IT’S TIME TO GET SERIOUS ABOUT THE REAL CRISIS

Paul Krugman’s latest piece in the NY Times is quite good.  Unfortunately, it is a bit too political for my taste.  But the general message is right.  Dr. Krugman says it’s time to recognize that the markets don’t think we’re Greece.  They don’t think we’re bankrupt.  They’re worried about growth.  And that means the government can afford to take further action.  I fully agree.  But where we part ways is in what action we can/should take.  Dr. Krugman says:

“The point is that it’s now time — long past time — to get serious about the real crisis the economy faces. The Fed needs to stop making excuses, while the president needs to come up with real job-creation proposals. And if Republicans block those proposals, he needs to make a Harry Truman-style campaign against the do-nothing G.O.P.

This might or might not work. But we already know what isn’t working: the economic policy of the past two years — and the millions of Americans who should have jobs, but don’t.”

We have to be honest with ourselves at this point.  There is simply no way the Republicans are going to pass a spending bill on jobs.  Not a chance in hell.  But a tax cut could be very appealing.  In this regard I agree 100% with John Carney of CNBC who says that Dr. Krugman should push for a full payroll tax holiday.  John says:

“Republicans are willing to accept deficits caused by tax cuts. The barrier is Democrats, who think that tax cuts are unfair because they help the wealthy disproportionately.

Someone like Krugman would be an ideal candidate to explain that we can argue about fairness later. Now is the time for stimulative action. Time for a tax cut.

So, come on, Paul. How about it?”

I think that’s spot on.  And Dr. Krugman is the kind of economist who would make ears perk up in Washington.  The only problem is whether Dr. Krugman is willing to walk across the aisle in these trying times and shake some hands to get some more fiscal policy?

In a sort of sick way, we are looking more and more European every day because of our failure to unite.   To me, this is the sort of compromise we can all love.  The Democrats get more fiscal stimulus and the Republicans get their beloved tax cuts. I think it would be a bold and patriotic move for someone like Dr. Krugman (or even Tim Geithner or the President himself) to come out and push aggressively for more aid to the American people.  The only question is whether we are willing to unite as Americans to make it happen?

How about it Dr. Krugman?   How about it Mr. Geithner?  How about it Mr. Obama?   Extend an olive branch.  And if it gets thrown back in your face you’ll always be able to say you tried to help Main Street when they needed you most….

PS – If you push for a payroll tax holiday please make sure Dr. Bernanke doesn’t bulldoze into the picture thinking he needs to help “finance” the tax cut with QE3.  He sufficiently squashed the last tax cut with QE2.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Would someone please demonstrate with evidence when tax cuts have been stimulative? W cut twice and look where it got us. Many corporations pay 0 tax and many others pay well below the stated corporate rate, but they won’t hire here in the US because there’s no demand growth. Small businesses never hire on the basis of expected tax cuts; they hire entirely based on demand. Period. When are you guys going to wake up to reality? Or is reality not your real game?

    • Tax cuts, by definition, add net financial assets to the private sector. Just like spending does. The only real difference is that the govt allocates one and not the other. So, really, the onus is on you to explain to me why a tax cut for the middle class is any different than something like unemployment benefits? Sure, one gets spent faster, but from a purely government accounting perspective, the effect is exactly the same on net financial assets ($ 4 $). Would I prefer spending? It depends on what it is. But we’re not going to get that. So, beggars can’t be choosers. We should fight for the tax cut and the increase in net financial assets (even if the multiplier won’t be as substantial).

  2. That is wonderful that you got a bit of recognition from PK, even if it was a back-handed dismissal.

    At the very least, Paul’s opinions at least get discussed (or shredded, in the Faux News Empire). The conversation NEEDS to shift, and everyone has to do their part to shift the conversation to the REAL crisis; the disincentive (or inability) for America’s worker to engage in productive enterprises.

    Since PK has far greater access to the ruling elite, he’s probably better attuned as to what actually COULD become a policy, than all of us relative nobodies.

  3. Cullen
    Progressive caucus produced a bill with all you ask for and what happened. Did you ever hear about it? Did Obama even announce it? How i know it? by being progressive and reading progressive blogs like crooksandliars and hullaballo. Krugman also noted about it.
    Can a minority bring up a bill in Congress? No it can’t. Reid tried to bring up a bill in Senate and what happened? filibustered.
    And with media that loves drama only, not reason, will not talk about it. What they talk about it is “both sides do it” mantra

  4. Cullen
    We should fight for the tax cut and the increase in net financial assets.
    Should differentiate between tax cuts for poor and middle class and tax cuts to rich.
    Tax cuts for poor doesn’t do nothing since they do not make enough to have tax liability, but they still pay full ammount of payroll tax. And since all of their income is consuming income, all tax credit they get is going to be consumed (highest multiplier).
    Tax cuts to middle class is effective as it helps if they are in debt, which they are. but there is a lot of non-consumed income higher the income.(high/mixed multiplier)
    Tax cuts to high incomes contribute fully to savings not to consuming, and also bribing politicians to keep their taxes low. (close to zero multiplier)

  5. DanB
    Is that what you are proposing? Just let inflation “solve” the problem?
    Since 1937 US govt debt did not go down 1C in dollar amount, not one cent ever. And it was 160% of GDP during WWII. But it did go down and up as percentage of GDP, which matters more. How? by inflation only.

