Few elected officials connect the dots in their economic decisions. Often, their political views create blind spots on the consequences of their votes. Their decision making is short term, until the next election.
For example, expenditures for foster kids and kids aging out of foster care benefits society. A disproportionate number of these kids end up in prison or the streets, or are exploited in the sex business or do not have skills to get employment. An investment in these kids now generates huge savings later. Cost benefit studies substantiate this affect. But “later” in politics is the operable word, so little money is spent with these kids.
Politicians may be ignorant, but that is no excuse. Here are a few thoughts to show our elected officials how the economy works in the real world.
Some believe that tax reductions for corporations mean an increase in GNP growth and thus jobs. That could be true when unemployment is high and the economy has slowed. JFK created an investment tax credit that jump-started the economy, for instance. Our economy is now at full employment (compounded by a shift in demographics) and growth is 2.5 to 3 percent.
Successful large corporations have long had loads of cash. If they are public, they are using their cash to buy back stock or raise dividends. When they buy companies, they first look to downsize the work force. If they build new plants, they automate and use robotics to increase productivity. This is what rational businesses do.
In a recent interview with a Trump official, the host turned to the business audience and asked how many planned to increase business spending. Few responded.
Why would one believe that a reduction in corporate taxes could result in new jobs?
One of Wisconsin’s U.S. Senators, Ron Johnson, is a deficit hawk. As a former business owner, he should know how business operates. Yet he says he believes that a corporate tax cut will generate increased tax revenue to pay for the estimated $1.5 to $1.7 trillion deficit in ten years.
I will not even argue that this deficit is closer to $2.1 trillion since tax cuts that expire will most likely be made permanent.
This way of viewing the world is similar to the negotiations between Foxconn and the State of Wisconsin. On one side there is a sharp businessman who wants as much as he can get versus an elected official desperate for a political win for his re-election. Yet Foxconn just automated a factory in China and dramatically reduced its number of workers. Foxconn knows their clients require a low-cost quality product that can be manufactured in a short time. That is reality. They will by necessity automate and reduce head count.
Deficit hawks hate debt, but it is staring them in the face.
But is all debt wrong? Certainly the “kick the can down the road” debt is bad. Those who vote for this type of “pass on” debt won’t be around when it comes due.
There is another type of debt. The Federal Reserve Bank of New York bought fixed rate, mortgage-backed securities that Freddie Mac, Fannie Mae and Ginny Mae guarantee. From 2008 to March 2010, the Federal Reserve bought $1.2 trillion of debt with cheap borrowed money. A conservative calculation of the spread between purchases and debt is between 0.75% and 1.0%.
This mortgage backed paper pays both interest and principal, like a mortgage. While a mortgage can take 30 years to pay, most are repaid in 12 years. This is how the Federal Reserve has repaid billions back to the Treasury.
This arbitrage is a case of good debt.
Our national debt is $13.62 trillion so the $1.25 trillion for this arbitrage is 9.1% of the “debt.” (Fortune Magazine would argue that the debt is $21 trillion or 108.3% of GDP, but I am using Treasury debt only).
To point out the obvious: government rarely influences the economy except at points of significant stress. Paul Volcker choked off 14-15% inflation. George W. Bush and Barack Obama threw enough stuff against the wall in 2008 to save us from a major depression. Chrysler and General Motors were “saved” by Cash for Clunkers to stimulate car purchases and their restructuring. This saved Ford and the auto suppliers. Banks, AIG, and money market funds were saved. It was not pretty, but the alternative was unacceptable.
Compare those to Herbert Hoover’s actions at the beginning of the Great Depression. He raised taxes, had the Federal Reserve restrict the money supply and reduced government spending. We ended up in a depression that only war pulled us out of.
What are the lessons learned here? Connect the dots. Look at the consequences of your political actions. Think more about good policies than getting elected. Stick to your principles- if you believe we have too much debt, work on policies long term to reduce it.
And, most importantly, don’t lie to yourself by having your “beliefs” become facts.
Bob Chernow is a Milwaukee businessman and the former vice chair of the World Future Society.
