Black: Ireland and Iceland were models to follow?

Black asks if anybody cares to remember how Ireland and Iceland were trotted out by EU and US neo-liberals as great successes to follow in their deregulation, privatization of public assets, and budget cuts, particularly to the social safety net.

And yet budget surpluses and supply-side growth didn't save Iceland or Ireland from the financial crisis.

ECB President Trichet Praised Ireland as the Model for the EU to Follow
By William K. Black
June 7, 2011 | New Economic Perspectives

URL: http://neweconomicperspectives.blogspot.com/2011/06/ecb-president-trichet-praised-ireland.html

'Regulate' Wall Street by controlling gov't deficits?

Very interesting history on the sudden rise of the once very small Wall Street firms in the 1980s, thanks in large part to Reagan's skyrocketing budget deficits.

Although I definitely don't agree with Farrell that the "only way to truly rein in the power of the modern financial giants, aka the too-big-to-fail club, is for governments to embrace balanced budgets," it certainly would help, and it highlights the symbiotic relationship between out-of-control gov't spending and too-big-too-control Wall Street banks which must trade all that gov't debt. (This goes for Europe and Japan, too.)

Keep Wall Street in Check by Balancing the Budget

Since the giant financial firms gorge on massive government debt issuance, a prudent fiscal regime would curb the investment bankers' power

By Chris Farrell

April 28, 2010 | Bloomberg Businessweek

The future of Wall Street certainly seemed bleak on Apr. 27. Executives from Goldman Sachs (GS), the world's most profitable securities firm, were grilled by the Senate Permanent Subcommittee on Investigations for their behavior during the housing market crash. The stature of the firm—and by proxy, Wall Street—are diminished, no matter what comes of the Securities & Exchange Commission's allegation that Goldman defrauded customers in creating and selling a synthetic security during that crash.

But another meeting that day in Washington suggests the possibility of a brighter business future for the major Wall Street firms: the National Commission on Fiscal Responsibility & Reform's gathering at the White House. The bipartisan blue chip group has been charged by President Barack Obama with devising ways to reduce the federal government's $1.4 trillion deficit and bring down its $7.8 trillion debt. The meeting served as a sober reminder that it will take years to bring down the massive amounts of debt the government will be issuing in coming years—assuming that a bipartisan deficit-reduction measure can be agreed upon and passed into law.

Here's the thing: History may not repeat itself, but it does rhyme. In which case the increase in government debt should be a good thing for Wall Street. After all, it isn't just the U.S. that's issuing lots of government debt that needs to be distributed to investors worldwide. Following dramatic actions to shore up their beleaguered economies during the Great Recession, sovereign debt levels of the Group of Seven industrialized nations as a proportion of gross domestic product are nearing 60-year highs, according to the International Monetary Fund.

The numbers are striking. The IMF projects that gross general government debt will reach 78% of GDP in 2010 in the United Kingdom, 77% in Germany, 84% in France, 93% in the U.S., and 227% of GDP in Japan. According to the 2010 league tables compiled by Bloomberg, the leading players in global bonds are Barclays Capital (BCS); JPMorgan (JPM); UBS (UBS); Deutsche Bank (DB); Bank of America Merrill Lynch (BAC); Goldman Sachs; Morgan Stanley (MS); Citigroup (C); Credit Suisse (CS); and HSBC Bank PLC (HBC). The reputations of these Wall Street titans may be tattered at the moment, but governments will need them to market and manage all that debt.

IN THE '60S: "MAHOGANY ROLLTOP DESKS"

A critical factor behind the rise of modern Wall Street was a major shift in fiscal policy during Ronald Reagan's Presidency. In the post-World War II period, government debt had shrunk as a proportion of GDP. Even in the late 1960s, Wall Street was a small place, still recovering from the debacle of the 1930s. When Roy Smith, a market historian and professor at New York University's Stern School of Business, went to Goldman Sachs in 1966 after graduating from the Harvard Business School, the U.S. investment banking industry was dominated by Morgan Stanley. Investment banking consisted of some 20 partnerships that averaged 500 employees apiece, with an aggregate capital base of less than $100 million.

When Smith arrived on Wall Street, "many of the partners sat in one large Dickensian room behind matching mahogany rolltop desks so they could easily communicate with one another when they needed to," he writes in his latest book, Paper Fortunes: Modern Wall Street; Where It's Been and Where It's Going.

Wall Street started changing during the high-inflation years of the 1970s and the deregulation of commissions. With the rise of supply side economics in the early 1980s, government debt volumes surged and Wall Street expanded with them. All that debt had to be distributed, sold, and traded in large volume. "It had a lot to do with transforming the business model of the firms from advice into being traders for its own sake," says Smith. "You can't be a market maker without being a trader."

The effect was dramatic. For the first eight decades of the 20th century, financial assets grew at about the same rate as GDP, except in wartime. Subsequently the total value of financial assets as a percent of GDP has grown more than twice as much as in the previous 80 years, according to calculations by McKinsey & Co. In 30 years, the Wall Street firms grew from small private partnerships to publicly traded global behemoths.

BIG DEMAND FOR BAILOUTS, REFINANCINGS

To be sure, marketing government bonds is a low-margin business. And there were plenty of other things keeping Wall Street busy, from rising stock market trading volumes to merger & acquisition mania. Still, the "growth of government debt might have encouraged all of these other activities by providing safe and liquid securities that could be sold, repo'ed, or otherwise collateralized to fund the other activities," muses Richard Sylla, economic historian at New York University.

