Payroll tax - aka - FICA Tax or the Federal Insurance Contribution Tax - is a tax that is assessed against our gross paycheck amounts.  The current rate is 15.30% - 7.65% paid by employer and 7.65% paid by worker.  The tax collected goes into the Social Security Trust Fund and Medicare Trust Fund.

Obama Administration is floating this idea of payroll tax (temporary) holiday as a way to stimulate the economy (but don’t mention the word ‘stimulus’ - the Administration doesn’t like the word now).  Early indications are that this payroll tax holiday will only apply to employers tax obligation and apply only to new workers.  If this is the case, this will be another weak policy proposal.

Businesses are not hiring because there is no current demand for product and services and they don’t have confidence that there will be future demand for product and services.  Giving a payroll tax to employers for new hires only does very little to address this problem.  We need policies to address the lack of demand issue that businesses face. 

A correct payroll tax holiday would be for both the employer and CURRENT workers and new workers.  This would provide huge stimulus to economy.  This type of payroll tax holiday is putting cash in people’s pockets immediately - every pay period - and businesses get a tax savings every pay period that could be invested in new workers or equipment. 

Many people, including Prof. Jaime Galbraith and Warren Mosler, have been proposing a FULL payroll tax holiday for a while now.  Obama Administration should be open to listening to people who have been warning since 2009 that its stimulus policy was not strong enough.  It would do everyone some good if they listened. 

Now, there are those who are worried that this could hurt Social Security Trust Fund.  I can’t speak for the Obama Administration’s potential proposal but Galbraith’s and Mosler’s proposal would require the Treasury Department to credit the Trust Fund in the amount of payroll tax lost by holiday.  This is something that Treasury Department is use to doing.

Good luck. 

This is exactly what Prof. Krugman said:

The question is, why do such people command such attention? As I’ve pointed out before, the same people who denied the existence of a housing bubble also told investors that budget deficits would send interest rates soaring; in other words, anyone who believed these people in the past, and acted on that belief, has lost a lot of money.

Yes they have lost a lot money. They have lost trillions including money managers who manage retirement savings of millions of working families.  Why?

Prof. Krugman maintains a certain level of professional decorum and diplomacy which I do not share with the professor.  Those who denied the existence of a housing bubble and are now saying fiscal stimulus can’t and don’t work (despite real evidence to contrary) share an adherence to defunct neo-liberal economic theories .  Neo-liberalism and corresponding economic theories come in many forms the most popular are monetarism and “Trickle Down Economics” that Repuglican Party espouses. 

Some the more common points of neo-liberal economic theories include the following:

1) Government spending is bad.  But tax cuts for wealthy are great.  They advocate the elimination of government programs such as medicare, social security and education spending but of course most are fine with corporate subsidies and tax breaks and loopholes.  They talk about stuff like ‘crowding out’ where government spending leads to crowding out of private investment.  However, despite the nice sounding theories and the sound bites (based on flawed theory) that Repuglican Party recite, there is NO empirical evidence to support the point that government spending is bad or ineffective.

2) ‘Free markets’ are great and all powerful.  Don’t interfere with markets.  This flawed notion ignores that fact that markets are created by people and people participate in markets.  So markets will have flaws and at times, like humans, very irrational.  One only has to look at are current global financial crisis to figure that out.

3) De-regulation - reduce government regulation of everything that could diminish profits, including protecting the environment and safety on the job.  This flawed point totally ignores the total cost of NOT regulating an industry.  Most recent examples (and there are many) of de-regulations damaging effects include: Global financial crisis, mine accident in West Virginia that killed 29 miners, and oil spill in Gulf of Mexico that killed 11 rig workers and caused environmental (possibly long-term) and economic damage to the Gulf region.

4) Privatization - sell public assets or turn over government functions to private investors.  We see this now with Repuglican Party’s push to private Social Security.  Idea is that private sector can do thing cheaper and more efficient than government.  Guess what - not always the case.  Just take a look at the global financial crisis caused by the private sector - Wall Street.  And what about Halliburton’s and its subsidiaries’ performances in Iraq - that should be criminal. 

It boils down to this - this flawed neo-liberal economics that these imbeciles espouse favors top incomes, executives, big shareholders and the oligarchy.  That is why these imbeciles command attention.  Traditional (corporate owned) media doesn’t want people to know that the dominant economic consensus in Washington - a neo-liberal economic consensus - is flawed.  The money train would come to an end.  At least I would hope so. 

Good luck. 

Last Friday, the Commerce Department revised its estimate for 2010 2nd quarter real GDP to 1.6% increase (first release of 2nd quarter GDP was 2.4%).  Real GDP for 1st quarter GDP was 3.7% increase. Here is a graphical representation of it:

Source: NYTimes.com

According to the Commerce Department the reason for revision:

The deceleration in real GDP in the second quarter primarily reflected a sharp acceleration in imports and a sharp deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an acceleration in nonresidential fixed investment, an upturn in state and local government spending, and an acceleration in federal government spending.

Our economy is made up of households, businesses, state and local governments and federal governments.  And what is happening:

1) Households - are still loaded with debt and are paying that debt off or can’t spend because someone is unemployed.

2) Businesses - are hording cash and NOT hiring or investing because there is very low demand for product and services.  Why very low demand?  Look at #1 right above.

3) State and local governments - since they are seriously revenue constrained (most can’t deficit spend) they are both cutting spending and raising taxes.  Not a good thing in a recession. It will be interesting to see if up turn in 2nd quarter spending will continue.

