Roubini: Cut the payroll tax

Conservatives are out there pushing the idea that what our economy needs is a lot more cash in companies' hands, therefore we should cut their taxes, and then firms will start hiring again. But as Roubini pointed out, many larger companies already "have built up huge cash reserves," and so "we need to subsidize the demand for labor -- achieving job creation -- rather than making it cheaper to buy capital, as investment and other tax credits would do."

What America needs is a payroll tax cut

By Nouriel Roubini

September 17, 2010 | Washington Post

Nearly three years since the onset of the financial crisis, the continued weakness of the labor and real estate markets, U.S. consumers' unbalanced balance sheets and fading support from policy stimulus have transformed the risk of a double-dip recession from unlikely to about a 40 percent likelihood. The government responded creatively and massively to the near collapse of the U.S. financial system: The Troubled Assets Relief Program, stimulus spending and near-zero interest rates for nearly two years prevented a second Great Depression.

But the Federal Reserve has little ammunition left to boost growth or fend off a slump. And the federal deficit has reached such levels that additional spending of the kind that helped kindle the mini-recovery of early 2010 looks unwise.

In the midst of an election with crucial implications for its ability to govern, can the Obama administration reduce the likelihood of a "double dip"?

The administration knows that it needs to fashion a revenue-neutral fiscal stimulus that increases labor demand and consumption. Its proposal to make permanent a research and development tax credit that dates to the 1980s, and then to enact a temporary investment tax credit allowing firms to write down capital investments at 100 percent of cost, are welcome -- but too modest a cure for what ails the economy.

A much better option is for the administration to reduce the payroll tax for two years. The reduced labor costs would lead employers to hire more; for employees, the increased take-home pay would boost much-needed economic consumption and advance the still-crucial process of deleveraging households (paying down credit card debt and other legacies of the easy-credit years).

Most policy approaches, including the Obama proposals, have tended to subsidize the demand for capital rather than the demand for labor. That has the problem backward. In the second quarter, capital spending reached an annual growth rate of 25 percent. The argument that increased demand for capital leads to greater demand for labor (i.e., if you buy more machines you need workers to run them) has not held up. Firms are investing in capital goods, equipment and offshore offices that allow them to produce the same amount of goods with less -- and lower labor costs. To avoid a chronic increase in the unemployment rate, we need to subsidize the demand for labor -- achieving job creation -- rather than making it cheaper to buy capital, as investment and other tax credits would do.

President Obama could fully fund the reduction in payroll tax by allowing the Bush tax cuts for people making more than $250,000 a year to expire. Meanwhile, the Bush-era cuts affecting middle- and low-income earners -- the vast majority of Americans -- would remain in place for the time being.

After two years, when U.S. growth is more robust and the pace of private-sector hiring has picked up, we can afford to phase out the payroll tax cut while maintaining the income tax rates for the rich. It's possible also that we could increase the tax burden on the middle class over time to reduce our budget deficit.

Proportion is critical in designing the payroll tax cuts. Small and medium-size enterprises have had it rough the past three years. They are scrambling for operating capital as banks hold reserves tightly, and they face higher borrowing costs than large corporations when they do find willing lenders. To maximize the incentives for private-sector hiring, there should be sharper reductions to the payroll taxes paid by employers than for those paid by employees. This will counter the argument that the higher income taxes funding these payroll tax cuts will hurt the wealthy and small businesses (many of which are run by those same high-income individuals) and their willingness to hire. Moreover, any cut in the payroll tax reduces the costs of operation and labor for all businesses. Other targeted policies that induce smaller banks to lend to small and medium-size businesses may be needed.

Low-income workers have historically shown a much higher propensity to consume when given extra money, so the payroll tax cut should be designed to provide a larger-percentage break to those on the low end of the income scale compared with the upper middle class.

Payroll tax cuts for the majority of low- and middle-income Americans could be just the beginning. The administration could propose even deeper cuts in payroll taxes if the president could get Congress to accede to a partial expiration of the other 2001 and 2003 tax cuts. At the end of this year, marginal cuts in capital gains, dividends and estate taxes are all up for renewal. A partial expiration of those special reductions -- more likely to hit higher-income individuals -- would not have to raise rates to the levels that preceded the Bush tax cuts; it could also incentivize those companies that have built up huge cash reserves (in effect, overinvesting in capital at the expense of hiring) to increase their demand for labor.

