they have no need for additional employees because there is a lack of consumer demand. When consumer demand picks up, they will start hiring. It is well established that 70% of the economy comes from the consumer. That is why putting money into the hands of people who will spend it on consumer goods is by far the most effective way to move the economy. The stimulus worked, despite all the denials. Look at the figures. Before the stimulus, jobs were being lost at a rapid clip. Right after job losses declined rapidly, and then jobs started being created at an ever faster clip. It is true that the stimulus was too small and did not last long enough, but that is not Obama's fault. The size of the stimulus was the best that could be gotten out of Congress. 

Republicans are right that the best way to deal with the deficit is by growing the economy, but wrong about the way to grow the economy. The economy grows from the bottom up, not from the top down, i.e. consumers drive the economy, not supply side economics. Compare the economy under Bush I lower taxes, Clinton's higher taxes, and with Bush's II lower taxes.

Joel Wiener of Boca Ratan Florida, had this observation:

I found Krugman's earlier column (November 8th - Let's Not Make a Deal) on the Fiscal Cliff interesting, especially his conclusion:  

“Meanwhile, the president is in a far stronger position than in previous confrontations. I don’t place much stock in talk of ‘mandates,’ but Mr. Obama did win re-election with a populist campaign, so he can plausibly claim that Republicans are defying the will of the American people. And he just won his big election and is, therefore, far better placed than before to weather any political blowback from economic troubles — especially when it would be so obvious that these troubles were being deliberately inflicted by the G.O.P. in a last-ditch attempt to defend the privileges of the 1 percent." 

"Most of all, standing up to hostage taking is the right thing to do for the health of America’s political system. So stand your ground, Mr. President, and don’t give in to threats. No deal is better than a bad deal.”  

I just don't think the Obama has the nerve to see what happens. I recall that in the third debate, when asked about the Fiscal Cliff, he said: "It will not happen." That was before the election, however.

To which I replied:

In a sense this is like the confrontation with the Russians in the Cuban Missile Crisis. Don't act too tough; don't overplay your hand, but be tough and offer the other side some kind of concession.

The military wanted Kennedy to immediately order the invasion of Cuba. Kennedy said NO! That would definitely lead to war. But he ordered a blockade. He then contacted Kruschev and said take your missiles out of Cuba and we will take ours out of Turkey.

That’s what we need here. Tough and a signal that we are willing to face disaster (falling off the cliff if we have to) but not so tough as not to offer concessions and to make a deal unlikely.

                       

No deal may be better than a bad deal, but what is the definition of a bad deal. Is a bad deal any that makes painful concessions?

I trust Obama's judgment. This is where Krugman and I part. He does not.

And Rick Pereira of North Adams, Massachusetts chimed in with:

I totally agree with you that gerrymandering continues to be, if not the primary, then at least the fundamental, cause of our perceived political instability. It may well be part of why we have effectively only two parties. In my belief, it will take one or more states to take action against gerrymandering as a political message against it and to raise public awareness of it.  I have long complained of the lack of the words "accountability" and "transparency" in politics (national as well as state) and although I'm encouraged by Cuomo's efforts, I've been very disappointed in New York's lack of transparency in its election laws.  Furthermore: if there is any contingent of citizens concerned enough about this issue, one strategy may be to promote enlarging of political districts in the name of saving money, because technology is now easily able to handle larger districts. This should obviate gerrymandering on a zipcode-by-zipcode basis.

To which I responded:

We need to revise the Constitution as difficult as that may be. We are spending too much time on elections, so that as soon as one election is finished, fund raising begins for the next. I would suggest that both members of the House and the Senate should be elected every four years to coincide with Presidential elections and that state elections for Governor and state legislatures be held at the same time. One election every four years is more than enough and the Presidential election brings out more people voting, so the results are more democratic.

An override of United needs to go with it, saying specifically that the Congress shall have the power to regulate the manner of raising and spending money in elections and the extent to which the government shall finance it. Fewer members of Congress and larger districts are desirable. 

