Mr. President, members of both houses of the Congress of the United States of America, elected officials of all State and Local governments in this nation and its territories and all appointed bureaucrats:

TEAR DOWN THIS WALL OF RESTRICTIONS ON THE EXPLOITATION OF OUR ENERGY RESOURCES!!

• Free this great nation from the grip of the GREAT RECESSION.  Bring back the jobs of the 14.5 million women and men unemployed according to the realistic U-6 measure, wanting to work but cannot find jobs, many having given up looking, out of frustration.

• Eliminate the persistently high foreclosure rate on homes. According to Bloomberg, “As many as 1.25 million of America’s least cared for homes are headed for auction after a year-long probe into foreclosure practices kept them off the market.”

• Bring back oil prices from their current crippling level of around $100 a barrel to range of $30-60 per barrel and derivative petroleum products such as gasoline currently around $4.00 a gallon to it pre-crisis level of $1.30 or so by eliminating the monopoly power over crude oil prices and downstream petroleum products of the now re-cartelized U.S. oil industry.  It claims that it is just going along with market prices – prices heavily influenced by OPEC, we must add.  It is acting like it is an informal part of the OPEC cartel.

• Free up the permitting process so that petroleum refineries can be expanded, modernized, and built to avoid impending shortages caused by approaching lack of refining capacity. Similarly, free up the permitting process for pipelines needed to take advantage of newly exploitable gas and oil shale fields (Marcellus, Bakken, Eagle Ford, and others) and the oil sands of Canada. 

This is the nation that undertook the Manhattan Project bringing the end to the War in the Pacific and launched us into the nuclear fission age and is helping propel us along to the age of nuclear fusion, the virtually unlimited energy resource. 

This is the nation that took us from horse and buggies and landed us on the moon.

This is the nation that forced the collapse of the Iron Curtain and the Soviet Empire.

We do not need to have our president bowing and scraping to the royalty of nations limiting our sovereignty by orchestrating the contrived scarcity of crude oil nor trying to emulate the leaders of Europe floundering with the problems of sovereign risk having brought it on by seducing a large portion of their populations into a state of dependency on government handouts.

What we do need is an energy policy that will take advantage of the abundant currently technologically exploitable energy resources.

According to recent testimony by Federal Reserve Chairman, Ben Bernanke:

Nevertheless, as shown by indicators like the rate of unemployment and the ratio of employment to population, we still have a long way to go before the labor market can be said to be operating normally.

Since Chairman Bernanke’s speech – using January 2012 data, the Employment–Population Ratio rose in February to 58.6% and then fell back to the 58.5% level as reported in the March Employment Report from the U.S. Department of Labor, Bureau of Labor Statistics

Even further troubling than the overall Employment-Population Ratio is the ratio for the 25-54 year olds, who constitute the heart of the working population – those in their prime earning years. The rate has remained at 81.6% for the last three months and just doesn’t appear to be budging.

We’ve been focusing on the employment problem for several issues, paying special attention to the Labor Force Participation Rate. Rather than retread that ground, what we will focus on in this issue is how many jobs we are really short of achieving a Labor Force Participation Rate of 67% with an accompanying 5% Unemployment Rate.

First, the Labor Force Participation Rate is the percent of Employed and Unemployed as a percent of the Civilian Noninstitutional Population. Again, focusing on a Labor Force Participation Rate of 67%, which was last achieved in 2001, and an Unemployment Rate of 5%, which was last achieved in 2008, we want to illustrate how far we are from those levels. Just to reiterate, a higher Labor Force Participation Rate is better than a lower rate; and a lower Unemployment Rate is better than a higher rate.

Following an uptick from 63.7% in January 2012 to 63.9% in February 2012, the March Labor Force Participation Rate fell back to 63.8%. In March, the Civilian Noninstitutional Population grew by 169,000 while the Civilian Labor Force fell by 164,000. The Labor Force Participation for the 25-54 Year olds remained flat at 81.6%

It’s clear from the data that while the U-3 Unemployment Rate is falling, something is just not right with the employment picture.

We’ve stated repeatedly that the objective is to return to a 67% Labor Force Participation Rate and a 5% Unemployment Rate --- these are levels that we last saw before the economic collapse referred to as the Great Recession.

So let’s take that journey...