4) Federal government - well, well.  Federal government is the only entity listed here that can deficit spend without risk of insolvency.  Federal government is the only entity that can break this downward spiral. As the graph above shows even the weak 2009 stimulus did something positive.

In order to break out of this downward spiral we need a more effective stimulus.  A more effective stimulus means one that targets FULL EMPLOYMENT with more job creation programs such as a direct jobs program and a Job Guarantee and investments in green technology, infrastructure, education and health care.  Federal government is the only entity that is in position to do something to prevent this downward spiral.

Good luck. 

On November 4, 2008, I was an attorney/poll watcher for the Obama campaign in Milwaukee, Wisconsin.  Turnout was great.  I witnessed the most incredible sight - an older African-American woman (I didn’t ask her age) needed directions to the polling place.  I obliged but during our very brief encounter she shared with me that nothing - not even her aching body - was going to stop her from voting in that historic election.  Later that evening, when it had became clear that Barack Obama was going to win, I admit, I broke down and cried tears of joy.  Boy, a lot has changed from that glorious day.  Sadly, not for the better.

TEAM OBAMA

Disturbing signs started to emerge shortly after November 4.  Rumors and later confirmation that now President-elect Obama was choosing Rahm Emanuel for his Chief of Staff.  I rationalized this appointment - maybe its good to have a ‘veteran’ of congress and White House for the huge battles ahead.  But the disturbing signs continued with the appointment of Larry Summers as his chief economic adviser and Tim Geithner as Treasury Secretary (what a fiasco that was - remember the tax issue). 

Now his brain trust regarding economic and political issues consisted of Clinton retreads.  Emanuel, Summers and Geithner were part of an administration and philosophy that contributed to the financial crisis and the Great Recession.  I rationalized some more - Obama was not going to be like Clinton.

WALL STREET BAILOUT

Obama Administration, despite its tough rhetoric, decided not to hold Wall Street and financial oligarchy accountable for its actions that contributed to the financial crisis. It did not attach any ‘strings’ to the $700 billion+ bailout (passed under Bush) nor did it push for transparency on how Wall Street firms used the money.  Its response to the mortgage crisis with its alphabet soup of new programs has been weak to down right cruel to homeowners.  I continued to rationalize.

2009 ECONOMIC STIMULUS

Obama Administration decided to first compromise with itself and then compromise further to get votes in congress for its 2009 economic stimulus.  The result was a weak and poorly structured stimulus.  A New Yorker Magazine article later reported on the internal debate of Obama’s economic team regarding the stimulus.  The article reported that Christina Romer, another chief economic adviser, was advocating a much bigger stimulus but she was voted down by Summers and Emanuel.  I thought - if they knew they had one shot at the stimulus why not go big - heck, Obama had most of the country behind him.  I became nervous but rationalized some more.

HEALTH CARE REFORM

After spending months cutting backroom deals with Big Pharma and its wishy washy support for the public option, I knew the Clinton retreads were winning the internal battles in the White House and there was NOT going to be any change.  In the end what we got was a mandate (which Candidate Obama campaigned against) to an inferior product - health insurance policy - with NO public option (remember when Candidate Obama said public option was needed “to keep insurance companies honest”).  Sure, insurance companies will be required to cover people with pre-existing conditions but at what cost?  There was no cap on insurance premium increases.

FINANCIAL REGULATORY REFORM

Let me say upfront that I don’t believe President Obama provided the necessary leadership, at least publicly, on financial regulatory reform.  This lack of leadership provided pro-Wall Street Democrats and Repuglicans an opportunity to weaken the final bill.  Obama Administration did offer a comprehensive proposal regarding financial regulatory reform but was this for show and how much did it really fight for it?  Sure it proposed the Volcker Rule but again, how hard did it fight for its passage?  The only redeeming provision of financial regulatory reform was the creation of the Consumer Financial Protection Bureau.  Financial regulatory reform failed to address the problems that caused the financial crisis including preserving ‘too big to fail’ financial conglomerates.

CATFOOD COMMISSION

President Obama decided, after Democratic Congressional leadership rejected the idea, to create the ‘bipartisan’ National Commission on Fiscal Responsibility and Reform.  This commission was “charged with identifying policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run”.  To date, it appears from its public statements and public hearing (at least the ones that are public) that it’s focusing on cutting Social Security - hence the name “Catfood Commision” because of the commission’s intent on cutting Social Security and forcing Social Security recipients to eat catfood.  Early indications are that the Catfood Commission will propose increasing the full retirement age to 70.  This is clearly a benefit cut.

There is nothing wrong with Social Security - it is NOT broken.  And it definitely did not contribute to the budget deficit nor will it be a problem in the future.  But the Obama Administration and Democrats are weak and feel compelled to do ‘something’ about the deficit so they pick Social Security.  The deficit will still be with us for many generations, regardless of any proposed cuts to Social Security, and that is not necessarily a bad thing.

LINE IN THE SAND

I am just one person but this one person is taking a stand:

If the Obama Administration proposes any cuts to Social Security, I will work hard to make sure that Barack Obama is a one-term president

At some point we have to draw a line in the sand and say no more!

Good luck. 