  6. Roger
    Since PK has far greater access to the ruling elite, he’s probably better attuned as to what actually COULD become a policy, than all of us relative nobodies.
    I’m reading PK daily, and his assessment of possible policy is that only FED can do something. Fed can keep doing QE and more importantly is announcing the inflation target of 5-6% in order to push the cash from sidelines and into economy. Threat of the inflation(destroying the cash value) would push it from savings into market. Only announce the high target, not really cause it.

    • CT:

      I don’t the threat of inflation will put wealthy savers money into the market, at least not spent into the economy. It would likely go into commodities and precious metals, like it has been flowing recently.

      I think PK is wrong that the FED can fix this.

  7. This article is totally absurd. First of all, we already have payroll tax cuts which Obama negotiated as part of the extension of the Bush tax cuts. Second, Republicans have rejected any proposals to extend/increase the payroll tax cut several times.

    Paul Krugman has already said that payroll tax cuts would be a decent idea, although he believes not as efficient as stimulus spending. Your criticism of his piece is simply completely ignorant of realities.

  8. There isn’t anyone that the Republicans will pay more attention to than Paul Krugman. Brilliant suggestion!

  9. As PK is gleefully pointing out,you’ve forgotten the Republicans have already rejected a payroll tax holiday. The criticism anyway was fairly trivial since I don’t see how you can separate the politics from the economics of this issue since the Republican approach to economics is entirely the product of partisan politics. As a noted conservative commentator pointed out the other day on the economics since 2000 Krug has been pretty much right most of the time while conservatives have been largely wrong. I think he glosses over political realities but I’ve increasingly come to the view that strictly on the economics Krug is THE man.

  10. “But the general message is right. Dr. Krugman says it’s time to recognize that the markets don’t think we’re Greece.”

    Er…this has been apparent for over two years. The only people who claimed it was otherwise were conservative commentators and think tanks whose opinions were recycled by Republican politicians.

  11. Herein lies the problem with you all. You need to think big now if we are going to solve this problem. Payroll tax solves nothing really. How about a complete income tax break. How about hiring people to repair the infrastructure in this country and get the politicians out of the way for the country and the people to solve the problems. If MMT applies then totally apply it. Thinking small is not going to work right now as we need employment. How about we get some drilling and get that pipeline moving invest in green energy. While we are at it lets bailout all of the states as well.

    A couple of policies need changing. Like you want a hand out come to work for the Fed or your going to starve unless your elderly or disabled. Lets nationalize child care so they can go to work. We need to change the education system and actually teach again so people can read and write and do simple math.

    This is the problem you all think too small. While we are at lets just close the borders and hang huge Tariffs so the manufacturing jobs in this country re-start. I could go on and on. We need to demolish the excess housing inventory or better yet just give it to everyone.

    I am tired of plugging a little of this and a little of that, it is time to go whole hog!

  12. Payroll tax “holiday” is a terrible idea because it’s primary purpose is to start defunding social security. Everyone knows social security’s finances are in fine shape (2.5T surplus…). Defunding it is a sure way of making there be a problem, then you can cut it. An employer side “holiday” is just pure gravy for the employer, as they won’t hire more because there’s no demand to buy their products or services anyways. Money’s gotta get in the hands of those who actually need it.

    How about a tax cut for the middle class and poor by having them pay a negative federal income tax rate? Since that’s a tax “cut”, that should go over well with the republicans. But it might not, since the republicans really only like tax cuts when it’s for the wealthy. Be honest now.

  13. I would love to see a FICA tax holiday on the employee side for a year or two. With that and even more important a commitment to become at least 90% energy independant in 20 years. This will go along with an upgrade of our nations electrical grid. For the first time in decades, we have the people available to pull this off and with our current deflationary struggle this will fix that. The payroll tax holiday will allow for deleverage needed. I don’t know anybody that would argue that we need a goal to supply our own energy supply domestically but as with any other large idea we get stuck of the financing aspect. Imagine unemployment shrinking dramatically by these energy endeavours. This would provide long term stability in our energy based inflation which we prolly have the least control over currently. Granted our debt would rise but even outside of the MMT scope, I could justify this debt and risk with the long term rewards possible. What could happen? A further downgrade in our “credit rating”. I don’t see this remotely possible given our political climate but it would be fantastic. This wouldn’t even have to be even mostly government employees, government hired contractors but a partnership with private entities for the further benefit of all involved in the nation. Ahh dreams….

  14. Finding new ideas for taxing is like promoting “new math.” It doesn’t work. Stick with the basics. (1)Reduce taxes to reduce the risk constraints on businesses and people and (2) reduce the spending to permit more money being spent in areas where these is a multiple factor of income generation.