Michael Meeropol is Professor and Chair of the Department of Economics at Western New England College in Springfield, Massachusetts and the author of SURRENDER, HOW THE CLINTON ADMINISTRATION COMPLETED THE REAGAN REVOLUTION.

Back to the Top

Michael Meeropol is Professor and Chair of the Department of Economics at Western New England College in Springfield, Massachusetts and the author of SURRENDER, HOW THE CLINTON ADMINISTRATION COMPLETED THE REAGAN REVOLUTION.

Back to the Top

Footnotes:

¹ See "Is a Lean Economy Turning Mean? Why It's Now Even Harder to Find Job" and "The Buck Has Stopped," The New York Times (March 2, 2008): Business Section, p. 1. See also "The Jump-Start That Hasn't Started," The New York Times (March 2, 2008): Business Section, p. 6. Then, the day after this commentary aired, March 8, 2008, The New York Times had two front page stories that made clear we are already in a recession: "Sharp Drop in Jobs Adds to Grim Economic Picture" and "End to the Good Times (Such as they Were)." The second article concluded with a really dismal picture of the past six years of economic recovery, "The median household earned $48,201 in 2006, down from $49,244 in 1999." [p. A9]. The 1999 figure is at the top of the recent business cycle before the stock market crash of 2000 and the recession of 2001 reduced income. The fact that median household income did not grow over a full business cycle is extraordinary. It means that the recent growth in consumption has mostly been fueled by debt expansion. This means that the decline in consumption will be quite significant because people have already borrowed a great deal and may have little room to borrow more.

² "Is a Lean Economy Turning Mean?": p. 8.

³ "The Buck Has Stopped": p. 1.

⁴ See http://www.foxnews.com/story/0,2933,333553,00.html. The full statement from President Bush would have been impossible to really follow without the insertions I put into the text. Here it is verbatim from the transcript: 'It's - I know there's a lot of, you know - here in Washington, people are trying to, you know - stimulus package II and all that. Why don't we let stimulus package I, which seemed like a good idea at the time, have a chance to kick in?"

⁵ The decade of the 1970s was marred by stagflation. Here is the data:

Date	Unemployment Rate (in percent)	Inflation Rate (in percent)
1970	4.9	5.7
1971	5.9	4.4
1972	5.6	3.2
1973	4.9	6.2
1974	5.6	11.0
1975	8.5	9.1
1976	7.7	5.8
1977	7.1	6.5
1978	6.1	7.6
1979	5.8	11.3
1980	7.1	13.5

[Source: Economic Report of the President, 2004: 330, 357.]
Note the persistence of high levels of unemployment through much of the decade accompanied by surges in inflation 1973, 74 and 1978, 79 and 80.

⁶ See Economic Report of the President, 2006: 355. For some strange reason the number I spoke on the air was incorrect. I said 1.5% when I should have said 1.6%.

⁷ See the Bureau of Labor Statistics Table at ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

⁸ The January figure is on the Bureau of Labor Statistics' front page: http://www.bls.gov/cpi/home.htm

⁹ See http://www.fxstreet.com/fundamental/interest-rates/ben-s-bernanke-testimony-before-the-committee-on-f/2008-02 On other issues he commented as follows:
Discussion on the housing market: "The housing market is expected to continue to weigh on economic activity in coming quarters. Homebuilders, still faced with abnormally high inventories of unsold homes, are likely to cut the pace of their building activity further, which will subtract from overall growth and reduce employment in residential construction and closely related industries."
Discussion on the economic outlook: "The risks to this outlook remain to the downside. The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further."

¹⁰ The tools of monetary and fiscal policy mostly affect aggregate demand - either the consumption spending of individuals, the investment spending of businesses or the government's own spending. Expansionary monetary and/or fiscal policy (reduced interest rates by the FED, a stimulus package passed by Congress) will increase spending if it is effective. However, any increase in spending might make it easier for businesses to raise prices - and in the context of rising oil prices and other business costs, they will have a strong incentive to do that. Should the FED and Congress try to restrain inflation by raising interest rates or cutting government spending (this is what Congress and the FED did early in 1980), that could have the effect of making the recession deeper. During the 1970s, government policy shifted from anti-inflationary to expansionary and back again. There was even a period of direct wage and price controls in 1971 and 1972. For details see SURRENDER, chs. 3, 4, 5.

Michael Meeropol is Professor and Chair of the Department of Economics at Western New England College in Springfield, Massachusetts and the author of SURRENDER, HOW THE CLINTON ADMINISTRATION COMPLETED THE REAGAN REVOLUTION.

Back to the Top

Footnotes:

¹ See "$146 Billion Stimulus Plan Passes House" Washington Post January 30, 2008; Page A03 http://www.washingtonpost.com/wp-dyn/content/article/2008/01/29/AR2008012901935.html?hpid=topnews

²On January 31, the New York Times reported that the GDP had grown at a disappointing .6% during the fourth quarter of 2007 suggesting that by the end of the year growth might have turned negative thus heralding the start of a recession. Recessions are "called" by the National Bureau of Economic Research many months after they have begun so we will not know for sure for some time. However, with growth slowing to a dead stop, declines in housing sales and prices, rises in unemployment, slowdowns in job creation, huge write-downs by financial institutions there is every indication that a recession is here or almost here. See my most recent commentary.

³ See, for example, the following article in the New York Times in October of 2007. Note that this was already into the last quarter - the quarter that now we find saw growth plummet to .6% after posting a 4.9% rate of growth in the third quarter (see http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm.). The New York Times piece described job growth in September as having "bounced back" which combined with a revision in the numbers for August were, "…easing fears of a recession and making it more likely the Federal Reserve will hold interest rates steady when it meets at the end of this month [September]. The news set off a surge on Wall Street, sending the Standard & Poor's 500-stock index to a record close. The economy added 110,000 jobs in September, and the Labor Department reported that employment increased by 89,000 jobs in August, revising an earlier report that showed an unexpected loss of 4,000 jobs. The original figure prompted a stock market sell-off and was followed by a half-point cut in the Fed's benchmark interest rates as investors worried that turmoil in the housing market had bled into the larger economy. Today's report - considered a leading indicator of the nation's economic health - suggests that pain from the subprime lending crisis subsided somewhat in September. Government and education jobs rose sharply, spurring the upward revision for August." http://www.nytimes.com/2007/10/05/business/04cnd-econ.html?emc=eta1 Read that ridiculously optimistic last sentence again!

