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Under the Microscope: Understanding Economics and the Unemployment Rate   

“She Sat like Patience on a Monument, Smiling at Grief.”

Twelfth Night, William Shakespeare

Introduction

     The unemployment rate is but one factor or variable in our economy. There are many others including:

  • Inflation
  •  consumer aggregate demand for goods and services
  •  governmental fiscal policy (spending and taxes)
  •  monetary policy (policies around the expansion or contraction of the money supply)
  •  private sector business practices including business contraction or expansion
  •  population expansion or contraction
  •  different industries
  •  technological development
  •  national and global politics
  •  Entrepreneurship
  •  skill sets and educational level of Americans today.

Then there is one important “juice of the economy” that affects everyone, and is known as Credit Availability. All these factors or variables affect each other to one degree or another.

A Sense of Bewilderment and Frustration

     Understanding the unemployment rate has never been a simple task. Complex interactive variables and a constantly changing economy sometimes seem to conspire to give the public a sense of bewilderment when trying to understand or figure out what is going on. It’s sad and disappointing when your close friends and/or family members just can’t seem to find a job. The Unemployment Rate is more than a statistic; it’s about real people, their lives, and their livelihood.

This bewilderment and frustration does cause anger creating a kind of collective social consciousness where everybody agrees on only one thing, namely: Let’s point a finger and play the “Blame Game.”

People want to blame the Congress, the President, or Democrats and Republicans in general, the Federal Reserve or its chairman, or the global economy when jobs are viewed as leaving the United States.

Economists aren’t too helpful sometimes because they cannot always agree on what is the best course of action for creating jobs or achieving full employment in the United States. Others prefer to blame labor unions, illegal immigration, Wall Street, or big business and/or small business.

As a blogger I can’t extricate the public from their frustrations, lack of knowledge, or prejudices.  However, one way I can help is to provide a more factual and theoretical basis for understanding what unemployment really is, and how it fits within the overall framework of what we call the economy. Under the microscope, here is some background which should help with understanding the economy.

Background

       Generally, astute observers might suggest that the problem of unemployment is somehow tied to the economy or business cycles such as (Expansion and Growth, Prosperity, Recession [or contraction], and finally Recovery). Other economists prefer the following descriptive terms: (Prosperity, Recession, Depression, and Recovery). The guy on the street might suggest that our economy simply involves only three cycles (The Good, The Bad, and the Ugly). All of this will become clearer later in this Blog.

Economic cycles, however described, do account for the lion’s share of the explanation of how the economy works, including how the Unemployment Rate fits in. Economic forces seem to have a life of their own. Nevertheless, other forces besides economic cycles are important.

The other explanation for the economy and unemployment rate relates to politics and government actions to deal with the economy and unemployment.

Current Economic Environment

     In the current economy the country does seem to be in a very long recovery cycle. Although business cycles always occur in the same order, the length of each cycle cannot easily be predicted.

Since much unemployment or underemployment occurs among the poor and the working poor, some people feel the replacement of lower skilled jobs with better technology and more jobs requiring higher skill sets has left the poor and working poor holding the bag. However, given that almost every profession experiences unemployment during a recession (engineers, scientists, teachers, highly skilled technicians, etc.) a reasonable person might conclude that unemployment affects everyone, not just the poor and the working poor.

Other targets for blame include: the rich and wealthy in society, poor planning of the job-seeker himself, and finally—the consumer for not spending enough money that would support and stimulate business. When business suffers as consumer demand ebbs, it creates the conditions that allows  a higher than normal unemployment rate.

How best can one unravel the various complexities of understanding the economy and begin to shed light on the unemployment rate? In an ideal world we all want full employment for our citizens. Unfortunately, no society ever lives in an ideal world.

     So what is the best course to understanding the complexities of the economy and the unemployment rate?

In a cosmic sense every variable affects every other variable to some degree. But in a down-to-earth way we have to remember the famous words of Jack Webb’s character Joe Friday in the hugely popular television series, Dragnet. “Just give me the facts, mame!”So, what are the facts?

     First we need to start with a few facts on the unemployment rate in America followed by an explanation of the various phases of the business cycle.

 

Unemployment Rate Data

 

The Unemployment Rate in the United States (January and December 2003-2013)

 

                               January                 December

2003                            5.8                            5.7

2004                            5.7                            5.4

2005                            5.3                            4.9

2006                            4.7                            4.4

2007                            4.6                            5.0

2008                            5.0                            7.3

2009                            7.8                            9.9

2010                            9.8                            9.3

2011                            9.1                            8.5

2012                            8.3                            7.8

2013                            7.9*

*As of August 2013 the unemployment rate in the United States was 7.3%, a level not seen since December, 2008. It went from a high of 9.9% in December 2009 to a low of 7.3% in August, 2013. This 2.6% drop in the unemployment rate occurred during the administration of President Barack Obama, who said “Yes We Can” while Republicans blamed him for the high unemployment. This was despite the fact they created the conditions that caused the unemployment rate to jump from 5.0% to 7.3% during the catastrophic economic collapse of 2008 which occurred during the last year of the Bush Administration.

Definitions and Concepts

    

 

Unemployment

 

There are four types of unemployment:

 

Structural Unemployment

     Structural unemployment is caused by the types of production and laws of an economy that govern whose skills are valuable in the marketplace.

Frictional Unemployment

     Frictional unemployment is associated with changing jobs, often because workers are searching for better opportunities or moving to new locations.

Cyclical Unemployment

     Cyclical unemployment is caused by changes in real GDP that are associated with the business cycle.

Seasonal Unemployment

     Lastly, seasonal unemployment is caused by changes in employment associated with changes in the seasons.

 

The Basic Business Cycle

The four phases of a business cycle are briefly explained as follows:

1. Prosperity Phase

When there is an expansion of output, income, employment, prices and profits, there is also a rise in the standard of living. This period is termed as Prosperity phase.

The features of prosperity are:

  1. High level of output and trade.
  2. High level of effective demand.
  3. High level of income and employment.
  4. Rising interest rates.
  5. Inflation.
  6. Large expansion of bank credit.
  7. Overall business optimism.
  8. A high level of MEC (Marginal efficiency of capital) and investment.

Due to full employment of resources, the level of production is Maximum and there is a rise in GNP (Gross National Product). Due to a high level of economic activity (buying and selling goods and services), it causes a rise in prices and profits. There is an upswing in the economic activity and economy reaches its Peak. This is also called as a Boom Period.

2. Recession Phase

The turning point from prosperity to depression is termed as the Recession Phase.

During a recession period, economic activities slow down. When demand starts falling, the overproduction and future investment plans are also given up. There is a steady decline in the output, income, employment, prices and profits.

The businessmen lose confidence and become pessimistic (Negative). It reduces investment. The banks and the people try to get greater liquidity, so credit also contracts. Expansion of business stops, stock market falls. Orders are cancelled and people start losing their jobs. An increase in unemployment occurs with or following a sharp decline in income and aggregate demand. Generally, recession lasts for a short period.

Many people talk about a “mild recession” and even “severe recession.” These are all matters of degree and economists can endlessly debate which is which. However, almost no one wants to consider or talk about the more devastating type of decline called a Depression.

3. Depression Phase

When there is a continuous decrease of output, income, employment, prices and profits, there is a fall in the standard of living and depression sets in.

The features of depression are:

  1. Fall in volume of output and trade.
  2. Fall in income and rise in unemployment.
  3. Decline in consumption and demand.
  4. Fall in interest rate.
  5. Deflation.
  6. Contraction of bank credit.
  7. Overall business pessimism.
  8. Fall in MEC (Marginal efficiency of capital) and investment.

In depression, there is under-utilization of resources and fall in GNP (Gross National Product). The aggregate economic activity is at the lowest, causing a decline in prices and profits until the economy reaches its Trough (low point).

4. Recovery Phase

The turning point from depression to expansion is termed as Recovery or Revival Phase.

During the period of revival or recovery, there are expansions and rise in economic activities. When demand starts rising (many economists assert that consumers are the driving force of any economy), production increases and this causes an increase in investment. There is a steady rise in output, income, employment, prices and profits. The businessmen gain confidence and become optimistic (Positive). This further increases investments.

The stimulation of investment brings about the revival or recovery of the economy. The banks expand credit, business expansion takes place and stock markets are activated. There is an increase in employment, production, income and aggregate demand, prices and profits start rising, and business expands. Revival slowly emerges into prosperity, and the business cycle is repeated.

Thus we see that, during the expansionary or prosperity phase, there is inflation and during the contraction or depression phase, there is deflation.

Economics and Employment in a Nutshell

     As our population increases there is more consumer demand. And, there are those that say that the driving force behind any economy is the consumer. This aggregate demand for goods and services causes businesses to have to keep up with consumer demand. Business does this by expanding or creating more products (inventory) and needed services.

This creates more money for businesses through profits and may require credit and acquiring loans to expand a business as well. In turn, business must hire more people.

Hiring people involves more money for salaries, insurance, office space, vehicles, etc. But here is the rub: In order for business to pay for all this expansion, they must raise the prices on goods and services. This, as everyone knows, is Inflation.

 As prices go higher consumer demand begins to lessen, and people get laid off when consumer demand begins to really tank. The sad truth is—as prices come down (deflation), the unemployment rate goes up. When the economy heats up again, then the expansionary business cycle causes businesses to once again hire more people. Near full employment (not real full employment) is achieved during the economic cycle known as “Prosperity.” The variability one finds in the unemployment rate is a direct result collectively of the four business cycles, and political factors as well.       

Political Influences on the Economy

     In the final analysis, a high unemployment rate is due to both political factors and the recessionary/depression economic business cycles. Economic business cycles are inevitable, but very difficult to predict how long each cycle will last. However, political factors make their own contribution to a high unemployment rate. And, everyone should be aware,  the order of economic cycles cannot be altered. Although timing of economic cycles can’t be predicted, they can be influenced by political factors. Such timing is heavily influenced by which political party dominates fiscal and monetary policies. These policies can be narrowed down to party-related tax policies, spending policies, monetary policies, and policies dealing with the availability of credit. All of these factors affect the unemployment rate.

Explanations for all these governmental actions can be found in a seven part series I blogged called, “Election Year Politics and the Economy,” back in 2012.

The Current Political Environment

     One question the public needs to think about is whether Republicans or democrats are better at tinkering with the economy and the unemployment problem?

At the present time that question is difficult to answer because the U.S. Government is in a state of crisis where efforts to help the unemployed or improve the economy have taken a back seat to politics and the shutting down of the government.

A hand full of Republican Tea Party members in Congress wanted and decided to hold the American people, and its government, hostage. It was a strategy created in lieu of the normal legislative process. As a result this caused a government shutdown. They did so primarily over just one issue—The Affordable Care Act. Until the government shutdown is really over, plans and resources to stimulate the economy and lower the unemployment rate—are evidently on hold.

So the public needs to start asking questions of Tea Party members now, long before the public goes to the polls in 2014. They might take this approach. Like Inspector Harry Callahan (played by Clint Eastwood) in the 1971 movie Dirty Harry, they might ask Tea Party members something like this: “So, you have to ask yourself this question. Do you feel lucky? Well, do you punk? The serial killer thought he was lucky. He reached for his gun and Inspector Harry Callahan blew him away.

Tea Party members, like Dirty Harry’s serial killer, may think they just might get lucky by holding the country hostage. Unfortunately, with recalcitrant Tea Party members controlling The House of Representative like domestic terrorists, they just might succeed. Polls indicate the Republican Party is going to get the most blame for the failed ill-conceived strategy to shut down the government and government services. The country is really pissed over the government shutdown!

Metaphorically speaking, the public after having been raped in 2013 by Tea Party members is going to get the last word, and perhaps poetic justice and revenge. It is my fondest hope that during the upcoming 2014 elections, the public, like the Terminator or Dirty Harry, is going to end the political careers of all Tea Party members who shouldn’t have been elected to Congress in the first place. However, the public has a very short memory. So, we’ll see what happens in 2014.

But a bigger question remains. How should sensible moderate Republicans or Democrats in general be viewed as to their ability to help improve the economy or help to lower the unemployment rate via job creation? In the upcoming congressional and senatorial elections in 2014 how should you vote if unemployment and a thriving economy is your uppermost concern?

To understand and answer the question, one needs only to look at past behavior of either political party. Again, who best can tinker effectively with the economy and the unemployment problem, Democrats or Republicans?

 

The Answer

     Since Democrat John F. Kennedy took office in January 1961, non-government payrolls in the U.S. swelled by almost 42 million jobs under Democrats, compared with 24 million for Republican presidents, according to Labor Department figures. Democrats hold the edge though they occupied the Oval Office for 23 years since Kennedy’s inauguration, compared with 28 for the Republicans. In addition, over the past 50 years, Republican administrations oversaw the largest decline in wages as measured as a percentage of the U.S. Gross Domestic Product (GDP).

If you really care about data and facts (not just value judgments), then it should be very clear to you who to vote for during the 2014 and 2016 elections.