These temporary changes could not realistically be promoted as deficit-reduction measures. But they would hold the line against additional government debt while the nation awaits the recommendations of the president's bipartisan panel on deficit reduction. Absent a new stimulus package -- which appears highly unlikely at this point -- these cuts direct billions in cash back into precisely those American households most likely to spend it and those businesses most likely to apply it to hiring. A tiny percentage of the highest-income Americans will pay more for the service the government rendered to their brokerage firms and investment banks in 2008. In exchange, a large tax break can be fashioned for employers and employees that jump-starts consumption, encourages hiring and thereby reduces the risk of a double dip without busting the budget.

Nouriel Roubini, chairman of Roubini Global Economics and a professor at New York University's Stern School of Business, is the author of "Crisis Economics: A Crash Course in the Future of Finance."

Reagan's OMB Director: We can't afford tax cuts

He's going to lose his membership card if he keeps this up.

We Can't Afford Bush Tax Cuts: David Stockman

By Nicole Lapin
September 13, 2010 | CNBC

Don't extend the George W. Bush tax cuts, David Stockman, the director of Office of Management and Budget under President Reagan, told CNBC.

"We couldn't afford those tax cuts back when they were implemented by Bush. We can't afford them now," said Stockman.

"This is $300 billion a year. I think both parties are dreaming. Our fiscal situation is far worse than they're really telling the public, and since they're unwilling to cut taxes, and since we can't keep borrowing a trillion and a half dollars year in and year out, it's time to face the music."

Meanwhile, the White House continues to cite a report from the Congressional Budget Office that maintains that extending tax cuts for the wealthy could add $700 billion to the US deficit over the next decade.

"I realize people will say this [increasing taxes for the wealthy] will slow down the recovery, but, frankly, the recovery is over. We had a small inventory bounce. That's done. The economy is now bouncing along the bottom. It's not going to get a lot better, and we don't have the luxury of time," Stockman said.

"We're borrowing money or creating deficit at a $100 billion a month. We're creating deficit, or new debt, at twice the rate of our economic growth. I don't think that's sustainable and one of these days we're going to get a huge wake-up call as the global markets finally figure this out. We can't wait for that to happen, because if we do, it will be too late."

Stockman scoffed at the idea that tax cuts creates jobs, a point made by Obama's former OMB director Peter Orzag, in a recent New York Times column.

"That's a Republican National Committee talking point. We have millions of excess small businesses in the United States that were created during the boom—construction companies, restaurants, retailers and so forth—that have no business, and they're not hiring because their taxes are too high, they're not hiring because they don't have any customers," said Stockman. He also said that there are more homebuilders than housing starts.

"We have to recognize that we're in a major debt deflation, debt liquidation. Our economy has to go through vast restructuring, and the typical historical expedience, like tax cuts for a short period stimulus, simply is irrelevant. They [tax cuts] will only make the problem larger in terms of the fiscal side and will not create jobs. We've had tax cuts for the last three years, and how many jobs have been created? Net, very few."

Income growth: Dems vs. GOP, 1947-2008

Go ahead, you teabaggers, this is your chance to tell me how this graph is so dishonest.

This should prove once and for all that Democrats are better stewards of the economy. Indeed, historically they do their best when they have total control of the House, Senate, and Presidency.

http://i.imgur.com/Tt8qs.png

Zakaria: U.S. overreacted to 9/11

It's always nice when Fareed Zakaria decides to agree with me, albeit late. However I'm very late in posting this, so it kind of evens out.

What America Has Lost

By Fareed Zakaria

September 4, 2010 | Newsweek

Nine years after 9/11, can anyone doubt that Al Qaeda is simply not that deadly a threat? Since that gruesome day in 2001, once governments everywhere began serious countermeasures, Osama bin Laden's terror network has been unable to launch a single major attack on high-value targets in the United States and Europe. While it has inspired a few much smaller attacks by local jihadis, it has been unable to execute a single one itself. Today, Al Qaeda's best hope is to find a troubled young man who has been radicalized over the Internet, and teach him to stuff his underwear with explosives.

