40 Years of Tax and Spend: The Disconnect of our Government Policies from Our Economy

Now that the election is over it is time to get back to the business of actually governing our country, seriously two years is too long to not pass any meaningful legislation. The first order of business of course is the infamous fiscal cliff. I hope your brain like mine just did the obligatory dun dun dun. I also hope that like me it wasn’t the serious drum beat but the joking voice mimicking the drums. The fiscal cliff is a manufactured crisis to allow our two political parties to engage in what I will delightfully call legislative masturbation. Much like throughout the election we are going to waste the next several weeks agonizing over two subjects: tax cuts and debt. By focusing so much attention on these two topics it ignores the realities of our economy for the last 40 years. Which is a problem, because the last 40 years ups and downs have had little if nothing to do with our debt or our tax code.

I Owe Me

Not too long ago I started asking myself why do people spend so much time worrying about the national debt and the deficit? It is not as if they have any tangible effect on our day to day lives. Besides being too large the numbers don’t even mean anything to the average citizen. Does it mean you’re paying more for things? Well no, inflation is at its lowest levels in generations so any change in prices is independent of our debt levels. Does it affect the cost of you or of companies to obtain loans? Again no, interest rates are at historically low levels. Well doesn’t it make us more like third world countries and failing economies like Greece? Nope, we have a highly diversified economy, and a strong revenue structure making the graft of the tax system incredibly difficult, though not impossible. What about the dangers of being in debt to China, obviously we don’t want to be beholden to a foreign country, right? Again there is just no there, there. Our current debt is above 16 trillion dollars, meanwhile if you combine the holdings of all foreign entities it is 5.5 trillion. China only holds about 1.2 trillion of that debt. The rest of it is held by, well… us, or put another way 65% of our debt is to ourselves. I would not say as Dick Cheney did that “deficits don’t matter” The do have long term impacts that are relatively important but in terms of the day to day state of the economy it has virtually no impact.

Taxation 101

The same is true for our tax code, time and time again we hear that raising taxes will prevent companies from hiring. This is laughable for two reasons. The first being the changes being proposed are so miniscule they roughly make for a rounding error. The second and most important is NO COMPANY WOULD PAY A DIME MORE IN TAXES BECAUSE THEY HIRED SOMEONE. This is taxation 101 people, you only tax earnings; another way of saying this is you tax profit. When you hire someone the amount you pay them counts as expense, and does not get taxed. So if you hire a new employee everything you spend on that new hire reduces your tax burden. Therefore the equation to hire a new employee comes down to the fundamentals of the business and whether or not hiring the new employee will result in increased revenue.

The Ballad of John Henry

The distressing thing about this focus on taxes and debt is that it is whistling pass the soon to be grave of the manufacturing worker in America. This has been the real story of the economy of the last 40 years. By the end of the 70’s steel manufacturing jobs were dying. It was not so much that the need for steel evaporated, quite the contrary we still use steel in almost every major industrial application. What changed was the way it was produced. Some of this had to do with regulations, albeit not bad evil no good dumb regulation, but safety regulations that keep people coming home with all their limbs and their life. Regulations such as OSHA had finally become widely accepted to the point that all industries had to comply with basic safe and humane work environments. This did result in some jobs going overseas, which continues to this day, but outsourcing is not what killed manufacturing jobs in this country, it was technology. A lot has been said about the work environments and the pay wage discrepancies for overseas workers, and it is absolutely true that this has driven down the cost of labor overseas, and contributes to the loss of manufacturing in America. The problem is this doesn’t address the fact that the cost of labor in America for manufacturing jobs is prohibitively high. If we made it cost prohibitive to ship manufacturing overseas the response from businesses would not be to return to the number of manufacturing jobs we had in the 60s and 70s, it would be to increase the amount of automation. Watch an episode of “How It’s Made” and you will see that manufacturing in this country rarely if ever involves humans putting widgets together. This is because while it is still cheap to have humans in deplorable conditions overseas put together widgets, having robots do it here doesn’t cost that much more. We are in essence victims of our own success. Productivity in this country is tremendously high do to the vast resources we devote to optimization. As a result a lot of manufacturing jobs we do in this country can be done with half the labor.

The Death of the Middle Class

If as I say manufacturing jobs have been dying a cancerous death for the last 40 years why hasn’t our economy been in the toilet all those years? Well the truth of the matter is for most people it has. Wages in this country have been stagnating for the last 40 years. Most of the increase in household earnings has been the result of multiple incomes in the home and longer hours. If you also take into consideration that most employers in this time period also switched from defined pension systems to matching contributions in 401ks the total income earned by workers during the life of their employment has substantially decreased. This fact has largely been masked for a number of reasons. First cheap credit and low cost consumer goods gave Americans the feeling of increased purchasing power, though as I wrote before this is in no way a good thing. Second home values went through an illogical and unprecedented surge that gave people the feeling of increased wealth. These reasons though have the same root cause, and ultimately at the close of 2008 were revealed as the same false promise.

Boom, Bust, and Speculations

The cause from my perspective has been the oversized financial industry. Our nation has lots of vices, but this one stands out as more insidious than even our insatiable addiction to fossil fuels. From the 1960s to the 1980’s the financial sector stayed relatively flat at roughly 15% of our GDP. After this it has doggedly ticked passed 21% in recent years; despite being the absolute epicenter of the 2008 recession.  This is like drinking till you have liver failure and before you even fully recover going back to drinking at the exact same pace. The role of a financial sector is to connect people with money to people with businesses. That’s it; anything else would be a perversion of the arts. In other words the financial sector should not be really making much profit at all.  But over the last few decades the financial sector has become the profit engine of businesses. GE originally entered into the financial market to make it easier for their customers to buy their products, now they make more profit on the financing then they do selling the actual product.

Building a new Economy

The problem is the financial industry has been the steroids keeping an old economy going passed its time. If we are truly going to recover from the economic downturn we have to realize how big the problem is. Changing the debt levels or the amount we collect in taxes isn’t really going to change the trajectory of our economy any more than sending more people to college or increasing the amount of manufacturing in this country would (we still have damn near the largest in the world). Our problem is we have an old economy ill suited for the challenges of the modern world. In the 20th century the world needed more food and better ways of transportation. America responded creating the biggest farm industry in the world and created vehicles to get you anywhere including the moon and back. These are not the challenges we face now. In the 21st century creating sustainable energy and protecting and healing our battered planet are the most daunting challenges. In fact daunting may be to reserved a sentiment. Responding to these challenges will require literally remaking the country, from changing the way our electrical grid works, the vehicles we drive, to the very landscape of cities and suburbs themselves. These changes will transform our economy and provide a better growth model then anything being proposed by our pointless discussion of the fiscal cliff.

 

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