Governments are going to need the set of skills honed over the decades by Wall Street financiers. It isn't just the volume of debt. Sovereign bailouts, refinancing, and other financing maneuvers are complicated. "All the major firms are comfortable dealing with U.S. government debt and foreign bonds," says Smith. "It's a great business opportunity for the next several years."

It all implies that financial reform is the solution. The only way to truly rein in the power of the modern financial giants, aka the too-big-to-fail club, is for governments to embrace balanced budgets. That's what Tyler Cowen, economist at George Mason University and Marginal Revolution blogger, recently wrote about the U.S.

"There's a different way to think about the bailouts, namely that the U.S. government stands at the center of a giant nexus of money-raising, most of all goes to finance the U.S. government budget deficit and keep the whole show up and running," Cowen wrote. "If you do wish to break or limit the power of the major banks, running a balanced budget is probably the most important step we could take."

He's right, and not just for the U.S. In the meantime, Wall Street looks to thrive once again on debt volume and market turmoil. Plus ça change ….

California's budget crisis is a warning to supply-siders

Clearly California's state legislature has a pro-business agenda, and has had for about 20 years. We are now seeing the combined disastrous effects of recession and "supply-side" tax policy in California, the world's 8th largest economy. California is a bellwether for the U.S. and should serve as a warning to those preaching irresponsible fiscal policy in the name of economic growth.

66% of respondents in a recent poll said that Americans are overtaxed. And teabaggers argue incessantly that we are overtaxed, and that the situation is only getting worse.

That's true -- but only if you're poor! For instance, in California, the bottom 20% of earners pays 11.1% of income in local taxes, whereas California's top 1% of earners pays 7.8%. If you added in FICA for the two groups, the disparity would only get worse.

Check out this amazing post by business writer Michael Mandel which shows the average tax burden for the whole U.S. economy is actually the lowest it's been since 1966.

Even the anti-tax Tax Foundation admits that so-called "Tax Freedom Day" (the day in the year when the average U.S. worker starts earning for himself after paying all taxes) is the earliest it's been since at least 1971.

The answer is not to raise everybody's taxes, but to increase taxes on the rich and corporations, who are paying less than their fair share, historically. Indeed, the U.S. Government Accountability Office reported in 2008 that 72% of all foreign corporations and about 57% of U.S. companies doing business in the U.S. paid no federal income taxes for at least one year between 1998 and 2005. And in 2005 about 25% of the largest U.S. companies paid no federal income taxes despite $1.1 trillion in gross sales. Recently Forbes noted that huge global companies like Exxon and G.E. paid no U.S. income tax in 2009.

Supply-siders and business gurus like JPMorgan Chase's chief executive sleazeball Jamie Dimon respond that if gov't raised their taxes from, well, zero to some egregious number greater than zero, that corporations would simply pass on this cost to consumers and hold it back from workers. But workers are being denied the benefits of pro-business, supply-side tax policy right now!

And indeed, very few have mentioned stagnant wages as a cause of the Great Recession, and not a result: without growth in wages, U.S. households have had no choice but to borrow to finance the 70% of U.S. GDP which is private consumption. Wall Street banks were happy to provide them credit, as long as it was speculatively profitable. Then we all know what happened next.

This liberal for one trusts Big Guvmint more to redistribute their wealth than corporations themselves, who are obviously, inarguably, doing a terrible job of it. Social Security and Medicare make up about half of the federal budget and they are overwhelmingly popular programs that nobody -- left, right, or center -- really wants to cut. They are so important that it's hard to make a rational cost-benefit analysis, because we'd only know how much suffering and privation these programs prevented if we abolished them -- a prospect so frightening, nobody wants to contemplate it.

California's poor pay the highest tax rate

By Martin Wisckol

April 13, 2010 | The Orange County Register

California households in the lowest 20 percent of income pay the highest portion of their earnings when it comes to state and local taxes, according to a new report from the California Budget Project.

Additionally, changes in state tax law have benefited corporations while costing individual taxpayers more, according to the report. And the net income of corporations has grown 411 percent from 2001 to 2008, while the adjusted gross income income of individuals has risen just 27.8 percent during the period.

The report rates California a "moderate tax state," noting that in 2008-09 it ranks 21st in the U.S. in terms of state taxes as a percentage of personal income.

At a time when many Republican candidates are calling for more tax breaks for businesses and lower taxes for individuals, the California Budget Project offers a somewhat different perspective. The CBP has a history of presenting data that often supports policies on the Democratic side of the aisle, but its methodology and research are usually sound.

However, the CBP's latest report does not appear to contradict the GOP mantra that the state's problem is not income, but spending.

Among specific findings:

• The bottom fifth in family income pay 11.1 percent of their earnings in state and local taxes.
• The top 1 percent pay 7.8 percent.
• The state's median wage has risen 25.6 percent from 2001 to 2008.

"Over the past two decades, the cost of funding state services has shifted from corporate to personal income taxpayers. The Department of Finance estimates that personal income tax receipts will provide 53.2 percent of General Fund revenues in 2009-2010, up from 35.4 percent in 1980-81. Corporate tax receipts are expected to provide 10.7 percent of General Fund revenues in 2009-2010, down from 14.6 percent in 1980-81."

The report continues, "New, increased, and expanded corporate tax breaks and the 1996 corporate tax rate reduction are responsible for the decline in the share of state revenues provided by the corporate income tax. Additional corporate tax cuts were included in the September 2008 and February 2009 budget agreements that will result in a loss of nearly $2 billion per year when fully implemented."

Meanwhile, the Tea Party activists say everybody is being taxed too much. Read this story about what's ahead for the movement.