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Purpose of Blog

As the government goes about the business of dealing with the the Fiscal Cliff, one of the most controversial issues it will have to address is raising taxes on our wealthier citizens. Value judgments work their way into the decision-making process because everyone, democrats, republicans, and independents, all have different ideas about what constitutes “Fairness, and Fairness for Whom?”

But one thing that can help extricate decision-makers from their own prejudices and value judgments, is to shed light on the issue with data and facts. I would be naïve to suggest that this is going to be an easy process. It will take their best effort and require everyone involved to put aside their political biases. The purpose of this Blog is the answer with data and facts the following question on the revenue generating side of their deliberations:

What is the Effect on the Economy if the Wealthy Are Taxed at Higher Rates?

With the 2012 presidential election over, it is important now to review facts as President Obama and the Congress come to grips with an important issue now looming over the nation. That issue has been metaphorically described as a fiscal cliff.

What is the Fiscal Cliff?

I love the way we use metaphors in this country to describe every social or economic problem. There once was a “War on Poverty,” “The Missles of October” that was better known as the Cuban Missle Crisis (Gee! I thought it was an American crisis as well) and now we have a “Fiscal Cliff” where all our money is going to drop over the edge of a great chasm like the Grand Canyon. The latter, like all the previous metaphors, conjures up graphic images in order to convey a very important message: Whatever the crisis is or gap between people, whatever the details are, the American people need to take the “Fiscal Cliff” seriously because the consequences are important to the nation’s financial health, and may be longlasting.

So personally, I get the message and I know it’s serious. Hopefully, my fellow Americans will take the underlying metaphorical graphic image such as a “Fiscal cliff” seriously as well.

Basically, the Fiscal Cliff is a popular way to describe the confusing, difficult riddle or puzzle the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

Laws will be affected when the gong hits midnight on December 31, 2012, including last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law.

At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.”

According to author Thomas Kenny, writing for About.com Guide, “In dealing with the fiscal cliff, U.S. lawmakers have a choice among three options, none of which are particularly attractive:

They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.

They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States’ debt will continue to grow.

They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.”

There are really only three things the U.S. Government can do to solve the problem of the Fiscal Cliff: Raise Taxes, Cut Spending, or both.

Fiscal Policy involves two major components: Taxes and Spending. While Monetary Policy is very important to the economy under the control of the Federal Reserve Board, my best guess at this point (as we get closer to the December 31, 2012 deadline) is that most of the compromises to be reached will be worked out between the President and Congress will mostly involve taxes and spending cuts.

The Issue of Higher Tax Rates for the Wealthy

President Barack Obama, of course, won re-election and, in a sense, is in the driver’s seat politically. The cornerstone of the President’s campaign in 2012 was to protect the middle class and require (on the tax revenue side) higher income households to pay more in taxes. Nevertheless, now is the time for a factual assessment of this issue.

According to author Chye-Ching Huang:

“Many policymakers and pundits assume that raising federal income taxes on high-income households would have serious adverse consequences for the economy. Yet this belief, which has been subject to extensive research and analysis, does not fare well under scrutiny. As three leading tax economists recently concluded in a comprehensive review of the empirical evidence, ‘there is no compelling evidence to date of real responses of upper income taxpayers to changes in tax rates.’ The literature suggests that if the alternative to raising taxes is larger deficits, then modest tax increases on high-income households would likely be more beneficial for the economy over the long run.

The debate over the economic effects of higher taxes on people with high incomes has focused on a number of issues — how increasing taxes at the top would affect taxable income and revenue as well as the effects on work and labor supply, saving and investment, small businesses, entrepreneurship, and, ultimately, economic growth and jobs.”

Economic Growth and Jobs

I found during the presidential campaign many people on both sides had something to say about job creation. All of the topics above can be found in Huang’s full report referenced at the end of this Blog. However, I want to share with you the relationship between taxing the wealthy and job creation, since it too is critically important.

History shows that higher taxes are compatible with economic growth and job creation: job creation and GDP growth were significantly stronger following the Clinton tax increases than following the Bush tax cuts. Further, the Congressional Budget Office (CBO) concludes that letting the Bush-era tax cuts expire on schedule would strengthen long-term economic growth, on balance, if policymakers used the revenue saved to reduce deficits.

In other words, any negative impact on economic growth from increasing taxes on high-income people would be more than offset by the positive effects of using the resulting revenue gain to reduce the budget deficit. I venture to say that Wall Street’s reaction  would be very positive if a major dent were to occur in our national debt. Risk/Reward ratios would favor the Bulls (“and you can take that to the bank”).

In addition, tax increases can also be used to fund, or to forestall cuts in, productive public investments in areas that support growth such as public education, basic research, and infrastructure.

Summary

According to Huang, “These findings from the research literature stand in contrast to assertions of extensive economic damage from increases in tax rates on high-income households, which are repeated so often that many policymakers, journalists, and ordinary citizens may simply assume they are solid and well-established. They are not.

These issues are of considerable importance, because sustainable deficit reduction is not likely to be possible without significant revenue increases. Unsupported claims that modest rate increases for high-income people would significantly impair growth ought not stand in the way of balanced deficit-reduction strategies that ask such individuals to share in the burden and pay somewhat more in taxes.

Raising revenues by broadening the tax base can in fact improve the efficiency of the tax code. And, because a cleaner tax code offers fewer opportunities to evade taxes, base broadening can reduce the economic cost of any rate increases also needed to achieve fiscal sustainability.

The research in the field does not provide strong evidence that modestly raising tax rates at the top of the income scale would have significant growth-reducing effects on labor supply, taxable income, savings and investment, or entrepreneurship. Moreover, as Professor Joel Slemrod has emphasized, the economic impact of tax increases depends in part on how the revenue raised is used. In the current fiscal and political environment, policymakers would likely use revenue raised by increasing marginal tax rates for high-income taxpayers to reduce deficits, which likely would have positive overall effects on long-term economic growth.

The nation faces a daunting fiscal challenge, as well as historically large income inequality and increased spending needs stemming from the graying of the population and advances in medicine that improve health but add to cost. These challenges mean that revenues, as well as spending cuts, need to make a significant contribution to deficit reduction.”

Post Script

As a political moderate, I have never been a big fan of class warfare discrimination, or any kind of discrimination for that matter. This is why it is so important to bring in facts, not just one’s value judgments. Even in “The Reasoned Society” separating facts from value judgments, in one’s own reasoning ability, can at times be a slippery-slope. The wealthy in America do in fact contribute disproportionately (as a percent and in gross dollar amounts) more money to charity than do lower-and-middle class individuals. The wealthy are to be applauded and respected for that kind of giving. Being wealthy, of course, does put one in a rather unique position to help others—and that is a good thing for society.

Nevertheless, quite clearly, the data have shown that our tax laws have disproportionately favored high-income taxpayers for decades over low and middle income citizens. Fairness as a concept is a two way street where income or tax equality is concerned. Many lower and middle class individuals often use sterotypical thinking to villify and demonize wealthy individuals to the point of appearing to be “Not Too Bright.” Nevertheless, the research data presented by Huang clearly and strongly sugggest that raising marginal tax rates on high-income individuals to help pay down our national deficit, and put our economic house in order, is both reasonable and fair.

Also, evidence shows that taxing wealthier individuals will have a positive effect on increasing GDP and job creation, what everyone, on both sides of the aisle, said was so important during the 2012 presidential election campaign.

________________________________________________________________________

The information for this Blog comes from two sources, Thomas Kenny who wrote an article in About.com Guide called The Fiscal Cliff Explained, and Chye-Ching Huang who wrote an article for the Center for Budget and Policy Priorities that answers the primary question raised in this Blog. The title of her article was Recent Studies Find Raising Taxes on High-Income Households Would Not Harm the Economy —Policy Should Be Included in Balanced Deficit-Reduction Effort. I was impressed by the clarity of writing by both these authors.

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The Political, Social, and Economic Issues in 2012:

How Do the President and Mitt Romney Stack Up?

 

 

Introduction

There is perhaps no better way to clarify how you should vote in 2012 than to lay out the plan and beliefs of each candidate regarding the critical issues of our time. As we get closer to Election Day, I hope you keep these differences between the candidates in mind. Initially, I had planned to discuss the fine points and relative value of Supply Side Economics (Republican approach to the economy) versus Demand Side Economics (Democratic approach to the economy). Instead, I have decided to cover a broader set of issues.

Back in March 2012 I began writing a six part series on Election Year Politics and the Economy. There, in the broadest sense, I covered the basics of economics and I would encourage you to review them once again. We are told incessantly by the media and party leaders that the crucial issue in 2012 is the economy. However, many many other issues are important to various segments of the population, as well as important to the voting public as a whole.

Consequently, I have layed out how each candidate views a variety of social, political, and economic issues. In this way, the larger broader view of election year politics will be covered. With this broader view, coupled with the specifics of economic theory covered in the six part series, each reader should be adequately prepared with knowledge to vote for the candidate of his or her choice on November 6, 2012.

In a final Conclusions Section I will tell my cyberspace audience how I will vote this fall and my reasons for doing so.

 

Critical Issues of Our Time

 

 The following shows how Democratic President Barack Obama and Republican presidential hopeful Mitt Romney stand on a selection of issues. This information comes mostly from the Associated Press but also from this Blogger.

 ABORTION & BIRTH CONTROL

OBAMA: Supports abortion rights Health care law that requires contraceptives to be available for free for women enrolled in workplace health plans.

ROMNEY: Opposes abortion rights. He previously supported them. Says state law should guide abortion rights, and Roe v. Wade should be reversed by a future Supreme Court ruling. Said he would end federal aid to Planned Parenthood.

WAR

OBAMA: Ended the Iraq war. He increased U.S. troop presence in Afghanistan then began drawing down the force with a plan to have all out by the end of 2014. He approved U.S. air power in NATO-led campaign that helped Libyan opposition topple government. There are major cuts coming in the size of the Army and Marine Corps as part of agreement with congressional Republicans to cut $487 billion in military spending over a decade.

ROMNEY: Endorses 2014 end to U.S. combat in Afghanistan, subject to conditions at the time. He would increase strength of armed forces, including number of troops and warships, adding almost $100 billion to the Pentagon budget in 2016.

TERRORISM

OBAMA: Approved the raid that found and killed Osama bin Laden and set policy that U.S. would no longer use harsh interrogation techniques, a practice that had essentially ended later in George W. Bush’s presidency. He largely carried forward Bush’s key anti-terrorism policies, including detention of suspects at Guantanamo Bay despite promise to close the prison. Expanded use of unmanned drone strikes against terrorist targets in Pakistan and Yemen.

ROMNEY: No constitutional rights for foreign terrorism suspects. In 2007, Romney refused to rule out use of waterboarding torture to interrogate terrorist suspects. Despite the fact the war crimes tribunal executed Japanese soldiers for waterboarding following the ending of WWII, Mitt Romney in 2011, said he does not consider waterboarding to be torture. The fact that the United States itself strongly supported all of the Geneva Convention laws prior to the Bush administration, Mitt Romney ignores the fact that the use of torture by the Bush administration dishonored and disgraced our country. Evidently, Mitt Romney would do the same by ignoring both national and international laws that forbid it.

IMMIGRATION

OBAMA: Issued directive in June that immigrants brought illegally to the United States as children be exempted from deportation and granted work permits if they apply. He took the temporary step after failing to deliver on promised immigration overhaul, with the defeat of legislation that would have created a path to citizenship for young illegal immigrants enrolled in college or enlisted in the armed forces. Says he is still committed to it. Government has deported a record number of illegal immigrants under Obama.

ROMNEY: Favors U.S.-Mexico border fence and opposes education benefits to illegal immigrants. He opposes offering legal status to illegal immigrants who attend college, but would do so for those who serve in the armed forces. Establish an immigration-status verification system for employers and punish them if they hire non-citizens who do not prove their legal status. He would end immigration caps for spouses and minor children of legal immigrants.

GUNS

OBAMA: Has not pushed for stricter gun laws as president. Signed laws letting people carry concealed weapons in national parks and in checked bags on Amtrak trains. Favors “robust steps, within existing law” to address gun issues, White House says. He voices support for renewed ban on assault-type weapons but has not tried to get that done. He previously backed stronger gun controls.

ROMNEY: Opposes stricter gun control laws. He suggested after the shooting in a Colorado theater that he favors tougher enforcement of existing gun laws. As Massachusetts governor, he vowed in 2002 to protect the state’s “tough gun laws,” and in 2004 signed a Massachusetts ban on assault weapons.

FOREIGN POLICY

OBAMA: Opposes near-term military strike on Iran but holds that option open if it proves the only way to stop Iran from getting nuclear weapons. He declined to repeat the Libya air power commitment for Syrian opposition. Instead Obama seeks international pressure against the Syrian government. Chastised Israel for continuing to build housing settlements in disputed areas and pressed both sides to begin a new round of peace talks based on the land borders established after the 1967 Arab-Israeli conflict. He signed into law to expand military and civilian cooperation with Israel. Sought penalties against China for unfair trade but opposes branding China a currency manipulator.

