Monthly Archives: December 2010

William Black interviewed on Bloomberg

William Black was interviewed yesterday on Bloomberg.  The full interview is available via here.

Randall Wray Interviewed on KPFK’s Daily Briefing

Randall Wray was interviewed recently on the economics and politics of the banking industry.  The full program can be found here, with Professor Wray’s interview beginning at 39:00.

William Black Interviewed on Parker & Spitzer

William Black was interviewed recently on the subject of unethical banking practices for Parker and Spitzer’s blog (  The full interview is available here.

Obama haters praise his tax policies because they believe those policies will make him fail

William K. Black

Like the Sirens reputed to lure sailors onto rocks, a series of columnists who want President Obama to fail are praising Obama’s capitulation on extending the Bush tax cuts for the wealthy. The motif of these comments has three common characteristics – all designed to destroy the Obama presidency. First, and the chutzpah of this aspect is wondrous, those that hate Obama’s policies are telling Obama he is demonstrating his strength by surrendering on the Bush tax cuts to the wealthy. Second, they claim that Obama “moved to the center” by agreeing to support tax cuts for the wealthy. Third, they claim that Obama’s attacks on his strongest supporters are brilliant politics essential to saving his Presidency.

Dana Milbank’s recent column is one example of the three-part motif. The title of the column captures the first aspect: “Obama finally stands his ground.” What he means of course is that Obama failed to stand his ground, repudiating his promises to end the Bush tax cuts for the wealthy. Milbank also said that while extending the Bush tax cuts for the wealthy was “dumb,” Obama’s agreement to extend those tax cuts was the first thing that Obama had ever done that made Milbank “proud.” Milbank is finally “proud” because Obama is excoriating his strongest political supporters – the “liberals” who Milbank detests. Milbank’s explanation of why he detests liberals parrots conservative Republicans.

Monday, we were treated to the triple motif from another commentator who desperately wants Obama to fail. Mark Penn, the CEO of Burson-Marsteller, claims in a column entitled “Democrats need to back Obama” that:

By becoming reverse tax protesters (chanting “raise taxes”), the liberals are sending out all the wrong messages to a country that overwhelmingly backs the key elements of the bipartisan deal the president struck.

[T]he Democrats have got to stop returning to class warfare.

Obama took the first step this week in seeking to save his floundering presidency by moving to the center. His execution was far from perfect but his actions were sound.

Obama has now gone down a path he cannot and should not retreat from — governing from the center.

In a series of untruthful sentences, Penn hits each of the elements of the motif. Supporting the Bush tax cuts for the wealthy constitutes “moving to the center.” “Liberals” are the demons whose desire to raise taxes would doom the Obama Presidency. Bush doesn’t engage in “class warfare” when he cuts tax rates for the wealthiest Americans – anyone who opposes Bush’s tax cuts for the wealthy, however, is engaged in “class warfare.” Obama’s capitulation on Bush tax cuts for the wealthy is not a retreat from his campaign promises – repudiating his capitulation to the Republicans on those tax cuts would constitute a “retreat” and demonstrate weakness.

None of Penn’s claims are true. The folks pushing for tax increases, during a severe recession, are financial conservatives in both parties. They were the deficit hawks, and Obama appointed many of them to the deficit commission. It was the Republicans who were holding tax cuts for 98% of U.S. taxpayers hostage. By calling the Republican bluff on taxes the House caused the Republicans to make this clear to the American people. The Republicans’ strategy would have compelled them to raise taxes on nearly all Americans, which is why their strategy was a bluff. 

Obama’s promise to end the Bush tax cuts for the wealthy was supported by a strong majority of Americans. That means that Obama’s capitulation on those tax cuts constitutes a move away from the center toward the far right. This makes perfect sense. The people who want Obama to fail consistently push him to abandon policies that are desirable and broadly supported by the public because they want Obama to fail. Obama cannot seem to grasp that straight forward concept. Milbank, for example, attacks liberals’ support for the public option because it was both substantively critical to an effective health care plan (because it would contain costs) and politically popular.