⁴ It is sometimes instructive to read the minutes of the Federal Open Market Committee. At the meeting October 30-31 (the commentary called it the November meeting because the results were announced November 1) there were references to the "upside risks to the outlook for inflation" [p. 7] and the following statement as well: "Readings on core inflation had improved modestly during the year, but the Committee judged that some inflation risks remained, and the Committee planned to continue to monitor inflation developments carefully." [p. 4] For the full minutes see http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20071031.pdf ⁵ Because the level of total (aggregate) demand helps determine both the inflation rate and the unemployment rate - but has the opposite effect of both - it is impossible to use the tool of aggregate demand management (fiscal and monetary policy tools) to fight both problems at the same time. Thus, policy-makers basically have to choose which problem - inflation or unemployment - is likely to pose the most immediate danger. It is clear that between the end of October and January 22, the Fed changed its main focus from fearing inflation to fearing recession.

⁶ This refers to the House bill passed on January 29. There will no doubt be many changes in the bill before it reaches the President's desk.

⁷ In March of 1975, Congress pass a significant tax cut at the urging of (Republican) President Gerald Ford. That tax cut was clearly focused on increasing consumption. Marginal rates were not cut, and instead all taxpayers and their dependents received a credit of $30 (over $100 in current dollars). In addition, the standard deduction was increased, and a refundable earned income tax credit was enacted. As a result, some beneficiaries of the 1975 tax cut carried no liability for federal individual income taxes. Here's where the fiscal stimulus difference becomes apparent. The federal budget was nearly balanced in 1974, with a deficit of less than 1% of GDP. That deficit, however, jumped to 3.4% of GDP in fiscal year 1975 and 4.3% in the following year. (See Economic Report of the President, 1998, p. 373.) It is clear that the 1975 tax cut, plus some increased spending in the form of extended unemployment compensation benefits, helped raise the federal deficit and increase aggregate demand. As a consequence, this deficit increase was temporary; both deficits and debt as a share of GDP fell at the close of the 1970s.

⁸ For the testimony of Peter Orszag, Director of the Congressional Budget Office, see http://www.cbo.gov/ftpdocs/89xx/doc8932/1-22-TestimonyEconStimulus.htm Director Orszag noted that "… tax cuts or increases in transfer payments from the government to people (such as Food Stamps or unemployment insurance benefits) increase household demand by providing consumers with additional spending power. The bigger the chunk of that additional income that consumers are willing to spend instead of save, the more stimulus there will be from a particular tax reduction or increase in government transfer payments. But households do not predictably spend a fixed proportion of the extra income left in their hands when taxes are reduced or transfers are increased. Rather, a

Michael Meeropol is Professor and Chair of the Department of Economics at Western New England College in Springfield, Massachusetts and the author of SURRENDER, HOW THE CLINTON ADMINISTRATION COMPLETED THE REAGAN REVOLUTION.

Back to the Top

Footnotes:

¹ For Grant's complete op-ed, see http://www.nytimes.com/2007/12/16/opinion/16grant.html?_r=1&oref=slogin. That entire OP-ED page set of articles is quite interesting. It is from the December 16, 2007 edition and available on line at http://www.nytimes.com/2007/12/16/opinion/16recession.html?ref=opinion. The other articles are: You Can Almost Hear It Pop, by Stephen S. Roach, The Facts Say No, by Marcelle Chauvet and Kevin Hassett, Bet the House on It, by Laura Tyson, Not if Exports Save Us, by Jason Furman, and Wait Till Next Year, by Martin Feldstein

²The Full Employment and Balanced Growth Act is Pub.L. 95-523. It was signed into law on October 27, 1978. The relevant passages specifying the goals to be achieved between 1978 and 1983 are as follows:

(b) Interim numerical goals for initial Economic Reports The medium-term goals in the first three Economic Reports and, subject to the provisions of subsection (d) of this section, in each Economic Report thereafter shall include (as part of the five-year goals in each Economic Report) interim numerical goals for- (1) reducing the rate of unemployment, as set forth pursuant to section 1022 (d) of this title, to not more than 3 per centum among individuals aged twenty and over and 4 per centum among individuals aged sixteen and over within a period not extending beyond the fifth calendar year after the first such Economic Report;

(2) reducing the rate of inflation, as set forth pursuant to section 1022 (e) of this title, to not more than 3 per centum within a period not extending beyond the fifth calendar year after the first such Economic Report: Provided, That policies and programs for reducing the rate of inflation shall be designed so as not to impede achievement of the goals and timetables specified in clause (1) of this subsection for the reduction of unemployment; See http://www4.law.cornell.edu/uscode/uscode15/usc_sec_15_00001022---a000-.html

To find these sections, you will need to go to the THIRD screen once you click on this link.

³ See, for example a staff report for the Federal Reserve Bank of New York which attempts to measure the so-called "sacrifice ratio" - the output lost due to constraining the economy with monetary policy aimed at reducing inflation. The authors note: "It is generally agreed that permanently low levels of inflation create long run benefits for society, increasing the level and possibly the trend growth rate of real output. There is also a strong belief that engineering inflation reductions involve short-term costs associated with a corresponding loss in output." "Structural Estimates of the US Sacrifice Ratio," Stephen Cecchetti and Robert Rich, Federal Reserve Bank of New York, March 15, 1999 (http://www.newyorkfed.org/research/staff_reports/sr71.pdf): 1

⁴ The National Bureau of Economic Research identifies the "turning points" of business cycles - the peaks tell us when an expansion ends and a recession begins - the troughs tell us when an expansion ends and a recession begins. See http://www.nber.org/cycles/cyclesmain.html. For rates of growth of GDP (in nominal and in real terms) see http://www.bea.gov/national/index.htm#gdp (on the first screen click on "percent change from preceding period." From 1945 to 1973, real GDP growth averaged 3.33% per year. From 1973 to 2006 that average fell to 2.8% per year. (The average for 1946 to 1973 is much higher because the year 1946 saw so much inflation that real GDP actually fell 11%. The 1946 to 73 average is 3.49% per year.) ⁵ These numbers all come from the Bureau of Labor Statistics. I found them on an article entitled Our Subprime Economy by Richard D. Wolff of the University of Massachusetts Economics Department. If anyone wants an electronic copy, just write me at mameerop@wnec.edu.

⁶ I am not trying to be flip here. One of the major aspects of growth in a market economy (a capitalist economy) is that it happens over a boom and bust cycle. The late David M. Gordon penned an article in the New York Times Magazine entitled, "Recession is Capitalism as Usual" on April 27, 1975 which spells out the argument completely. The argument being made in my commentary, following the Grant piece in the New York Times is that the suppression of the role of recessions has a potentially negative feedback onto the rate of growth of the economy as a whole. This point is developed quite forcefully in Michael Perelman's book The Pathology of the US Economy Revisited which was published in paperback in 2002.

