The Myth Of Supply-side Economics

Since the era of Ronald Reagan, Americans has been held hostage to the myth of the power of supply-side economics. Ronald Reagan promised to cut taxes to spur economic growth. He cut taxes alright, and we had economic growth. We also had a record budget deficit and debt. The economic boom of the Reagan years was a result of the massive borrow and spend policy. Reagan funded the economic growth on the back of future generation by presiding over the greated borrowing ever in peace time.
The deficit hawks did not see anything wrong with it. The same way the Republicans saw borrowing to give tax cuts to the wealthy is exactly the way the current republicans see cutting essential government services to finance tax cuts for the wealthy. The Reagan policy resulted in net increase in spending due to increase in debt, it is called leveraging. Tax cut for the wealthy did not create American jobs, it created demand for the luxury goods made overseas that the affluent have an insatiable taste for. On the other hand, the current push to cut spending and lower taxes for the wealthy will have, at best, zero impact on economic growth and job creation. The most likely effect is an increase in  consumption of foreign luxury goods at the expense of basic domestic goods and services that have been displaced by the cut in government spending. Watch out, we may be cutting our way into another recession for the benefit of the priviledged few.

Competition in Health Care Industry

How amazing that some representatives have their head stuck in the sand. Paul Ryan (R-WI) talks about the role of competition in bringing down health care cost.  He proposes replacing medicare with private health insurance such that competition among private firms will bring down health care cost.  Can it be that his advisers has no idea of basic Economics 101 and the oligopolistic natyre of the health care insurance industry. What a shame that the fate of our great nation should be allowed to rest on the shoulders of such representative with such limited or in this care zero knowledge of the issues they legislate.

He also argues that the competitiveness of the United States corporations is dependent on lower tax burden. I believe the representative must have selective anmesia. Did he not hear of the recent out cry on the amount ot taxes paid by gaint GE!!!  A causry glance at the financial statement of US firms will show that taxes are not the problem. Overhead costs and cost of goods sold are the leading cause of the inability of United States firms to compete. Taxes as a percent of sales are under 4% on the average. The so called high income earners who need lower taxes as an incentive to investment in new ideas is just a myth employed by the likes of Paul Ryan. More than 80% of new jobs are created by entrepreneurs, with modest means not the top 2% income earners whom he cares about.

Oil Futures and American Greed

It is interesting to hear the pronouncements on the eminent soaring of oil prices due to the crisis in Lybia. Lybia maybe an oil exporter, but the impact on the world oil supply has literally been nullified by actions by Saudi Arabia. So why is the price of oil still sky high, GREED.
The futures market is the gambling pit for the price of commodities etc. Traders, yes traders, people who profit based on expected impact of world events on the price of commodities, are primarily responsible for the rise in oil prices. With very little investment, these gamblers speculate on the price of precious resources that the general public needs. The outcome of this speculative shinigans determines the rate of inflation and the prices we pay for goods and services.
The financial reform act of 2010 tried to tame this behavior by requiring the Federal Reserve Bank to regulate futures market.  This was supposed to lead to increease in the margin requirements on futures contract and thus minimize speculation. Fat chance. The fox cannot guard the hen house. Until we get some agency with enough guts and indepent thought to oversee the Financial markets, we are doomed to life at the mercy of Greed.

Government Entitlements: An Oxymoron

The budget fight is all about cutting entitlements which they estimate is crippling the US and leaving a mountain of debt to future generations. It is ironic that the largest entitlements are funded by s specific tax. Social security is funded by social security tax, and medicare by medicare tax. Entitlements are not the problem. The problem is politician using the funds generated or collected for the specific pupose of the programs as a  revenue source for a myraid of unfunded programs. The key word here is unfunded. Cutting of entitlements is a breach of contract. Seniors have paid the government throughout their working life for the RIGHT to receive the "ENTITLEMENTS". These are services that have been paid for and therefore must be delivered by the government.  It is an obligation, not a favor or an act of benevolence by the government.  Calling social security and medicare benefits as entitlements is an oxymoron. For the politicians who are contemplating renaging on these obligations, I have news for you, LAWSUIT. I have paid for these services and you must deliver or give me back my contributions plus punitive damages for a breach of contract. You cannot walk away when it is time to deliver the promised services!!!! 