Penn’s claim that Obama must not “retreat” on his capitulation on Bush tax cuts for the wealthy because that would demonstrate weakness is so obviously backwards that one is in awe of his willingness to spin fables that are the opposite of the truth. Penn comes by his willingness to spin professionally – it’s what he does for a living. He gets paid enormous sums to spin absurdities that have no basis in reality. Penn is the CEO of Burson-Marsteller, a PR firm. BM goes well beyond the typical PR firm. As Rachel Maddow has said, “When Evil needs public relations, Evil has Burson-Marsteller on speed-dial.” There is an entire web site devoted to BM’s penchant for putting a happy face on mass murderers.

There are three questions that we need to ask about the campaign by those who want Obama to fail to encourage him to support the Bush tax cuts for the wealthy by advancing this three-part motif. First, why would those who want Obama to fail suddenly offer him good, sincere advice on how to succeed? Second, why would any Obama supporter believe that they were offering him advice on how to succeed rather than suckering him into political suicide? Third, given the facial absurdity of the motif and the obvious incentive of the commentators to harm Obama, why wouldn’t Obama treat their comments as conclusive evidence that his capitulation on the Bush tax cuts for the wealthy was a disastrous mistake?

Cumulatively, these questions lead to a disturbing inference. The Milbanks and Penns of the world invest the time to spin these fables because they think that senior members of the administration hate liberals so badly, and are so desperate for compliments, that they will fall for praise from people that hate them and want them to fail. They hope that the administration will take their advice and destroy itself and the Democratic Party by adopting policies that harm the nation (by making already record income inequality even worse) and require Obama to betray his campaign promises. It’s hard to conceive of a nastier insult to the administration – they’re convinced that Obama and his senior staff are uniformly incompetent.

The ideal result for supporters of the Bush tax cuts for the wealthy is to get them extended in a manner that allows Republicans to escape from the suicidal bargaining position they were in on holding taxes for 98% of American taxpayers hostage and blocking the extension of unemployment benefits, in a fashion in which the Republicans get to take primary credit for all of the tax cuts, and while causing the President to betray his campaign promises and launch an attack on his strongest supporters – an attack taken word-for-word out of the Republican playbook. That is precisely what they’ve achieved. They did not achieve the result through brilliance and they cannot achieve it without cowardice and ineptitude on the part of the Democrats.

Bill Black is an associate professor of economics and law at the University of Missouri-Kansas City. He is a white-collar criminologist, former senior financial regulator, and author of The Best Way to Rob a Bank is to Own One.

Liberals need not fear Obama’s tax deal: Why a payroll tax holiday actually helps support tomorrow’s retirees

By Marshall Auerback and L. Randall Wray

The commentary in the aftermath of President Obama’s announced tax deal with the GOP has been both predictable and, for the most part, misconceived. Leaving aside the issues of income inequality (which we discussed in a previous post), the more predominant critique (especially from the “deficit dove Left”) focuses on the proposed temporary payroll tax cut and the adverse implications that such a cut implies for budget deficits and for Social Security’s longer term “solvency”. Payroll tax cuts are seen by many as part of a bigger plot by Republicans to destroy Social Security’s finances or permanently fund it with general revenues rather than allowing the payroll tax to be re-imposed at the end of the tax “holiday”. One staffer in Congress expressed the concern that funding Social Security with general revenues was part of a bigger plan to destroy it by converting Social Security into a welfare program, rather than an earned benefit.

A related concern deals with the overall solvency issue and is best expressed by Robert Kuttner, who has argued: “The deficit commission appointed by the President has called for an increase in the retirement age, as well as other cuts in benefits over time. And the deal that Obama made with the Republicans just gave deficit hawks new ammunition by increasing the projected deficit by nearly $900 billion over a decade. Social Security will be in the cross-hairs.”