Michael Meeropol is Professor and Chair of the Department of Economics at Western New England College in Springfield, Massachusetts and the author of SURRENDER, HOW THE CLINTON ADMINISTRATION COMPLETED THE REAGAN REVOLUTION.

Back to the Top

Footnotes:

¹ See SURRENDER, 284-5 for a discussion of the term recession and the dating of recessions from 1948 through 1991. See pp. 21-22 for a general discussion of the business cycle. Before the 1930s, economists used to divide the business cycle into four phases: The upswing when the economy was doing really well, the recession when it was starting to go down after reaching its peak, the depression when it was stuck at the bottom, and the recovery when it was starting to grow after hitting bottom. The Great Depression of the 1930s was so traumatic for the US economy (and the citizenry as a whole) that after World War II it became fashionable never to use the term "depression" in describing economic activity. Thus, we have used the word "recession" to describe the interruptions in economic growth that have occurred since the war and have (for the moment) shelved the word "depression."

²For a rather typical textbook discussion of recessions, etc. see PRINCIPLES OF MACROECONOMICS by Karl Case and Ray Fair (Upper Saddle River, NJ: Pearson, Prentice-Hall, 2007): 134-143. There is even a reference to the potential benefit of a recession - namely the ability to reduce inflation. This is actually quite a controversial point. There are those that argue that if recession reduces inflation, that might increase economic growth in the future over and above what it would have been if the inflation had not been reduced.

³ Notice that this assertion runs counter to the point mentioned briefly in footnote 2. I am well aware of that argument, I just do not find it convincing.

⁴ In an article entitled "When the Economy Goes South" by Jane Katz in the Regional Review published by the Federal Reserve Bank of Boston (http://www.bos.frb.org/economic/nerr/rr1999/q3/katz99_3.htm) there is a table identifying 20th century recessions in the US with a column for production lost in months. These recessions averaged 11 months and lost on average 3.1 months of output. The recession in the 21st century began, according to the National Bureau of Economic Research began in March of 2001 and ended in November of 2001. See http://www.nber.org/cycles/cyclesmain.html.

⁵ There are so many references to these issues that the best advice I can give is to use Google to search for articles about "the Housing bubble" and "the credit crunch." Here are a couple of examples: "3 Big Banks See No Relief as Write-Offs Mount" The New York Times Dec 13, 2007: C7. "Central Bankers to Lend Billions in Credit Crisis" The New York Times Dec 13, 2007: A1 "Big Banks Scale Back Plan to Aid in Debt Crisis," The New York Times Dec 10, 2007: C1. For a recent summary see Paul Krugman, "After the Money's Gone" The New York Times Dec 14, 2007: A35. ⁶ Consumption has been very strong since the 2001 recession in large part because the increased value of homes made it possible for individuals to take out loans using that increased value as collateral. Thus, consumption as a percentage of GDP held steady at 70% as GDP grew after the recession. If consumption growth slackens, which is virtually inevitable, GDP will also. Meanwhile, investment as a percentage of GDP rose from 15% in 2002 to 16.7% in 2006. (This 1.7% change is quite significant - it represented over $132 billion!). See http://www.bea.gov/national/nipaweb/TableView.asp#Mid. For discussion of how this will negatively affect the economy, see Mark Weisbrot: "Housing Crash Still Weights Heavily on the Economy" Center for Economic Policy Research, December 12, 2007.

⁷ Any decline in profits will reduce investment incentives. In addition, any decline in profits will cause businesses to reduce their predictions of future profits. It is these dampened expectations of future profits that have even more of an impact on investment decisions.

⁸ For the behavior of the FED see "Credit Crisis Prompts FED to Roll Back Rates Again," The New York Times, December 12, 2007, p. C1. Unfortunately, many investors felt that the Fed's action was too little too late as evidenced from the stock market decline that very day. That was why the world Central Bankers stepped in - see "Central Bankers to Lend Billions in Credit Crisis" The New York Times Dec 13, 2007 from footnote 5 above. In this context, the recent Republican debate where all candidates spoke of the need to cut government spending was very disappointing. Equally disappointing were some Democrats who insist on maintaining the "PAYGO" rules regarding government expenditure. As anyone who has taken one course in economics ought to know, during a recession the important role of government is to INCREASE its spending and/or DECREASE it's taxation to counter the declines in consumption and investment that are causing the recession.

Michael Meeropol is Professor and Chair of the Department of Economics at Western New England College in Springfield, Massachusetts and the author of SURRENDER, HOW THE CLINTON ADMINISTRATION COMPLETED THE REAGAN REVOLUTION.

Back to the Top

Footnotes:

¹ The New York Times: September 1, 2007: "Bernanke Says Fed is Prepared for More Action" (p. 1) Since then, there appears to be a concensus among financial and economic prosnosticators that the Federal Open Market Committee will lower the federal funds rate, it's benchmark short term interest rate, by either ¼ or ½ of a percent.

²The New York Times: ibid. "On Mortgages, Bush Plans a Limited Intervention." [B1]. In this article, President Bush quite rightly notes that "A federal bailout of lenders would only encourage a recurrence of the problem. It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford." It is in his last sentence where President Bush erroneously creates an equivalence between the victims of shady lending processes and the perpetrators. Obviously no one buys a home knowing "they could never afford"(emphasis added) it. They were tricked into believing they could afford that home by deceptive lending practices. According to the article (p. B6) a half a million homeowners are in danger of foreclosure because of already missed payments. The Bush proposal will make it easier for some low income mortgage holders to get federal mortgage insurance - that would help about 80,000 but it would really help the very speculators Bush said he didn't want to help. If these folks get federal mortgage insurance, then the speculators who bought those mortgages won't lose money on them. Much worse, by the way, are some proposals by Congressional Democrats that would use Fannie Mae and/or Freddie Mac to come to the rescue of hard-pressed homeowners and thus, on a much larger scale, validate the bad investment choices of speculators.

³ This article ran in the Providence Journal on September 3. I consider it so valuable that I recommend that it be read in its entirety. Read the article

⁴ And it has become so dire not just for the homeowners who are in danger of losing their homes but for the economy as a whole. As home prices across the country fall, construction activity falls. The construction industry is an important component of investment. As it declines, job growth slows. (The August job figures were quite disappointing - a predicted increase turned into a decline.). Another important fact is the the rising values of homes had been a major source of consumer spending. In effect, consumers who owned homes were using the rising equity in their homes as an ATM machine to increase consumption spending. That has stopped --- and as home values fall, homeowners will have to cut back on spending just to stay in their homes. As we move through September, economists are recognizing the possibility of a recession sometime before the year is over.