ROMNEY: Appears to present a clearer U.S. military threat to Iran and has spoken in more permissive terms about Israel’s right to act against Iran’s nuclear facilities, without explicitly approving of such a step. “Of course you take military action” if sanctions and internal opposition fail to dissuade Tehran from making a nuclear weapon, he has said. Has spoken in favor of covert action by the U.S. and regional allies in Syria but “the right course is not military” intervention by the U.S. Associates himself more closely with hardline Israeli Prime Minister Benjamin Netanyahu, pledges more military assistance to Israel and agreed with Israel’s position that Jerusalem is the capital, disregarding the Palestinians’ claim to the eastern sector. Branded Russia the “No. 1 geopolitical foe” of the U.S. and threatened to label China a currency manipulator in a move that could lead to broad trade sanctions.

DEBT

OBAMA: Fourth-straight year of trillion-dollar deficits is projected. He won approval to raise debt limit to avoid default. He calls for tackling the debt with a mix of spending cuts and revenue increases. Central to Obama’s plan is to let Bush-era tax cuts expire for couples making more than $250,000.

ROMNEY: Defended 2008 bailout of financial institutions as a necessary step to avoid the system’s collapse, but opposed the auto bailout. He would cap federal spending at 20 percent of gross domestic product by end of his first term, down from 23.5 percent now, with largely unspecified spending cuts. He favors a constitutional balanced budget amendment.

ECONOMY

OBAMA: Term marked by high unemployment, a deep recession that began in previous administration and has created a sustained gradual recovery. Responded to recession with a roughly $800 billion stimulus plan. Continued implementation of Wall Street and auto industry bailouts begun under George W. Bush. Proposes tax breaks for U.S. manufacturers producing domestically or repatriating jobs from abroad, and tax penalties for U.S. companies outsourcing jobs.

ROMNEY: He advocates lower taxes, less regulation, balanced budget, more trade deals to spur growth. He would replace jobless benefits with unemployment savings accounts. He proposes repeal of the law toughening financial-industry regulations after the meltdown in that sector, and the law tightening accounting regulations in response to corporate scandals.

EDUCATION

OBAMA: Has approved waivers freeing states from the most onerous requirements of the Bush-era No Child Left Behind law. “Race to the Top” competition has rewarded winning states with billions of dollars for pursuing education policies Obama supports.

ROMNEY: Supported the federal accountability standards of No Child Left Behind law. He has said that student testing, charter-school incentives and teacher evaluation standards of Obama’s “Race to the Top” competition “make sense” although the federal government should have less control of education.

ENERGY & ENVIRONMENT

 OBAMA: He ordered temporary moratorium on deep-water drilling after the massive BP oil spill in the Gulf of Mexico but has pushed for more oil and gas drilling overall. He achieved historic increases in fuel economy standards that will save money at the pump while raising the cost of new vehicles.

He achieved first-ever regulations on heat-trapping gases blamed for global warming and on toxic mercury pollution from power plants. Spent heavily on green energy and has embraced nuclear power as a clean source. Failed to persuade a Democratic Congress to pass limits he promised on carbon emissions.

ROMNEY: He supports opening the Atlantic and Pacific outer continental shelves to drilling, as well as Western lands, the Arctic National Wildlife Refuge and offshore Alaska.

Wants to reduce obstacles to coal, natural gas and nuclear energy development, and accelerate drilling permits in areas where exploration has already been approved for developers with good safety records. Says green power has yet to become viable and the causes of climate change are unknown.

GAY RIGHTS

 OBAMA: Supports legal recognition of same-sex marriage, a matter decided by states. He opposed that recognition in his 2008 presidential campaign, and in 2004 Senate campaign, while supporting the extension of legal rights and benefits to same-sex couples in civil unions. He achieved repeal of the military ban on openly gay members. He has not achieved repeal of the Defense of Marriage Act, which denies federal recognition of same-sex marriages and affirms the right of states to refuse to recognize such marriages. His administration has ceased defending the law in court but it remains on the books.

ROMNEY: Opposes legal recognition of same-sex marriage and says it should be banned with a constitutional amendment, not left to states. “Marriage is not an activity that goes on within the walls of a state.” He also opposes civil unions “if they are identical to marriage other than by name,” but says states should be left to decide what rights and benefits should be allowed under those unions. Says certain domestic partnership benefits —largely unspecified — as well as hospital visitation rights are appropriate but “others are not.” Says he would not seek to restore the ban on openly gay military members.

HEALTH CARE

 OBAMA: Achieved landmark overhaul putting U.S. on path to universal coverage now that Supreme Court has upheld the law’s mandate for almost everyone to obtain insurance.

Under the law, insurers will be banned from denying coverage to people with pre-existing illness, tax credits will subsidize premiums, people without work-based insurance will have access to new markets, small business gets help for offering insurance and Medicaid will expand.

ROMNEY: Promises to work for repeal of the law modeled largely after his universal health care achievement in Massachusetts because he says states, not Washington, should drive policy on the uninsured.

Proposes to guarantee that people who are “continuously covered” for a certain period be protected against losing insurance if they get sick, leave their job and need another policy. Would expand individual tax-advantaged medical savings accounts and let savings be used for insurance premiums as well as personal medical costs.

SOCIAL SECURITY

OBAMA: Has not proposed a comprehensive plan to address Social Security’s long-term financial problems. In 2011, he proposed a new measure of inflation that would reduce annual increases in Social Security benefits. The proposal would reduce the long-term financing shortfall by about 25 percent, according to the Social Security actuaries.

ROMNEY: Protect the status quo for people 55 and over but, for the next generation of retirees, raise the retirement age for full benefits by one or two years and reduce inflation increases in benefits for wealthier recipients.

TAXES

 OBAMA: He wants to raise taxes on the wealthy and ensure they pay 30 percent of their income at minimum. He supports extending Bush-era tax cuts for everyone making under $200,000, or $250,000 for couples. But in 2010, agreed to a two-year extension of the lower rates for all.

He wants to let the top two tax rates go back up 3 to 4 percentage points to 39.6 percent and 36 percent, and raise rates on capital gains and dividends for the wealthy. Health care law provides for tax on highest-value health insurance plans. Together with Congress, he built a first-term record of significant tax cuts, some temporary.

ROMNEY: He would keep Bush-era tax cuts for all incomes and drop all tax rates further, by 20 percent, bringing the top rate, for example, down to 28 percent from 35 percent and the lowest rate to 8 percent instead of 10 percent. Curtail deductions, credits and exemptions for the wealthiest.

He would end Alternative Minimum Tax for individuals, eliminate capital gains tax for families making below $200,000 and cut corporate tax to 25 percent from 35 percent. Does not specify which tax breaks or programs he would curtail to help cover costs.

  

Conclusions

Mitt Romney as a Choice in 2012:

And all our yesterdays have lighted fools
the way to dusty death. Out, out, brief candle!
Life’s but a walking shadow, a poor player
that struts and frets his hour upon the stage
and then is heard no more: it is a tale
told by an idiot, full of sound and fury,
Signifying nothing.

Shakespear’s MacBeth

 

This fall I’m voting to re-elect President Barack Obama to a second term as our president. While Mitt Romney appears to be a good and decent man, he does not have the experience, attitudes, or mental acuity to convince me he is more qualified to be the President of the United States.

I don’t like President Obama’s 2011 measure to eliminate inflationary increases for Social Secuirty recipients, and I do like Mitt Romney’s plan to eliminate Capital Gains taxes on those making $200,000 or less. I also don’t think the President was aggressive enough on banning assault rifles, while Romney succeeded in getting assualt rifles banned in his state of Massachusetts.

That’s it folks. The President, on balance, is still the right choice this fall because of all his tremendous accomplishments while in office.

The Accomplishments of President Barack Obama

By some accounts (Florida Professor of American Studies Robert P. Watson of Lynn University) President Obama’s accomplishments now total 244 since he took office. Here are just a few of the significant accomplishments of the president during his first term in the White House.

  • Overhauled the food safety system;
  • Approved the Lily Ledbetter ”Equal Pay” for women rule;
  • Ended “Don’t Ask/Don’t Tell” discrimination in the military;
  • Passed the Hate Crimes bill in Congress;
  • Saved the auto industry from bankruptcy which included General Motors and Chrysler;
  • Appointed two progressive women to the U.S. Supreme Court including the first Latina;
  • Pushed through the Affordable Health Care Act, outlawing denial of coverage for pre-existing conditions, extending until age 26 health care coverage of children under parent’s plans, steps toward “Medicare for All;”
  • Expanded the State Children’s Health Insurance Program (SCHIP) health care for children. This helped to cover 4 million more lower-income children;
  • Pushed through a $789 Billion economic stimulus bill that saved or created 3 million jobs and began task of repairing the nation’s infrastructure;
  • Overhauled the credit card industry, making it more consumer friendly;
  • Established the Consumer Financial Protection Bureau and used a recess appointment to keep it on track in the face of  GOP attempts to derail it;
  • Also outmaneuvered GOP in naming two members of the National Labor Relations Board blocked by the Republicans in their attempt to shut down the NLRB;
  • Won two extensions of the debt ceiling and extensions of unemployment compensation in the face of Republican threats to shut down the U.S. government;
  • Pulled troops out of Iraq and began drawing down of troops in Afghanistan;
  • Signed an omnibus public lands bill that allowed for 2 million more acres to be declared wilderness. It added 1,000 miles designated for scenic rivers, and added lands for national trails;
  • Signed into law the Family Smoking Prevention and Tobacco Control Act;
  • Signed into law the Edward M. Kennedy Serve America Act, which expanded the scope of AmeriCorps;
  • Signed an executive order easing restrictions on the use of federal money for embryonic stem cell research;
  • Created greater transparency in government by creation of White House visitor logs, a ban on lobbyist gifts, or allowing lobbyists from serving on advisory boards, and restrictions on the hiring of lobbyists.
  • Obama persuaded BP to put up $20 billion as a guarantee that the Gulf Coast residents whose livelihoods were damaged or destroyed by the spill would be compensated.
  • In 2011 President Barack Obama gave the order for Navy Seals commandos to take out Osama Bin Laden, the architect of 911. They were successful and Osama Bin Laden is dead.
  • President Barack Obama achieved, as of October 2012, the lowest unemployment rate (7.8%) since he took office. Remember folks, the unemployment rate during the recession, which the President inherited, reached a peak of (10.0%) on October, 2009. C’mon Man, give credit where credit is due! We’re now in an expansionary economic cycle. Guess what economic cycle comes after the expansinary one? That’s right genius—you guessed it—PROSPERITY!

At the value judgment level, I simply prefer the values of the democratic party than I do those of the Republican party. It seems to the objective observer that Republicans are always playing “catch-up” to the rest of society. Problem is “the Party of No” never really seems to catch-up. In addition,“Trickle Down (Supply Side Economics)” just doesn’t work because tax cuts for high income individuals, corporations, and large businesses don’t necessarily lead to economic expansion thereby creating jobs and lowering unemployment.

Why? Because there are other choices for using tax cut windfalls besides reinvestment in one’s business that might lead to job creation. One can simply save the money for a reserve or a rainy day. Or, one can invest their tax windfall in the stock market or other investments. Or, one can spend the tax windfall on hefty bonuses for executives, and salary increases for managers or staff, or one can actually plow the tax windfall back into the business.

Point is—there are many choices for what to do with a tax cut windfall. Current Republican rhetoric would have you believe that tax cuts always lead to job creation and lowering unemployment. It can, but what Republicans try to hide from the public and the voter is that, in reality, there are many other choices for spending a tax cut windfall, not just job creation.

For all these reasons around economics and taxes, as well as the President’ many other significant achievements while in office, I’m giving my support and vote in the coming election to the President of the United States—Barack Obama.

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ELECTION YEAR POLITICS

AND THE ECONOMY

 

[Part VI-B]

 

 

Background

This is the last of my six part series on Election Year Politics and the Economy. And, as most people know, the number one issue during this presidential run for the White House in November, 2012 is the economy.

Before I reveal who I am voting for (if you haven’t already figured it out) I’ll make a few comments on the economy itself, especially since I provided a lot of information related to it.

First, I have tried to drive home the point that the economy has a life of its own and has predictable cycles. They are: expansion, prosperity, contraction, and recession. They always occur in that order; what isn’t known is just how long each cycle will last. And, the only tools the government has to deal with the economy, regardless of which party is in office, is Fiscal Policy having to do with spending and taxes, and Monetary Policy (which is set by the Federal Reserve) having to do with controlling the amount of money (including interest rates and credit) in the economy at any one time.

I think it’s fair to say that the last four years of the previous Bush administration was rather complicated and chaotic, particularly with respect to fiscal policy. Following Keynesian economic theory, Bush lowered taxes to stimulate growth but that also added to our national debt by lessening revenues to cover other spending needs. But with two wars initiated by his administration, he also increased huge amounts of spending (like floating a big check my late father would have said) at the same time, thus once again adding to our national debt. Being the “compassionate conservative” that he is (and I take him at his word) he did pass legislation to increase more Medicare Prescription Drug Benefits. A wonderful thing to do—but it nevertheless added another $300 billion dollars to our national debt.