First, if we adjust the Employment level to capture those discouraged workers outside of the Labor Force (yet, within the Civilian Noninstitutional Population) who have been sidelined, we are looking at a 12.383 million ‘Employment Shortfall’ in March 2012, up from 12.245 million in February.

Next, we want to focus on driving down the unemployment rate to 5%. This means that we have to move people WITHIN the Civilian Labor Force from the Unemployed to the ranks of the Employed. Keep in mind that the Unemployment Rate = Unemployed / Labor Force... (and the Labor Force = Employed + Unemployed)

To arrive at the total jobs required, we have to combine the increased Employment number (drawn from the outside of the Labor Force, yet within the Civilian Noninstitutional Population --- these are the sidelined or DISCOURAGED workers) with the lower Unemployment number (drawn from within the Labor Force---moving from the Unemployed to the Employed)

A Drum roll, please...

Using the 67% Labor Force Participation Rate and 5% Unemployment Rate as measuring stick, the March jobs shortfall revealed 16.929 million!

So the real question is how do we grow 16.929 million jobs?

Keep in mind that the Civilian Noninstitutional Population expands by at 150,000 per month. The math is easy: all we have to do is add 500,000 to the Employment rolls per month for 48 months, (350,000 from current data plus 150,000 in population growth per month).

The reality is something entirely different. Looking back over the past year, we can see the problems that lie ahead. While it seems obvious that employment growth is a requirement for recovery, there is often a confusion between the ‘employed’ numbers from the Household Survey and the ‘jobs’ number from the Payroll Survey. The Household Survey covers a wider swath of the population, while the Payroll Survey provides us with a more detailed, yet smaller image of those comprising the Civilian Labor Force (including those employed and those unemployed). In short, the Payroll Survey is a subset of the Household Survey.

“The payroll survey provides a highly reliable gauge of monthly change in nonfarm payroll employment. The household survey provides a broader picture of employment including agriculture and the self employed.”

The first monthly measure of change in employment is the Nonfarm Employment Report (Payroll Survey), which includes employment statistics reported on a monthly basis from established businesses. From April 2011 through March 2012 the average employment growth rate was 158,000.

The second monthly measure we’ll consider is the data from the Current Population Survey (also referred to as the Household Survey). From April 2011 through March 2012 the average employment growth rate in the Household Survey was 189,000 per month.

Another consideration regarding economic recovery in the employment situation includes the number of new entrants into the Civilian Noninstitutional Population. Again, measuring from April 2011 through March 2012, we see the number of new entrants averaging 300,000 per month. Note that there was a population adjustment from the Census Bureau in January 2012. Setting the adjustment aside, the average Civilian Noninstitutional population growth was around 174,000 per month.

Given the economic track record over the past year, it is obvious that going forward – unless there is a HUGE INCREASE IN MONTHLY EMPLOYMENT GROWTH, there is no way we will reach an acceptable Labor Force Participation Rate anywhere near 67% in conjunction with an Unemployment Rate of 5% in the foreseeable future.

In March 2012, the U-3 Unemployment Rate fell slightly from 8.3% to 8.2%, but the Labor Force Participation Rate fell 63.9% to 63.8!

So, how are we going to get back those 16.929 million lost jobs?

Using the 67% Labor Force Participation Rate, there are 12.4 million sidelined or discouraged workers. Measuring the difference in the current U-3 Unemployment Rate of 8.2% and moving down to 5%, we have 4.5 million Unemployed that have to be moved over to the Employed side of the Labor Force equation.

What are the causes of America’s economic problems? The most common response today, at least in Washington, DC, is that the top one percent are prospering at the expense of the ninety-nine percent. And the standard solution is for government to get tough with the business community, tax the rich, and “redistribute the wealth.”

I recently revisited a classic book that offers a very different perspective: Economics in One Lesson by American economist and philosopher Henry Hazlitt. This slender, lucid volume is filled with thought-provoking ideas about today’s most vexing problems. Ironically, it was first published more than six decades ago!

In it, Hazlitt exposes the common fallacies about economics, notably the tendency to press for private agendas at public expense, and the habit of making policies on the basis of short-term benefits to one group and to ignore the long-term impact on all groups.

