The Weiner Component #156 – Fear & the Economic Situation

Official photographic portrait of US President...

Official photographic portrait of US President Barack Obama (born 4 August 1961; assumed office 20 January 2009) (Photo credit: Wikipedia)

Starting slowly, probably around the 1970s, the process of splitting real estate loans into a few parts began, and then, with the election of Ronald Reagan as President of the United States in 1981, the concept took off on a refined bases, with each real estate mortgage being broken into innumerable parts and having each piece put into a different hedge fund and sold as a safe investment. It was considered safe because any single or few losses on any one of these hedge funds would be so small that it wouldn’t be noticeable and would not really affect the amount of the dividend.

 

Two things occurred from the 1980s on: one was the election of Ronald Reagan to the presidency of the United States and the imposition of a total Free Market Economy and the other was an incessant need in the general society for a much greater cash flow.  We were in a period where there was not enough money available to serve the overall needs of the population.  More cash was needed for the economy to function.

 

The agency of Federal Government that was supposed to be keeping track of this problem and monetarily serving the needs of the nation was the Federal Reserve.  It’s Chairman from 1987 to 2006, Alan Greenspan, like the President believed in a totally Free Market that would automatically adjust itself.  Consequently he and the FED did nothing to alleviate the problem. 

 

This in turn left the need prevalent and either purposefully or inadvertently it was picked up by the banks which were also deregulated by the Reagan administration.  They, at first, gradually and then, with ever increasing speed, using real estate as their base, picked up the speed of creating new value or money throughout the society.  This was to continue through late 2008 when the banks had far     exceeded the amount of money needed for the society to properly function and the Great Real Estate Crash occurred.

 

What happened was that the banks, by their lending policies from the 1980s until late 2008, over 28 years, created trillions of dollars of additional value based upon the public housing industry within the United States.  In addition deregulation also allowed them to freely invest their deposits into the agencies or funds that directly serviced this expansion.

 

By 2007 most bankers were aware that property values had far exceeded a sane level and that a crash was probable.  But by 2007 most of the bankers had been making high commissions on the property market for most, if not all, of their banking careers; they were in denial that conditions could ever change. 

 

The Real Estate Market crashed or the Real Estate Bubble burst in late 2008 under President George W. Bush.  Virtually overnight the economy of the United States went into an instant depression.  There was suddenly mass unemployment, many people owed more on their homes than they were then worth.  Some people just walked away from their homes, others stayed, the hedge funds, which many or the deregulated banks had also invested in, collapsed from non-payment on mortgages.  Bush and his Treasury Secretary bailed out some of the banks; then his term ended and Barack Obama became the next President of the United States.

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Barack Obama would spend his eight years in office dealing with this mess.  For his first two years he had a Democratic Congress and their full support.  From 2011 on the House of Representatives gained a Republican majority and thereafter passed no legislation that dealt with the economic emergency.  In fact they passed economizing laws that actually increased the disaster.  President Barack Obama and the Federal Reserve Chairman, Ben Bernanke, using Creative Monetary Policy were able to change the depression into a recession.  The country is still dealing with this problem that the House of Representatives refused to deal with.

 

Conditions have improved.  Unemployment is now at about 5%, a long way from the initial 12½%  The Republicans still have done nothing to improve conditions, instead they have actually worsened them.  They are a great political party for complaining and blaming.  But what they are blaming President Obama for, is mainly for what they, themselves, have not done, passing fiscal laws creating jobs and upgrading the infrastructure.

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In 2008, the year of the Real Estate Crash, the Gross Domestic Product   was at 800 trillion dollars.  In 2009 it dropped to 700 trillion dollars.  By 2010 it was slightly above where it had been the year before.  By 2015 it was in the area of 17.95 trillion dollars.

 

Keep in mind that the GDP refers to the market value of all goods and services produced within the country during the fiscal year.  Interestingly the United States is now ranking first in the world’s GDP level.  That makes it, even now with 5% unemployment, the world’s richest nation.

 

If, as we’ve seen in the GDP, the overall wealth within the United States was continually increasing by 2010 above the 2008 Real Estate Crash level then why was the U.S. up to 12 ½% unemployment?  The answer, of course, comes into the area of spending priorities mostly by the United States Government and the overall population.