Our modern monetary economy is based on a fiat currency system where the federal government has a monopoly over the issuance of the dollar.  It can issue checks or electronically credit bank accounts without fear of running out money or bytes of information - IT CREATES ‘IT’ (last IT being US Dollar).  It creates it out of thin air or bytes of information.  There is NO intrinsic value to the dollar.  The one thing supporting the dollar is the requirement that taxes and other financial transaction with federal government must be done with U.S. dollars (and not gold or chickens). 

A sovereign country that issues its own currency - like the U.S. - is NEVER constrained by revenue.  Why?  Because IT CREATES ‘IT’.  There are other constraints on government spending such as inflation or supply of real resources to purchase. 

Consider this - when was the last time you heard the federal government say: “we are running out of money for war in Afghanistan we better stop.”  Or how about the Wall Street bail out - do you think that someone Treasury Department ever stopped to check if there was enough tax revenue to cover the trillions of dollars that went to Wall Street.

The President issues a budget for the upcoming fiscal year which reflects his/her budget priorities (including tax plan) to congress.  The House Appropriations Committee and Senate Budget Committee review it, discuss it, amend it and eventually approve it.  Full congress votes on it and sends it back to President for his/her signature or veto.  That’s it. It is NEVER revisited again.  This is very different from state and local governments who are currently struggling to fund their budgets with shrinking revenues and as a result are forced to amend their budgets during the budget year.  Why the difference?  You got it - federal government CREATES ‘IT’.

You, I, most state and local governments and, yes, businesses cannot spend without having revenue/income to support it.  Federal government is NOT like us.  Warren Mosler, independent candidate for U.S. Senate for Connecticut, explains it this way (from his book “Seven Deadly Innocent Frauds of Economic Policy”):

Your team kicks a field goal and on the scoreboard, the score changes from, say, 7 points to 10 points. Does anyone wonder where the stadium got those three points? Of course not! Or you knock down 5 pins at the bowling alley and your score goes from 10 to 15. Do you worry about where the bowling alley got those points? Do you think all bowling alleys and football stadiums should have a reserve of points’ in a “lock box” to make sure you can get the points you have scored? Of course not! And if the bowling alley discovers you “foot faulted” and lowers your back down by 5 points, does the bowling alley now have more score to give out? Of course not!

We all know how data entry works, but somehow this has gotten turned upside down and backwards by our politicians, media, and, most all, the prominent mainstream economists. Just keep this in mind as a starting point: The federal government doesn’t ever “have” or “not have” any dollars. It’s just like the stadium, which doesn’t “have” or “not have” a hoard of points to give out. When it comes to the dollar, our government, working through its Federal agencies, the Federal Reserve Bank and the U.S. Treasury Department, is the score keeper. (And it also makes the rules!)

You now have the operational answer to the question: “How are we going to pay for it?” And the answer is: the same way government pays for anything, it changes the numbers in our bank accounts.

If federal government CREATES ‘IT’ or is just a score keeper the bottom line is the same - federal government doesn’t need taxes or even federal debt to fund JACK. 

So why does it tax or issue debt?  First, taxes, again from Warren Mosler:

Taxes create an ongoing need in the economy to get dollars, and therefore an ongoing need for people to sell their goods and services and labor to get dollars. With tax liabilities in place, the government can buy things with its otherwise-worthless dollars, because someone needs the dollars to pay taxes.

U.S. dollar is a tax-driven currency.  The need to pay taxes and conduct other transaction with the federal government creates the demand for dollars. The effect of taxes in our modern monetary system is NOT to fund government spending but to extract money or aggregate demand from our economy - yes, to slow the economy down.  A problem arises when government spending doesn’t match the level of taxation (or the extraction of money/aggregate demand from economy) this in effect can cause a drag on the economy and possibly a recession.

As for federal debt, the reason why government issues it is not very obvious - but again, federal debt doesn’t fund JACK.  Government spending is not constrained by revenue or the need for debt financing.  Current budget deficit is about $1.3 trillion and the amount of federal debt outstanding is close to $13 trillion.  There is something more going on then funding spending or deficit but what? 

There are two possible explanations for this: one is technical and other is ideological.  Hold on tight (from Prof. Bill Mitchell):

In a technical sense, when there are deficits bank reserves are growing and banks will try to get rid of these reserves by lending them on the overnight interbank market. The competition for funds drives the interest rate down to whatever support rate the central bank pays on overnight reserves. The problem is that the banks cannot eliminate the system-wide reserve surplus created by the deficits. If the system is left alone the central bank will lose control of its target interest rate.

As noted above there are two things the government can do to retain control over its monetary policy stance. It can offer an interest-bearing asset in place of the reserves – that is, sell the banks government bonds (that is, “borrow”) or it can pay the target interest rate on overnight reserves. The second option is currently being used in the US for example.

The technical reason for issuance of federal debt is to manage short-term interest rates.  As for the ideological reason:

...governments borrow much more than is needed to fulfill the liquidity management function of the central bank. So then we have to understand the ideological nature of government borrow and its intrinsic lack of utility other than to provide corporate welfare to lazy bond investors.

The overwhelming sentiment of the business community and the conservative nature of our political system (and its participants) leads to a largely anti-government swell of opinion which is continually reinforced by the media – the “debt-deficit hysterics”. The neo-liberal expression of this over the last three decades has overwhelmingly imposed massive political restrictions on the ability of the government to use its fiscal policy powers under a fiat monetary system to ensure we have full employment.

We now accept very high unemployment and underemployment rates as a more or less permanent feature of our economic lives because of the political constraints imposed on government.

