Voting Republican this fall is voting against America

9.5% unemployment. That's in an economy in which the total Gross Domestic Product is 70% Consumption and about 20% more is in investment. Investment does not occur if there is no predicted market to sell the goods or services the money is invested in. So expenditures of investment money which would put workers back to work are not going to happen as long as unemployment remains high and the markets for products and services is reduced.

The Republicans are suggesting (demanding) tax cuts to increase investment as the solution to unemployment. But where are the markets that the investors will invest in? If they exist they are outside the United States. Any additional employment that results from tax cuts that give the wealthy more money to invest will occur outside the U.S. Where the returns are predictable and sizable. They won't happen here in the U.S.

Here is what the New York Times has to say.

By DAVID KOCIENIEWSKI
Published: September 10, 2010

With Congressional midterm elections looming, the financial debate in Washington this fall will probably be consumed by one incendiary and expensive issue: whether, and how, to extend the multitrillion-dollar Bush tax cuts.

President Obama is advocating a mixed bag of tax proposals. He wants to extend the cuts for all but the wealthiest 2 percent of Americans and offer businesses hundreds of billions in breaks and write-offs intended to encourage investment and hiring.

Republicans, and a few Democrats, assert that the Bush tax cuts should be extended for everyone, warning that a tax increase right now, even if limited to the highest income bracket, would hurt small businesses and choke off an economic recovery that is already gasping.

Given the economy’s persistent weakness and an unemployment rate hovering above 9.5 percent, those arguments have gained traction. And because another round of government stimulus spending is considered politically unviable even if it were warranted, the debate over the tax cuts will be laced with promises to spur economic activity and reduce unemployment. The concept of lower taxes is so appealing to voters that many embrace them as an economic cure-all.

But economic research suggests that tax cuts, though difficult for politicians to resist in election season, have limited ability to bolster the flagging economy because they are essentially a supply-side remedy for a problem caused by lack of demand.

The nonpartisan Congressional Budget Office this year analyzed the short-term effects of 11 policy options and found that extending the tax cuts would be the least effective way to spur the economy and reduce unemployment. The report added that tax cuts for high earners would have the smallest “bang for the buck,” because wealthy Americans were more likely to save their money than spend it.

The office gave higher marks to the proposal, now embraced by President Obama, to allow small businesses to write off 100 percent of their investment costs.

Neither of those options, though, would do as much to stimulate the economy as offering direct payments to the unemployed and Social Security recipients or reducing the payroll taxes of workers, the study found. But those proposals — as well as aid to states and municipalities — are considered politically untenable with many elected officials reluctant to even utter the word “stimulus” after the $787 billion stimulus.

So while the decision on whether to extend the tax cuts will have a lasting impact on the deficit and on how the nation’s tax burden is distributed, economists and tax experts say it is unlikely to offer much immediate relief for high unemployment and sluggish growth.

“It may have some small impact along the margins, but firms don’t hire based on tax breaks; they hire based on demand,” said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center. “So a lot of the tax breaks are likely to be rewarding people and companies for that they were going to do anyway.”

When they were signed into law in 2001 and 2003, the huge package of income and capital gains tax reductions that became known as the Bush tax cuts were hailed as a way distribute the government surplus and promote long-term economic growth. Mr. Bush was so confident in their power to generate business growth and revenue that he predicted they would enable the government to pay down $1 trillion in debt in just four years.

Those surpluses have now become crushing deficits because of a combination of factors, including the recession, the cost of the wars in Iraq and Afghanistan, the Medicare prescription drug benefit, and the $1.7 trillion in forgone revenue from the tax cuts themselves.

The specter of a ballooning national debt has led even some of the early supporters of the cuts, including the former Federal Reserve chairman Alan Greenspan, to advocate letting them expire.

The Republicans are being paid off by the wealthy to push for tax cuts because that benefits the wealthy. But the Obama administration is pushing for aid to small businesses. Small businesses are where all new employment occurs. The Republicans are fighting against that proposal because it will succeed in improving the economy and that will make Obama harder to defeat in 2012.

Anyone who votes for Republicans This November is voting against America's economic success and for the Republican Party regaining power. It's really that simple.

The position of the Dollar as the World Reserve Currency is in real doubt

World Bank President Bob Zoellick is no anti-globalism Casandra, so when he says the greatest danger to the continuation of the Dollar as the world's reserve currency is those central bankers and Congresspersons who should be defending it, it's time to look at the issue carefully. Here is an article about what Zoellick said,

The international economic system will evolve with our cooperation or without it. Currently the biggest threat to the dollar is not those who seek alternatives but the U.S. policies that are pushing them in that direction.

and this is from the Wall Street Journal article:

Mr. Zoellick said central banks around the world fell down as regulators -- and that the Treasury, which is more accountable to Congress, should be given the authority to regulate big financial institutions, not the Fed.