 

Congress, from 2011 on, with a Republican majority in the House of Representatives, was on an economizing bilge. The country underwent and is continuing to undergo Sequestration, spending cuts across the board in virtually every area.  The President, on the other hand, particularly in 2009 and 2010 underwent expansive spending programs to avoid a depression greater than that of 1929.  Basically what started from 2011 on was a redistribution of income, with gradually more and more money going to the upper echelon of society and less and less being available for the middle and lower classes, these amounts increasing yearly.

 

In 2009 and 2010 the Obama Administration spent inordinate amounts of money extending unemployment benefits, saving the American banking and auto industries, among other things.  From 2011 on gradually most of these programs ended and government began a struggle between the House of Representatives and the President.  In 2013 we had both Sequestration and a shutdown of the Federal Government from October 1 through October 16, 2013, for 15 days.  The shutdown was over the issue of government funding for Planned Parenthood in the 2014 funding bill.  The Republican House of Representatives attempted to force its will upon the President and the Democratic led Senate.  The President and Democratic Senate would not cooperate with the Republican led House of Representatives.  In many cases Congress has refused, or through different Republican disagreements, has been unable to act.

 

The positive movement that had occurred in the economy, turning a potential Great Depression into a Great slow-moving Recession came about through Creative Monetary Policy, government spending policy, by the Federal Reserve with the compliance of the President.  In essence it’s been a battle between the President and the Republican House of Representatives, with the administration slowly winning since national unemployment is today in the area of 5%.

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The question that arises: if the GDP (Gross Domestic Product) today is greater than it was in the period prior to the 2008 Real Estate Crash then why is the middle class in the United States continually shrinking and why are more and more people continually having a harder and harder time economically surviving?  The answer to that questions is that the National Income is like a balloon filled with helium, slowly and continually rising and becoming part of the incomes of the top few percentile, the upper 5 or so percent of the population.

 

In essence the rich are getting richer and everyone else has less money.  It would seem that the society is geared so that the rich pay a lower percentage of their incomes in taxes than everyone else does.  For example: Donald J. Trump, who is running for the presidency in 2016 as the Republican candidate, has refused to show his tax returns for any prior year.  Trump claims to have over ten billion dollars.  The probability is that he is not showing his income taxes because he doesn’t pay any of these taxes.  Being in real estate he would have endless write-offs and building depreciations.

 

But it isn’t just people in real estate who have these tax advantages, it’s anyone who earns over $464,850.  The income tax system is graduated up to that point; that is the more one earns, the higher a percentage of his/her income he/she pays in taxes.  Anyone earning over $464,850 pays the same rate as those earning that amount.  A person earning a million dollars or 25 million a year pay the same percentage of the incomes as the person earning the above figure.

 

While the number of individuals is not large compared to the overall population of 350 million people, yet the taxation system is rigged in favor of the very rich.  The more they earn over $464,850 the smaller a percentage of their income do they pay in taxes.

 

This change or decrease in taxes was brought about during the last five years of the Obama administration.  The Republicans actually lowered taxes for the very rich.  The Democrats were forced to go along with this in order to pass other similar required legislation.

 

The Republican argument for this action is that the rich need more money because they are the ones who invest in new industry.  Without them there would be no growth in the economy.

 

This argument that has been endlessly repeated over the years sounds wonderful.  But it is a myth.  It has never happened.  The rich invest their surplus incomes in old established industries that pay a set reasonable income or they, like Mitt Romney, bank some of it overseas where somehow they pay no taxes on the interest received.

 

Taxes are geared so the less an individual earns the higher a percentage of his/her income is paid in taxes.

 

The United States is the wealthiest nation in the history of the world.  Yet its unequal taxation system taxes the poor and middle class far more than the wealthy, they pay a higher percentage of their income in taxes.  It also has an underclass that is so poor they live in the streets and even though these people pay no income tax they also pay a higher percentage of their incomes in other taxes than the rich.  The national distribution of income is today a farce.  Someone like Warren Buffet has remarked that it’s a strange situation where he pays a smaller percentage of his income in taxes than his secretary.