Kuttner’s views reflect a fairly typical concern of deficit doves, who worry relentlessly about the public debt to GDP ratio because they assume that the “credibility” of the government debt will be compromised as we lose the “confidence” of the markets.   Even President Obama has argued that deficits today leave our grandchildren with a heavy burden, which is why he is already proposing budget freezes for the federal employees next year. Other deficit doves are somewhat more tolerant of near-term budget shortfalls than our President, but they still worry about long term pain. That pain is said to be compounded by the imminent retirement of baby-boomers, which will threaten the “solvency” of Social Security. Thus, it is all the more necessary to get the budget “under control” as quickly as possible and payroll tax cuts which, according to this view, “fund” Social Security, cannot and should not be cut, even though these kinds of tax cuts would constitute a highly effective form of fiscal stimulus and mitigate the aggregate demand shortfall which is the core of the problem in the first place.

Yet again, we see the dangers of accepting the neo-liberal paradigm, which holds that government spending is limited by tax collections or bond sales.  It represents a form of fiscal chastity in which (much like St. Augustine), we acknowledge the need to become “fiscally chaste, but not yet”. To which the Right has a legitimate rejoinder:  if deficits are bad long term, then why not start to deal with them in the short term, to mitigate the longer term damage?

The truth of the matter is that payroll taxes do not fund the program. Social Security was constructed this way to buttress its political legitimacy against widespread charges of “socialism” in the 1930s, but the reality is that the federal government has been (since the inception of the program and well before) the sole issuer of our currency, and the dollar, which is nothing more than the government’s IOU, is always accepted in payment as such. Government actually spends by crediting bank deposits (and simultaneously crediting the reserves of those banks). For more on this see here.

The “government as household” analogy, which persistently interposes itself on the deficit dove or hawk paradigm, is fundamentally flawed because no household (or firm) is able to spend by crediting bank deposits and reserves, or by issuing currency. Households and firms can spend by going into debt, but the debt must be serviced with the debt of another—usually a bank debt. Sovereign government only makes payments—including interest payments on its debt—by issuing its own IOU. This is why it is ludicrous to speak of Social Security as some sort of “Ponzi scheme”, because unlike private debtors the sovereign government can always make payments and service debt by crediting bank accounts.

The Social Security program has run large budget surpluses since the early 1980s; Treasury then matches those surpluses with an equivalent amount of treasury debt—and then credits interest to the Social Security Trust Fund account. In the future, the program will turn the bonds back to the treasury when Social Security revenues are less than its benefit payments. Social Security’s treasury holdings in reality amount to no more than an internal record keeping—a sort of reminder that someday the treasury will cover Social Security’s shortfall. It will do that the same way it pays retirement benefits now—by crediting the bank accounts of recipients.

Even by Federal Reserve Chairman Ben Bernanke’s own admission, neither taxes nor bonds should impose any technical constraints to spending.   Yet many of the same figures who acknowledge this reality, such as Bernanke, still insist on discussing issues such as the budget deficit (or, more specifically, Social Security “shortfalls”) within the constructs of a financing constraint.  They seem to recognize that the Treasury/Federal Reserve finances spending or purchases by electronically injecting reserves into the system and that there is no limit to its ability to do so. On the other hand, most (including Bernanke) still argue that somehow taxes are necessary to fill the government’s coffers, and that any shortfall in revenue collections would cause the government to deplete private savings through borrowing (domestically or abroad) to finance the expenditures of something like Social Security.  In so doing, Bernanke misstates (perhaps purposely) the reality of how a government actually spends and feeds the myth that our taxes fund our federal government’s spending programs.

In response to this fear, ironically, the reality is that government spending cuts proposed to “ensure” Social Security’s “solvency” in the future, work in exactly the opposite way to what the mainstream neo-liberals claim. Today’s budget cuts actually generate higher unemployment, poorer educational facilities, increased malnutrition, etc.  They will impose real burdens on our children, who will be less educated, less skilled, less experienced, and have lower income as a whole as a result of the fiscal austerity and will have less real income later, which of course is no means to solve a solvency issue if that is in fact the real issue.  In any case, government cannot financially provision in advance for future benefit payments.  Indeed, attempts to do so via the encouragement of deficit cuts today will simply exacerbate the “dependency” problem implied by ageing demographics.  