The TEA Party Fad

I am amazed that the TEA party movement have somehow managed to hijack the republican party under the guise of fiscal conservatism. I am a republican that refuses to buckle to the mania of the tea movement. It is a fad that will come to pass. The TEA movement reminds me of the Y2K mania that claimed the world was going to end when the clock strikes mid-nite on December 31, 1999. Well we are still here. The Y2K movement tried to get people to believe that year '00 on the chrIstain calender meant the world was going to end. They conveniently ignored that the rest of the world did not run on the christain calender. TheY turned a computer programming event into an end of the world as we know it hype. This is the tea movement for you.
Everyone is concerned about the growing government debt. No one wants to entertain the idea of increased taxes to pay for the massive increase in the size of government. Most importantly, no one seems to consider the effect of two foreign wars of choice on government spending. And no one wants to remember that the financial melt down was caused by the financial services deregulation movement. And watch out, another movement, tax enough already.
The Spending Reduction AcT of 2011 (H. R. 408) wants to cut federal spending by $2.5 Trillion over the next ten years, what a grand idea(nightmare) or should I say illusion. Will those fiscal conservatives please provide some indication of the effect of such a draconian spending cut on the role of government.  Everyone who pushed for financial services reform and deregulation saw it as the majic wand that will unleash the American ingenuity and restore our competitive edge. Yes it did, we traded "mechanical engineering for financial engineering". WE traded funding for innovation in the goods and services for an organized gambling.
And for those pushing for the repeal of the "ObamaCare". The public will like to know how much the health insurance industry coughed up for their election campaign, then will we know who is actually calling for the repeal. I do not like the Obamacare. There are certain things that do not require a compromise. Either we have a universal healthcare with one single payer( disburser of healthcare funds to healthcare providers) or we have no government involvement AT ALL. There is no middle ground. Government should stay out of health care completely, let the market place take care of it. To the tea party fad, there is no heads you win and tails the other loses. You can not have government providing the services "that benefits you" while you decry those that do not directly benefit you. Stop the HYPOCRISY.

Deficit = Income - Expenses

Here is going back to the basics. We run a deficit because we spend more than we take in.  The Congress and the President are focused entirely on the spending side of the equation. How about the revenue side?  No no no, it is the sacred cow. We can not increase taxes under this bad economic times, but it is alright to cut spending. Increasing taxes or cutting spending are fiscal policy equivalents. Both of them independently will reduce the GDP. Increase in taxes reduces personal consumption, but either increases government spending  or reduces deficit while maintaining spending on essential government services and programs.
My previous blogs focused on reducing spending, but can that be a viable solution. It reminds me of corporations seeking to increase earnings by cutting costs. These firms realized that such a strategy assumes excessive waste that can be eliminated without adversely affecting the operating efficiency of the organization.
The level of spending cuts advocated by the republicans is akin to a firm shuting down the research and development program in other to increase profitability. Education is the research and development arm of the economy.
Corporations sometimes have to raise prices even though economic theory says that increase in prices will lead to a loss in revenue. This is possible because of the existence of the concept of elasticity: the responsiveness of quantity demanded to price increase. If the demand is inelastic, raising prices results in an increase in revenue.
The goverment should increase tax revenues by targeting the segment of the population whose consumption is not elastic. These are the high income earners and these are precisely the people whom the republicans have decided to bestow with all the tax breaks and cuts imaginable. What an oxymoron.

Deficit Reduction and Economic Growth

Most of the talk about deficit reduction has focused on the immediate effect on government programs and entitlements. But there is another dimension that so far has been ignored: borrowing effect. A reduction in deficit means that the United States will reduce her level of borrowing from the capital markets. This reduction in demand for funds could result in lower interest rate if the loanable funds theory of interest rates hold true. A reduction in interest rate can concievably lead to increase in consumption and investments. Both of these activities has the potential to increase economic growth and hence employment, and more tax revenues. So let us take a second look at the role of deficit reduction, it may not be the doomsday some of us are painting it. It could be a blessing in disguise with short-run heartburn and a long-term relief for generations to come.