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In 2016, the year of the next Presidential Election, this created a strange phenomenon within both political parties within the nation.  Currently there is a Republican majority in both Houses of Congress.  Very little if any needed legislation is being passed.  This situation has existed since 2011 when the Republicans took control of the House of Representatives.  In both major political parties there are large numbers of people who are totally frustrated with their Federal Government.  Many of whom are not overly well educated or generally too busy with their lives to follow what is actually happening in Washington D.C.  Their knowledge of the government is what they’re told by the news media, which can be tilted to the right or the left by which channel they are watching.  This doesn’t really answer their questions or needs. 

 

What exists today are large segments of the population which are looking for easy answers to what seems impossible questions or problems.  They want a simplistic solution which, in essence, is a return to a past which never existed.  They want a simplistic solution to their economic problems, to bring the manufacturing jobs back to the United States and allow people to earn more money so they will no longer be economically stressed out.  Whether this is real or not is beside the point; there is a strong desire among many for a simplistic change within the society.

 

For the Republicans the person who will do this is Donald J. Trump.  He claims that he will force the companies that have moved their manufacturing overseas or to Mexico to bring these jobs back to the U.S.  In addition he will get rid of all illegal foreigners in the U.S. and lessen competition so that there will be jobs available for everyone who wants to work.  He will also make the U.S. safer by not allowing alien radicals to migrate to the U.S. and keep Mexicans out of the country by building a wall between the United States and Mexico.  And so on.  He will bring us to a golden age that never existed in the U.S.

 

In essence Trump is feeding on all the basic prejudices and fears that seem to still exist in this country.  He is opposed to Mexicans, Hispanics, Muslims, Syrians, Blacks, Women having a right to deal with their own bodies, and the list goes on.  Trump has promised to take us all to-never-never land if he becomes president.  He seems to open up all the hidden prejudices in a large percentage of his followers.  He has also increased bullying among the children of his followers.

 

For the Democrats there is Senator Bernie Sanders, a Democratic Socialist.  Over a year ago he changed his party registration from an Independent Socialist who always caucused with the Democratic Party to a Democrat.  Sanders now calls himself a Democratic Socialist.  This has enabled him to run as a Democratic candidate for the presidency in 2016.

 

I strongly suspect that Bernie Sanders initially expected to run as a protest candidate with no chance of winning.  However he inadvertently tapped into the younger generation of voter; those who had been too young to vote in prior Presidential Elections.  To these people and the others who have joined them he offers a utopian future. Free education from pre-school through college and free medical coverage for everyone.  He supports abortion rights and a more liberal drug policy.  He believes in gun control, immigration reform, LGBT rights, expanding social security, and tax reform.  Among other things he has stated: “We need to get big money out of politics and restore our democracy,” and “Climate change is real, it is caused by human activity.”

 

He has also brought large numbers of Independents and some older Democrats to his cause.  His campaign took off like a rocket shooting upward and Bernie could almost taste victory.  But he never quite caught up with his competition, Hillary Clinton. 

 

He is promising a new society with benefits for everyone.  And all this will be paid for by the rich who have up to this point exploited their position in society.  The image is wonderful but the reality doesn’t exist.

 

I suspect that the majority of the population agrees with most of if not all of Senator Bernie Sander’s goals.  But they would have to be paid for if they were to be put into laws.  And his solution to this is rather naïve.  He says he would put a tax on Wall Street’s excess profits.  Traditionally in United States history, going as far back as the Revolutionary War from 1776 on the practice has been to make someone else pay for what you want.  The Southern planters owed millions to English merchants which they never paid after the Revolutionary War.  Afterwards Daniel Shay, a Revolutionary War veteran, led Shay’s Rebellion where the inland farmers refused to pay taxes that were brought into being by the Tidewater merchants in the coastal cities.  In recent years there was an attempt on the California side of Lake Tahoe to tax the Time Share facilities to pay for the public schools in the region; it failed.  It’s always nice to get someone else to pay for what is needed or wanted but generally it doesn’t work.

 

The term Wall Street is an abstraction; it has no specific meaning.  Are they talking about the banks or the large commercial corporations, or any company that sells stock?  An excess tax on the sale or purchase of stock or company profits would bring about economic disaster.  A tax on profits already exists, increasing it could destroy incentive.  Senator Bernie Sanders funding solution sounds just but it is nonsense.

