Truth and Lies about the Economy

First, turn on your shit detector, then watch this video:
The Truth About the Economy

This is not really the big picture. It's details about tax and spending policy. I'll discuss the real big picture later. But for now grab some popcorn, it's time to unravel the intertwined lies, fallacies and red herrings in that video.

Reich: Economy doubles in size but wages are nearly flat (adjusted for inflation)

We'll start with this red herring. Why is this bad? Here's a different way of saying the same thing:
The overall economy got bigger and a greater number of people each got a slightly bigger piece of it. A small few are worse off, most people are better off, and some are much better off than others.
In short, we've had a rising tide and it has lifted all boats, though some more than others.
Again, why is this bad?

Reich: Gains have gone to super-rich.

Reich never defines what "super-rich" means, but he implies it's the "top 1%". Is that the top 1% of income earners? Top 1% of net worth? There's a big difference between the two. I understand why he's intentionally vague about this... a precise definition would undermine his effort to fuel class envy in order to get people to support higher taxes and more government.
Let's assume it's the top 1% of income earners.

Here's another look at the top 1%. They pay:

  • more income tax than the bottom 95% of everyone else combined
  • about 40% of all income tax revenues
  • NOTE: before the Bush tax cuts, the top 1% paid about 36% of all income tax revenues

    • That is not a typo. When Bush lowered the top marginal tax rate, the proportion of total taxes paid by the top 1% increased from 36% to 40%. That's not a surprise to anyone who understands economics.

    Reich: Tax rates are proportional to federal income

    Reich implies this throughout the video, and it's wrong. Overall taxes as % of GDP has held around 15%-20% over the past 50+ years. Over that half century we have seen HUGE swings in tax policy, with the top marginal rate varying from 35% to 70%. But throughout it all, total revenue collected in taxes stayed in a narrow range.
    The relationship between tax rates, overall revenue, and GDP is complex, and higher rates do not mean higher revenue or % of GDP (or vice versa).
    Reich knows this, so he only implies the lower rates reduced government funds without actually saying it, which is highly misleading.

    Reich: Implies schools are suffering due to lack of funding

    This is one of the most ridiculous statements in the video. Educational spending has increased EXPONENTIALLY year over year:

    How did this affect performance or outcomes? The graph shows that but you might not have noticed. See those flat red, green & purple lines at the bottom of the chart? Yep, that's performance as measured in test scores.

    You might be asking, WHERE THE HELL IS ALL THAT MONEY GOING?
    Great question. Look at educational hiring - it's increased TEN TIMES faster than the number of students:

    But with NO CHANGE in student-teacher ratio. How can that be? It's simple: few or none of the additional hires are teachers. You might be asking, WHAT THE HELL ARE ALL THOSE PEOPLE DOING?
    Great question. I have no idea. But I can tell you something they're NOT doing - teaching our kids.

    Now that you've seen the charts, do you really think more money is the answer to fixing our problems with education? Can anyone seriously believe that the problems with our schools are due to lack of funding? I didn't think you did. You'd have to be completely insane or an absolute idiot, and if you're reading this, you're not either.

    Reich: Higher tax rates can fix the deficit

    Bush-43 brought in big spending increases but as you can see in the graph below, it was only a blip compared to what Obama has done. Spending is growing faster than GDP. When spending increases faster than GDP it is by definition unsustainable and no amount of tax increases can pay for it.
    A picture's worth 1,000 words:

    In this graph you can see the Obama spending increases in perspective over the past 50 years. The govt is now consuming nearly 25% (red line + black line) of GDP. This is the largest % of GDP it has consumed since the WW-II wartime economy. This is the highest level of non-wartime, non-military spending in the history of our nation. When spending rises this quickly to these unprecedented levels, taxes are not the problem, and they cannot be the solution.

    Anyone who talks about raising taxes when the spending curve looks like this, is a fool who doesn't know any better or is benefiting from all this spending.

    Finally, the Big Picture

    What caused the economic crash of 2008?
    It was the cumulative effect of years of bad government financial and housing policy finally coming to fruition. In short, government policy created and fueled the housing bubble. The government:

  • Used Freddie & Fannie to buy mortgages from banks
  • This made taxpayers assume the risks of these loans
  • With risk-free loans, banks are incentivized to lend to people who can't afford it - the bank makes a quick profit selling the loan and the taxpayers take the risk
  • The government further encourages risky lending by forcing banks to loan to people who can't afford it, for example through the Community Reinvestment Act (and others)

    • Net result, loans are "risk-free" to banks. Loaning money to people who can't afford it is profitable and keeps the regulators off their backs. There are only 2 things that amaze me about this:
  • Anybody was suprised at the outcome
  • Our legislators fail (or refuse) to recognize the root causes.

    • Fannie & Freddie are still in business. The CRA (and a plethora of other ill-devised public policy) is still in effect.

    Why is the recovery taking so long?
    Because more bad government policy (bailouts, TARP, etc.) is propping up the bubbled assets, preventing the economy from readjusting. And because our politicians (I won't call them leaders) not only fail or refuse to recognize the root causes, they are fueling the fire with more of the bad policy that caused this in the first place. And because our government is on a spending binge with no end in sight. And because our government is busy (re)writing new regulations every day (think health care, environmental, etc.), which creates uncertainty for business.

    The astute reader will have observed that NONE of these root causes can be solved by the higher taxes that Reich recommends, and many of them will only be made WORSE.