In that regard, it is worthwhile reading Don Peck’s story in a recent Atlantic Magazine: “How a New Jobless Era will Transform America” as well as Edward Luce’s recent account of the crisis of middle class America in the Financial Times.  Both recount what are undoubtedly the real intergenerational issues which affect demand, future economic growth and employment. The retired and retiring baby boomers want their high nominal fixed incomes plus purchasing power preservation (if not deflation) now and until the day they die. 

The youth want jobs and the prospects of a life worth living. The fiscal rectitude wing is literally strangling the baby in the crib today by denying a sensible fiscal response for the current generation’s plight, while hyperventilating that fiscal deficits will do the strangulation of the next generation tomorrow.  All of which exacerbates a problem of economies facing intense global headwinds from private sector deleveraging.
Maximizing employment and output in each period is a necessary condition for maximizing long-term growth. The emphasis in the fiscal hawk intergenerational debate is on the adverse demographics and they suggest that we have to lift labor force participation by older workers—for example by postponing retirement. Perhaps, but this is contrary to current government policies which reduces job opportunities for older male workers by refusing to deal with the rising unemployment. To us, it makes far more sense to eliminate unemployment of the pre-retirement crowd—to produce the goods and services our retirees need. If it turns out that is not enough—that it does not produce enough goods and services for the retired as well as the pre-retired—then at that point it will be useful to encourage older people to remain in the labor force.

What is required is an aggressive fiscal policy today to establish effective demand (as well as facilitating ongoing private sector financial deleveraging).  Constraints should be viewed from an inflationary perspective, rather than through the “solvency” paradigm.  If total spending in the economy including the rising pension and health care spending exceeds the real capacity of the economy to meet this demand by supplying output then inflation becomes the issue, not national insolvency.  

By the same token, the purpose of the payroll tax is NOT to “fund” a “pay as you go” scheme, but to prevent wage earners from consuming all the output, so something is left for those who do not work. But at less than full employment, we do not need to do that since all we need to do is put more people to work to produce Winnebagos (etc) for the elderly. If we should ever get to full employment, then we will need a tax. But all the evidence is that the US fiscal stance is set far too tight–anytime we get nearer to full employment, tax revenue literally explodes, growing above 15% per year.

And that is why we do not fear a payroll tax holiday—we need to further loosen the fiscal stance. And once Americans get used to that holiday we certainly do hope that they will insist on making it permanent. Goodbye and good riddance to the payroll tax—a poorly designed tax by any measure. Why discourage hiring and employment by imposing a “tax wedge” (as supply-siders call it), increasing the cost of hiring a worker and reducing take-home pay? Further, the tax is regressive—lower rates for those at the top. For the vast majority of Americans, the payroll tax takes far more income than the federal income tax. And why should only wage earners “share the burden” of supporting retirees? Remember, the purpose of the tax is to reduce consumption by income earners, to leave more goods and services for retirees. If that is the case, why exempt the rentier class (that lives on interest, rent, and profits) from this burden? Especially as the wage share has fallen substantially (and is projected to continue to fall for decades—which accounts for much of the future Social Security “shortfall” that intergenerational warriors are so concerned about). If we need to reduce consumption of income earners to leave more for retirees, then we should tax all forms of income.

A Social Security retirement benefit is not welfare; retirees have earned their benefits. Not by paying taxes but rather by working, contributing to the production of the goods and services needed by past and present generations of retirees. Those retiring today and tomorrow should be proud of the contributions they made. And those contributions take the form of the accumulated annual produce of American workers. Many of their contributions are still in evidence and are still being enjoyed: our housing, our schools, our bridges, our educated population, our arts and literature, our justice system (Ouch! It is mostly on holiday right now, although it used to be the envy of much of the world.) and our financial system (Double ouch!—unfortunately, a monument to excess and fraud.). You get the picture. 

The fact that retirees paid payroll taxes is the least of their contribution. Note that we do agree that taxes are one of the two unpleasant inevitabilities (death, unfortunately, is the other)—but the purpose is not to raise revenue to fund a government program. From inception, taxes create a demand for our sovereign currency. Working hard for money gives money its value; retirees have worked hard over their careers, giving value to the money that we award them in their retirement. They pass the burden of work on to the next generation of workers, who keep money strong—and provide the goods and services the retired generation needs. Social Security is really a social compact among generations. This is something the intergenerational warriors wish to deny. 