"It will be difficult to vest the independent and powerful technocrats at the Federal Reserve with more authority," he said. "My reading of recent crisis management is that the Treasury Department needed greater authority to pull together a bevy of different regulators. Moreover, the Treasury is an executive department, and therefore Congress and the public can more directly oversee how it uses any added authority."

Mr. Zoellick, among other positions in the U.S. government, served in various posts in the Treasury from 1985 to 1993.

"Central banks failed to address risks building in the new economy," Mr. Zoellick said. "They seemingly mastered product price inflation in the 1980s, but most decided that asset price bubbles were difficult to identify and to restrain with monetary policy. They argued that damage to the 'real economy' of jobs, production, savings, and consumption could be contained once bubbles burst, through aggressive easing of interest rates. They turned out to be wrong."

The idea that somehow the solution to America's economic problems can be solved by piling more and more power onto the (bank-controlled) Federal Reserve is reaching the level of pure silliness. The Fed already has too much power and too little accountability for the good of the American economy.

Nobody could have predicted .... Macroeconomics in the ashes of the Recession of 2008

The Macroeconomics profession had essentially concluded by the end of the century that they knew enough so that another Great Depression was now impossible. Not that if it started economists and policymakers could head it off, but that it was impossible for it to even start. That conclusion was based on the assumption that the price valuations set my markets were perfect, given the available information at the time along with a great deal of very complex mathematical models and a lot of high-level statistics.

The assumptions that financial markets provide perfect prices and that people are perfectly rational were the same assumptions made by the Classical Economists before the Great Depression. It became the new assumption when Keynesian explanations of Depressions being caused by a lack of adequate demand were rejected in a flurry of new mathematical models and a flash of computer monitors. Unfortunately the models were essentially based on what Krugman calls ketchup economics.

Ketchup economics means the "...because a two-quart bottle of ketchup costs twice as much as a one-quart bottle, finance theorists declare that the price of ketchup must be right." It ignores the underlying factors that establish the true value. So if you compare home prices at a given point of time and the price of two comparable homes is roughly the same, then the price is right. There is no consideration of whether the income of the homeowners can support the mortgage required to meet that price. Those fancy mathematical models threw out answers that just don't match up with reality in the long run.

Financial markets, unfortunately, are well known to be based on short term considerations and to not consider long term factors.

The economic and financial experiences world wide of the last two years has left economies world wide in much worse shape than previously and also it has left the profession of Macroeconomics strongly questioning where they went wrong. Bankers are beginning to speak publicly about the need to put human beings back into the lending decisions and not depend on the mathematical models.

Paul Krugman has presented a fascinating overview of the questions the Macroeconomic profession are now grappling with The generally accepted new assumption goes back to Keynes' conclusion that recessions, even the depression, are caused by lack of adequate demand. But the beauty of the neo-classical models holds a powerful attraction. The recognition of what went wrong is not yet there.

Go read Krugman's article. It is lengthy, but written in language a layman with some understanding of Macroeconomics can handle.

OK. I want to quote Krugman on why the government has to be spending so much right now.

During a normal recession, the Fed responds by buying Treasury bills — short-term government debt — from banks. This drives interest rates on government debt down; investors seeking a higher rate of return move into other assets, driving other interest rates down as well; and normally these lower interest rates eventually lead to an economic bounceback. The Fed dealt with the recession that began in 1990 by driving short-term interest rates from 9 percent down to 3 percent. It dealt with the recession that began in 2001 by driving rates from 6.5 percent to 1 percent. And it tried to deal with the current recession by driving rates down from 5.25 percent to zero.

But zero, it turned out, isn’t low enough to end this recession. And the Fed can’t push rates below zero, since at near-zero rates investors simply hoard cash rather than lending it out. So by late 2008, with interest rates basically at what macroeconomists call the “zero lower bound” even as the recession continued to deepen, conventional monetary policy had lost all traction.

Now what? This is the second time America has been up against the zero lower bound, the previous occasion being the Great Depression. And it was precisely the observation that there’s a lower bound to interest rates that led Keynes to advocate higher government spending: when monetary policy is ineffective and the private sector can’t be persuaded to spend more, the public sector must take its place in supporting the economy. Fiscal stimulus is the Keynesian answer to the kind of depression-type economic situation we’re currently in.

This observation was at the core of Krugman's book "Depression Economics." It also explains why attempting to balance the federal budget anytime soon is likely to cause a second economic downturn.

At the end of his article Krugman lays out where he thinks the profession has to go next, with his reasons for thinking so. anyone interested in macroeconomics or in investing needs to read this article carefully.