During the last two years of the George W. Bush administration (2007-2008) all of us watched the development of the most severe financial crisis and meltdown in United States history since the great depression.

The financial crisis was triggered by a complex interplay of valuation and liquidity problems in the United States banking system in 2008. The bursting of the U.S. housing bubble, which peaked in 2007, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined. Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts. Although there have been aftershocks, the financial crisis itself ended sometime between late-2008 and mid-2009.

In the U.S. the government responded by a stimulus package and avoided a double-dip recession. In the E.U. the U.K. responded with austerity measures and it has since slid into a double-dip recession. Although the Bush Administration left us with tremendous national debt, the administration did not cause the financial meltdown per se (unless you want to speculate about errors of omission). The major players in the financial meltdown in the United States were Wall Street and the Banks.

President Barack Obama did not create any of the above situations—he inherited them on January 20, 2009. Through his leadership the financial crisis was averted and turned the corner into the next economic cycle—expansion. Yet, there was an enduring residual problem created by the financial crisis. That problem turned out to be a rather stubborn unemployment rate. The unemployment rate represents the civilian work force, 16 years of age and older.

Lingering Unemployment Problem

Just before the financial meltdown, the unemployment rate was 4.6 % in 2007, but climbed to 9.3% in 2009, then reached a high of 9.6% in 2010. Then the President’s stimulus package and fiscal policies began to kick in. However, even the president increased our national debt during his time in office trying to meet a multiplicity of needs and concerns. But once his stimulus package kicked in the unemployment rate began to drop significantly to where it is now at 8.2%. As our expansion cycle begins to come into full view in the months ahead, the unemployment rate will decline even further.

But please remember—as we achieve the desirable goal of near full employment—there is an inescapable trade-off. And that trade-off is inflation and higher prices. One way you can be certain that the current administration is succeeding in lowering unemployment, is that you know the demand for good and services are increasing. Why? Because increases in employed people mean that consumer spending will likely increase causing businesses of all types to expand.

What happens when there is increased demand? You guessed it—inflation and prices increase. It’s no secret we are now paying higher prices for commodities like food and gasoline. I happen to shop at Raleys. I like the store but I’ve definitely noticed my vegan food choices from the health section have slowly crept up in price the last year and a half. And, I don’t need to remind you that gas prices are very high. In my neighborhood it is currently $4.29 a gallon.

 

Three Factors Needing Evaluation

It is important to know how the economy works. I considered the need for casting an informed vote in Part I; at a minimum, the following information should be recognized and reflected upon:

Knowledge of the Presidential Election Cycle Theory

Business cycles

Fiscal and Monetary policy

Basic Keynesian Economic Theory

Knowledge of our National Debt

Collectively, such knowledge will allow one to make a sensible judgment in any election. For me, this knowledge, combined with my own values, will help determine my vote. Consequently, I’ve used the combination of knowledge and values to evaluate three areas of concern.

These areas of concern are:      

 

IMPACT OF POLITICAL PARTY   ON WALL STREET

ACCOMPLISHMENTS OF DEMOCRATS VERSUS REPUBLICANS

THE ROAD AHEAD WITH OUR NATIONAL DEBT PROBLEM

Impact of Political Party on Wall Street

 For me this area of concern is very personal. I’ve been trading stocks on Wall Street since I was a young man of 25 in 1968. Today, a greater proportion of the electorate, and others in the population, are investing money in the stock market where they hope, over time, to get a decent return.

I have been a day trader as well as an ordinary investor over the last 44 years. Perhaps it is a selfish motive, but I want whoever is in the White House not to screw things up. No one can predict who might do that. Therefore, I needed to consider how well the stock market did with either a Republican or a Democratic administration. So, I reported in Part II whether it was better to have a Republican administration in the White House, or a Democratic one. The following were the findings:

 Although Republicans are generally considered to be more pro business than democrats, studies suggest that when a Democratic president is in the White House, it may be generally better for the stock market.

A research study called “The Presidential Puzzle: Political Cycles and the Stock Market” (2003) done by Pedro Santa Clara and Rossen Valkanof of the University of California, Los Angeles, demonstrated that the stock market performs better under Democratic presidents.

 Using data from 1927 to 2003, they found that the excess returns have been about 2% for Republican presidents, but 11% for Democratic presidents. Among small cap stocks, the difference is even greater. The bottom 10% of stocks as measured by market cap showed a difference of excess returns of about 22% for Democrats compared to when a Republican held the presidential office.

Furthermore, on average, the stock market volatility during a Republican administration was more pronounced than that during a Democratic administration.

Accomplishments of Democrats versus Republicans

In Part I of the series I said accomplishments should be the primary basis for evaluation. This means comparing the President’s accomplishments while in office to those of the Republican Party during the same time frame. But it also means making one-on-one comparisons between the President and his opponent, Mitt Romney. I make that latter comparison in the final conclusions section. This and the previous section are influenced heavily by my “value judgments.” In the last section I am influenced much more by knowledge of the economy and analysis of our national debt.

Where the President is concerned, there are 234 accomplishments so far during his first term in office according to Florida professor of American Studies Robert P. Watson. But ten of his accomplishments really stood out for me as having great value and importance to the United States. You may feel differently, or value things in a different way, but here is my take and what I found that trumps anything the Republicans (The party of NO) have accomplished either in terms of proposed Legislation, or their ideas during the last four years.

These ten accomplishments of the President include:

  • The new effort to bring the country closer to universal health care through passage of the Affordable Health Care Act, outlawing denial of coverage for pre-existing conditions, and extending coverage of health care for children under parent’s plans, steps toward “Medicare for All;”
  • Saved the auto industry from bankruptcy which included General Motors and Chrysler;
  • Obama persuaded BP to put up $20 billion, a guarantee of compensation for the Gulf Coast residents whose livelihoods were damaged or destroyed by the spill.
  • In 2011 President Barack Obama gave the order for Navy Seals to take out Osama Bin Laden, the principal architect of 911. They were successful and Osama Bin Laden is dead.
  • Pulled troops out of Iraq and began drawing down troops in Afghanistan;
  • Approved the Lily Ledbetter “Equal Pay” for women rule;
  • Ended “Don’t Ask/Don’t Tell” discrimination in the military;
  • Expanded the State Children’s Health Insurance Program (SCHIP) health care for children. This helped to cover 4 million children of lower-income families;
  • Signed an omnibus public lands bill that allowed for 2 million more acres to be declared wilderness. It added 1,000 miles designated for scenic rivers, and added lands for national trails;
  • Pushed through a $789 billion economic stimulus bill that saved or created 3 million jobs and began task of repairing the nation’s infrastructure

.

 

The Road Ahead With Our National Debt Problem

Related to the issue of the general economy, is the problem of our staggering national debt. Most voters react to this issue on an emotional level without fully comprehending what a national debt problem is really all about. In 2012 our national debt looms over everyone in society and has done so through many governmental administrations. I have some suggestions and am confident that the future solution to our national debt is sound; I’m equally confident that many people will balk at “the austere cod liver oil” solution to our national debt.

Analysis

In the United States, national debt is money borrowed by the Federal government. Debt burden is usually measured as a ratio of public debt to gross dpmestic product. Debt as a share of the US economy reached a maximum during Harry Truman’s first presidential term (121.7% of GDP).

Public debt as a percentage of GDP fell rapidly in the post-WWII period, and reached a low in 1973 under President Richard Nixon (23.9%). The debt burden has consistently increased since then, except during the presidencies of Jimmy Carter and Bill Clinton. In recent years sharp increases in deficit spending and Bush’s tax cuts has resulted in larger debt. This has led to heightened concern about the long-term sustainability of the Federal government’s fiscal policies.

So what can be done to get us out of this mess? We did it after World War II. So is it possible to reduce the national debt? The question we need to be asking ourselves is —How did we go from 121.7% of GDP in 1946, then 27 years later achieve a ratio of debt to GDP of 23.9%. The debt burden fell rapidly after the end of World War II because the United States and the rest of the world experienced a post-war economic expansion.

The main reason the country dug its way out a crippling public debt at the end of World War II is that there occurred a huge economic expansion in the country. Millions of men returned home from the war. Many Americans feared that the end of World War II, and the subsequent drop in military spending, might bring back the hard times of the Great Depression.

But instead, pent-up consumer demand fueled exceptionally strong economic growth in the post war period. The automobile industry successfully converted back to producing cars, and new industries such as aviation and electronics grew by leaps and bounds. A housing boom, stimulated in part by easily affordable mortgages for returning members of the military, added to the expansion. The demand for goods and services was absolutely profound. Huge social and business changes began to occur. These changes included the baby boom generation, conversion of manufacturing of war material back to high demand useful products of every kind. Also, there was a revolution in new business concepts like large shopping malls (early 1950s).

There were also great cultural changes in entertainment and music, changes in clothes, and that wonderful new babysitter—the television set. Conservatism wasn’t dead, but the nails to its casket were being pounded in every day by a changing much more liberal society. Change wasn’t just economic; WWII changed us as a people as to how we viewed the world in the post-war era. Consequently, all these changes led to a boom in suburban development, urban sprawl, and the need to own an automobile.

The nation’s gross national product rose from about $200,000 million in 1940 to $300,000 million in 1950 and to more than $500,000 million in 1960. At the same time, the jump in postwar births, known as the “baby boom,” increased the number of consumers. More and more Americans joined the middle class. What lessons can we all learn from this? I’ll explain shortly.

Current Debt History

The national debt reached or exceeded 100 percent of GDP only twice since 1900. The first time was during World War II and the second time was in the aftermath of the Crash of 2008.

From 2000 to 2008 debt held by the public rose again from 35% to 40%, and to 62% by the end of fiscal year 2010. During the presidency of George W. Bush, the gross public debt increased from $5.7 trillion in January 2001 to $10.7 trillion by December 2008, due in part to the Bush tax cuts and increased military spending caused by the two wars in the Middle East. He also bailed out the banks in the crisis of 2008.

Under President Barack Obama, the national debt also increased from $10.7 trillion in 2008 to $15.5 trillion by February 2012, caused mainly by decreased tax revenue due to the late-2000s recession and stimulus spending.

However, this President recognized the problem and put into effect a plan of action to deal with the national debt. The President set a goal of reducing Federal deficits by $4 trillion over the next 12 years. He called on Congress to establish a mechanism that would trigger across-the-board spending cuts in 2014 if the nation’s debt as a share of gross domestic product hasn’t stabilized. He even proposed to cut spending on Medicare and Medicaid, two safety-net programs held near and dear by Democrats. While I applaud this effort, it’s obvious $4 trillion dollars deficit reduction is not the same thing as bringing 15.5 trillion dollars back down to zero debt.

 

Proposed Solution

 

If we did it once the country can do it again.

Let’s say for the sake of argument that the United States ought to bring down its deficit from 100% of GDP (that it currently is) to a more comfortable level of 40% of GDP, or be even more ambitious and drop it to 23.9% as it was at the end of Richard Nixon’s  term in office. Nixon left in 1974 but I’m referring to the actual end of his elected term in office.

Our goal should be somewhere between 3.7 trillion and 6.2 trillion dollars of national debt. Let’s further say that the President and the U.S. Congress woke up one morning to its collective senses and said “Let’s Do It.” In fact, how should they do it? How did the Federal government tackle the national debt problem in 1946, at the end of WWII?

All of this comes back to what was covered in Parts II and IV on Fiscal Policy and Monetary Policy. Now our President has made a good faith effort to deal with the national debt. His plan is thoughtful in terms of considering the nation’s future and current needs; but at the same time, he developed a strategic approach to trimming the national debt.

Fiscal Policy and Monetary Policy are still the answer but what is the real question? Can we repeat the events following World War II? No! Those events aren’t going to repeat themselves because the social conditions affecting the country at that time would not be the same now.

So the point is how does the country stimulate massive growth and produce the revenues necessary to pay off, stabilize, and put a cap on, our national debt? This question brings us back to creating new economic events that stimulate expansive growth and rely once again on—Keynesian Economic Theory. The following material was covered in Part II of this series but I repeat it here.

The government began to use fiscal policy in the 1930s during the Depression, not just to support itself or pursue social policies, but to promote overall economic growth and stability as well. Most importantly policy-makers were influenced by John Maynard Keynes, an English economist who argued in The General Theory of Employment, Interest, and Money (1936) that the rampant joblessness of his time resulted from inadequate demand for goods and services.

According to Keynes, people did not have enough income to buy everything the economy could produce, so prices fell and companies lost money or went bankrupt. Without government intervention, Keynes said, this could become a vicious cycle. As more companies went bankrupt, he argued, more people would lose their jobs, making income fall further and leading yet more companies to fail in a frightening downward spiral.

Keynes argued that government could halt the decline by increasing spending (The preferred Democrat Approach) on its own, or by cutting taxes (The Preferred Republican Approach). Either way, incomes would rise, people would spend more, and the economy could start growing again. If the government had to run up a deficit to achieve this purpose, so be it, Keynes said. In his view, the alternative—deepening economic decline—would be worse.