So let us have a permanent payroll tax holiday, but meanwhile we need to strengthen our social compact—not by legislating future benefit cuts (which reduce the willingness of today’s workers to join the compact) but rather by legislating more generous retirements!

No, Mr. President, you did not negotiate a winning tax deal

By William K. Black

This the third column in a series about President Obama’s decision to agree to support the extension of Bush’s tax cuts for the wealthiest Americans. The first column explained why the President folded on a winning hand on taxes. The second column showed that four of the five economists the administration was citing as supporting its plan were virulent opponents who were delighted that the President was capitulating to the Republicans and making them and their wealthy clients far richer. This column analyses Obama’s claim that he got the better of the Republicans in the negotiations.

The administration claims that it negotiated a winning deal with the Republicans on taxes because the Republicans gave up more than did the Democrats in the deal — a better deal than Obama thought possible. Austan Goolsbee’s (Chairman of Obama’s Council of Economic Advisors) white board presentation claims that the administration received concessions by the Republicans that are over twice as large as the concessions that the administration made on reducing taxes for the wealthiest two percent of Americans ($238 v. $114 billion in 2011). The administration (implicitly) argues that its claim of extraordinary negotiating success represents a miraculous accomplishment given the facts that the Republicans were holding all legislation hostage to their non-negotiable demand that the Bush tax cuts for the wealthiest of Americans be extended and the administration’s irrevocable decision that it could not call the Republican’s bluff because the economy would likely sink back into recession unless tax cuts for the middle class were immediately passed.

The first problem with Obama’s claimed tax miracle is that if you accept Goolsbee’s claims, then it takes a political miracle in America for a political party, pledged to ending the tax cuts for the wealthy, controlling the Presidency and with strong majorities in both Houses to get 98% of the citizens 67% of the benefits while giving the wealthiest two percent of the citizens 33% of the benefits. If Goolsbee is correct, then Obama’s tax miracle vastly increased America’s already record income inequality and ensures that the ultra wealthy will have even more dominant political power in the future to ensure that there are no new miracles. If Goolsbee is right, then things are so bad that our miracles are now disasters that further imperil our democracy.

The second problem with Obama’s claimed tax miracle is that it is too good to be true. If the Republicans really had total negotiating leverage and really opposed Obama’s plans then they would not have made any meaningful concessions to Obama. The material tax reductions for the non-wealthy and modest increased spending that the Republicans were willing to agree to prove that the Republicans could not have had total negotiating leverage and have been opposed to Obama’s proposals.

The third problem is that no element of the claimed miracle is true. The Democrats had overwhelming negotiating leverage, the Republicans did not oppose, and often strongly favored, Obama’s proposals on taxes compared to their alternative — no tax cuts. Obama capitulated to Republican demands and negotiated a deal that harmed the nation. He capitulated in a manner than guarantees that the Republicans (and the surviving Blue Dogs) will increase their tactics of bullying and holding Americans hostage to their political demands. The Republicans have confirmed (again) that Obama can be bluffed even where the bluff is taken right out of the movie Blazing Saddles (because it is facially absurd). The President compounded his failure by folding his winning hand when he would have been on the cusp of victory had he not undercut through secret surrender negotiations his Party’s big win in the House. Obama then engaged in his characteristic attack on his strongest supporters, channeling Republicans’ favorite diatribes about progressive Democrats. As my second column explained, the administration descended so low that while it was excoriating its supporters it gloried in the praise it received for capitulating on tax reductions for the wealthy from the banks representing (and the bankers who are among) the wealthiest two percent of Americans.