So while there was a major shift in history after the collapse of Bretton Woods, the logic that applied in the fixed exchange rate-convertibility days is still being imposed despite the economic fact that it does not apply in the fiat currency era.

As a result, governments imposes voluntary constraints on themselves for political reasons? The neo-liberal macroeconomic reasoning that you read about in the newspapers is really the sort of reasoning that prevailed in the days prior to fiat currency. The shift in history renders most of the textbook economics outdated and wrong, in terms of how they depict the operations of the fiat monetary system.

Professor Mitchell offers up two ideological reasons to issue federal debt: 1) it’s basically a corporate subsidy to Wall Street and 2) the dominant economic consensus or theories (which are very conservative or neo-liberal) are based on a monetary system that doesn’t exist today.  With fiat currency system the federal government doesn’t have to issue debt - it doesn’t fund JACK.

Professor Mitchell is on to something with the dominant pro-Wall Street and neo-liberal economic consensus.  The reason why we won’t learn about how our modern monetary system really works in mainstream economic classes or hear in traditional media about it is because there is a LOT at stake - both in terms of careers and money.  What better reasons to keep us in the dark!

Further reading:

**Seven Deadly Innocent Frauds
**Elephants Everywhere

As mentioned above, there is only ONE person currently in congress or a candidate for congress that truly understands our modern monetary economy.  Warren Mosler is that one person who can bring this understanding to Washington.  He has a plan to address our current economic situation and he is running as an independent.  As we know all to well, Senate campaigns are very expensive and any little bit helps.  I encourage you to check out his website (and even ask him a question via email).  If you agree with what he has to say, want someone in Washington who understands our Modern Monetary Economy and can spare several bucks - please contribute.  If contributions are not your thing but want to volunteer - here is the link for that.

Thanks and Good Luck.

Carl Paladino, a wealthy real estate developer and a favorite tea party activists, proposes transforming some NY prisons into dormitories for welfare recipients (including unemployed) where they could work in state-sponsored jobs, get employment training and take lessons in “personal hygiene.”  This proposal has some good points but why isolate or house welfare recipients or even the unemployed in former prisons.  Is it a matter of out of sight out of mind?  Or is it that the real estate developer in him is thinking of a land grab once poor people are in this form of concentration camp?  And I am sure he calls himself a Christian.  BTW, he says this is all voluntary.

There is something positive in this otherwise very extreme proposal.  The idea of offering a job to ANYONE ready and willing to work for a certain wage paid by federal government is a good one.  This idea is the basis for a Job Guarantee Program.  But with a Job Guarantee you don’t have to house poor people in concentration camps and it’s offered to any American not just poor Americans. 

A Job Guarantee would include a package of benefits (of course subject to congressional approval) such as health care, childcare, payment of social security taxes, and usual vacations and sick leave.  It would also include job training and other life skills training such financial literacy (Paladino’s ‘personal hygiene’ lessons was just a racist statement).  The beauty of a Job Guarantee is that it sets up competition for labor by creating a ‘buffer stock’ of jobs.  If private sector wanted to hire someone then they would have to offer a wage and benefit package at least as good as the Job Guarantee Program.  Now, that’s putting capitalism to work for workers. 

Further reading on Job Guarantee Program:

* Job Guarantee
* When is a job guarantee a Job Guarantee?

Good luck. 

Obama Administration has set a goal of doubling exports in five years and creating 2,000,000 new jobs.  How do they propose to do that - not by more trade agreements but by more “promotion” and more rigorous enforcement of trade rules.  Sorry, that’s not going to cut it.  A slew of more “free trade” agreements could possibly double exports but it certainly won’t create that many jobs.

As of June 2010, exports were $150,451,000,000 and imports were $200,345,000,000.

U.S. and UK are pushing hard for export-led economic growth.  There are many problems with this focus.  First, not every country can be a ‘net exporter’ (meaning exports more then imports) that’s the nature of the balance of trade and being a ‘net exporter’ is what it will take to have export-led growth.  Germany, Japan and China are examples of larger economies that are export driven.  U.S. has not been a ‘net exporter’ (on a consistent basis) since the 1960’s.  Second, it will take some rather drastic changes in policy and possibly living standards for Middle and Working Class Americans.  The living standard issue is what Mike Norman was talking about.  In order to compete with other exporting countries such as China, other Asian countries and Latin America labor costs (wages) and working conditions would have to be significantly lowered.  Third, we have a floating rate fiat currency system meaning our exchange rate is allowed to ‘float’ against other currencies - there is no active intervention or other means to manipulate the dollar’s value by the Fed or Treasury Department.  The same cannot be said about other ‘net exporters’/trading partners - specifically China and possibly Japan if its export position is threatened. 

Imports are suppose to be a benefit to a country.  This seems contrary to reality but the idea is that producing real goods and services to export for someone else to consume provides no economic benefit, UNLESS you get to import and consume the real goods and services others produce in return.  That’s not happening.  The real wealth of a nation is all it produces and keeps for itself, plus all it imports, minus what it must export.

The problem is NOT trade or imports.  The problem is globalization and economic policies that have prevented us from keeping what we produce at home.  Why?  Because, globalization and economic policies have worked to suppress wage growth of U.S. workers so that workers cannot afford to keep what it produces plus imports. 

Instead of focusing on export policies that are even too weak to increase exports, the Obama Administration should be developing and implementing policies that encourage wage growth and increase domestic demand.  One place to start is with Job Guarantee Program (which includes re-training).  With a floating exchange rate (which we have) and a Job Guarantee, we can truly capitalize on the benefits of imports and stop stressing about “free trade”. 