For many years the Federal government has pretty much adopted the economic theories of John Maynard Keynes and, indeed, we have run up a very sizable deficit. Personally, I think the country needs a new twist on Keynesian economics. Demand side (Keynesian) economics is probably better in the long run for the country than Supply side economics (trickle-down economics just doesn’t work like we’d like it to). But Keynesian economic theory still needs to be twisted a little to include things that were not part of his theory in 1936. By this I mean, rather than lowering taxes, they should be raised instead (not because of continuing class warfare but in terms of simple citizenship—everybody needs to pay his/her fair share).

So, how do we stimulate growth, lower unemployment and, at the same time, obtain significant revenues to pay down and stabilize our national debt? How do we achieve all this and meet all of the needs of the American people at the same time? Well folks, we can’t.

Economic Explosion in Growth

I always liked the expression, “When the going gets tough, the tough get going.” How do we stimulate growth? We do this by spending large amounts of money to target selected areas where new jobs can be created [our near full employment goal]. My ideas for targeting would be total gentrification of our cities, new infrastructure projects in suburban and rural areas of the country such as better highways, dams, and bridges; modernize and overhaul energy alternatives such as natural gas, solar, wind, and start a massive program of building “Green Friendly” homes nationally and overseas by contract.

Lower Unemployment

Many types of jobs would need to be filled if we did all this. We would need every occupation from laborers, carpenters, electricians, plumbers, supervisors, building inspectors, architects, engineers, secretaries, small business owners, managers, waitresses, cooks, doctors, nurses, sales staff, clerks, dentists, police, and firemen. We need to construct more modern large buildings in urban areas where buildings are falling apart due to age.

Massive energy projects are needed, than shortly thereafter smaller peripheral and supporting projects would be needed: new gas stations, grocery stores, restaurants, motels, and medical facilities. This may not be 1946—but look around you—there is much to be done (and redone) in this country of ours right now.

If these things were done in earnest, huge economic growth would certainly occur. With changes in monetary policy occurring at the same time, more credit, lower interest rates, and greater loan activity would provide the cash needed for economic expansion in almost every part of the country.

Precipitously Bring Down the National Debt

This is the hard, unpopular part of my plan. First, reduce government spending of all government agencies across the board by 10%. What will government agencies do? I was in government for 32 years and experienced several 10% cuts. We adjust, we improvise, yet we still managed to get the job done. It was no big deal. I went without an annual increase in pay as well. Trust me! Cutting government services can be done.

Now very tough decisions will need to be made if we, as a nation, want to simultaneously (besides economic expansion and lowering unemployment) reduce our national debt by 10+ trillion dollars. To achieve this will require pain and sacrifice on everyone’s part. What do we do? We make major changes to our system of taxation.

Instead of replacing the current income tax system with a national sales (consumption or fair tax), I propose the country simultaneously do both an income and a consumption tax. You pay your income taxes as you currently do, but also pay a federal sales tax on all goods and services that is tied to the GDP. If GDP currently is 16.5 trillion dollars, we need to generate an additional 9% in revenues each year through a consumption tax. That would add approximately 1.48 trillion dollars (.09 X 16.5 trillion) each year in theUnited States.

And from this time on, the Federal budgetary process would need to have what I call a “soft cap.” That is, the annual Federal budget needs to be tied to the growth rate of GDP. If the GDP increased 2.0% in one year, then the President’s budget could not increase beyond the 2.0% in the GDP.

My modified Keynesian approach doesn’t favor a Democrat or Republican approach to fiscal or monetary policy. It’s just what needs to be done to stabilize this country’s financial situation now and into the future. When I run for the United States Senate next year I plan to propose this solution for our economic woes (JUST KIDDING!).

You probably have thought all this out yourself, and have ideas of your own as to how to revitalize the economic growth of the country and bring down the national debt. However, you’re probably scratching your head right now asking yourself—how can he propose tremendous spending for economic expansion and, at the same time, put a “soft cap” on government spending?  The soft cap is more about controlling any future short-fall between government spending and revenues generated (How else are we going to prevent government borrowing and generating more debt each year?). The answer to the question is easing monetary policy (i.e., easier borrowing, credit, and lower interest rates) combined with dramatic increases in taxation (income plus a national sales tax) should provide the funds for a tremendous spike in economic growth and expansion without putting us further in national debt. I’d be more than delighted to hear your ideas on these topics or my general plan.

In the meantime, President Barack Obama has implemented a moderate plan to trim 4 trillion dollars from our national debt over the next 12 years. If my aggressive approach isn’t wanted by giving the country its austere cod liver oil to courageously attack our economic woes, then I suggest the country embrace his plan for dealing with the problem of our national debt.

What I’ve been saying is that it is time to increase spending to create growth and achieve near full employment and raise taxes by aggressive measures such as a national sales tax on top of our income tax. Substantial increases in spending should occur only if large tax increases are implemented at the same time.  Inflation would occur under my plan but would be countered by raising taxes. It could be done with monetary policy but wouldn’t work because of the need to ease monetary policy to help stimulate growth.

Fighting inflation requires government to take unpopular actions like reducing spending or raising taxes, while traditional fiscal policy solutions to fighting unemployment tend to be more popular since they require increasing spending or cutting taxes. My plan does not involve cutting spending to fight inflation. And yet inflation is like an unintended tax measure resulting in greater tax revenues for the country. To that extent, inflation would directly raise revenues and indirectly help to pay down the national debt.

The downside of my proposal is that the individual will have to pay more in taxes at the same time inflation eats away at any money he has left after taxes; it’s a bitter pill to swallow. The upside to my proposal is that tremendous economic growth in the country would occur, near full employment would be achieved, and our national debt would stabilize and be reduced significantly, and finally controlled by a “soft cap.” Some employed people, and government workers, and retirees would probably hate my proposal, while the unemployed and the business community would probably love it.

The bottom line is—“the country gets what it pays for.” Unfortunately these are times when the country has to pay a lot more to get what it wants. I think the readers of this six part series can now clearly see that tinkering with the economy is no simple matter. I suppose that in the end I have a great deal of respect for those we elect to office. They have to be “all things to all people” and, at the same time, have to struggle with prioritizing economic objectives along side with doing what’s best and right for the country. During these tough economic times—that is no easy task.

Conclusions

This fall I’m voting to re-elect President Barack Obama to a second term as our president. While Mitt Romney appears to be a good and decent man, he does not have the experience, attitudes, or mental acuity to convince me he is more qualified to be the President than Barack Obama.

Regardless of how you arrive at your decision as to who to vote for, I want to thank you for reading this six part series on Election Year Politics and the Economy. I’ve given it my best shot in deciding who to vote for, now it’s time for you to do the same.

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ELECTION YEAR POLITICS

AND THE ECONOMY

[Part VI-A]

The final segment of my six part series will be composed of a Part VI-A and a Part VI-B. In Part VI-A I present the accomplishments of the Republican Party and provide a biography of their candidate in 2012—Mitt Romney.

In Part VI-B I will suggest who I think should be elected  president of the United States on November 6, 2012. I will post Part VI-B a few days after people have had a chance to digest the data in Part VI-A. I am not going to tell you who to vote for; that is now up to you. What I will do is explain, in detail, the reasons why I’m voting as I am.

I will explain as best I can both the strengths and weaknesses of each candidate in a final conclusions section. Everyone may or may not come to the same conclusion as I have. Hopefully, since the economy is the main issue, I hope everyone makes intelligent use of the material I’ve provided about how the economy really works, and integrates such knowledge into each person’s value framework and political preferences. No one can predict the future but as voters, let’s give it a good shot as to who we think will best serve as president of the United States during the next four years.

                                Accomplishments of the Republican Party

In this author’s opinion the accomplishments of the Republican Party fall into two areas: (1) signed legislation that became law, and (2) bills introduced giving you some idea as to what they wanted to do for the American people.

The Republican Party, of course, did not have control of the White House between 2008-2012. However, they did regain control of the House of Representatives in November, 2010. And, they did propose major legislation in a number of areas. Many of their Bills they proposed failed to pass muster in the Senate, and on several occasions President Obama promised to veto many of the major types of legislation proposed by the Republicans.

If one defines accomplishments as bills that become laws, then by that standard they failed miserably in terms of doing something useful for the American people. It may be one of the reasons why the Republican Party is often called “the Party of No.”

 I believe, in all fairness, the voter needs to evaluate The Republican Party in a different way. Since you are comparing a party with lots to show for it, the only other remaining way to evaluate Republican contributions to the country is to usefully look at their ideas as reflected in the Bills they put forward. If you agree with those ideas you’ll still have a basis for comparison to President Obama’s accomplishments. If you don’t like what was proposed by the Republicans, then perhaps you have a clear choice in November, 2012.

So what major legislation did the Republican Party propose before the Congress during the last four years.

MAJOR LEGISLATION PROPOSED BY THE REPUBLICANS

 I found five major pieces of legislation proposed by the Republican Party during the last four years. A sixth bill actually became law in 1998. That law was the Defense of Marriage Act. It is discussed here because it was followed during the last four years as the Respect for Marriage Act, which failed to become law.

Most Republican bills seem ideological in nature. Only two seem to relate to economics. Along with the Defense of Marriage Act passed in 1996 the bills are the No Taxpayer Funding of Abortion, the Protect Life Act, and the Respect for Marriage Act which was a new version of the original Defense of Marriage Act.

One bill was actually bi-partisan in nature and was the Stop Online Piracy Act. The one bill that tackled spending issues, the debt ceiling, and balancing a budget was the only truly economic bill proposed by the Republican Party. That bill was the Cut, Cap and Balance Act of 2011.

Collectively, these legislative efforts are the ideas of the Republican Party.

Defense of Marriage Act

The Defense of Marriage Act (DOMA) Public Law 104-109, 110 Statute 2419, enacted September 21, 1996, 1 U.S.C. & 7 and 28 U.S.C. & 1738C is a United States federal law that defines marriage as the legal union of one man and one woman. The law passed both houses of Congress by large majorities and was signed into law by President Bill Clinton on September 21, 1996.

Under the law, no state or other political subdivision of the U.S. may be required to recognize as a marriage a same-sex relationship considered a marriage in another state. Section 3 of DOMA codified the non-recognition of same-sex marriage for all federal purposes, including insurance benefits for government employees, Social Security survivors’ benefits, and the filing of joint tax returns. This section has been found unconstitutional in two Massachusetts court cases and a California bankruptcy court case, all of which are under appeal.

The Obama administration announced in 2011 that it had determined that Section 3 was unconstitutional and, though it would continue to enforce the law, it would no longer defend it in court. In response, the House of Representatives undertook the defense of the law on behalf of the federal government in place of the Department of Justice (DOJ).

Respect for Marriage Act

The Respect for Marriage Act, or RFMA (H.R. 1116, S. 598), was a proposed bill in the United States Congress that would repeal the Defense of Marriage Act and allow the U.S. federal government to provide benefits to couples in a same-sex marriage; the bill would not compel individual states to recognize same-sex marriages. It was supported by former U.S. Representative Bob Barr, original sponsor of the Defense of Marriage Act, and former President Bill Clinton, who signed the Defense of Marriage Act in 1996.

Until 1996, the federal government customarily recognized marriages conducted legally in any state for the purpose of federal legislation. Following an unsuccessful law suit aimed at legalizing same-sex marriage in Hawaii, the United States Congress passed the Defense of Marriage Act one section of which forbids the federal government from recognizing same-sex marriages.

H.R. 3567

a) repeals section 1738C of title 28 of the United States Code

b) amends Section 7 of title 1 in the United States Code to read:

(a) For the purposes of any Federal law in which marital status is a factor, an individual shall be considered married if that individual’s marriage is valid in the State where the marriage was entered into or, in the case of a marriage entered into outside any State, if the marriage is valid in the place where entered into and the marriage could have been entered into in a State. (b) In this section, the term ‘State’ means a State, the District of Columbia, the Commonwealth of Puerto Rico, or any other territory or possession of the United States.

No Taxpayer Funding for Abortion Act

The No Taxpayer Funding for Abortion Act (H.R. 3) is a bill that was introduced to the 112th Congress of the United States in the House of Representatives by Rep. Chris Smith (R-New Jersey) and Dan Lipinski (D-Illinois). Although the bill is a bipartisan effort, most of the 173 co-sponsors were Republicans. The bill’s stated purpose was “[t]o prohibit taxpayer funded abortions and to provide for conscience protections, and for other purposes.”

In large measure, it would render permanent the restrictions on federal funding of abortion in the United States laid out in the Hyde Amendment. The bill passed the House on May 4, 2011 by a vote of 251-175; however, because it was not expected to pass the Senate, the bill was largely a symbolic one.

Controversy over language about rape

The text of the most recent version of the Hyde Amendment provides an exception for cases of rape, stating that its prohibitions shall not apply “if the pregnancy is the result of an act of rape or incest.” The rape exception in H.R. 3 uses somewhat different language, stating that its limitations shall not apply “if the pregnancy occurred because the pregnant female was the subject of an act of forcible rape or, if a minor, an act of incest.” Some women’s rights groups have questioned the addition of the qualifier “forcible” to the word “rape” in H.R. 3, noting that it excludes many forms of rape and “takes us back to a time where just saying no was not enough.”

