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FEBRUARY 19, 2011 2:23PM

Economic Myths Revisited, Part 3

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 Part 1 of Economic Myths Revisited

Part 2 of Economic Myths Revisited

 This is why the Republicans harp on tax reductions....because that's the only way to inject more capital into the economy that doesn't increase the economy's dependence upon federal spending.

But tax reductions carry the seeds of another issue with them.  Tax reductions are essentially unequal.  A small percentage discount puts millions more in the hands of a very few while giving the vast majority of the people a minuscule and useless emolument that disappears without a trace into the general economy.

The illusion of the trickle down theory is that if we give more money to business, business will create more product and therefore create more jobs.

That might have been true once, a long time ago, but automation has made it possible to increase or decrease production without significantly increasing or decreasing staffing patterns on the production lines.

Note that the greatest number of jobs being created now are in low-paying service occupations. Temporary, seasonal positions at The Home Depot may make the jobless numbers look better, but that is obviously only a temporary solution.   Within a year’s time, those temporary workers will be looking for work again.

Rich people spend approximately the same per capita on their immediate personal needs on a pro rata basis.  They may buy more expensive items but they buy approximately the same number of items because even if the rich have more closet space than the poor, they are still limited in their purchases to the sizes of their closets.

When you give tax breaks to the rich, they spend their tax breaks on more expensive toys, but those toys don’t add significant numbers of jobs to the economy and sometimes none at all.  Expensive art and antique purchases, jewelry, and even homes, don’t add large numbers of jobs to the economy, and some add none at all.

The idea that tax reductions will result in business investment is laughable.  Personal tax reductions cannot be directly injected into publicly traded firms and small businesses, contrary what you have read elsewhere, contribute an annual increase of approximately 31,600 per year to the economy. 

The Small Business Administration estimates that, in 2008, there were 627,200 small business start-ups and 595,600 small business failures, for a net gain of 31,600 busineses.  If each of those businesses employed 500 people – the maximum for a business defined as small – they would generate 15.8 million new jobs.  More than 52% of those small businesses  were actually home-based businesses, which employed an average of three people each, which means that 16,500 small businesses provided employment for less than 50,000 people.  The remaining 15,200 businesses employed anywhere from three to 500 workers.  Since very few businesses start up with 500 employees all at once, let’s use the median of 251employees per business:  that 48% of the new “larger” small busineses actually provided employment for 3.8 million workers.

But the vast majority of the new businesses created each year don't have that average number of workers.   According to statistics from 2004, there were a total of 5,066,703 small businesses incorporated businesses in America. 

Of these, 55% had one to four employees, including the owner, 21% had 5 to 9 employees, 13% had 1o to 19 employees, 10% had 20 to 99 employees, but only 1.7% had 100 to 499 employees. 

Those are disheartening numbers for anyone who thinks that small businesses will save America.  The won't.

Now, let’s not forget that a whopping 95% of those new businesses will fail within two years. 

Small business isn’t the way out.  It’s a dead end myth.


And then, finally,  we come to cutting "entitlements" where all of the same caveats apply.   Cuts to entitlements will trickle down through the economy causing further economic dislocations.

Cutting Social Security payments, which no one is publicly talking about yet, would have some dire repercussions:

Senior citizens who rely on their social security payments to cover mortgage or rent payments would go into default.  Those who don’t go into default will cut back their optional expenses.  No more eating out.  Eating out is important to seniors because, often, their jaded appetites require the stimulation of unfamiliar foods.

You will hear arguments that if we just shave a few percent off the monthly payments with an across the board reduction that no one would be harmed.

Bullshit.  Many seniors have their expenses figured to the last dollar and cent.  It is heuristic nonsense for anyone to suppose they know what anyone else’s budget can afford to lose.

Add a three percent reduction in social security payments, which is the number that will eventually be proposed, to the three percent cost annual inflation rate and you get a six percent loss of income power for approximately 59.4 million people who are receiving some form of Social Security, an amount that totaled almost $700 billion in 2010.

Take six percent off that, and the economy will lose some $42 billion a year in spendable dollars…along with untold numbers of hardships for our senior citizens.

All that pain and suffering gains us only a third as much as ending the wars in Afghanistan and Iraq.

Get the picture?

The sour joke is that even if we could reduce the federal tax rate to zero, that would only inject 30% more revenue into the economy (averaging between the lowest and highest tax rates), and that's not nearly enough to generate the economic boost Republican strategists are hoping for when the push for tax cuts.

The ultimate answer is, of course, revaluation of our currency.....and it's also the only answer.  Our trading partners don't like that answer because that will dilute the value of their American investments and will adversely impact the value of their exports into the American market.

Too bad.  

These are wages the world must pay for the 65 years we have spent keeping the world from falling into a state of perpetual worldwide warfare.  Those chickens are coming home to roost now.  The Lend Lease debts that were never repaid, the vast expenditure of American treasure expended to beat back the barbarians at the gates in three world wars (Korea was a world war) and a dozen other conflicts, and the incalculable costs to the American psyche is a burden the world must share with us because there is no other alternative.