Every chapter offers answers to the questions that still confound government officials and academics. Here is a brief sampling:

Is the pursuit of profit a bad thing? Many say it is, citing the billions of dollars in profit corporations earn from consumers as evidence of “corporate greed.” Such people demand that government do more to regulate business. In contrast, Hazlitt argues that profit occurs when someone discerns a product or service is needed and finds a way to provide it at an attractive price. When private individuals or companies produce goods or services that are not needed or affordable, they fail and go out of business. Governments, however, lack the discernment necessary to make sound decisions and, because they use other people’s money, are undeterred by failure. That, he concludes, is precisely why government involvement in business is a bad idea.

Does technological advance cause unemployment? This notion has produced a number of unfortunate effects, including union pressure to retain jobs even when innovation has made them obsolete. Hazlitt demonstrates that new inventions create as many or more jobs than they eliminate. But his most devastating argument against fear of invention is that if technological advance really caused unemployment, then logic would demand we categorically oppose it. In that case, he says, we would end up reasoning as follows: “Why should freight be carried from Chicago from New York by railroad when we could employ enormously more men . . . to carry it all on their backs?”

Is deficit spending the solution to unemployment? This idea has been more mindlessly embraced in our day that in Hazlitt’s. (Our deficit is now over sixteen trillion dollars and rising.) Hazlitt points out this idea has repeatedly been shown to be false. He adds that the acceptance of deficit spending not only worsens economic conditions; it also obscures “the real causes of unemployment, such as excessive union wage-rates, minimum wage laws, excessive and prolonged unemployment insurance, and overgenerous relief payments.”

Will "printing" more money help the economy recover? The perennial answer of government officials is “yes.” But Hazlitt points out that printing money causes inflation, and inflation is not just a form of taxation but the “worst form” because it hurts the poor more than the affluent.

Are government efforts to redistribute wealth beneficial? As anyone who watches the news knows, “redistribution of wealth” is the dominant political slogan of the day. Hazlitt argues that, far from being beneficial, such initiatives generally “smother productive incentives and lead toward general impoverishment.” He concludes that “it is the proper sphere of government to create and enforce a framework of law that prohibits force and fraud. But it must refrain from specific economic interventions. Government’s main economic function is to encourage and preserve a free market.”

In the 1978 edition of this classic book, Hazlitt added a final chapter in which he lamented that in the 32 years since it was first published, politicians had learned none of its lessons. Regrettably, their refusal to learn continues to this day and now poses an even greater threat to America’s future.

Copyright © 2012 by Vincent Ryan Ruggiero. All rights reserved

There is a real life story that has haunted me since it occurred 25 or so years ago.  The University of Detroit, at which I was teaching at the time, had a very diverse student body from many nations and nearly every continent.  As Chair of the Economics Department, I spent a considerable amount of time in the departmental office counseling both undergraduate and graduate students.

One day, early in the afternoon, an African student, from Nigeria I believe, came storming into my office shouting about poverty.  He wanted to know where the poverty, about which he had so often heard, could be found as he had seen none in the Metro area of Detroit and none in his travels around the U.S. 

I had never seen him before and have never seen him since.  After he calmed down a bit, I talked to him and told him that if he journeyed a few blocks to the southeast of the campus, he would find a large area of many square miles with tens if not hundreds of thousands of people living in material poverty.  He just shook his head and said he had done so on more than one occasion and found no such poverty. 

I, of course, had in mind the relative material poverty of the developed world while he was talking about the abject or absolute material poverty so common in the ‘Third World’.

I suddenly remembered about Biafra in southern Nigeria where absolute or abject material poverty was the norm.  The government of Nigeria (an oil rich member of OPEC) had recently launched attacks to quell the riots there in the late 1960s and early 1970s. 

The work of Blessed (Mother) Teresa of Calcutta among the destitute and dying souls of the impoverished parts of India flashed across my mind.

On Sept. 23, 2011, some 25 or so years since that incident, I was attending a conference of the Fellowship of Catholic Scholars at the Inn of St. Johns in Plymouth, Michigan, where earlier in the morning I had presented a paper on Catholic Social Teaching and the Case for Competitive Free Market Capitalism.  The president of the organization, Fr. Joseph W. Koterski, S.J, was commenting on the need for defining the terms about which much confusion seemed to reign.  The term, Hermeneutics, was used a number of times.  That term refers to the meaning of words. It is...