One critic, Mother Jones, alleged that the bill is a deliberate attempt on the part of the Republican Party to change the legal definition of rape.

Another critic, Representative Debbie Wasserman Schultz (D-FL) criticized the legislation, too. An article in The Raw Story had this to say about her reaction to HR 3. “The Florida Democrat, a rising star in her party and vice chair of the Democratic National Committee, is a leading voice on women’s issues.

And she didn’t mince her words in an interview with The Raw Story, fiercely denouncing GOP colleagues over H.R. 3, the “No Taxpayer Funding for Abortion Act.” ‘It is absolutely outrageous,’ Wasserman Schultz said in an exclusive interview late Monday afternoon. “I consider the proposal of this bill a violent act against women…” She continued, “It really is — to suggest that there is some kind of rape that would be okay to force a woman to carry the resulting pregnancy to term, and abandon the principle that has been long held, an exception that has been settled for 30 years, is to me a violent act against women in and of itself,” Wasserman Schultz said.” “Rape is when a woman is forced to have sex against her will, and that is whether she is conscious, unconscious, mentally stable, not mentally stable,” the four-term congresswoman added.”

Critics insist that HR 3 would directly diminish the rights of women who have fallen victim to rapes that are not considered “forcible” by the bill, as well as increase the danger of these types of sexual abuse occurring.

TalkingPoints Memo reported, “In an interview with the anti-abortion site LifeNews, Douglas Johnson, the legislative director for the National Right to Life Committee, admits the language in the House’s No Taxpayer Funding for Abortion Act “would not allow general federal funding of abortion on all under-age pregnant girls.”

However, the bill’s text does not offer a definition of “rape” nor of “forcible rape.” Responding to the criticism about the language used in the rape exception clause, bill co-sponsor Dan Lipinski (D) stated, “The language of H.R. 3 was not intended to change existing law rearding taxpayer funding for abortion in cases of rape, nor is it expected that it would do so. Nonetheless, the legislative process will provide an opportunity to clarify this should such a need exist.”

Protect Life Act

The Protect Life Act (H.R. 358) is a bill introduced to the 112th United States Congress in the House of Representatives by Rep. Joe Pitts (R-PA). The bill had 121 co-sponsors, including 6 Democrats. It would make several amendments to the Patient Protection and Affordable Care Act.

The bill was initially referred to the House Energy and Commerce Committee, Subcommittee on Health, of which Pitts is the ranking majority member. The committee approved it 33 to 19.

On October 13, 2011, the Republican-controlled House of Representatives passed the bill; however, it was judged unlikely to pass the Democratic Senate, and President Obama stated that he would veto it if it reached his desk.

The following are the provisions of the bill.

Provisions

  • Ban the use of federal funds to cover any costs of any health care plan that covers abortions. (This would extend previous restrictions on abortion coverage, which currently ban the use of federal funds for abortion and require federal funds and abortion-related funds to be kept separate.) Require the Office of Personnel Management director to make sure no health plans that fall under the Exchange cover abortions.
  • Require any entity offering, through a federal exchange, a health care plan that covers abortions to also offer an otherwise identical one that does not cover abortions.
  • Prohibit government agencies from “discriminating” against health care providers who refuse to undergo, require, provide, or refer for training to perform abortions.
  • Allow remedies to be sought in court for violations of PPACA abortion provisions.

Stop Online Piracy Act

The Stop Online Piracy Act (SOPA) is a United States bill introduced by U.S. Representative Lamar S. Smith (R-TX) to expand the ability of U.S. law enforcement to fight online trafficking in copyrighted intellectual property and counterfeit goods. Provisions include the requesting of court orders to bar advertising networks and payment facilities from conducting business with infringing websites, and search engines from linking to the sites, and court orders requiring Internet service providers to block access to the sites. The law would expand existing criminal laws to include unauthorized streaming of copyrighted content, imposing a maximum penalty of five years in prison. A similar bill in the U.S. Senate is titled the PROTECT IP Act (PIPA).

Proponents of the legislation state it will protect the intellectual-property market and corresponding industry, jobs and revenue, and is necessary to bolster enforcement of copyright laws, especially against foreign websites. Claiming flaws in present laws that do not cover foreign-owned and operated sites, and citing examples of “active promotion of rogue websites” by U.S. search engines, proponents assert stronger enforcement tools are needed.

Opponents state the proposed legislation threatens free speech and innovation, and enables law enforcement to block access to entire internet domains due to infringing content posted on a single blog or webpage. They have raised concerns that SOPA would bypass the “safe harbor” protections from liability presently afforded to Internet sites by the Digital Millennium Copyright Act. Library associations have expressed concerns that the legislation’s emphasis on stronger copyright enforcement would expose libraries to prosecution. Other opponents state that requiring search engines to delete a domain name could begin a worldwide arms race of unprecedented censorship of the Web and violates the First Amendment.

On January 18, 2012, the English Wikipedia Reddit, and an estimated 7,000 other smaller websites coordinated a service blackout, to raise awareness. In excess of 160 million people viewed Wikipedia’s banner. Other protests against SOPA and PIPA included petition drives, with Google stating it collected over 7 million signatures, boycotts of companies that support the legislation, and a rally held in New York City.

In response to the protest actions, the Recording Industry Association of America (RIAA) stated, “It’s a dangerous and troubling development when the platforms that serve as gateways to information intentionally skew the facts to incite their users and arm them with misinformation,” and “it’s very difficult to counter the misinformation when the disseminators also own the platform.”

The sites of several pro-SOPA organizations such as RIAA, CBS.com, and others were slowed or shut down with denial of service attacks started on January 19. Self-proclaimed members of the “hacktivist” group Anonymous claimed responsibility and stated the attacks were a protest of both SOPA and the United States Department of Justice’s shutdown of Megaupload on that same day.

Opponents of the bill have proposed the Online Protection and Digital Trade Act (OPEN) as an alternative. On January 20, 2012, House Judiciary Committee Chairman Smith postponed plans to draft the bill: “The committee remains committed to finding a solution to the problem of online piracy that protects American intellectual property and innovation … The House Judiciary Committee will postpone consideration of the legislation until there is wider agreement on a solution.”

Cut, Cap and Balance Act of 2011

The proposed Cut, Cap and Balance Act of 2011 (or HR 2560) was a bill put forward in the 112th United States Congress by Republicans during the 2011 U.S. debt ceiling crisis. The provisions of the bill included a cut in the total amount of federal government spending, a cap on the level of future spending as a percentage ofGDP, and, on the condition that Congress pass certain changes to the U.S. Constitution, and an increase in the national debt ceiling to allow the federal government to continue to service its debts.

The bill had the support of Republicans and much of the Tea Party movement. It passed the U.S. House of Representatives on July 19, 2011, but was rejected by the President and the Senate. The Senate voted to table the bill on July 22. President Obama had promised to veto the bill had it proceeded further.

The Republican Candidate in 2012

The Republican cadidate running for the Office of the President of the United States in 2012  is former Massachusetts Governor, Mitt Romney.

 

Biography

Born Willard Mitt Romney onMarch 12, 1947, in Detroit,Michigan and raised in Bloomfield Hills,Michigan, Romney attended the prestigious Cranbrook Schoolbefore receiving his undergraduate degree fromBrighamYoungUniversityin 1971. He attended Harvard LawSchool andHarvard Business School and received both a law degree and an M.B.A. in 1975.

Mitt Romney married Ann Davies in 1969; they have five sons, Tagg, Matt, Josh, Ben and Craig. He is a member of the Church of Jesus Christ of Latter-day Saints, also known as the Mormon Church.

Entry into Politics

The son of George Romney, Michigan governor and Republican presidential nominee (he was defeated by Richard Nixon in 1968), Mitt Romney began his career in business. He worked for the management consulting firm Bain & Company before founding the investment firm Bain Capital in 1984. In 1994, he ran for the U.S. Senate in Massachusetts but was defeated by longtime incumbent Edward Kennedy.

In 1999, Romney stepped into the national spotlight when he took over as president of the Salt Lake Organizing Committee. He helped rescue the 2002 Winter Olympics from financial and ethical woes, and helmed a successful Salt Lake City Olympic Games in 2002.

In 2004 Romney authored the book Turnaround: Crisis, Leadership, and the Olympic Games.

Masachusetts Governor

Romney parlayed his success with the Olympics into politics when he was elected governor of Massachusetts in 2003. During Romney’s term as governor, he oversaw the reduction of a $3 billion deficit. Romney also signed into law a health care reform program to provide nearly universal health care forMassachusetts residents.

2008 Presidential Run

After serving one term, he declined to run for reelection and announced his bid for U.S.president. Romney made it through Super Tuesday, winning primaries inMassachusetts, Alaska, Minnesota, Colorado and Utah, before losing the Republican nomination to John McCain. In total Romney spent $110 million on his campaign, including $45 million of his own money.

Romney continued to keep his options open for a possible future presidential run. He maintained much of his political staff and PACs, and raised funds for fellow Republican candidates. In March 2010, Romney published a book titled No Apology: The Case for American Greatness. The book debuted on the New York Times Best Sellers list.

2012 Campaign

At a farm in New Hampshire on June 2, 2011, Mitt Romney announced the official start of his 2012 campaign. A vocal critic of President Barack Obama, Romney has taken many standard Republican positions on taxes, the economy and the war on terror. Romney’s critics charge him with changing his position on several key issues including abortion, which he opposes, and health care reform—he opposed President Obama’s health care reform program, which was similar to theMassachusetts plan Romney supported as governor.

From the start of his campaign, Romney emerged as the front-runner for the Republican nomination. He showed more mainstream Republican appeal than Tea Party-backed competitors such asTexas governor Rick Perry. In January 2012, Romney scored a decisive victory in the New Hampshire Republican primary. He captured more than 39 percent of the votes, way ahead of his closest competitors, Ron Paul and Jon Huntsman.  As the race has continued, Rick Santorum became his greatest competition, winning several states. But Romney had been able to secure a substantial lead in the number of delegates needed to clinch the nomination.

In April 2012, Romney benefitted from a narrowing of the field when Santorum announced he was suspending his campaign. He publicly paid tribute to his former rival, saying that Santorum “has proved himself to be an important voice in our party and in the nation.” After Santorum’s departure, Romney only had two opponents left—Ron Paul and Newt Gingrich. But neither seems to have enough support to gain the necessary delegates to take the nomination from Romney. In May, 2012 Newt Gingrich departed from the campaign.

Post Script

At this point every reader of this six part series should now be armed with enough knowledge to make an informed intelligent decision as to who should be elected to the White House this coming November. Good luck in how you arrive at that decision. In a few days following the posting of this Part VI-A, I will present how I plan to vote this coming November. Based on all the knowledge presented in this series I will explain all the reasons why I have selected one candidate over the other. And, I will present such reasons in terms of both strengths and weaknesses of each candidate.

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ELECTION YEAR POLITICS

AND THE ECONOMY

[Part V]

In this Part V of my six part series I describe the accomplishments of President Barack Obama during most his first term as president.

In a final section (Part VI-B) I will bring all of the knowledge gained in the entire series together and render a decision as to who I’m voting for (and consistent with writing a blog called the Reasoned Society) with the reasons why I have reached a decision in casting my vote in favor of one candidate over the other. Ultimately, you will also have to decide who you will vote for in the upcoming presidential election in November, 2012.

The Accomplishments of President Barack Obama

 

By some accounts (Florida Professor of American Studies Robert P. Watson of Lynn University) President Obama’s accomplishments now total 244 since he took office. Here is just a few of the significant accomplishments of the president during his first term in the White House.

 

  • Overhauled the food safety system;
  • Approved the Lily Ledbetter “Equal Pay” for women rule;
  • Ended “Don’t Ask/Don’t  Tell” discrimination in the military;
  • Passed the Hate Crimes bill in Congress;
  • Saved the auto industry from bankruptcy which included General Motors and Chrysler;
  • Appointed two progressive women to the U.S. Supreme Court including the first Latina;
  • Pushed through the Affordable Health Care Act, outlawing denial of coverage for pre-existing conditions, extending until age 26 health care coverage of children under parent’s  plans, steps toward “Medicare for All;”
  • Expanded the State Children’s Health Insurance Program (SCHIP) health care for children. This helped to cover 4 million more lower-income children;
  • Pushed through a $789 Billion economic stimulus bill that saved or created 3 million jobs and began task of repairing the nation’s infrastructure;
  • Overhauled the credit card industry, making it more consumer friendly;
  • Established the Consumer Financial Protection Bureau and used a recess appointment to keep it on track in the face of GOP attempts to derail it;
  • Also outmaneuvered GOP in naming two members of the National Labor Relations Board blocked by the Republicans in their attempt to shut down the NLRB;
  • Won two extensions of the debt ceiling and extensions of unemployment compensation in the face of Republican threats to shut down the U.S. government;
  • Pulled troops out of Iraq and began drawing down of troops in Afghanistan;
  • Signed an omnibus public lands bill that allowed for 2 million more acres to be declared wilderness. It added 1,000 miles designated for scenic rivers, and added lands for national trails;
  • Signed into law the Family Smoking Prevention and Tobacco Control Act;
  • Signed into law the Edward M. Kennedy Serve America Act, which expanded the scope of AmeriCorps;
  • Signed an executive order easing restrictions on the use of federal money for embryonic stem cell research;
  • Created greater transparency in government by creation of White House visitor logs, a ban on lobbyist gifts, or allowing lobbyists from serving on advisory boards, and restrictions on the hiring of lobbyists.
  • Obama persuaded BP to put up $20 billion as a guarantee that the Gulf Coast residents whose livelihoods were damaged or destroyed by the spill would be compensated.
  • In 2011 President Barack Obama gave the order for Navy Seals commandoes to take out Osama Bin Laden, the architect of 911. They were successful and Osama Bin Laden is dead.