Good luck.

Suggested Reading:

*7 Deadly Innocent Frauds By Warren Mosler
*When Exports are a Cost and Imports are a Benefit: The Conditions Under Which Free Trade is Beneficial By Stephanie A. Bell and John F. Henry

Stephen A. Schwarzman, chairman and CEO of Blackstone Group and a member of the financial oligarchy, has broken the silence by comparing President Obama’s plan to raise the tax on “carried interest” to - in his own words:

“It’s like when Hitler invaded Poland in 1939.”

Get the Hitler reference - you know the same sort of crap that right wingnuts and teabaggers are saying about President Obama.  Great messaging.

So what is “carried interest”?  Well, its a form of compensation that private equity fund managers receive from its investors.  Typically, private equity fund managers will receive a certain percentage of profits of an investment fund, say 15%, without having to contribute 15% of investment capital.  Currently, this carried interest is treated and taxed as a capital gain.  Capital gains have much lower tax rates - 15% - than ordinary income tax.  Did I mention that is was a form of compensation - pay for services type of compensation?  It’s a nice tax benefit for private equity fund mangers. 

Financial oligarchy is fighting hard to keep its billions while the rest of us deal with deficit hysteria and cuts to public services and public education - stuff that matters to Working Class Americans.  The oligarchy are pulling out all the stops.  Besides comparing the increase in carried interest tax to Hitler’s invasion of Poland, they have called it a ‘job killer tax’.  Oops, I guess I missed where private equity funds were creating so many jobs in the first place. 

Private equity industry is really not providing a social or even much of an economic benefit to warrant such a tax break.  If the financial oligarchy wants a ‘class war’ consider this - they have much more to lose than the rest of us.  At some point the oppressed can’t be harmed anymore and when that happens look out. 

BTW, the Democratic controlled congress recently killed a proposal to raise the carried interest tax but this proposal will probably be resurrected and it should be.

Suggest reading:

Compromise Provision to Narrow “Carried Interest” Tax Loophole Should Not Be Weakened Further

Good luck. 

“The definition of success—To laugh much; to win respect of intelligent persons and the affections of children; to earn the approbation of honest critics and endure the betrayal of false friends; to appreciate beauty; to find the best in others; to give one’s self; to leave the world a little better, whether by a healthy child, a garden patch, or a redeemed social condition.; to have played and laughed with enthusiasm, and sung with exultation; to know even one life has breathed easier because you have lived—this is to have succeeded.”

- Ralph Waldo Emerson

Good luck. 

By Bryce Covert

A few weeks ago I wrote a post about my personal decision to stay away from credit cards and my struggle with a society that is rigged in favor of them. The post didn’t advocate getting rid of credit cards; it advocated getting rid of a credit score system and other incentives that make it difficult not to have one.

The comments section for the post on reddit had a variety of opinions in response, both positive and negative. But many of them used the words “dumb,” “idiot,” “lazy,” “stupid.” They used words such as “responsibility” and “discipline” and “self-control.” The crux of these arguments is that those who get into heavy credit card debt are financially illiterate (or just plain naive). This viewpoint rests the blame of soaring American credit card debt on those who get the cards, rather than the companies who issue them. There is of course a grain of truth in this — many people who have credit card debt spend beyond their means. And there are ways to be savvy about credit cards and not run up a balance.

But that is not what a credit card company wants, and you may in fact find yourself rejected from getting a card if you are that responsible. You are far outside the sweet spot, or what Ronald J. Mann, a professor of law at UT Austin, calls the “sweat box”:  “the spectrum from those who carry balances, to those who routinely make minimum payments, to those who miss payments altogether… [where] the interest rates that borrowers pay…greatly exceed the cost of the lender’s funds.” Mann wrote a paper in 2006, right after Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act. Proponents of the act relied heavily on a moral argument: that it is shameful Americans could ‘easily’ walk away from their debt by filing for bankruptcy. Those pushing the reforms were concerned that consumers used bankruptcy as a convenient part of financial planning, not as a last resort. Thus the rules for filing had to be tightened.

But Mann smelled something fishy: the credit card companies had lobbied heavily and expensively with this bill. But the bill was unlikely to return enough income through increased bankruptcy payouts to justify the expense of lobbying. In fact, it had none of the effects you might think credit card companies would want: deterring risky borrowing, increasing bankruptcy payouts, or lowing bankruptcy filing rates. So why did they do it? It turns out that the major outcome of this bill, and all that lobbying, was to delay consumers from filing for bankruptcy. The credit card companies weren’t worried about losing money when a customer defaulted; they were worried that too many defaults too early led to lower profits. This is where credit card companies make their money. Not off of customers who are so irresponsible as to default right away, not off of customers who are so responsible that they pay their bills on time. Rather, off of those who are just bad enough to drag out their balances for a long period of time. And that’s where they want to keep you — in the sweat box.

