Tax cuts won't do the heavy lifting this time

The GOP believes that tax cuts are the best way to stimulate the economy. Republicans would say that tax cuts are preferable to government spending because the American people know best how to spend their money and that the government has a poor track record for effectively spending tax dollars. But Daniel Gross makes a strong case that the traditional wisdom doesn't apply in this recession.

The whole idea behind tax cuts stimulating the economy is that Americans will spend the newfound discretionary income they have when their taxes are cut. It seems logical that if there are less withholdings, she'll buy that new pair of shoes she's had her eye on with the extra money she finds in her paycheck. Or if his income tax refund is unexpectedly large next year, he'll finally buy that widescreen HD TV that's been tempting him lately. Maybe the simultaneously increasing take-home pay and price of gasoline will convince you to finally buy that hybrid car you've been considering (as long as the desperate Big Three are offering so many incentives nowadays).

It makes sense, right? After all, we Americans love instant gratification and we're certainly not savers. Well, maybe it does not make so much sense this time. There are some factors that make this recession unique.

First of all, there is less job security than ever in today's workplace. There are now fewer career employees than ever and we have the highest rate of unemployment in many years. Worse yet, it's plummeting faster than it has in recent recessions:
(Click chart above to see in full-size from House Speaker Nancy Pelosi's office)
With the large number of unemployed Americans, there are fewer tax payers to spend the tax cuts. This alone reduces the impact the tax cuts will have on the economy.

Add to that the fact that Americans that are still employed lack confidence that they will stay that way long term. Not knowing how long it would take them to find a replacement job in this tight job market, American's feel that they need a larger safety cushion than usual right now. If they would want to have health insurance should they become unemployed, COBRA would be a substantial additional expense that they don't have while employed. Subsequently, Americans are much more likely to save their tax cuts for a rainier day than they are to spend them. While that's fiscally healthy for the individual, it's not stimulating to the economy.

To further exacerbate matters, the housing market is at the root of this economic downturn. During the housing boom, Americans were spending Bush's tax cuts hand over fist on their homes. They improved their homes to accelerate its appreciation. With home values falling like a rock in this recession, homeowners will not be spending their tax cuts at Home Depot because to do so would just be throwing good money after bad. Many homeowners are seeing their ARMs reset, so they will just spend their tax cuts on their higher mortgage installments (to banks likely to go bankrupt anyway). Renters will not likely spend their tax cuts on buying a home because of the concern that their mortgage would just be underwater a few months later.

Finally, there are Americans' retirement accounts to consider. The shrinking Dow reflects Americans' IRAs and 401(k)s. Losing 45% of their nest egg in less than a year, Baby Boomers are postponing the retirement they planned. Instead, they will just have to plow their tax cuts back into their retirement accounts to make up for their recent losses.

Of course, these factors will not completely eliminate the stimulative effect of tax cuts. Nonetheless, they will certainly significantly diminish the tax cuts' impact on this recession. The economic stimulus bill that just passed congress this weekend was the right recipe for this recession. Although it has some tax cuts, it's more heavily weighted to investments in America's future -- monies that we know will be spent.

Maybe the sky really is falling

When Secretary Hank Paulson started running around like Chicken Little telling everyone the sky is falling, I thought it was just hyperbole. After all, former president Bush had been employing scare tactics to control the American people for years. So when the Fed came to the rescue with a $700-billion economic rescue plan, I questioned if it really was necessary.

Then I saw the video of Representative Paul Kanjorski, a Democrat from Pennsylvania, talking about the events that led up to Paulson's histrionics (below). It made me think twice about just how bad things might really have been. Kanjorski said of the day that Paulson visited congress with his dark news:

On Thursday, at about eleven o'clock in the morning, the Federal Reserve noticed a tremendous draw-down of money market accounts in the United States to the tune of $550-billion being drawn out in a matter of an hour or two ... We were having an electronic run on the banks. They decided to ... close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn't be further panic ... If they had not done that, their estimation was that by two o'clock that afternoon, $5.5-trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.

Why didn't Paulson tell us about this activity then? Well, obviously because it probably would've scared investors even worse than they already were right in the middle of what turns out was a significant run on the investment banks. But what were these people thinking? Didn't they realize that money market funds don't evaporate in value like the bank securities were doing and that their investment accounts were insured by the feds in the event of a bankruptcy like Lehman Brothers?

Apparently, they didn't. Just watch this video, listening up sharp at 2:10 in, to hear a little told story about what was happening during those days:
Go to source web page>>

California steals from its taxpayers

I visited the Franchise Tax Board's website to check on the status of my state income tax return today. Imagine my surprise to see their reply was "your refund cannot be issued at this time." How would they respond if I owed them money but instead of paying, I told them that their payment cannot be issued at this time? They would charge me penalties and interest.