Then Congress needs to legislate how Districts are to be drawn, setting forth the criteria, e.g. contiguous, no more population variation than 5%, geometrically concise such as a square, etc. and that these criteria are to be fed into a computer by the US Census Bureau. That may not be perfect, but I can't think of a better way. The type of voting machine to be used and how many voting machines per registered voter also needs to be mandated.

As for state elections, the above will improve these, but under our federal system, anything beyond this will have to be a state matter, though I would like to see a mandate that judges must be appointed by the governor and not be elected.

And finally I had an extensive exchange with Roger Streit of West Orange, NJ who opined:

I do agree with Paul Krugman’s argument as set forth in his November 11 column  “Contrary to the way it’s often portrayed, the looming prospect of spending cuts and tax increases isn’t a fiscal crisis. It is, instead, a political crisis brought on by the G.O.P.’s attempt to take the economy hostage.” 

Why do you “take it from this that Krugman would be perfectly happy for taxes not to go up, even on the very rich, as the President wants, because … he doesn’t specifically say so”? 

From previous columns, it is very clear that he is in favor of raising taxes on the rich. He doesn’t have to make that point in every column. He was debunking the right’s supposed concerns of reducing the deficit. He identified the hypocrisy and also pointed out that they have been consistently wrong in their prescriptions and predictions. 

In short, you have to read Krugman on a consistent basis in order to appreciate his columns. I suggest that you read his blog as well as his columns before you criticize him. IMO, he has been right much more often than not. See also here.

To which I replied:

It is both a fiscal crisis and a political crisis. As I pointed out in numerous posts, the deficit is a phony issue when Republicans raise it, because they are totally insincere. Ryan's budget doesn't even attempt to close the budget gap. All it does is to destroy the safety net and all kinds of other governmental functions and cuts taxes on the higher incomes.

                       

But that doesn't mean that the looming deficit, which is a Bush creation, having inherited Clinton's balanced budgets and surpluses as far as the eye could see, isn't real. The Supreme Court's denial of the election to Gore was one of the greatest tragedies in American history.

                       

It is real. Not immediately. But down the road, but we can't wait till it is an immediate problem. That is too late. We need to put a long-range plan in place now. The President has been trying to do that for quite a long time with his proposals of tax increases and cuts, but the G.O.P. has been adamant for no revenue increases. That has changed. Now it is only how much and how. But cuts must be and will be part of the equation.

                       

Yes, Krugman wants taxes to go up, but he undermines the need for this when he argues that the deficit is irrelevant. If it is irrelevant, then we can just meet the nations needs without tax increases and let the deficit keep going up.

                       

Krugman is simply sloppy in writing his column and columns. Look back on my blog where I have time and again criticized him for undermining our President. He has no sense of political realities, and he is too often more of a polemicist than a thoughtful economist. I hope he does a better job in teaching his economics classes.

And then added:

Roger, let me add that I agree with much of what Krugman says. Erskine Bowles would be a terrible choice for Treasury Secretary, but I am not aware that he is being considered. When he says, "the deficit-scold movement was never really about the deficit. Instead, it was about using deficit fears to shred the social safety net," I agree with him, and I have been saying that all along. But when he says they "don’t even deserve a seat at the table." that is downright silly. The President can't deal with the "fiscal cliff without dealing with 'deficit scolds' in Congress!! To say they shouldn't have a seat at the table is ludicrous. Just because he rightly advocates for  ‘Keynesian economics’ as I do, doesn't give him a license to say silly things.

To which Roger replied:

I agree with you that you have to negotiate with the crazies, but you don’t have to give their arguments any credence. President Obama has given much too much weight on deficit reduction and has not focused enough on reducing unemployment. As Krugman has pointed out, the U.S. can borrow money for free and we have massive unemployment. Why not focus on putting these people to work?

And my rejoinder was:

That is an old but dangerous argument. Our debt has to constantly be refinanced. Three years from now interest rates may suddenly go up sharply, and will if the debt is large and growing. Then we are suddenly faced with a major crisis. We cannot just focus on now. We must also look to the future.

Comments, questions, or corrections, are welcome and will be responded to and distributed with attribution, unless the writer requests that he/she not be identified.