Credit cards have evolved along the same path as mortgages. As Elizabeth Warren, tireless consumer advocate, puts it: “The financial industry has perfected the art of offering mortgages, credit cards, and check-overdrafts laden with hidden terms that obscure price and risk.” Need proof? The average credit card contract has bloated up to 30 pages, from a page and a half in the early 1980s. Issuers advertise a single interest rate and then bury the real details in the contract. (It’s no coincidence that the landmark Marquette Nat. Bank of Minneapolis v. First of Omaha Service Corp. case was decided in 1978, which said that states could no longer regulate interest rates on nationally-chartered banks, leading them to easily find the laxest state laws and regulators.) Similarly, to quote Elizabeth Warren again, “More than half of the families that ended up with high-priced, high-risk subprime mortgages would have qualified for safer, cheaper prime loans.” Wonder why that is. Maybe all those families were interested in high-stakes gambling with their houses? “A recent Federal Trade Commission survey found that many consumers do not understand, or can even indentify, key mortgage terms.” Hmm, maybe not.

The responses to my credit card post mimic the response to the subprime mortgage catastrophe, which placed the blame on homeowners who got mortgages without the adequate funds to pay them back. Again, there is truth in this viewpoint. It is true that many people with little to no income bought houses that they couldn’t afford. But why were so many of these mortgages given out? Who gave them? And what were their motives?

Gary Rivlin may answer some of these questions in the chapter “The Birth of the Predatory Lender” in his book Broke USA. He writes about the early 1990s, when nonbank lenders started to realize that there were profits to be made from low-income neighborhoods. They preyed upon the poor, as “the typical customer…didn’t feel ripped off paying interest rates of 20% or more but instead felt grateful that finally, someone was saying yes.” A lawyer working to help some of these customers climb out of their debt “suspected that the lender was more interested in seizing homes through judgments of default than in accruing steady profits through regular monthly payments.” And indeed, Fleet, one of the first large banks get into the business, “lost $17,000 per home on the 101 homes it sold at a loss, [but] it made an average of $32,000 per home on 194 homes.” Again the story of relaxed regulation in the 80s comes to play: the state caps on interest rates banks could charge on mortgages were barred in 1980. Two years later, Reagan went further and gave lenders the ability to sell creative home loans, including balloon mortgages and adjustable-rate mortgages. A whole new lingo emerged: “packing” a loan, in which a salesperson was able to load it up with points and fees and credit insurance; “flipping,” in which a broker could convince customers to refinance loans again and again, each time adding more points and fees; and all of these practices falling under “equity stripping,” in which banks siphoned off the equity customers had in their homes. The cards were stacked against mortgage customers so that banks could profit. By the turn of this century, “Increasingly, mainstream banks were revving up profits by purchasing or starting a subprime subsidiary,” Rivlin recalls. And we all know how that turned out.

It’s tantalizingly easy to place the blame for huge problems like credit card debt and subprime mortgages on individual consumers. The solution to that is for them to “just man up,” as one of the reddit readers suggested. And as I said above, individual responsibility will always be a factor when it comes to these issues. In Elizabeth Warren’s words: “Nothing will ever replace the role of personal responsibility. The FDA cannot prevent drug overdoses, and the CFPA cannot stop overspending. Instead, creating safer marketplaces is about making certain that the products themselves don’t become the source of trouble.” And therein lies the rub. It is far more difficult to think and talk about the system in which so many of these decisions are taking place.

The flood of comments and reactions to my piece heartens me, however, for two reasons. One is that people who had similar stories to mine came out of the woodworks. Friends, family, coworkers, strangers all started telling me how they either stayed away from credit cards for similar reasons or got into debt early on, found a way out, and then stayed away. The second heartening thing is that clearly this is something that people care about. President Obama just signed sweeping financial regulation into law, and whether or not it’s strong enough to prevent another crisis, the new Consumer Financial Protection Bureau promises to right many of the wrongs listed above. Contracts will become clearer. Regulators will do a better job of regulating these products. Consumers will actually be able to compare credit products, because they will really understand them, and innovation and competition can come back to the market. But none of this will deal with the problem my original post addressed, which is the way our society tethers its people to debt products. If so many people care, so many people wish to be credit card-free, maybe this can change too.

Bryce Covert is Assistant Editor at New Deal 2.0.

Federal Open Market Committee of the Federal Reserve Bank announced on Tuesday that they were basically doing nothing to help the economy (despite a legal obligation to do something).  Don’t be fooled the Fed is NOT “printing more money”.  Quite the contrary - all they are doing is changing the make-up of its balance sheet - moving from mortgage backed securities to treasury securities.  It’s a punt on further action.

Here we are August of 2010 - the official start of the Great Recession was December 2007.  As of July, the economy is still shedding jobs - total non-farm payroll employment declined by 131,000.  We have 14.6 million Americans unemployed.  We have a labor underutilization rate (broadest measure of unemployment/underemployment) of 16.5% and holding steady.  Basically, we have a private sector not hiring because a lack of demand for product and services.

What do we get out of policymakers in DC?  A lack of courage (including the Obama Administration) and demented form of deficit hysteria.  It’s not really deficit hysteria because the Repuglican Party and Wall Street Democrats are pushing hard for continuation of Bush tax cuts for top income brackets.  This, in fact, would increase the deficit.  These huge tax cuts for top incomes have already shown that they do very little for improving the economy or the job situation. 

With the Federal Reserve punting and the private sector doing nothing, we need another stimulus.  But not just any stimulus.  We need a significant and better structured stimulus that focuses on job creation and should have the objective of achieving FULL EMPLOYMENT.  Why not offer a direct jobs program and a Jobs Guarantee.  Why not more significant investment in infrastructure, green technology and education. 

The choices are simple - suffer through a ‘new normal’ of low economic growth and high unemployment and don’t forget all the social costs related to high unemployment or a more significant and better designed fiscal stimulus that focuses on job creation and FULL EMPLOYMENT. 