David Cay Johnston explained in his article urging the President to “call their bluff” why the Democrats held a winning hand with regard to taxes for the rich. The Republicans were in a Blazing Saddles bluff — where the sheriff takes out his gun, aims it at his head, and threatens to shoot. The Republicans’ position on taxes and unemployment was political suicide and there was no chance that they could maintain Party discipline on a joint suicide pact if Obama called their bluff. The Republicans would have had to block tax reductions for 98% of American taxpayers and thrown well over one million unemployed under the bus before Christmas — six million of them by Spring. Here’s rule one about responding to elected officials who threaten to commit suicide en masse — “make my day.” Think of what President Clinton did when the Republicans threatened to “shut down the government.” The threat to the nation of a complete shutdown of the federal government was far worse than the Republicans’ threat about taxes, yet Clinton did not hesitate to call their bluff and no one accused him of being irresponsible. Clinton discredited the Republican Party and their Blazing Saddles strategy so badly by calling their bluff that the Republicans did not dare to repeat the tactics.

The suicidal nature of the announced Republican position on taxes and unemployment explains why the Republicans were overjoyed to support so many provisions that the administration is claiming represent miraculous accomplishments. The reality (obvious to anyone that didn’t fall for the Republicans’ Blazing Saddles propaganda) was that Obama had broad Republican support for extending unemployment benefits, tax breaks for businesses, tax breaks for the 98% of taxpayers, and some form of special tax reduction for working class Americans — regardless of whether he capitulated on tax breaks for the wealthy. None of the things that the administration claims as miracles represented concessions by the Republican Party. (Some individual Republicans opposed particular provisions, but most Republicans and Democrats supported these provisions and Obama needed to pick up less than a handful of Republican votes in the Senate.) That means that the relevant comparison is not the dollar value of the provisions that the Republicans and Democrats both support, but rather the cost in terms of increased inequality and lost services caused by Obama’s unnecessary capitulation on extending Bush’s tax cuts for the wealthiest of Americans.

It is not too late for Obama to call the Republicans’ bluff, but that can only occur if House Democrats call Obama’s “take it or leave it” bluff. Obama adopted the Republicans’ Blazing Saddles bluff. Obama’s bluff is expected to work easily against Senate Democrats. We’ll see whether the House will save Obama from himself. The political class is predicting that Obama’s bluff and attacks on House Democrats will cause them to “surrender.”

Here’s a hint. When Dana Milbank writes a column stating that you (Obama) have never done anything in your life that made him proud until you (A) capitulated on the Bush tax cuts for the wealthy and (B) attacked liberals for opposing your capitulation that means you have fouled up so profoundly that you have brought joy to folks like Milbank that have never respected you and want you to fail. Here’s a further hint: the title of his article is “Obama finally stands his ground.” Milbank is either mocking you or he has perfected unintentional self-parody. The reason Democrats are criticizing you is that you failed to stand your ground on tax breaks for the wealthy. You promised to end the Bush tax cuts for the wealthy. You had the majorities to do so long ago. Your promise had overwhelming support from the American people. Even Milbank concedes that extending the Bush tax cuts for the wealthy is “dumb.”

Bill Black is an Associate Professor of Economics and Law at the University of Missouri-Kansas City. He is a white-collar criminologist, former senior financial regulator, and author of The Best Way to Rob a Bank is to Own One.

The Effort to Claim that Economists Support Obama’s Capitulation on Tax Cuts for the Wealthy

By William K. Black*
You know the administration is desperate when it creates a web page citing economists who support its capitulation on taxes.

The web page cites the support of five economists. Peter Cardillo, the Bank of America, Greg Mankiw, and Wells Fargo (are the second through fifth economists on Obama’s list). Who are these supporters and why is the administration proud of their support? Cardillo is an economist for an investment firm, Avalon Partners. Avalon’s web site states that it specializes in “wealth management” for “affluent investors” “to meet the unique needs of high net worth individuals….” Yes, the wealthiest one-hundredth of one percent of Americans – the truly, uniquely needy.