 

Hillary Clinton is much more pragmatic.  The very existence of Senator Bernie Sanders has pushed her farther to the left in her own position.  She may be able to achieve many of Bernie’s goals which he should be able to get into the 2016 Democratic Platform. 

 

Sanders, on the other hand, as President would face endless frustration, even if he were to get Democratic majorities in both Houses of Congress, which is a low probability.  In all likelihood the House of Representatives will retain its Republican majority.  And even if Senator Bernie Sanders were to get an all Democratic Congress he would still have trouble both passing and funding his program.

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In the early 1800s England began the Industrial Revolution in the cotton industry.  Eli Whitney invented the cotton gin which allowed the cotton plant to be quickly separated from it many seeds.  Machinery was developed for spinning the cotton plant into thread and machinery was also invented for weaving the thread into cotton cloth.  Overnight spinners and weavers became obsolete, their occupation ceased to exist.  Some became luddites, breaking into factories and destroying the new machines in an attempt to bring back the past when they had a functioning occupation.

  

 Even if Trump, by some strange miracle, were to get elected the probability is that the results of the 2016 Presidential Election would leave a number of people totally dissatisfied  with the changes that don’t seem to be happening,  You can’t bring back the past, real or otherwise. 

 

Can conditions be improved?  Jobs are available in the United States.  The problem is that they require training and mobility.  It now requires a trained skilled employee for the jobs that pay a decent wage.  For those who refuse to undergo any training or move to where these jobs exist there are public sector occupations that do not pay much but that take almost no skills to do.

English: Seal of the President of the United S...

English: Seal of the President of the United States Español: Escudo del Presidente de los Estados Unidos Македонски: Печат на Претседателот на Соединетите Американски Држави. (Photo credit: Wikipedia)

 

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The Weiner Component #7 – Taxes: Franklin Delano Roosevelt & the Graduated Income Tax

Franklin D. Roosevelt

There are essentially two categories of taxes that a citizen of the United States pays: one group is called progressive and the other is regressive. A progressive tax is one that is “gradually increasing as an individual’s income increases beyond a certain minimum level. The income tax is an example of this type of tax. The more one earns the higher percentage of his/her salary the individual has to pay in taxes. In the case of State and Federal income tax the earnings have to be above a certain minimum for the person to pay any tax and then as the income rises so does the percentage paid to the government(s). Of course there are deductions which lower the income and the amount paid. Mitt Romney, with an income running into the multimillions in 2011 paid 14.1 % of his yearly income. It should be noted that he paid that much because he refused to take a two million deduction on his charitable contributions. In 2010 he paid thirteen something percent. The average earner getting about above fifty something thousand dollars a year, pays somewhere, after deductions, between twenty and thirty percent of their yearly compensation in income taxes.

(Parenthetically Romney has three years to file an amended tax return to claim and get money back for the two million in contributions he did not use in his 2011 income tax. If he loses the 2012 Presidential Election, or, for that matter, even if he wins the election he can still claim that amount and bring his percentage down to eleven or twelve percent of his income for that year.)

Most other taxes: sales, excise, etc. are regressive taxes. Paying this tax has nothing to do with your income. Everyone buys food and the assorted items needed for daily living; and they all, more or less, pay equally for these items. Consequently the more one earns the less a percentage of their income is spent on these items. These taxes are regressive in form because the smaller the income the higher a percentage is paid in taxes. Those people who are earning too little to pay income taxes are spending a large part of their resources on these survival items and paying a goodly percentage of their incomes on these taxes.. Both the poorest and richest people around must have food and shelter to survive. The difference that they would spend on these items is astronomical.

The other tax that seems to fall between these two areas is property tax. In order to pay this tax one has to own property and the appraised value of the property determines the amount of the tax. In the state of California there is an exception to this principle. In 1979 Proposition 13 was passed which lowered everyone’s tax rate and there after only allowed it to increase two or two-and-a-half percent per year. Everyone, who bought property after that point, paid and has continued to pay a higher tax rate than the people or corporations who owned property before the measure was passed. Still the category of this tax is somewhere between progressive and recessive taxes. For example Mitt Romney owns five houses, each valued at well over a million dollars. I own one house valued at well under one million dollars. In addition I have owned this house in California since 1970. I pay far less in property taxes than Mitt Romney. My neighbors, who have purchased similar houses after 1979 pay more than double what I pay. A person, who does not want to purchase or cannot afford property and rents, pays his/her share in their rent.