Good luck.

Suggested Reading:

They’re just sticking a finger in the air and guessing
When facts get in the way of the story

Here is the original speech by Dr. King where he talked about Revolution of Values.  Little has changed from Dr. King’s speech in 1967.  What has changed is the magnitude of the challenges we face.

Economically, we are seeing the creation of a ‘new normal’ of low economic growth and high unemployment.  We are facing the destruction of working and middle class Americans.  We are seeing Wall Street behemoths continuing on their path of destruction unfazed by new financial regulations.  We are faced with a choice of changing this path - a Revolution - or face a country with a caste system - where economic mobility is non-existent and the divisions between the haves and have not will never . 

In world affairs, we are tied up in two wars which will require more young people and innocent civilians to die and more financial resources.  Despite what we hear from the Obama Administration regarding our pull out of combat troops from Iraq, we will still have significant number of troops and financial resources ‘spent’ in Iraq for a very long time.  One word sums up Afghanistan - quagmire.  How many more young people and innocent civilians must die for a war that is not ‘winnable’?  How many more trillions will be spent?

Our environment - our planet - keeps sending us messages that all is not well.  But we choose to ignore these messages.  We continue to pursue and consume unsustainable and destructive energy resources with reckless abandon. 

The challenges we face seem much greater in magnitude then when Dr. King gave his speech in 1967.  Dr. King’s words and wisdom are just as applicable today as they were back in 1967.  Hopefully, this time we will listen and take meaningful action.  We need a Revolution of Vision, Values and Priorities. 

Good luck. 

By Hilary Doe

Millennials have the potential to dramatically reframe the Social Security conversation. There is a misconception that this largest-ever generation of Americans does not care about Social Security and the outcome of potential reforms. Despite the fact that the Social Security debate revolves around the alleged burden that the national debt places on “the next generation,” young people are rarely asked to contribute to these conversations.

Millennials are targeted by well-financed groups who seek to narrowly frame American’s challenges around fiscal responsibility. However, those outreach efforts often take the form of disempowering and fear-provoking lectures likening the deficit to student loan debt and Social Security funding to a missing slice of the group’s pizza dinner. It won’t be there for them anyway — so why keep paying into it? This model essentially silences the Millennial voice and prevents young people from weighing in.

To combat these arguments and really engage young people in strengthening Social Security, we must engage them in a way that is unique to the characteristics of our generation. Millennials are innovative, entrepreneurial, hyper-informed and extremely engaged. Millennials don’t want to pick from two predetermined choices — they want to contribute their ideas and engage substantively with issues. We have grown up expressing ourselves through technology and commenting on each other’s ideas, not looking at static pages. Therefore, when Roosevelt Campus Network members demanded that we provide them with an opportunity to make their voices heard on these issues, we created a forum for them to design, articulate, and begin to realize their vision for the future. We’re calling the program Think 2040. Think 2040 allows Millennials to do what they do best: be innovative and creative to re-imagine America.

Over the course of 2010, Think 2040 will challenge young people to design the America that they would like to inherit through a series of in-person and online conversations. Participants from across the country will delineate the values that they want American policy to reflect, identify the most crucial outcomes and policy priorities, and, as the year progresses, offer recommendations for policy steps we must take in order to realize the shared vision for the future that we, as Millennials, have designed together.

During the first set of Think 2040 conversations, I learned a lot about my generation and specifically how young people feel about Social Security. It quickly became clear that young people think of Social Security as an essential part of the fabric of American society — woven into our culture and inextricably linked to other policy outcomes that young people desire. Social Security isn’t necessarily on every Millennial’s mind, but when discussing America’s future, Social Security and a strengthened social safety net play an important role.

Specifically, in the Think 2040 conversations that we’ve had so far, young people consistently address two major themes that underscore the importance of social security to them:

The first is community empowerment and a sense of community responsibility. These were the top values cited by a large percentage of the groups that we’ve engaged thus far. Social Security and other major programs are considered by community-oriented Millennials to be a form of community expression — a shared initiative that we’ve taken on together to raise up those with the greatest need and keep the community as a whole at its strongest. We are socially empathetic, and this value expresses that sentiment. Millennials have had shared experiences that underscore the importance of supporting one another in order to prosper as a whole. We’ve lived through two recessions, Hurricane Katrina, 9/11, and we’re all conscious of the fact that we’re vulnerable. Our 8,000 active members across the country are acutely aware that the recent recession has hurt them deeply, personally, and with more sweeping long-term implications than it has affected almost any other demographic. Our generation lacks healthcare coverage, consistently ranks amongst the hardest hit by unemployment, and carries huge debt, with 20% of us owing more than ten thousand dollars. Millennials are conscious of the economic situation that they’re walking into. They can feel it. It hurts. Community empowerment and responsibility are values unique to the generation that have grown out of this experience.

The second theme is a shared spirit of entrepreneurialism and a desire to innovate. As more and more young people agree that they’d like to work for themselves, take advantage of a mobile work life, engage in business through an online community, become social entrepreneurs, grow a community-focused business, or advance their field through a job in the knowledge-based or green economy, Think 2040 participants noted the importance of feeling free to pursue their innovative ideas. Social Security provides the safety net necessary for young people across the country to take these risks and follow their dreams.