Dean Baker goes much further. He put it this way in an on-line commentary ("Alan Greenspan and His Bubbles" By Dean Baker CENTER FOR ECONOMIC POLICY RESEARCH September 18, 2007:)

"[T]he biggest effect will be the impact that the loss of housing wealth will have on consumption. As the bubble expanded, people borrowed against housing equity almost as rapidly as it was created. The Fed estimated that a dollar of housing wealth translates into 5 cents of additional consumption. This story works in reverse also. A loss of $4 trillion in housing wealth will lead to a reduction of approximately $200 billion in annual consumption. This drop in consumption, coupled with the downturn in the housing sector, virtually guarantees a recession, and quite likely a very severe recession."



⁵ One example of fine print coming to bite homeowners was highlighted in the New York Times of September 13. "A Home Loan Trap." (C1). The article notes that individuals who bought mortgages at initial low rates with the hope of paying them off when the rates rose are finding themselves hit with so-called "exit fees." These are penalties for paying off the mortgage earlier or refinancing. In other words, many people who were induced to buy homes with low "teaser" interest rates were under the impression that they could just pay off the loan when the rates started to adjust upwards. On the contrary, they are begin hit with large penalties - so large that selling the house and paying the penalty will actually consume all the equity they have. The problem for the money managers is spelled out in an excellent article by Roger Lowenstein in the New York Times Magazine on September 2. ("Subprime Time: How did Homeownership become so rickety?" pp. 11-12). Lowenstein describes the process of turning illiquid assets, mortgages on homes, into liquid assets, securities backed by mortgages on homes. "Even though each unit of real esates continued to be a slow-moving, illiquid asset, … the underlying mortgages could be traded as rapidly as stocks and bonds. Instead of keeping his mortgages in a drawer, the banker on Main Street could unload his risk by selling them to Salomon [Brothers]. The banker was thus converted from a long-term lender to a mere originator of loans. Salamon and other institutions would take the mortgages sold by banks and stitch together bonds backed by the payments of many mortgagees, which they dsold to investors. … a group of inert mortgages [were now] a tradable security. … Once the mortgage originator became, in effect, a supplier to Wall Street, new, often unregulated nonbanking companies jumped into the game of brokering and also issuing mortgages. Over time, this weakened lending standards…" Lowenstein concluded, "What happened over the last generation is that housing was turned from a market that responded to consumers to one largely driven by investors." The bubble that fueled the dot.com boom of the late 1990s was replaced by a similar bubble in homebuilding and investing since 2002. The second bubble was why the recession of 2001-2002 while experiencing a significant decline in investment spending, saw no drop in consumer spending. Unfortunately, that situation is ending now. One other impact of the housing bust is that lenders are now doubly shy of getting caught investing in securities of dubious value. This may lead to a credit crunch similar to the one that caused a very sluggish housing and construction market after the Savings and Loan meltdown of 1989 and beyond. A credit crunch will mean even legitimate investors will find it difficult to borrow funds for new investments, compounding the negative impact of the fall in consumption spending.

Michael Meeropol is Professor and Chair of the Department of Economics at Western New England College in Springfield, Massachusetts and the author of SURRENDER, HOW THE CLINTON ADMINISTRATION COMPLETED THE REAGAN REVOLUTION.

Back to the Top

7/6/07: What's all the fuss about the so-called Death Tax?

A public relations coup occurred recently. The estate tax has been reincarnated as the death tax. Though this tax is levied on only 2% of the population, millionaires and billionaires, it is one of our most unpopular taxes.¹

How is it a death tax? Consider the income or payroll tax. One reduces your income. The other reduces your wages. And what does the death tax reduce? What you keep after dying? Are there IRS agents taking a cut as you enter the pearly gates?

The so-called death tax is actually a tax on the value of assets - the estate - left by someone who dies. Those paying the tax are very much alive - they are the heirs.² And - they only have to pay the tax if the estate's total value is greater than $2,000,000.

What are the pros and cons of such a tax?

First of all the government needs to raise revenue. The estate tax is an almost perfect example of a tax based on ability to pay. What that means is that the people paying the tax can most afford to pay it.³

Suppose I were the grand-child of a very rich person. I might be earning $30,000 a year, I might be earning $300,000. I might be earning no income at all. Whatever my income, it is a fact that exists before I get my share of my grandparent's estate.

Suppose the estate is $3 million. The tax is levied only on the $1 million over and above the $2 million exemption. The tax rate is 45%. The estate loses $450,000 to the IRS which reduces the estate to $2,550,000. If I share with nine other people, I will get $255,000.

My annual income has not been reduced. No harm has been done to me by the tax. It was never my money - it belonged to my grandfather and just landed on me because he died.⁴

According to one estimate, the estate tax would raise $39 billion in 2011 if the law reverted to 2001 rules and $29 billion if the exemption stayed at $2 million.

This is not a lot of revenue when you consider the federal budget will exceed $3 trillion by 2001. However, for every dollar of reduced taxes, someone else has to pay higher taxes or some government service has to be reduced or more revenue has to be borrowed. In other words, there is some impact.

Some have argued that the existence of the estate tax discourages individuals from making investments and building up an estate because they know their heirs won't get all of it. This argument seems nonsensical to me. Even at a tax rate of 45%, the heirs get to keep 65 cents for every dollar left by grandpa. (after paying nothing on the first $2 million).⁵

Actually, the existence of that tax often convinces wealthy people to donate some of their wealth to non-profit organizations. Wealthy families often create tax-exempt foundations and make donations to colleges and universities. Such contributions reduce the estate tax burden while creating institutions that outlive the founders - think of the Rockefeller and Ford Foundations or Carnegie Mellon University.

A little understood effect of abolishing the estate tax is that it would be terribly destructive of the incentives and self-reliance of those heirs who receive a millions of dollars in inheritance. Pundits and politicians worry about the bad incentives created by our public welfare system - the willingness to work hard is virtually destroyed by the thousand dollars given to poor women with children to just "sit around" and allegedly "don't work…"

Imagine the disincentive to work or achieve anything if you know from the time you're born that you're going to inherit over a million dollars from grandpa.⁶ The estate tax reduces that serious disincentive as grandpa gives a lot away and the government takes 45% over $2 million.

The estate tax - we should keep it.