I do not minimize Al Qaeda's intentions, which are barbaric. I question its capabilities. In every recent conflict, the United States has been right about the evil intentions of its adversaries but massively exaggerated their strength. In the 1980s, we thought the Soviet Union was expanding its power and influence when it was on the verge of economic and political bankruptcy. In the 1990s, we were certain that Saddam Hussein had a nuclear arsenal. In fact, his factories could barely make soap.

The error this time is more damaging. September 11 was a shock to the American psyche and the American system. As a result, we overreacted. In a crucially important Washington Post reporting project, "Top Secret America," Dana Priest and William Arkin spent two years gathering information on how 9/11 has really changed America.

Here are some of the highlights. Since September 11, 2001, the U.S. government has created or reconfigured at least 263 organizations to tackle some aspect of the war on terror. The amount of money spent on intelligence has risen by 250 percent, to $75 billion (and that's the public number, which is a gross underestimate). That's more than the rest of the world spends put together. Thirty-three new building complexes have been built for intelligence bureaucracies alone, occupying 17 million square feet—the equivalent of 22 U.S. Capitols or three Pentagons. Five miles southeast of the White House, the largest government site in 50 years is being built—at a cost of $3.4 billion—to house the largest bureaucracy after the Pentagon and the Department of Veterans Affairs: the Department of Homeland Security, which has a workforce of 230,000 people.

This new system produces 50,000 reports a year—136 a day!—which of course means few ever get read. Those senior officials who have read them describe most as banal; one tells me, "Many could be produced in an hour using Google." Fifty-one separate bureaucracies operating in 15 states track the flow of money to and from terrorist organizations, with little information-sharing.

Some 30,000 people are now employed exclusively to listen in on phone conversations and other communications in the United States. And yet no one in Army intelligence noticed that Maj. Nidal Malik Hasan had been making a series of strange threats at the Walter Reed Army Medical Center, where he trained. The father of the Nigerian "Christmas bomber" reported his son's radicalism to the U.S. Embassy. But that message never made its way to the right people in this vast security apparatus. The plot was foiled only by the bomber's own incompetence and some alert passengers.

Such mistakes might be excusable. But the rise of this national-security state has entailed a vast expansion in the government's powers that now touches every aspect of American life, even when seemingly unrelated to terrorism. The most chilling aspect of Dave Eggers's heartbreaking book, Zeitoun, is that the federal government's fastest and most efficient response to Hurricane Katrina was the creation of a Guantánamo-like prison facility (in days!) in which 1,200 American citizens were summarily detained and denied any of their constitutional rights for months, a suspension of habeas corpus that reads like something out of a Kafka novel.

In the past, the U.S. government has built up for wars, assumed emergency authority, and sometimes abused that power, yet always demobilized after the war. But this is a war without end. When do we declare victory? When do the emergency powers cease?

Conservatives are worried about the growing power of the state. Surely this usurpation is more worrisome than a few federal stimulus programs. When James Madison pondered this issue, he came to a simple conclusion: "Of all the enemies to public liberty war is, perhaps, the most to be dreaded, because it comprises and develops the germs of every other … In war, too, the discretionary power of the executive is extended?.?.?.?and all the means of seducing the minds, are added to those of subduing the force, of the people.

"No nation could preserve its freedom in the midst of continual war," Madison concluded.

OK Go on net neutrality

OK Go makes really cool videos. Check 'em out.

OK Go on net neutrality: A lesson from the music industry
By Damian Kulash
August 29, 2010 | New York Times

On the Internet, when I send my ones and zeros somewhere, they shouldn't have to wait in line behind the ones and zeros of wealthier people or corporations. That's the way the Net was designed, and it's central to a concept called "net neutrality," which ensures that Internet service providers can't pick favorites.

Recently, though, big telecommunications companies have argued that their investment in the Net's infrastructure should allow them more control over how it's used. The concerned nerds of the world are up in arms, and there's been a long, loud public debate, during which the Federal Communications Commission appeared to develop a plan to preserve net neutrality.

The FCC's latest action on the question came partly in response to a federal appeals court ruling in April that appeared to limit the agency's authority over Internet service providers. In May, FCC Chairman Julius Genachowski issued a plan to classify the Internet under Title II of the 1934 Communications Act. In English, that means the agency would be legally recognizing a fact so obvious that I feel silly even typing it: We use the Internet to communicate. With that radical notion established, the FCC would have jurisdiction to protect the public interest on the Net, including enforcing neutrality. Since announcing its intent, though, the FCC hasn't followed through, and the corporations involved are trying to take the reins before the public servants do.