The Franchise Tax Board passed the buck. They went on to say:

Due to the state's persistent cash and budget problems, the State Controller has directed FTB to stop sending refund requests to the State Controller's Office for payment. Refund payments will resume when the State Controller indicates there is enough cash available to make refund payments.

That excuse is not good enough. If I owed it taxes, the state wouldn't accept a claim by me that I don't have enough cash available to pay them as an excuse. I shouldn't have to accept it from them.

My refund (and I don't call it a "tax" refund because it's not taxes -- it's my earnings) is not the state's money and it never was. I didn't want the state to have my money in the first place. The only reason they have it is because they forced my employer to withhold it from my paychecks.

Since it's not the state's money, the controller shouldn't have spent it. They should have secured it in a trust fund or some kind of escrow account. After all, that's what the state requires of businesses that hold their clients' monies. Apparently, the state does not believe that 'what's good for the goose is good for the gander.' So I won't bother charging the state a penalty for not refunding my money in a timely manner.

Restoring the American dream

I've already admitted to using Peter Schiff as my economic forecaster. He forecasted our current recession while many were still saying the fundamentals of our economy were strong. He was on target when his naysayers were calling him a crackpot. So what does he say about the recession this year?

Unfortunately, Schiff says there's no pain-free cure for the recession. Regarding economic stimulus, Schiff says:

Any jobs or other economic activity created by public-sector expansion merely comes at the expense of jobs lost in the private sector. And if the government chooses to save inefficient jobs in select private industries, more efficient jobs will be lost in others. As more factors of production come under government control, the more inefficient our entire economy becomes. Inefficiency lowers productivity, stifles competitiveness and lowers living standards.

So what does this portend for the fiscal policies that both president Bush and president-elect Obama have been pursuing? It means that we can expect higher inflation for years to come. Many of the actions they have been taking to protect the American dream are simply delaying the inevitable.

Please president-elect Obama, don't fall for the next wasteful bailout congress legislates. Don't you see that the current treasury secretary, Hank Paulson, is just another Wall Street banker looking out for the interests of his cohort? The Fed will not be able to rescue us from the predicament the American people have put themselves into. America will see a dramatic redistribution of wealth and widespread hardships sooner or later, regardless of fiscal or monetary policy.

I say rip the bandage off now. We're going to have to suffer through a reduction to intrinsic -- meaning dramatically lower -- values for our real estate. We'll have to see salaries for jobs that do not deliver tangible value to society, such as insurance agents and securities dealers, fall back to five-figures. We're going to have to reduce our collective personal debt and increase our savings, which means fewer flat-screen TVs and SUVs with leather seats. After all that has happened, our economy will again become strong and Americans will again be able to fulfill the American dream!

President-elect Obama

The raw truth comes out

The Raw Story has recently been validating my posts from the early months of The Progressive Zone. Back in 2005, I posted about the fascist elements of the USA PATRIOT Act. Section 501 of the Act seems to be contrary to everything this country stands for. It prevents someone accused of terrorist activity from being informed of the evidence against him or her, no matter how flimsy it be. It's no surprise then that a federal appeals court has finally invalidated the section of the Act which permitted "national security letters" to create blanket gag orders.

Also in 2005, I tried to reconcile president Bush's claim that "we do not torture" with vice president Cheney's insistence that the CIA should be permitted to torture detainees. Why would it need this permit if we do not torture? Well, now we know why. The Raw Story also reported this month that Cheney admits authorizing detainee's torture. He had the gall to say on national television that he supports water-boarding, an act for which Japanese soldiers were tried and convicted of war crimes after World War II.

Although I'm pleased that the truth is coming to light and the judiciary is beginning to restore civil liberties, I still wonder why it's taken so long.

The role of the government in an economic recovery

I've mentioned that I take my cue from Peter Schiff when it comes to forecasting the economy. It turns out that he was not the only one who many years ago forecasted the economic problems we're experiencing now. Martin Weiss also saw the housing bust coming back in 2005.

So last week, Esquire magazine asked Weiss what he forecast for the housing market over the next few years. In his response, Weiss had some insights regarding the role the government should play in the economy. I agree with him that "the debt problem is far too big for the government to be able to address with its limited resources, so they should back off and let the marketplace resolve the two big problems our economy faces -- too much debt, and prices that are too high." As we all know, the government has instead chosen to do the opposite by trying to fix the economic decline through increasing the debt load on our nation. Weiss said:

I believe we should give up the war we can't win, which is the war against the economic decline. Instead we should fight the battle we must not lose, and that's the battle to protect the health and well-being of the citizens of the country. Right now, for example, hospitals are going broke and the states are running out of money to pay unemployment benefits -- we have already 19 states that are in the red with respect to their unemployment benefit funds, and it could grow to 30 or 40 states very quickly. That's where the government's role has always traditionally been since the New Deal, and that's where our resources need to go.

This viewpoint is not far off from president-elect Obama's position on the right way to recover the economy.