Footnotes:

¹ For a good summary of the issues relating to the estate tax see the following: "Options to Reform the Estate Tax" by Leonard Burman, William Gale and Jeffrey Rohaly Tax Policy Issues and Options (Urban-Brookings Tax Policy Center) No. 18 March, 2005. It is available on the web at: http://taxpolicycenter.org/publications/template.cfm?PubID=9218 In 2001, President Bush's first tax cut was passed by Congress. One of its most significant provisions was the phase out of the estate tax. In 2001, the top rate of taxation was 55% and the exemption was less than $1 million. For 2007, 8 and 9, the exemption is set at $2 million with a rate of taxation not to exceed 45%. In 2010 unless the law is changed before then, the estate tax will disappear. However, in order not to appear to be losing the Treasury too much money over the ten years after the 2001 tax cut was passed, Congress provided for the estate tax to return with the exemption at $1 million and the top rate back up to 55% in 2011 (prompting many jokes about people killing off their rich elderly relatives in 2010). It is clear that some compromise will occur so as to create some estate tax with an exemption higher than $1 million before 2010 - though perhaps that one year window without an estate tax will occur with the compromise coming in 2011. For a brief discussion of different perspectives on the estate tax - and how the idea of calling it a "death tax" caught on - see, C. Eugene Steuerle Contemporary US Tax Policy (Washington, DC: The Urban Institute Press, 2004).

²This is an example of the difference between the group which legally must pay the tax and the individuals who ultimately bear the burden of the tax. The entities which legally must pay the tax are the estates of millionaires and billionaires. The individuals who bear the burden of the tax are those heirs who see their inheritances reduced. It is true that some of the heirs of millionaires and billionaires who have their inheritances reduced are themselves not rich. However, under current law, the reductions they experience in their inheritance only kicks in after the first 2,000,000 of the estate has been distributed.

³ There are two basic principles of taxation: One is the so-called benefit principle which attempts to levy a tax so that those that benefit from the government services provided end up paying for the tax. A good example of this tax is the gasoline tax though it is rather imperfect. The tax on the gallons of gasoline you burn in your car is held in a fund to build and maintain highways. The reason it's an imperfect tax on the benefit one derives from driving is cars have different gasoline mileage. Also, different sized cars have different impacts on the roads. Finally, the benefits of driving cannot be measured by the number of miles one drives. Driving to work has a much higher intensity of benefit associated with it than driving for pleasure. If you stopped driving for pleasure you might be less happy. If you stopped driving to work you'd have a significant reduction in income. The second principle of taxation is called the ability-to-pay principle. Since most government programs do not provide specific services which individuals can "consume" and attempt to measure their personal satisfaction from (as one might do in driving down a highway) it is often impossible to calculate the "benefit" that accrues to one person as opposed to another. (How could I quantify the benefit I get from the existence of the Federal Aviation Administration or the National Parks Service or the Postal Service or the Coast Guard?) Thus, the alternative method of calculating the appropriate tax is based solely on the ability of the taxpayer to pay. Using this principle, the tax should be levied either on a person's income, wealth or (according to some) consumption. In addition, there is a strong preference for taxes that provide an exemption for certain levels of income, wealth and/or consumption from taxation. The idea here is that if you have a low income or low consumption, all of it is being spent on necessities and it would actually create real hardship to take some of that away. Once one has agreed that some level of income, consumption or wealth should be taxed at a zero rate, then the positive rate on the amount over the exemption means that you have favored a progressive tax system where the higher your income, the higher the RATE at which you are taxed. Though there is pretty broad agreement on this point, there is a significant debate as to whether rates should escalate as incomes get even higher or should stay at the same fixed level once the income exempt from taxation (taxed at a zero percentage rate) has been exceeded. For a discussion of a number of these issues see Steuerle: ch. 2. On the income vs. consumption taxation, see Economic Report of the President, 2003, ch. 6.

⁴ This is a very important point because many opponents of the estate tax argue that the heirs of millionaires are not necessarily millionaires themselves. See, for example, Economic Report of the President, 2004: 119-120. While this is no doubt true, the individual who believes he or she will be a recipient of a bequest from a very wealthy relative (whose estate is likely to be subject to the estate tax) will not reduce his or her economic activity in anticipation of a smaller bequest than would exist if there were no estate tax. On the contrary, the prospect of a large inheritance (as argued in the text) might actually reduce the economic activity of the prospective heir.

⁵ The Economic Report of the President, 2004 argues that the "…reduction in estate building induced by the [estate] tax is likely to take the form of reduction in capital accumulation." (p. 120) The problem with this statement is that they present no evidence that there in fact IS a "reduction in estate building" as a result of the existence of the estate tax. Certainly, people who start off with nothing will have a tremendous incentive to build an estate of $2 million because there is no estate tax burden. In addition, if one has a "target" estate that one would like to leave to one's heirs, the existence of the tax will induce more effort because the individual building the estate will need to create a larger gross estate to counteract the impact of the tax.

⁶ Though there is obviously a bit of irony in this comment, I am quite serious. If we believe that poor women with children are induced to give up any relationship with the labor force and are willing to "sit around" devoting themselves full time to their children because the government is subsidizing them then new must in turn believe that heirs to million dollar fortunes have no incentive to make anything of themselves - no incentive to try to succeed in education, in business, anywhere. Obviously this is not true for all heirs but there has to be some negative incentive associated with the inheritance of large fortunes. The reduction in these fortunes due to the estate tax (both because of the inducement to donate sums to tax-exempt institutions and because of the "bite" of the tax) must, therefore, have a positive effect on the incentives of heirs.

Back to the Top

Footnotes:

¹ The column in the Republican is entitled "Knowing it all is not enough." It is available on a web site called TownHall.com dated May 16. There is has the title, "Presumptions of the Left." http://www.townhall.com/columnists/ThomasSowell/2007/05/16/presumptions_of_the_left

²Because of the need to compress the text into the time available for a radio commentary, the full text of this section of Sowell's argument was compressed. Here it is without the ellipses: "If you start from a belief that the most knowledgeable person on earth does not have even one percent of the total knowledge on earth, that shoots down social engineering, economic central planning, judicial activism and innumerable other ambitious notions favored by the political left. If no one has even one percent of the knowledge currently available, not counting the vast amounts of knowledge yet to be discovered, the imposition from the top of the notions favored by elites convinced of their own superior knowledge and virtue is a formula for disaster."

³ Here is Sowell's reference to Stalin and Mao: " …economic disasters, important as they are, have not been the worst consequences of people with less than one percent of the world's knowledge superimposing the ideas prevailing in elite circles on those subject to their power -- that is, on the people who together have the other 99 percent of knowledge. Millions of human beings died of starvation, and of diseases related to severe malnutrition, when the economic ideas of Stalin in the Soviet Union and Mao in China were inflicted on the population living -- and dying -- under their iron rule. In both cases, the deaths exceeded the deaths caused by Hitler's genocide, which was also a consequence of ignorant presumptions by those with totalitarian power." Note that Sowell cannot quite bring himself to acknowledge that Hitler's genocide was also the product of a mini-elite running an entire nation. In fact, there is nothing in his column to indicate that he believes there is any such thing as a right-wing or "conservative" elite.