 

Washington Post Editorial

Back in 2010 an editorial was written by Eugene Robinson of the Washington Post. This was written less than half way through President Obama’s first term in office. I think it’s worth repeating here:

In less than two years in office, the Obama Administration has made some incredible progress, from passing historic health reform to reining in Wall Street and fighting to create new jobs. Even so, sometimes it can feel like all of the day-to-day news is focused on the negative, without much emphasis on the real changes the President has made with the help of supporters around the country. For a look at some of the great accomplishments in just the past few weeks—including troops leaving Iraq, bringing the auto industry back from the brink of collapse, and containing the oil spill in the Gulf.

This is a radical break from journalistic convention, I realize, but today I’d like to give credit where it’s due — specifically, to President Obama. Quiet as it’s kept, he’s on a genuine winning streak. It’s hard to remember that the inauguration was just 19 months ago. Expectations of the new president were absurdly high. If Obama had done back flips across the Potomac River, when he reached the other side he’d have faced probing questions about why it was taking him so long to cure cancer, solve the Arab-Israeli conflict and usher in an age of universal peace and prosperity. But look at what he’s accomplished in just the past few weeks. Let me highlight four recent headlines.

“Last U.S. combat troops leave Iraq”: Obama campaigned as an early and vocal opponent of the Iraq war, calling it a distraction from the more important conflict in Afghanistan. When he took office, there were about 160,000 U.S. troops in Iraq on the heels of George W. Bush’s combat surge. Obama said he would bring our combat forces home and he did — ahead of schedule…. “General Motors to launch stock offering”: One of the many crises Obama faced when he took office was the imminent collapse of an iconic industrial giant….Obama ended up pouring $50 billion into the company, acquiring a 61 percent ownership stake.

Critics complained about the advent of “Government Motors” and raised the specter of bureaucrats in Washington holding public hearings to redesign the Corvette. But now, after making more than $2 billion in profits so far this year, the restructured company is confident enough to sell stock on Wall Street — and begin repaying the government’s investment. The company was saved, workers kept their jobs, and taxpayers are going to get their money back. That’s nice work.”Gulf oil spill contained”: When BP’s Deepwater Horizon well went rogue, the Obama administration was criticized for being slow off the mark. Some of the criticism was justified — the initial response did seem unfocused. But the administration managed to turn things around and quiet any talk of “Obama’s Katrina.”

Obama persuaded BP to put up $20 billion as a guarantee that the Gulf Coast residents whose livelihoods were damaged or destroyed by the spill would be compensated….

And finally, “President wades into mosque controversy”: Yes, I’m serious. Supporting the mosque in Lower Manhattan didn’t score any political points. But Obama saw his duty to uphold the values of our Constitution and make clear that our fight is against the terrorists, not against Islam itself. Instead of doing what was popular, he did what was right.

He still hasn’t walked on water, though. What’s wrong with the man?

 

Post Script

You will have to decide as a voter in a few months whether President Obama’s accomplishments during his first term in office justifies his being re-elected to a second term. In giving your vote you will also have to compare the president’s accomplishments to those of the Republican Party during the last four years.

In addition, you will have to decide whether the campaign promises of Mitt Romney appeal to you so much that you would support a change of course for the country. After Part VI-A and Part VI-B you will be in a good position, in terms of being an informed voter, to make such an important decision. And, you can be proud of yourself that you took the time to become better informed; it is the only really intelligent approach a citizen can take during so important an election as to who should become President of the United States.

 

 

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ELECTION YEAR POLITICS

AND THE ECONOMY

[Part IV]

The American Economy and Monetary Policy

 

The topic in Part IV of this blog is all about Monetary Policy. As you will see this is the other tool the government can use to influence the economy. Is Monetary Policy any more successful than fiscal policy? Well, let’s wait and see. Due to the complexity of some of the material to be presented, you might like to just puruse the topic of “Types of Monetary Policy.” It is sufficient for your education if you simply understand the 3 main tools the Federal Reserve has to manage the nation’s money supply. This will be very clear and understandable. If you wish to read the section on Types of Monetary Policy by all means go right ahead. Not to be flip I just want to warn you—the material is complex and gave me a headache as I was putting it all together. It’s important information but probably, unless you’re an economist, you could just simply gloss over the material from that section.

Money Supply

In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define “money,” but standard measures usually include currency in circulation and demand deposits (depositors’ easily accessed assets on the books of financial institutions).

Money supply data are recorded and published, usually by the government or the central bank of the country. Public and private sector analysts have long monitored changes in money supply because of its possible effects on the price level, inflation and the business cycle.

What is Monetary Policy?

Monetary Policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.

The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. It is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it.

Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values.

Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing.

Types of monetary policy

In practice, to implement any type of monetary policy the main tool used is modifying the amount of base money in circulation. The monetary authority does this by buying or selling financial assets (usually government obligations). These open market operations change either the amount of money or its liquidity (if less liquid forms of money are bought or sold). The multiplier effect of fractional reserve banking amplifies the effects of these actions.

Constant market transactions by the monetary authority modify the supply of currency and this impacts other market variables such as short term interest rates and the exchange rate.

The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority to achieve their goals.

Monetary Policy:

Target Market   Variable:

Long Term   Objective:

Inflation Targeting Interest rate on overnight debt A given rate of change in theCPI
Price Level Targeting Interest rate on overnight debt A specificCPInumber
Monetary Aggregates The growth in money supply A given rate of change in theCPI
Fixed Exchange Rate The spot price of the currency The spot price of the currency
Gold Standard The spot price of gold Low inflation as measured by the gold price
Mixed Policy Usually interest rates Usually unemployment +CPI  change

The different types of policy are also called monetary regimes, in parallel to exchange rate regimes. A fixed exchange rate is also an exchange rate regime; The Gold standard results in a relatively fixed regime towards the currency of other countries on the gold standard and a floating regime towards those that are not. Targeting inflation, the price level or other monetary aggregates implies floating exchange rate unless the management of the relevant foreign currencies is tracking exactly the same variables (such as a harmonized consumer price index).

Inflation targeting

Under this policy approach the target is to keep inflation, under a particular definition such as Consumer Price Index, within a desired range.

The inflation target is achieved through periodic adjustments to the Central Bank interest rate target. The interest rate used is generally the interbank rate at which banks lend to each other overnight for cash flow purposes. Depending on the country this particular interest rate might be called the cash rate or something similar.

The interest rate target is maintained for a specific duration using open market operations. Typically the duration that the interest rate target is kept constant will vary between months and years. This interest rate target is usually reviewed on a monthly or quarterly basis by a policy committee.

Changes to the interest rate target are made in response to various market indicators in an attempt to forecast economic trends and in so doing keep the market on track towards achieving the defined inflation target. For example, one simple method of inflation targeting called the Taylor rule adjusts the interest rate in response to changes in the inflation rate and the output gap. The rule was proposed by John B. Taylor of Stanford University. The inflation targeting approach to monetary policy approach was pioneered in New Zealand. It is currently used in Australia, Brazil, Canada, Chile, Columbia, the Czech Republic, Hungary, New Zealand, Norway, Iceland, India, Philippines, Poland, Sweden, South Africa, Turkey, and the United Kingdom.

Price level targeting

Price level targeting is similar to inflation targeting except thatCPIgrowth in one year over or under the long term price level target is offset in subsequent years such that a targeted price-level is reached over time, e.g. five years, giving more certainty about future price increases to consumers. Under inflation targeting what happened in the immediate past years is not taken into account or adjusted for in the current and future years.

Monetary aggregates

In the 1980s, several countries used an approach based on a constant growth in the money supply. This approach was refined to include different classes of money and credit (M0, M1 etc.). In the USA this approach to monetary policy was discontinued with the selection of Alan Greenspan as Fed Chairman.

This approach is also sometimes called monetarism.

While most monetary policy focuses on a price signal of one form or another, this approach is focused on monetary quantities.

Fixed exchange rate

This policy is based on maintaining a fixed exchange rate with a foreign currency. There are varying degrees of fixed exchange rates, which can be ranked in relation to how rigid the fixed exchange rate is with the anchor nation.

Under a system of fiat fixed rates, the local government or monetary authority declares a fixed exchange rate but does not actively buy or sell currency to maintain the rate. Instead, the rate is enforced by non-convertibility measures (e.g. capital controls, import/export licenses, etc.). In this case there is a black market exchange rate where the currency trades at its market/unofficial rate.

Under a system of fixed-convertibility, currency is bought and sold by the central bank or monetary authority on a daily basis to achieve the target exchange rate. This target rate may be a fixed level or a fixed band within which the exchange rate may fluctuate until the monetary authority intervenes to buy or sell as necessary to maintain the exchange rate within the band. (In this case, the fixed exchange rate with a fixed level can be seen as a special case of the fixed exchange rate with bands where the bands are set to zero.)

Under a system of fixed exchange rates maintained by a currency board every unit of local currency must be backed by a unit of foreign currency (correcting for the exchange rate). This ensures that the local monetary base does not inflate without being backed by hard currency and eliminates any worries about a run on the local currency by those wishing to convert the local currency to the hard (anchor) currency.

Under dollarization, foreign currency (usually the US dollar, hence the term “dollarization”) is used freely as the medium of exchange either exclusively or in parallel with local currency. This outcome can come about because the local population has lost all faith in the local currency, or it may also be a policy of the government (usually to rein in inflation and import credible monetary policy).

These policies often abdicate monetary policy to the foreign monetary authority or government as monetary policy in the pegging nation must align with monetary policy in the anchor nation to maintain the exchange rate. The degree to which local monetary policy becomes dependent on the anchor nation depends on factors such as capital mobility, openness, credit channels and other economic factors.

Gold standard

The gold standard is a system under which the price of the national currency is measured in units of gold bars and is kept constant by the government’s promise to buy or sell gold at a fixed price in terms of the base currency. The gold standard might be regarded as a special case of “fixed exchange rate” policy, or as a special type of commodity price level targeting.

The minimal gold standard would be a long-term commitment to tighten monetary policy enough to prevent the price of gold from permanently rising above parity. A full gold standard would be a commitment to sell unlimited amounts of gold at parity and maintain a reserve of gold sufficient to redeem the entire monetary base.

Today this type of monetary policy is no longer used by any country, although the gold standard was widely used across the world between the mid-19th century through 1971. Its major advantages were simplicity and transparency. The gold standard was abandoned during the Great Depression, as countries sought to reinvigorate their economies by increasing their money supply. The Bretton Woods system, which was a modified gold standard, replaced it in the aftermath of World War II. However, this system too broke down during the Nixon shock of 1971.

The gold standard induces deflation, as the economy usually grows faster than the supply of gold. When an economy grows faster than its money supply, the same amount of money is used to execute a larger number of transactions. The only way to make this possible is to lower the nominal cost of each transaction, which means that prices of goods and services fall, and each unit of money increases in value.

Absent precautionary measures, deflation would tend to increase the ratio of the real value of nominal debts to physical assets over time. For example, during deflation, nominal debt and the monthly nominal cost of a fixed-rate home mortgage stays the same, even while the dollar value of the house falls, and the value of the dollars required to pay the mortgage goes up. Mainstream economics considers such deflation to be a major disadvantage of the gold standard. Unsustainable (i.e. excessive) deflation can cause problems during recessions and financial crisis lengthening the amount of time an economy spends in recession. William Jennings Bryan rose to national prominence when he built his historic (though unsuccessful) 1896 presidential campaign around the argument that deflation caused by the gold standard made it harder for everyday citizens to start new businesses, expand their farms, or build new homes.

In a nutshell, monetary policy relates to increasing or decreasing the supply of money available in theU.S.Economy. Such actionable policy determines whether the economy heats up (more economic activity) or cools down (less economic activity). In turn, such decisions affect, either way, credit, and, down the road, influences business growth, hiring and employment, as well as everybody’s enemy—inflation.

The Infrastructure for Monetary Policy

While the budget remained enormously important, the job of managing the overall economy shifted substantially from fiscal policy to monetary policy during the later years of the 20th century. Monetary policy is the province of the Federal Reserve System, an independentU.S.government agency. “The Fed,” as it is commonly known, includes 12 regional Federal Reserve Banks and 25 Federal Reserve Bank branches.

All nationally chartered commercial banks are required by law to be members of the Federal Reserve System; membership is optional for state-chartered banks. In general, a bank that is a member of the Federal Reserve System uses the Reserve Bank in its region in the same way that a person uses a bank in his or her community.

