Grow the economy in a overcapacity world

[papau]

The question is how does one grow the economy in a overcapacity world that is unlike world of JFK's where the capacity was not being used and a properly structured tax cut gave much more stimulus than was lost by the effect on long term interest rates. I believe we actually have overproduction that needs a demand stimulus.

The 3rd World needs to grow also. Currently we destroy small countries via increased production incentives to our farming sector - if we limited those incentives to small farms we would still have the individuals who break up their family farm to max out the subsidy - but the Farm Corporations would not do this and indeed we'd help small countries as produce prices rise and, with Corporate monopoly Farm middlemen losing pricing power and having reduced profits, there would be an offset - leaving retail prices where they are now. Of Course the Big Farm Corporations are hard at work today at the GOP and at the world trade conf in Cancun telling the starving small countries the fact that grow food more cheaply than the US does not mean we want to cut back on US production or that we want to stop flooding the world markets with our tax dollar subsidized low priced goods - hell - these folks are red state folks that live on this welfare while voting GOP!!!

The Clinton econ discovery was to find out just how powerful a small change in long-term interest rates really is. Now long term interest rates are 95% determined by how well the economy is currently - mainly because the liquidity and ease of getting out of bonds is so great folks feel they have time to adjust to economic change. But rates are built up by the expectation for this year, for next year, plus the expectation for the year after that, etc., so that a 10-year bond is the sum of 10 annual rate expectations. And those rate expectation that are in the latter years look to the risks that rates will be much higher. Those risks are structural inflation developing or the supply/demand balance for bonds changing via run away growth or other causes - and demand relative to supply in the end determines the price of capital and that means the rate. The expected change in demand coulkd come from some demographic reason or from some Government out of control reason. It is the latter that is the problem now and which was the problem under Reagan/Bush (despite a $1.7 trillion fiscal stimulus under Reagan via tax cuts, he achieved only a 3.33% 8 year average growth rate, compared to Carter's 3.25%, and compared the much higher rate achieved by JFK and Clinton). Folks expect very high rates in the future if they see Gov deficits projected "forever" - meaning there will be a larger supply of gov bonds and rates must be raised to sell them (the old supply / demand thing determining price). This is a bit curious in that gov borrowing is small compared to corporate borrowing, but it is a fact.

And it is this expectation that moves 10 year and longer rates to the "high" end of the range that the current economic situation is justifying (indeed Japan's near zero interest rates - and for a few nights negative interest rates!!! - are at the high end of the "range" that is given for an economy going nowhere for 10 years - as with Japan).

So getting a PLAN - tax increases - that imply control of the situation - moves the long term rates down (relatively) and since these are the rates that are “hurdle” one most get past before getting Board room approval for a corporate investment - meaning the Board must feel that the investment will return more than the return obtained by a “safe” purchase of bonds - the lower lower 10 year rate means a lower hurdle rate which means more corporate investment gets approved that would otherwise be approved. One invests based on sales expectations and risk, and this lower hurdle rate lowers a “risk”, so with the same sales expectations more is invested by business.

And investment is what drives growth. So yes - a tax increase and change of administration will turn the situation around on a dime (albeit a 5 year “dime”), and is needed now.

As to the Trillions for Social Security that the GOP is trying to add to the pile of fear that is their sales pitch for 2004 - SS is solid at the current benefit levels that are required by current law until 2043 - and is then solid if the “retirement age” is raised from Reagan’s 67 (you thought it was 65???) to age 70 for those retiring after 2042 (this is in effect a 30% reduction from the current law level of benefits for 2043 - so those that choose to get benefits before the “retirement age” - all us folks drawing beginning at 62 - get 30% less!). One way to avoid this is a 30% increase in payroll taxes in 2043.

Now an alternative is to make the SS system more progressive meaning the rich pay a tax on all income, with their getting a higher benefit from the additional tax but at the 15% factor level - meaning the system gets much more than the annuity costs and all is well for the community of retires - and the rich pay more. Dean was in the increase the retirement age crowd in 1995 but is in the increase the wage base crowd today.

More Fear from the GOP was recently in the media via O’Neill's “trillions” in debt SS concept, that really refers to an approach where we break with the current workers paying for the current retired workers - the intergenerational compact concept of SS - and actually try to develop a huge fund that is not invested in gov securities. Indeed this was the 1935 concept - but the GOP fought and yelled about Socialism by the Backdoor in the early 40's when they controlled Congress - meaning the Trust fund would own a large chunk of the US economy - and we went to the current Gov Funds “investment” - sized at a few months benefits - Trust Fund with a Pay as you go system - and trust between generations - concept at that time. With no change in the SS intergenerational compact concept, there is no need to build up a Trust Fund ownership of corporate stocks and bonds

A payroll tax increase does nothing to increase the security of SS benefits - as we have seen, because the money is not needed right away, the GOP will steal it and then scream when the FIT needs to be raised so the Treasury can pay back the stolen money (now called Trust fund government bonds) via redemption of those bonds to get cash to give to SS to pay benefits. Indeed this is the Bush crisis - beginning around 2018 FIT must be raised so as to start paying back the SS the moneys stolen today. If it is paid back - meaning a gov bond owned by the SS Trust does indeed have real value, then the SS system is solid to 2043.