⁴ The full text is: "Many on the left may protest that they do not believe in the ideas or the political systems that prevailed under Hitler, Stalin or Mao. No doubt that is true. Yet what the political left, even in democratic countries, share is the notion that knowledgeable and virtuous people like themselves have both a right and a duty to use the power of government to impose their superior knowledge and virtue on others." This is definitely a correct description of the Leninist conception of communist organizations and the way governments controlled by parties calling themselves Leninist have behaved. However, movements of the left, in general, have often been highly democratic in organizational form and in practice. The most obvious examples have been anarchist groups. [Though there have been very few examples where true principles of anarchism have had a chance to be put into practice, one such example was during the Spanish Civil War. The details can be followed in Noam Chomsky's first major political work: American Power and the New Mandarins in his chapter: "On objectivity in liberal scholarship" where he shows how the story of the Spanish anarchists has been totally distorted by the scholarly community.] In the US, the Industrial Workers of the World (the IWW, known as the "Wobblies") was a highly democratic bottom up labor movement. Students for a Democratic Society and the Student Non Violent Coordinating Committee which were important organizations in the 1960s were highly democratic in structure as well as in their goals. (SDS has recently revived. You can check out their website at http://www.studentsforademocraticsociety.org/.) Since Sowell and the right-wing echo chamber that he invites [Anyone interested can go to the townhall.com web site and follow any of the discussion threads that respond to Sowell's postings. With one or two 'liberal' interlopers as exceptions, the attitudes of the posters are a pretty predictable example of right-wing groupthink.] include liberals and social democrats in their blanket condemnation of "the left" it is important to note that virtually every "liberal imposition" on the so-called free market that Sowell decries has come from bottom up pressure and not from the top down.

⁵ Sowell has published a detailed popularized version of his philosophy of economics and economic policy in Basic Economics. (3rd edition, NY: Basic Books, 2007) His attack on the minimum wage is presented on pages 210-221. His attack on Child Labor laws is presented on pages 232-4. (Reading the endnotes to these pages is quite revealing. [see p. 586] Sowell writes [p. 214] "Even though most studies show that unemployment tends to increase as minimum wages are imposed or increased, those few studies that seem to indicate otherwise are hailed as having 'refuted' this 'myth'." In the endnotes Sowell points the reader to articles that support his view and counter "those few studies…" but not to the articles that present the arguments and evidence in support of the view that the minimum wage does not increase unemployment. For a balanced view, and a reference to David Card and Alan Krueger's summary work Myth and Measurement, the New Economics of the Minimum Wage see an interesting set of exchanges from the blog of N. Gregory Mankiw, a former head of President Bush's Council of Economic Advisers: http://gregmankiw.blogspot.com/2006/06/sperling-on-minimum-wage.html

⁶ Minimum wage laws and laws banning child labor have been a demand of the labor movement from the earliest years of capitalism. Today, the labor movement is often characterized as part of the elite because labor leaders are well-paid executives of large organizations. However, the original labor movements (and this applies to the vast majority of union members and organizers and officials today as well) were groups of workers who recognized that they were powerless alone to force their bosses to pay them decent wages but that in unity there was strength. Many years, many struggles, (many deaths) later, they achieved things we take for granted - like the weekend, the eight-hour day, seniority, the ability to bargain over working conditions, and for some - health insurance and a pension. It is true that it took an act of Congress and the signature of a President to transform the minimum wage and a ban on child labor from demands into laws but Congress would never have acted without years of struggle and pressure. Many of the regulatory bodies that exist in the US today (the Food and Drug Administration, the Federal Trade Commission, the Occupational Safety and Health Administration, the National Highway Traffic Safety Administration) were created in response to wide public outrage against abuses documented often by muckraking journalists.

The Federal Reserve System (our nation's Central Bank) is an exception to this rule. Though there had been a long serious of popular movements in the 19th century who agreed that the control of the nation's finances by large private banks had a negative effect on the ability, particularly of farmers, to get credit when they needed it and to escape from the rising burden of debt as the currency deflated (yes, the US economy suffered a long run deflation between 1873 and 1897), the solution created with the Federal Reserve Act of 1914 was clearly a product of elite, top-down, decision making. The story is told in William Greider's masterful work, Secrets of the Temple (NY: Simon and Shuster, 1987): 243-289.

⁷ In other words, though I can go buy a small fuel efficient car and if lots of other people do that, then businesses will produce less SUVs and more of the fuel-efficient kind, there is no market out there where I as an individual can make a purchase that will cast my "dollar vote" for a light-rail line in the urban area where I live or a national rail system like France's or Japan's. Obviously, such a "vote" would have to be a political vote to get a majority of my fellow-citizens to support raising taxes to create such a transportation set-up.

⁸ For just one example of how real elites operate, check out the documentary "Who Killed the Electric Car" (2006). It argues that GM created and then failed to market the first battery-operated car called EV1. Meanwhile, the California Air Resources Board which had previously mandated the sale of zero-emissions vehicles, caved under pressure from industry lobbyists and removed that requirement. (The federal government had joined private industry in a suit against California to prevent them from enforcing the Zero Emission Vehicle mandate.) It's a complicated story and obviously subject to debate but the main point of the movie is that we as citizens have no way in the "free market" to "vote" for an electric car so long as oil companies are making lots of money selling gasoline. It requires government activity to make an electric car a viable alternative. Note that the recent growth of hybrid cars as a share of the market in the context of very high gasoline prices shows that markets can at times accurately signal what people want. However, the price of gasoline at the pump does not reflect the full cost borne by society as a result of the burning of that gasoline. This is an example of what economists call externalities. Sowell's celebration of the so-called free market [I use the modifier "so-called" because it isn't really free…] ignores the many situations where the prices charged in the market are actually sending the wrong signals. If the gasoline tax were more in tune to the true cost imposed on society of running a car on gasoline, the demand for SUVs would plummet. But that would cut auto industry profits and the demand for gasoline, so you can imagine how strong the political campaign would be against anyone who advocated a big hike in gasoline taxes. In addition, there would definitely be legitimate differences of opinion about what the "true cost" imposed on society by driving gasoline powered cars actually is.

For a general discussion of the role of private elites in the US, I still believe G. William Domhoff's work Who Rules America? and The Higher Circles is the best summary. For a summary see Professor Domhoff's web site: http://sociology.ucsc.edu/whorulesamerica/power/national.html

Back to the Top

Footnotes:

¹ See, for example, Robert Pollin, Contours of Descent (NY: Verso, 2003): 94-102.

² For a short introduction see Surrender: 46-48.

³ Bruce Bartlett, "How Supply Side Economics Trickled Down" New York Times, 6 April, 2007.

⁴ For more details on supply side economics, see Jude Wanniski "The Mundell-Laffer Hypothesis," Public Interest 39 (spring 1975): 31-57.