In the current economic climate, these entrepreneurial risks — however valuable to society and important to our recovery — are harder to take. Parents must work one, two, or three jobs to support their children. When they retire, they’re faced with the reality of paying for a life they can no longer afford while their children are unable to help them. While worker productivity goes up, and corporate profits skyrocket, real wages have stayed the same or even declined. And, most immediately pressing to Millennials, every recent college graduate is painfully aware that that they will graduate with loans, debt, and a potentially long bout of unemployment. College tuition has continued to rise, and students are shouldered with heavy debt before they even get their first job — if they can find one. Young people deserve the right to pursue their American Dream. But they need the promise of security to do it. Social Security provides that freedom.

In the words of one Roosevelt member from American University, instead of a safety net, we need a social trampoline — a trampoline that doesn’t just catch people near the ground, but bounces them back into the high-functioning roles where they’re capable of succeeding with the quality of life that they deserve.

A trampoline that allows them to take risks, to pursue their entrepreneurial, innovative ideas and take chances — the foundations of the American Dream.

A trampoline that ensures that not just the fortunate do well, but that our community remains strong. One that assures Social Security is there to support all of us in our time of need, and launch any of us that need it back into the action, growing and succeeding along with the rest of our community.

Hilary Doe is the National Director of the Roosevelt Campus Network.

By Wilhelmina Leigh

It is not in the nation’s interest to cut off lifelines for the most vulnerable citizens.

he phone rings. It’s your 75-year-old Aunt Mildred, the one who always helped you and your brother financially after your father died. She also helped your first cousins whose mom was disabled, and always had a little extra for her brother Steve who had difficulty making ends meet after he retired. Aunt Mildred is calling to ask for your help in managing her finances. She wants to be able to continue to help her family as she ages, and she wants to continue to help her family members with the greatest unmet needs.

Like your Aunt Mildred, the Social Security system at age 75 needs some assistance to manage its finances and continue helping the people of all racial and ethnic groups in the United States who receive its benefits in the event of disability, death, and retirement.

The nature of the “75-year tune-up” for the Social Security system, for which shortfalls are projected within the coming years, is likely to be shaped by the deliberations of the National Commission on Fiscal Responsibility and Reform. The panel was established by President Obama to report to Congress by Dec. 1 on ways to create a balanced budget by 2015, and it is eyeing the Social Security system as a potential source of revenue to help achieve this goal.

Making cuts to the Social Security program to help balance the budget, however, would fly in the face of public sentiment (See Page & Jacobs’s “Deficits, Social Security, and the American Public“) and would leave impoverished many who are already economically vulnerable — in particular the 54 percent of unmarried elderly African Americans and the 62 percent of unmarried elderly Hispanics who rely on Social Security benefits for 90 percent or more of their income. The average annual Social Security income for African American and Hispanic men and women 65 years and older is only $13,000 or less, meaning many who have worked throughout their lifetimes are impoverished during their retirement years.

Americans value and support Social Security. A 2009 poll by the Joint Center for Political and Economic Studies found that 54 percent of all Americans - and 68 percent of African Americans — think that the Social Security system should provide a minimum standard of living to all contributors, even if some receive benefits exceeding the value of their contributions. Large majorities — 92 percent of African Americans and 83 percent of both white Americans and all Americans — also believe that Social Security should provide long-term low-wage workers support sufficient to meet their basic needs.

Americans want to strengthen the Social Security system and do not want to use its revenues to balance the federal budget. When asked in a poll conducted by the National Academy of Social Insurance (NASI) last year whether they favored strengthening the Social Security program or tapping its reserves as a means to reduce the national deficit, two-thirds of Americans — including 73 percent of African Americans and 67 percent of Hispanics — responded that they favored strengthening the Social Security system.

How should we do this? One approach is to simultaneously make changes to ensure the solvency of the system and enhance the adequacy of benefits. For example, eliminating the wage cap — the earnings level at which Social Security FICA taxes are no longer deducted — and reducing the proportion of earnings above the current cap of $106,800 counted toward future benefits would generate an additional 2.17 percent of taxable payroll over 75 years, as estimated by the National Academy of Social Insurance. Meanwhile, updating the special minimum benefit to 125 percent of the federal poverty level for a 30-year worker at full-benefit age is estimated to cost the system just an additional 0.13 percent of taxable payroll over 75 years. This pair of changes would net the Social Security system an estimated 2.04 percent increase in taxable income, more than enough to close the projected deficit of 2 percent.

The 75th birthday is a time to take stock for both Aunt Mildred and the Social Security system. The best course for both is to seek advice and help from others, but to make changes with great care. For too many Americans — especially low-wage workers and people of color — Social Security is an economic lifeline. Severing this lifeline will not help us as a nation achieve lasting budget balance. Nor will it allow us to sleep comfortably at night, knowing that we have removed the economic safety net for so many of the most needy.

Wilhelmina Leigh is a senior research associate at the Joint Center for Political and Economic Studies.

Fair Credit Reporting Act (FCRA), federal law, allows Americans to obtain an annual (every 12 months) credit report free of charge.  This is an excellent way to track your credit particularly to check for identity theft.  And did I mention it was FREE.

We have to be careful though. There are a lot of scam websites that offer free credit reports.  They sound attractive but there is always a hook or catch or phishing for your personal information. But there is only ONE legitimate source for this FREE annual credit report:

AnnualCreditReport.com

Believe me there are a lot of sites that have names very close to the above - so be very careful.  If your not certain about the site please check with the Federal Trade Commission website. 

Good luck.