The administration’s web site gives pride of placement to Avalon Partners’ support of Obama’s decision to support the extension of Bush’s dramatic reduction in the taxes its ultra wealthy clients will pay. That tax reduction will make Cardillo and his senior colleagues at Avalon Partners, themselves among the wealthiest Americans, even wealthier. Obama’s capitulation on tax breaks for the richest one percent of Americans is worth tens of thousands of dollars personally to Cardillo and hundreds of millions of dollars to Avalon’s clients. Mr. Cardillo does not support Obama’s capitulation – he rejoices in it. Indeed, he has said in a recent interview that the reduction in taxes for the elites has helped fuel a “Santa Claus” rally in stocks. Obama played St. Nick for the wealthiest of Americans to the tune of tens of billions of dollars. The reasons that Cardillo supports the bill are obvious. The mystery is why Obama fails to realize that his support demonstrates why Obama’s capitulation is so harmful to the nation. At a time when income inequality has reached record levels in modern America and crippled our democracy Obama has given in to bullies who made increased inequality their central goal.

Obama claims that he capitulated to the Republicans on taxes for the wealthiest in order to reduce unemployment. Here’s what Cardillo said about Obama and unemployment just before the midterm elections.

“As far as corporate America hiring again it’s basically dependent on what happens in Washington,” says Peter Cardillo, chief economist at Avalon Partners in
New York. “If the opposition party should gain enough seats to perhaps reverse the present administration’s policies somewhat, then I think you’ll see a big
pickup in employment.”

Obama has promoted the views of one of his virulent opponents, who gloried in and profited from Obama’s and the Democrats’ recent electoral and legislative defeats. Simultaneously, Obama launched another petulant attack on his strongest supporters. The administration’s daily floggings will continue until morale improves among progressives. Generations of political scientists will marvel at this administration’s self-destructive reflexes.
The Bank of America (BoA) is next on the administration’s list of supporters. BoA’s senior leadership will personally save millions of dollars in taxes and its wealthy clients will save billions of dollars in taxes because of Obama’s decision to support the continuation of the Bush tax cuts for the wealthiest Americans. Their support for Obama’s agreement to support extended tax cuts for the wealth should have warned Obama that he was making a mistake.

The Bank of America is one on the major funders of the Chamber of Commerce’s war on financial regulation, the administration, and Democrats. The Bank of America is a perfect example of why the “three strike” laws never apply to corporations. The Bank of America has run a massively unlawful foreclosure system based on perjured affidavits. It purchased two notorious financial institutions (Countrywide and Merrill Lynch) that were destroyed by policies of deliberately making and purchasing fraudulent “liar’s” loans. The Bank of America has recently admitted to a widespread policy of defrauding states and localities. It even has an openly racist senior advisor in Germany who claims that the U.S. mortgage crisis was caused by outlawing “red lining” – refusing to loan to blacks. It’s not often that senior bank officials openly stress their nostalgia for the good ole’ days of open racism. I’ve repeatedly brought this racist to the attention of the administration and BoA in the U.S. and in Germany without ever prompting even a response. My colleague Randy Wray and I have explained why BoA should be placed in receivership for its serial crimes and unsafe and unsound practices. Instead, the Obama administration prominently displays its endorsement.

Professor Mankiw, Chairman of George W. Bush’s Council of Economic Advisors, is the next supporter that the Obama administration highlights. Mankiw was a leading apologist for the Bush tax cuts for the wealthy. He even defends the wealthy when they become wealthy through fraud. He infamously responded to George Akerlof and Paul Romer’s paper demonstrating the dominant role that “looting” by S&L CEOs (accounting control fraud) played in causing the debacle, by opining that “it would be irrational for operators of the savings and loans not to loot.” Looting: the Economic Underworld of Bankruptcy for Profit (1993). Mankiw blamed the S&L debacle on excessive regulation and was one of the architects of the desupervision that permitted the current crisis to occur.

The administration thinks it says good things that the Bush administration’s principal apologist for its tax cuts for the wealthy supports Obama’s agreement to extend those tax cuts. The mind boggles.

Wells Fargo is next on Obama’s roll of honor. Wells Fargo’s senior leaders, like BoA and Avalon Partners’ senior leaders, have personal and professional interests in supporting tax cuts for the wealthy. Wells Fargo is overjoyed by Obama’s agreement to extend tax cuts for the wealthy. All of these endorsements simply emphasize the extent to which Obama was taken to the cleaners. It’s bad to be bullied, but it’s pathetic to cite the testimonials of those that got even wealthier through the bullies’ triumph as evidence of your success.
Bill Black is an associate professor of economics and law at the University of Missouri-Kansas City. He is a white-collar criminologist, a former senior financial regulator and the author of The Best Way to Rob a Bank is to Own One.