The Federal Reserve Board of Governors administers the Federal Reserve System. It has seven members, who are appointed by the president to serve overlapping 14-year terms. The most important monetary policy decisions are made by the Federal Open Market Committee (FOMC), which consists of the seven governors, the president of the Federal Reserve Bank ofNew   York, and presidents of four other Federal Reserve banks who serve on a rotating basis.

Although the Federal Reserve System periodically must report on its actions to Congress, the governors are, by law, independent from Congress and the president. Reinforcing this independence, the Fed conducts its most important policy discussions in private and often discloses them only after a period of time has passed. It also raises all of its own operating expenses from investment income and fees for its own services.

The Federal Reserve has three main tools for maintaining control over the supply of money and credit in the economy. The most important is known as open market operations, or the buying and selling of government securities. To increase the supply of money, the Federal Reserve buys government securities from banks, other businesses, or individuals, paying for them with a check (a new source of money that it prints); when the Fed’s checks are deposited in banks, they create new reserves — a portion of which banks can lend or invest, thereby increasing the amount of money in circulation. On the other hand, if the Fed wishes to reduce the money supply, it sells government securities to banks, collecting reserves from them. Because they have lower reserves, banks must reduce their lending, and the money supply drops accordingly.

The Fed also can control the money supply by specifying what reserves deposit-taking institutions must set aside either as currency in their vaults or as deposits at their regional Reserve Banks. Raising reserve requirements forces banks to withhold a larger portion of their funds, thereby reducing the money supply, while lowering requirements works the opposite way to increase the money supply. Banks often lend each other money over night to meet their reserve requirements. The rate on such loans, known as the “federal funds rate,” is a key gauge of how “tight” or “loose” monetary policy is at a given moment.

The Fed’s third tool is the discount rate, or the interest rate that commercial banks pay to borrow funds from Reserve Banks. By raising or lowering the discount rate, the Fed can promote or discourage borrowing and thus alter the amount of revenue available to banks for making loans.

These tools allow the Federal Reserve to expand or contract the amount of money and credit in the U.S. economy. If the money supply rises, credit is said to be loose. In this situation, interest rates tend to drop, business spending and consumer spending tend to rise, and employment increases; if the economy already is operating near its full capacity, too much money can lead to inflation, or a decline in the value of the dollar. When the money supply contracts, on the other hand, credit is tight. In this situation, interest rates tend to rise, spending levels off or will decline, and inflation abates; if the economy is operating below its capacity, tight money can lead to rising unemployment.

Many factors complicate the ability of the Federal Reserve to use monetary policy to promote specific goals, however. For one thing, money takes many different forms, and it often is unclear which one to target.

In its most basic form, money consists of coins and paper currency. Coins come in various denominations based on the value of a dollar: the penny, which is worth one cent or one-hundredth of a dollar; the nickel, five cents; the dime, 10 cents; the quarter, 25 cents; the half dollar, 50 cents; and the dollar coin. Paper money comes in denominations of $1, $2, $5, $10, $20, $50, and $100.

A more important component of the money supply consists of checking deposits, or bookkeeping entries held in banks and other financial institutions. Individuals can make payments by writing checks, which essentially instruct their banks to pay given sums to the checks’ recipients. Time deposits are similar to checking deposits except the owner agrees to leave the sum on deposit for a specified period; while depositors generally can withdraw the funds earlier than the maturity date, they generally must pay a penalty and forfeit some interest to do so.

Money also includes money market funds, which are shares in pools of short-term securities, as well as a variety of other assets that can be converted easily into currency on short notice.

The amount of money held in different forms can change from time to time, depending on preferences and other factors that may or may not have any importance to the overall economy. Further complicating the Fed’s task, changes in the money supply affect the economy only after a lag of uncertain duration.

 

Monetary Policy and the Presidential Election Cycle

The Federal Reserve sets the monetary policy for the country. Although the Federal Reserve is supposed to be independent of the president and the Congress, monetary policy appears to follow the presidential election cycle as well.

In a paper entitled “The Presidential Term: Is the Third Year a Charm,” prepared by the CFA Institute and published in the Journal of Portfolio Management in 2007, the authors found that monetary policy is more accommodative in the second half of a presidential term and more restrictive in the first term.

These findings suggest that policy makers are reluctant to take a restrictive stance for fear it might slow down the economy in the months leading up to a presidential election. Of the four years, the third year is the year with the most expansionary monetary policy. During that year, the author found that monetary policy was expansionary 65% of the time versus 48% for the other three years.

Stock markets do well in periods of expansionary monetary policy and do relatively poorly when monetary policy is restrictive; therefore, it is no coincidence that the stock market is generally strong in the third year of a presidential cycle, when the Federal Reserve is in an expansionary mood. (For more insight, read Formulating Monetary Policy.)

Although the relationship between the presidential election cycle and the stock market appears to be strong, this does not mean it is going to play out the same way every cycle. However, when combined with other information, it can provide additional insights that investors can use to improve their investment decisions.

Monetary Policy and Fiscal Stabilization

The Fed’s operation has evolved over time in response to major events. The Congress established the Federal Reserve System in 1913 to strengthen the supervision of the banking system and stop bank panics that had erupted periodically in the previous century. As a result of the Great Depression in the 1930s, Congress gave the Fed authority to vary reserve requirements and to regulate stock market margins (the amount of cash people must put down when buying stock on credit).

Still, the Federal Reserve often tended to defer to the elected officials in matters of overall economic policy. During World War II, for instance, the Fed subordinated its operations to helping the U.S. Treasury borrow money at low interest rates. Later, when the government sold large amounts of Treasury securities to finance the Korean War, the Fed bought heavily to keep the prices of these securities from falling (thereby pumping up the money supply).

The Fed reasserted its independence in 1951, reaching an accord with the Treasury that Federal Reserve policy should not be subordinated to Treasury financing. But the central bank still did not stray too far from the political orthodoxy. During the fiscally conservative administration of President Dwight D. Eisenhower (1953-1961), for instance, the Fed emphasized price stability and restriction of monetary growth, while under more liberal presidents in the 1960s, it stressed full employment and economic growth.

During much of the 1970s, the Fed allowed rapid credit expansion in keeping with the government’s desire to combat unemployment. But with inflation increasingly ravaging the economy, the central bank abruptly tightened monetary policy beginning in 1979. This policy successfully slowed the growth of the money supply, but it helped trigger sharp recessions in 1980 and 1981-1982. The inflation rate did come down, however, and by the middle of the decade the Fed was again able to pursue a cautiously expansionary policy. Interest rates, however, stayed relatively high as the federal government had to borrow heavily to finance its budget deficit

(Speaking of interest rates, 1980 was a very bad time where buying homes was concerned. One of our friends bought her first home that year. She paid a mortgage rate of just over 14%. That was a long ways upward from the no-down GI loan rate of 7% my wife and I paid 11 years earlier). Rates slowly came down, too, as the deficit narrowed and ultimately disappeared in the 1990s.

The growing importance of monetary policy and the diminishing role played by fiscal policy in economic stabilization efforts may reflect both political and economic realities. The experience of the 1960s, 1970s, and 1980s suggests that democratically elected governments may have more trouble using fiscal policy to fight inflation than unemployment. Fighting inflation requires government to take unpopular actions like reducing spending or raising taxes, while traditional fiscal policy solutions to fighting unemployment tend to be more popular since they require increasing spending or cutting taxes. Political realities, in short, may favor a bigger role for monetary policy during times of inflation.

One other reason suggests why fiscal policy may be more suited to fighting unemployment, while monetary policy may be more effective in fighting inflation. There is a limit to how much monetary policy can do to help the economy during a period of severe economic decline, such as the United   Statesencountered during the 1930s. The monetary policy remedy to economic decline is to increase the amount of money in circulation, thereby cutting interest rates. But once interest rates reach zero, the Fed can do no more. The United Stateshas not encountered this situation, which economists call the “liquidity trap,” in recent years, but Japandid during the late 1990s. With its economy stagnant and interest rates near zero, many economists argued that the Japanese government had to resort to more aggressive fiscal policy, if necessary running up a sizable government deficit to spur renewed spending and economic growth.

Measuring Effect of Monetary Policy

Today, Federal Reserve economists use a number of measures to determine whether monetary policy should be tighter or looser. One approach is to compare the actual and potential growth rates of the economy. Potential growth is presumed to equal the sum of the growth in the labor force plus any gains in productivity, or output per worker.

In the late 1990s, the labor force was projected to grow about 1 percent a year, and productivity was thought to be rising somewhere between 1 percent and 1.5 percent. Therefore, the potential growth rate was assumed to be somewhere between 2 percent and 2.5 percent. By this measure, actual growth in excess of the long-term potential growth was seen as raising a danger of inflation, thereby requiring tighter money.

The second gauge is called NAIRU, or the non-accelerating inflation rate of unemployment. Over time, economists have noted that inflation tends to accelerate when joblessness drops below a certain level. In the decade that ended in the early 1990s, economists generally believed NAIRU was around 6 percent. But later in the decade, it appeared to have dropped to about 5.5 percent.

Perhaps even more importantly, a range of new technologies — the microprocessor, the laser, fiber-optics, and satellite — appeared in the late 1990s to be making the American economy significantly more productive than economists had thought possible. “The newest innovations, which we label information technologies, have begun to alter the manner in which we do business and create value, often in ways not readily foreseeable even five years ago,” Federal Reserve Chairman Alan Greenspan said in mid-1999.

Previously, lack of timely information about customers’ needs and the location of raw materials forced businesses to operate with larger inventories and more workers than they otherwise would need, according to Greenspan.

But as the quality of information improved, businesses could operate more efficiently. Information technologies also allowed for quicker delivery times, and they accelerated and streamlined the process of innovation. For instance, design times dropped sharply as computer modeling reduced the need for staff in architectural firms, Greenspan noted, and medical diagnoses became faster, more thorough, and more accurate.

Such technological innovations apparently accounted for an unexpected surge in productivity in the late 1990s. After rising at less than a 1 percent annual rate in the early part of the decade, productivity was growing at about a 3 percent rate toward the end of the 1990s — well ahead of what economists had expected. Higher productivity meant that businesses could grow faster without igniting inflation. Unexpectedly modest demands from workers for wage increases — a result, possibly, of the fact that workers felt less secure about keeping their jobs in the rapidly changing economy — also helped subdue inflationary pressures.

Some economists scoffed at the notion American suddenly had developed a “new economy,” one that was able to grow much faster without inflation. While there undeniably was increased global competition, they noted, many American industries remained untouched by it. And while computers clearly were changing the way Americans did business, they also were adding new layers of complexity to business operations.

But as economists increasingly came to agree with Greenspan that the economy was in the midst of a significant “structural shift,” the debate increasingly came to focus less on whether the economy was changing and more on how long the surprisingly strong performance could continue. The answer appeared to depend, in part, on the oldest of economic ingredients — labor. With the economy growing strongly, workers displaced by technology easily found jobs in newly emerging industries. As a result, employment was rising in the late 1990s faster than the overall population.

That trend could not continue indefinitely. By mid-1999, the number of “potential workers” aged 16 to 64 — those who were unemployed but willing to work if they could find jobs — totaled about 10 million, or about 5.7 percent of the population. That was the lowest percentage since the government began collecting such figures (in 1970). Eventually, economists warned, the United Stateswould face labor shortages, which, in turn, could be expected to drive up wages, trigger inflation, and prompt the Federal Reserve to engineer an economic slowdown.

Still, many things could happen to postpone that seemingly inevitable development. Immigration might increase, thereby enlarging the pool of available workers. That seemed unlikely, however, because the political climate in theUnited Statesduring the 1990s did not favor increased immigration.

More likely, a growing number of analysts believed that a growing number of Americans would work past the traditional retirement age of 65. That also could increase the supply of potential workers. Indeed, in 1999, the Committee on Economic Development (CED), a prestigious business research organization, called on employers to clear away barriers that previously discouraged older workers from staying in the labor force.

Current trends suggested that by 2030, there would be fewer than three workers for every person over the age of 65, compared to seven in 1950 — an unprecedented demographic transformation that the CED predicted would leave businesses scrambling to find workers.
“Businesses have heretofore demonstrated a preference for early retirement to make way for younger workers,” the group observed. “But this preference is a relic from an era of labor surpluses; it will not be sustainable when labor becomes scarce.” While enjoying remarkable successes, in short, the United States found itself moving into uncharted economic territory as it ended the 1990s.

While many saw a new economic era stretching indefinitely into the future, others were less certain. Weighing the uncertainties, many assumed a stance of cautious optimism. “Regrettably, history is strewn with visions of such `new eras’ that, in the end, have proven to be a mirage,” Greenspan noted in 1997. “In short, history counsels caution.”

In Part V ahead I will review the actual accomplishments of President Obama throughout the lion’s share of his first term in office. This will be followed by Part VI-A . In that segment, I will describe the accomplishments of the Republican Party the last four years and describe the background of their presidential candidate in 2012, Mitt Romney.

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