 

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Bravo!! Fascinating analysis and right on! I'm interested in learning more about the ultimate answer you propose - revaluation of the currency. Thanks for blowing my mind in all three parts.
I agree with the generality that the Republican concern with eliminating taxes is insanity but its motivation is to excuse the wealthy from the responsibility of living within a national community. I have severe doubts that the monstrous military expenses have saved the world from large conflicts. If anything it seems very apparent that they encourage conflict and spill a huge amount of valuable and needed human wealth down a rathole.
I have missed your commentary and insights. I read your posts yesterday and again today. Still processing and working through it. I have become very cynical and really believe that power corrupts and absolute power corrupts absolutely (don't know who to cite for the quote). There is sooo much money and power in our federal coffers, that it is not just the bloated bureaucracy, but power and greed that corrupt our representatives to ignore their duties to citizens. If/when a currency deval occurs, what effect will this have on the corporate stranglehold and greed that has infected our governments?
Good work Sage. When the wealthy spend so much time and money to find ways to make it seem like what they want is no burden at all to anyone I think that they are forgetting that if they have five million in the bank then cutting forty eight thousand out of their budgets might be noticeable on the profit loss statement but not a real hindrance to their lives while that same amount taken from what constitutes the other 95 percent of the people would leave those that are in the middle of that group broke and the rest of them in debt for thousands of dollars. How damned hard is that to understand? Why is it that a huge number of the people affected the hardest by the tactic of trickle down still support it so strongly?
I think that a movement by union leaders to picket the exportation of jobs is necessary to level the playing field. It is an immense task and not seemingly within the purview of any current union thinking that I know about. But...we're not going to be paid back any other way.
In additon, the maniacal self destructive counter-intuitive thinking the foments and drives ideas such as reducing Social Security benfits is trickling down to those younger than me. I have seen and heard hard working 25-40 year olds who believe that they should not have to conribute to Social Security to partially subsidize the future they think I did not prepare myself to face. That completely ignores the conribution my generation has made for 40+ working years to assist their ancestors.
How does this type of limited deductive reasoning get such a hold on their group-think?
OK, keep digesting this and I am scared shitless, I have had a busy day, but this has been with me all along.. If a reval of USD$ actually could happen I am more disturbed than Scanners fiction about little G. I am not an economic guru, do you really think the movers and shakers or this world would let a reval of US currency happen? I don't have TV in my house. tell me that I haven't been a total idiot for not investing all my assets in gold and ammunition.
The time to buy gold is always a year ago. Gold and oil are the real standards of exchange, not paper currencies. Re-evaluation of currencies results in a sudden increase in the prices of all consumable goods because consumables have a real value based on the cost of production.

It is important to understand that every time Congress votes an increase to the debt ceiling, we are devaluing the dollar because those resolutions authorize the Federal Reserve to issue more dollars and increasing the money supply automatically causes devaluation and therefore price increases.

We have no choice about this. If we do not increase the debt ceiling, as the Republicans are currently threatening, then we have to cut spending so that we don't exceed the debt ceiling.

The great fallacy is that anyone is in control of these economic mechanisms. The big banks and their stock broker cohorts didn't control anything. They merely took advantage of evolving circumstnaces.
Not only is the federal debt unpayable but unsustainable. The only way out is to inflate the fiat currency to worthless.
We are well on our way. Great Post and I am off to read the previous ones I have missed due to sunshine and almost warm weather.
Actually, if you think about it, inflation is the "fairest" tax of all in one respect in that what is taxed is the purchasing power, the "intrinsic value" of the dollar itself.
What they all do is deficit-spend so the money trail is too cold for the hoi-palloi to follow.
In my lifetime there have been at least 6 undeclared "wars" that were deficit funded.
Valuable post!
So glad to have someone spelling out trickle down in a concise manner.
Your POV is of great clarity and understanding. Maybe you should run for office somewhere some how...Please do.
Cogent analysis, Sage. It is time to take care of home, just like every middle-class and poor family in America is having to do. There is nothing extra with which to "save the world."

Lezlie
Wow, so much good sense, it has my head spinning. I wonder what you think of Obama's proposal to end federal subsidies for home ownership. The idea is that all home loans will be made by the private sector, with no government guarantees. Naturally, interest rates will be higher. A policy of widespread homeownership may be part of the "trickle up" economics you mentioned (though I'm not sure I understood the reference). Regardless, withdrawing the federal government from homeownership will lead to even more sharp class distinctions. Renting is a fine way to live, if you have decent rental laws. I don't now of any state with decent rental protections. It will be another financial insecurity for people to deal with.
One of the best economic essays I have read anywhere, period. Should be submitted to the NY Times. I'm not kidding. Rated
I am flattered that people think I should write for the NYT but the truth of the matter is that you are known by the company you keep and the quality of the reporting and writing coming from the Times these days isn't the kind of company I want to keep. Consider that the best reporter working today, Matt Taibbi, writes for Rolling Stone.

The question become whether this new thing we are developing will become a force in its own right, or if we will continue to pander to the Old Media instead of promoting the new.

I am not good at pandering.