* This post originally appeared in the Huffington Post

Ready for 1937 v.2?

The Great Recession is a replay of the Great Depression in many ways; one of them is fiscal policy. Let’s rewind the tapes:
-1929-1930: President Hoover’s first response is to do as little as possible to let market mechanisms do the job of “correcting imbalances.” The general consensus is that government deficit would lead to crowding out effects and so would worsen the economic situation. As a consequence, those first two years records a fiscal surplus (Figure 1).
-1931-1932: The economic situation worsens and enters into a debt-deflation process. Hoover is forced to increase government involvement through policies like the Reconstruction Finance Corporation. This leads to a fiscal deficit representing about 2.5% of GDP.
-1932-1933: Public opinion is outraged by the “massive” deficit and “waste.” Roosevelt runs a Presidential campaign that promises to bring back the federal government fiscal position into the black; he is elected in a landslide.

-1933-1936: Roosevelt puts in place New Deal programs and experiments a bit more with fiscal deficit. While the scale of ND programs is quite impressive, their actual impact on the deficit-to-GDP ratio is limited with a deficit of 5% relative to GDP. Unemployment rate (Figure 3) goes down from 25% to 9% if one includes WPA, CCC and others New Deal employees into the employed population (official data counts them as unemployed). WPA, CCC, and other work programs bring the US into the 20th century in terms of infrastructures (electrification, irrigation, schools, etc.). However, all this is completely overshadowed by outcries about the “unsustainable” deficit and the supposed “communistic” nature of the New Deal.
-1936: An election year, Roosevelt feels the pressure in terms of discontent regarding the deficit so he proposes to cut New Deal Programs massively (see Figure 2) and to lower other government expenditures.
-1937: Recession year. Roosevelt implements his proposal to “restore fiscal sanity.” The decline in government spending leads to massive layoffs, and so to a decline in wage earnings. Profits of companies also go down because of decline in aggregate demand. Nobody is happy even though the deficit-to-gdp ratio reaches 0%.
-Back to the present:
We are now in 1936 with the government focused on trying to cut deficit because “America cannot be great if we go broke”. The government proposes to cut government spending and to raise taxes.
Get ready for a replay of 1937 if the government goes through with its propositions. The first step in this direction seems to have been taken with Congress failing to extend unemployment benefits.
This constant hysteria about fiscal deficit is counterproductive, dangerous and unnecessary. The deficit to gdp ratio (and debt to gdp ratio) will go down by itself as the economy recovers, no need to cut government spending and to raise tax rates now. On the contrary, one should let government spending and tax levels be whatever they need to be to promote economic stability. As the economy recovers, government spending will go down and tax levels will rise (given tax rates) which will lower government deficit.
Figure1 . Deficit/GDP ratios
Source: BEA.
Figure 2. Federal Work Programs During the New Deal
Figure 3. Unemployment rate.

Sources: BLS, Historical Statistics of the United States by Census Bureau (ed.).
Note:  Data is for persons 16 years old and over, except prior to 1947 when the figures are for persons 14 and over.  Dotted line represents the corrected BLS data to remove emergency relief workers from unemployed.

Is Bernanke’s QE2 an act of desperation?

An interview with Professor Tcherneva on Bloomberg radio’s The Hayes Advantage.

In his scholarly work Bernanke has clearly stated that governments like those in the U.S. and Japan (but unlike those in the European Union) do not have a solvency problem.

He also seems to understand that only fiscal policy produces net new financial assets in the private sector. By contrast, purchases of government securities by the Fed only replace interest-earning financial assets (bonds) with non-interest earning assets (reserves), leaving the net wealth position of the private sector unchanged. For this reason, Bernanke has argued that monetary policy is effective in deflationary periods mainly because of its fiscal components. In other words, the central bank can and should finance whatever size government spending is necessary to bring the economy out of a recession.

Continue reading