The question raised by Franklin Delano Roosevelt in his first Administration, during the low point of the Great Depression was: How much does a person need to live comfortably for a year? Roosevelt felt that beyond a certain point the amount of money being earned was ridiculous; after all, how much could any individual spend, for himself and possibly for his family, in a year. Amassing large amounts of funds for their own sake was ridiculous, particularly in a dire time of need. He felt that the balance should be taxed. To Roosevelt, the progressive or graduated income tax should be a means of serving the entire nation. Both Houses of Congress refused to go along with this idea and it never even came to a vote in either House of Congress.

In his Third Administration, during World War II, Roosevelt brought the same point up again in terms of war profits. Again Congress refused to consider the idea. It was not really an issue then because anyone who could or wanted to work was employed helping the War Effort. The problem then, with the war, was that there were not enough goods for everyone who had money to spend.

The problem seems to deal with the concept of what is really wealth. Is the money spent to acquire the goods and services produced or is it really the goods and services produced? Is it the productivity of the nation or the money, which the government prints?

If it’s the money then some individuals can amass great amounts of currency in their lifetime and they will then be very wealthy. But if the true wealth is the productivity of the nation, then the wealth is determined by both the level of productivity, and the prosperity of everyone in the nation.

The issue is confusing. Obviously the answer is on two levels: one, money determines an individual’s level of success within the economy. Also money has value in that it can be exchanged for goods and services in the present or in the future. Actually the currency is really a means of exchange. In itself, money has no real value except that arbitrarily assigned to it by the state. In a manner of speaking, money is the tail that wages the dog, the economy.

Roosevelt’s point is well taken: there are only so many goods and services that can be used in a year or even in a lifetime. If there is much more money than is needed, then those amounts are superfluous funds and should be taxed and used for the common good. Money ceased to have any real value when it became paper with nothing behind it but the word of the government.

It can and has been further argued that if tax policy stuck to its principles and was truly graduated for the rich then why should anyone create new industries. Take for example Bill Gates, one of the enervators of Microsoft. Gates is today a billionaire, who is currently spending his life giving millions away to assorted charities. And he and his wife are trying to upgrade the human condition, through medical, educational, and assorted other charities.

Another justification for gathering wealth is so that it can be used for inheritance purposes to create a future dynasty. Mitt Romney is a good example of that category; he has set up a trust fund for his five adult sons and their families of one hundred million dollars; and he has kept for himself and his immediate family between one hundred and ninety to two hundred and fifty million dollars, which was mostly “harvested” from his years as CEO of Bain Capital. In addition he has a ten million dollar retirement fund, from which he should start collecting soon, since he is in his sixties. It’s interesting to note that no one in his family even has to get out of bed to live comfortably for countless generations. Parenthetically, I would wonder if he’s really doing them a favor? What is needed there is a stout inheritance tax for a number of generations!

To the individual, monetary success is important; to the Federal Government economic prosperity is necessary. These two forces contradict one another. What we are dealing with, here, is microeconomics vs. macroeconomics. Microeconomics is the individual and his level of success, which, unfortunately, has led to economic winners and losers. In 2012 the estimate is that twenty percent of the population in the U.S., one in five people, are food insecure and go to bed hungry or without proper nutrition every night, while one percent lavish in lush wealth.

Money, itself, as we have seen, has no real intrinsic value: it is all token, fancy printed paper and cheap metal coins that have only the word of their government behind them. As long as everybody, nationally and internationally, agree on the value of the currency, it exists. To the Federal Government money is a tool to enhance productivity. In a manner of speaking the Federal Government owns the printing press and all it takes to issue more dollars is an act of Congress signed by the President. The amount of money in circulation has to be great enough to allow for full possible productivity and just short of the amount that will start a spiral of inflation.

The question then is: What is more important Macroeconomics or Microeconomics? Where should the emphasis be placed? Should it be with the prosperity of the country, or with the prosperity of a small number of the population?

I don’t think there’s any question that the prosperity of the entire population should be primary and Franklin Delano Roosevelt’s point about the graduated income tax is valid. The Federal Government should control the money supply and its continuous goal or mission should be the welfare of the entire population.

We desperately need realistic tax reform!

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