The first volley, earlier this month, was a proposal from Google and Verizon. The part they'd like us to notice, and the part I was thrilled by, is where they say there shouldn't be paid priority for the transmission of Internet content, meaning all legal data should be treated equally. Hear, hear, Googrizon! We, the stuff-making, freedom-loving, innovation-crazed citizens of the Internet, could not agree more.

Unfortunately, a couple of parts of the proposal radically contradict the noble principle outlined above.

First, Google and Verizon would like to exempt wireless Internet, which leads one to wonder just how dumb they think we are. Everyone's heard that the future of the Web is all wireless, but in truth, the present of the Web is all wireless. We are already deep in the iPad/BlackBerry/Android era, and there's no going back. So limiting equality and fair play to wired territory would be kind of like civil rights legislation that dealt with bus seating but exempted schools, the workplace and the voting booth.

Second, the companies slipped in a doozy of an idea for what seems like a hypothetical "fast lane" apart from the "public" Internet. Big bucks could gain access to this separate, specialized service, guaranteeing faster delivery of corporate ones and zeros. Essentially they are saying: Don't worry, there would be no "paid priority," except in the instances where you could pay for priority. Words fail to convey my incredulousness.

Let me tell you why I take this so seriously, and so personally. I've spent a decade working in the music industry, a business in which the big guys block out the rest of us. Creativity and innovation take a distant back seat to money, and everyone loses, even the big guys themselves. They have insulated themselves from change for so long, they've dug their own grave.

Both as a musician and as a music fan, I've always wanted to see the best and most exciting musical ideas rise to the top. But we all know the story of the music business: Success is bought more often than earned. Smart money looks for low risks, so the safest, blandest music attracts the most investment, and only the safest, blandest music makes it to the airwaves and the shelves at Wal-Mart. Creative, innovative artists toil in obscurity, the public is fed rubbish, and, for decades, the industry contentedly made its way to the bank.

Music is subjective, of course, so you don't have to agree with my assessment of what's innovative and what's trash. But business is less so, and the past decade of the music industry is as clear an example as you can find of what happens when the depth of pockets, not the quality of ideas, is the arbiter of success. It's been like a corporate version of the Three Stooges: absurd flailing, spectacular myopia and willful ignorance of reality. Now that the big record companies have made themselves obsolete, bands such as mine can make a better living without their help than we can with it.

The lesson is that insider's clubs don't nurture the best ideas, which is the whole point of markets: Competition is supposed to keep everyone on their toes. Sure, it's a drag that the radio plays such bad music, but it won't sink our economy. Can you imagine, though, what would happen if we let the same thing happen to ideas themselves?

The Internet is the purest marketplace for ideas that the world has ever seen, and the amazing power of such a level playing field has revolutionized everything. Google knows this better than anyone. It started in a garage and became an industry leader by having great ideas, not mountains of cash. And it's wonderful: The Internet works! It rewards innovators such as Google, and it relegates protectionist, defensive, idea-squashing fogies such as record companies to the dustbin of history.

Now that the Internet has been around long enough to have developed its own giants, though, we need to make sure they don't ruin what's great about the technology that made them. We need to make sure they don't crush the idea industry the way the music giants crushed the music industry. I hope Google keeps succeeding (seriously, I'm a stockholder), but it must be because of the power of its ideas, not its power to tilt the playing field.

The Google and Verizon statement, which was roundly criticized when it was released, is unlikely to be the only proposal we'll see from the big boys. A week and a half ago, AT&T, Verizon, Microsoft, Cisco Systems and a trade group called the National Cable & Telecommunications Association met for closed-door negotiations on managing online traffic that didn't include the FCC or the public.

The good news is that the Obama administration has repeatedly promised that it supports net neutrality. Right now the FCC can lastingly protect freedom and equality on the Net. To establish that authority, the agency needs the support of three of its five commissioners. Two commissioners, Michael Copps and Mignon Clyburn, Democratic appointees, have loudly backed the effort.

What we need is for the chairman to join them and follow through on the plans he laid out months ago. Mr. Genachowski, we, the citizens of the Internet, are with you.

Damian Kulash is the singer for the band OK Go.