⁵ Keynes' work is The General Theory of Employment Interest and Money (London 1935). Virtually all Principles of Economics textbooks have presentations of what they claim are Keynesian economics, but unfortunately these often depart from Keynes' own approach. A good intermediate level treatment is in Macroeconomics (James Galbraith and William Darity, Jr.): 9-17, 25-40, 84-130.

⁶ Here is Bartlett's caricature: "Among the beliefs held by the Keynesians of that era were these: budget deficits stimulate economic growth; the means by which the government raises revenue is essentially irrelevant economically; government spending and tax cuts affect the economy in exactly the same way through their impact on aggregate spending; personal savings is bad for economic growth; monetary policy is impotent; and inflation is caused by low unemployment, among other things." I will comment on each assertion one at a time:

1.) "Budget deficits stimulate economic growth." Traditional Keynesian theory argues that when the economy is producing below its capacity, any boost to total spending (whether from budget deficits, increases in consumption, increases in investment or increases in exports) will raise total income by putting previously unemployed resources - people and factories and farms - to work. This was proven in 1935 when the Germans built the Autobahns putting many unemployed workers to work and giving them incomes to spend putting still other people to work. (This illustrated the principle of the multiplier which is at the heart of Keynesian economics. For one example, see Campbell McConnell and Stanley Brue Macroeconomics (17th edition): 158-162. The original multiplier effect was introduced into economic theory in 1931. See R. F. Kahn, "The Relation of Home Investment to Unemployment," Economic Journal (1931): 173-93.) Keynesians, however, have always argued that if the economy is utilizing its labor force and capital stock fully - in other words if we are at "full"employment - then any increase in aggregate spending (including as a result of budget deficits) will not increase economic growth but merely accelerate inflation. Keynesians, therefore, argued in 1967 that it was essential to raise taxes in order to reduce inflationary pressure because the US economy had driven the rate of unemployment down to 3.8% (below the target of 4% which was judged to be "full"employment at that time).

2.) "The means by which government raises money is essentially irrelevant economically" and "Government spending and tax cuts affect the economy in exactly the same way through their impact on aggregate spending" actually are making the same point. Bartlett wants to highlight the fact that because Keynesians focus on aggregate spending, they ignore the incentive effects of the TYPES of taxes imposed on individuals and businesses to raise funds for government spending. Bartlett and other supply siders want to argue that you can raise income by stimulating more effort, savings, investment and innovation and that will produce more rapid economic growth than when you stimulate output by increasing spending. The main way to stimulate more effort, etc. is to cut the marginal tax rate on income. It is true that Keynesians believe that the surefire way to increase output when the economy is producing short of potential is to increase spending. It is also true that Keynesians have believed that the incentive effects of different kind of taxes are probably relatively small. (The period of very rapid growth for the US economy in the post World War II period featured very high marginal tax rates - the period of much lower marginal tax rates featured slower economic growth. For details see Surrender: 150-168.) However, Bartlett's extreme statement would probably not be supported by any Keynesian today.

3.) "Personal savings is bad for economic growth," is one of the worst caricatures of Bartlett's article. This actually refers to a specific problem that Keynes recognized that has come to be called the "paradox of thrift [or savings]." This concept is considered so archaic that current editions of Principles of Macro textbooks fail to refer to it. (For a reference see O. Blanchard, Macroeconomics, 4th Ed. (Upper Saddle River, NJ: Pearson Prentice Hall, 2006]: 60. It is a very simple statement. If the rate of personal savings goes up and private investment does not go up to match that increase in personal savings, then because consumption falls when savings rises the resulting decline in spending will, indeed be "bad for economic growth." Of course if investment goes up to match the increase in savings, then savings are NOT "bad for economic growth." Any textbook in Principles of Economics from previous years when the paradox of thrift/savings was regularly taught would have this presentation. For Bartlett to write it the way he did is fraudulent. The real issue between supply siders and Keynesians is which way does causation go? Do decisions to raise savings create more investment (some supply siders are explicit that this happens) because the rise in savings lowers interest rates which stimulate investment? OR, as Keynesians would argue, do decisions to raise investment create more savings because the rise in investment raises incomes via the multiplier and thus increases savings?

4.) "Monetary policy is impotent," was the original view of some Keynesians during the 1940s and 50s. They looked at the experience of the Great Depression when interest rates were below 1% and decided that as a depression fighting tool, monetary policy was likely to be ineffective. The Central Bank could lower interest rates but couldn't force businesses to borrow and invest. (There was a saying to describe this: "You can lead a horse to water, but you can't make it drink."). In the context of the post World War II period, Keynesians all agreed that manipulation of interest rates was an important component of any coherent policy to stimulate economic growth, reduce unemployment and restrain inflation. Actually, it is the right-wing MONETARIST economists who argued that discretionary changes in monetary policy by the Central Bank would be ineffective - and thus they recommended taking discretion away from the Central Bank and forcing it to raise the supply of money a fixed amount every quarter no matter what. (For details see Surrender: 42-3 and the footnote references). Again, Bartlett is incorrectly characterizing the position of Keynesian economists.

5.) Finally, Bartlett argues that Keynesians believed that "Inflation is caused by low unemployment." Actually, Keynesians believed that inflation occurs when there is an attempt to increase total spending when unemployment is very low (at the "full" employment level). Thus, they recommended wage and price controls during World War II, high taxes during the Korean War, and a tax increase to finance the Vietnam War after 1967. Keynesians also acknowledged, however, that there was such a thing as "cost-push" inflation that could occur even when unemployment was well below the full employment level. For a very Keynesian interpretation of the combination of cost-push inflation and unacceptably high unemployment (called "stagflation") in the 1970s, see Alan Blinder Economic Policy and the Great Stagflation (NY: Academic Press, 1979). See also, Surrender: 51-57. Once again, Bartlett unfairly caricatures Keynesian analysis.

6.) Blaming Keynesian economists for the stagflation of the 1970s is partially correct. Since Keynesian economics' tool for dealing with the economy is to raise or lower spending, it is incapable of combating both inflation and unemployment at the same time. That is why President Richard Nixon imposed wage and price controls in 1971 and why President Gerald Ford flip-flopped from recommending a tax increase to fight inflation in the Fall of 1974 and a tax cut to fight recession in the Winter of 1975. But Keynesian economics didn't cause the problem - it just had no way to simultaneously solve both parts of that problem.

⁷ And what were those correct policies? Here is Bartlett again: "Based on insights derived from the Nobel-winning economists Robert Mundell, Milton Friedman, James Buchanan and Friedrich Hayek, the supply-siders developed a new program based on tight money to stop inflation and cuts in marginal tax rates to stimulate growth." What he left out was the fact that it took a fifteen month recession associated with the tight money policies to "stop inflation" between August of 1981 and January of 1983. Though inflation was already below 4% in 1982, unemployment stayed above 9% through 1983. Supposedly, the tax cuts were supposed to usher in an era of explosive growth but in fact, though the tax cuts finally ended the recession (with help from rising government spending as well), the unemployment rate did not fall below 6% till 1988 and the average rate of growth of the economy from the bottom of the recession in 1983 to the end of the recovery in 1990 was lower than in the recovery between 1974 and 1980 - during the "bad old days" when according to Bartlett, Keynesian economic policy had caused stagflation. In other words, Barlett's assertion is flatly wrong. The policies did not cure stagflation. First they made the economy worse in order to cure the inflation (any depression or prolonged recession will do that) and then they did not permit the economy to grow very fast during the recovery in order to keep inflation "tamed" and thus, unemployment stayed quite high and growth, as a result, was relatively slow.

⁸ This is the theory of supply side economics. Bartlett attempts to fudge the issue by presenting his version of the conclusions of supply side economics: " … incentives matter, … high tax rates are bad for growth, and … inflation is fundamentally a monetary phenomenon." On the first point, the question is - how much do incentives matter? The evidence from the 1980s indicates - not so much. On the second point, the comparative data for the various ups and downs of the economy between 1960 and 2000 indicates how much this assertion has been disproven by historica. experience. Finally, the last point is either a meaningless tautology or false. Inflation occurs as a result of a variety of causes. Once inflation begins, monetary growth occurs with it. In other words, there is a correlation. The argument between monetarists and Keynesians is about the direction of causation.

⁹ In response to the Bartlett OP-ED piece, I submitted the following letter to the Editor of the NY Times. It was not published. I include it here with the references to the data on the bottom:
The predictions of supply side economics were that a cut in marginal individual income tax rates would 1) stimulate individual activity causing an increase in individual income tax revenue over time, 2) stimulate a higher rate of personal savings, and 3) reduce the federal budget deficit over time. The following table shows none of these came true. 1982 was the first year the tax reductions were felt. 1983 was the year the full tax cut had been phased in. 1983-1989 were the years of recovery from the recession. Where is the increased savings? Where is the increased government revenue from the income tax? The budget deficit finally comes down but in 1989 it is no lower than it was in 1980 (it was 2.7% of GDP then).

Year	Individual Income taxes as a percentage of GDP	Personal Savings as a percentage of GDP	Federal Deficit as a percentage of GDP
1982	9.5	8.3	4.0
1983	8.9	6.6	6.0
1984	7.6	8.0	4.8
1985	7.9	6.6	5.1
1986	7.8	6.0	5.0
1987	8.3	5.1	3.2
1988	7.9	5.3	3.1
1989	8.1	5.2	2.8

Sincerely, Michael Meeropol

Every number in the table is from the ECONOMIC REPORT OF THE PRESIDENT, 2004. GDP from p. 284. Federal Income Tax receipts from p. 379, Personal Savings from p. 320, the Federal Budget Deficit as a percentage of GDP from p. 378.

Michael Meeropol is Professor and Chair of the Department of Economics at Western New England College in Springfield, Massachusetts and the author of SURRENDER, HOW THE CLINTON ADMINISTRATION COMPLETED THE REAGAN REVOLUTION.

Back to the Top

Footnotes:

¹ "Military Is Ill-Prepared For Other Conflicts," By Ann Scott Tyson. Washington Post, March 19, 2007; Page A01

² Virtually all economics textbooks introduce the problem and scarcity and choice right at the beginning. See, for example, Campbell R. McConnell and Stanley L. Brue Microeconomics (17th ed): NY: McGraw-Hill Irwin, 2008, pp. 10-13. There they note that if society had only two choices, Pizza and Robots to the extent that the society used all its resources at maximum efficiency, the only way to have more of one good, say, more Robots, would be to give up some of the other good, in this case, Pizza. Sometimes in class we switch the choice to national defense goods and civilian goods. We can try to minimize the amount of civilian goods produced so as to maximize military goods - as the US and other combatants did during World War II - but we cannot produce ONLY military goods (if we tried all the soldiers would starve!) and even if we could that would be a finite amount.

³ Washington Post (same as note 1) unequally.

⁴ I was inspired to do this commentary and ask this question by an article by Chris Floyd: "Hard Truths for Hard Times" posted on the "Global Research" web site on March 21, 2007. http://www.globalresearch.ca/ After going to this web site, type in Chris Floyd in the "search" box about 2/3 of the way down on the left and you will be directed to all of his articles. Floyd presents detailed arguments as to why General Pace's comments and the response from both the members of Congress and the media are much more worrisome than the alleged fact that President Bush's policies have "depleted" our armed forces. If we leave out Afghanistan, Iran, Iraq, and North Korea, that still leaves Syria, Lebanon, Yemen, Somalia, Sudan, Venezuela, Colombia, Philippines, Malaysia, Indonesia, and Pakistan, as areas where according to General Pace it is important that the US military be able to invade. And note, he stated "I probably missed a few…" Do we really believe that the United States will be HARMED if we do not have a military capable of invading and conquering all of these countries? How do most other countries in the world survive with tiny militaries compared to us - or is it only us who are the object of such universal world-wide hatred that we need to be able to conquer virtually every poor country on earth? The logic of global empire truly escapes me.

⁵ For some extremely valuable historical background, see the following works by and about William Appleman Williams: The Tragedy of American Diplomacy, America Confronts a Revolutionary World, 1776-1976, Empire as a Way of Life (1980). For an excellent biography see Edward Rice-Maximim and Paul Buhle, William Appleman Williams: The Tragedy of Empire. (1990).

⁶ Before anyone complains, I want to make it clear that I, too, believe that the Bush Administration's neglect of our military personnel in terms of care and equipment in the field is virtually criminal. That is not my point. My point is, a smaller military with a mission consistent with a democratic republic not a worldwide empire is what we should all prefer. Not only will it cost less for taxpayers - it will also cost less in terms of world wide resentment and hatred for us as a country. And the most important point I would like to make is that we as a society LOSE on balance by attempting to become a world wide empire. True, some individuals and businesses gain dramatically but the average taxpayer pays more, the average citizen (potentially) sacrifices more (in terms of being wounded, killed or having a family member be a casualty) than would be the case if we remained true to our ideals as a republic and eschewed Empire.

Michael Meeropol is Professor and Chair of the Department of Economics at Western New England College in Springfield, Massachusetts and the author of SURRENDER, HOW THE CLINTON ADMINISTRATION COMPLETED THE REAGAN REVOLUTION.

Back to the Top