“Derived from a Greek word connected with the name of the god Hermes, the reputed messenger and interpreter of the gods. It would be wrong to infer from this that the word denotes the interpretation or exegesis of Sacred Scripture. Usage has restricted the meaning of hermeneutics to the science of Biblical exegesis, that is, to the collection of rules which govern the right interpretation of Sacred Scripture. Exegesis is therefore related to hermeneutics, as language is to grammar, or as reasoning is to logic.”

Memories of my undergraduate days at the University of Detroit gushed forth.  I could picture in my mind as clear as could be, those wonderful Jesuit Fathers A. Patrick Madgett, S.J., J. Remi Belleperche, S.J., Edward F. Maher, S.J., Vincent L. Brennan, S.J., Emmett O’Connell, S.J., Jules J. Toner, S.J.,  Edmund J. Montville, S.J., Charles A. Weisgerber, S.J.,  and others.  The excellent lay faculty joined the flood of those memories, Desire Barath, Leonard D. Maliet,  S.W. Budzinowski, Robert M. Biggs Louis W. Matusiak, Raymond Zulaf, and many others blanketed my consciousness.  All have since gone to their eternal reward, the Beatific Vision I am sure.  As they taught me, they are the Church Triumphant, praying for and encouraging the Church Militant. 

http://catholicdaily.net/faith/2011/11/14/the-church-militant-suffering-and-triumphant-day-5-using-susan-tassones-book/

• “Church Militant – us Catholics living on earth now. Our spiritual armor is Baptism, Communion, Confession, Penance, Confirmation, Marriage in the Catholic Church with realizing it is “Three to be Married” with God above the couple, Adoration, Rosary, Almsgiving,  ”Offering it Up”, etc.
• Church Suffering – the Holy Souls in Purgatory who in turn can pray for encouragement, endurance, courage, perseverance for the Church Militant on earth, as long as we pray for them, and remember to ask for their prayers.
• Church Triumphant – the Saints in Heaven, who can continuously intercede for us with God, as we ask for their help with our needs.”

Those memories continued for a bit and I recalled the persistent insistence by the Jesuit Fathers that when arguing and discussing propositions, one should always define the terms being used. Words are shells that often are used with different contents. Democracy to one in reality is tyranny to another, although both use the same term, democracy. 

To some, the term poverty means abject, absolute material poverty, while to others it means relative material poverty since the income of many of the poor in our society would enable them to be materially much better off in a Third World society.

Some use the term wage as though it was income as in discussing such things as a living or family wage. To a well versed economist, wages or its more contemporary equivalent, compensation to employees which includes both wage and non-wage components, is but one type of income. Some use the term wealthy when referring to income but income and wealth, although related, have different meanings. And so it goes. 

The result is that two discussants that appear to disagree with one another would often be in agreement if the terminology was cleared up, while two discussants that seem to be in agreement with each other would often be in disagreement if the meaning of the terms being used were defined properly. 

Examining more deeply one such example is the use of the term poverty.  In a materially rich nation like the U.S of A., where the annual median household income is $49,445 in current dollars, would in the impoverished areas of the Third World represent the materially very well off.  Currently in the U.S., the threshold income level of $20,000, below which are 20% of the households, would place that household among the top one-third of households in Third World nations, if not higher.

Not too long after the incident of which I spoke at the beginning of this article, I was standing in the Liberal Arts office next to a priest of some international fame who was a widely acclaimed as well as a self-professed “Christian Marxist”.  This expression was to me the grandfather of all oxymorons.  I studied and wrote several papers on Karl Marx and in my mind, by no stretch of the imagination could he and his ideas be labeled, Christian. 

I knew this good Father well as I had developed a course on the “Foundations of Free Enterprise Capitalism and the Radical Criticism Thereof” so that a radical (left) economics professor and two of the more radical Jesuit Fathers could interact with Professor Desire Barath and me in an academic setting.  It was offered over several years until the priest to which I have been referring, developed cancer and died just as he was to begin a new semester with this course as part of his teaching load.  

After a bit of idle chatter, I asked the good Father if we would discuss the meanings and moral implications of the terms relative and absolute material poverty.  In a tone of dismissive finality that I thought I would hear only from Almighty God at my judgment, he said to me that he would not engage in such a discussion.  So much for hermeneutics! 

In our nation, one of the most highly materially developed not only currently but in all of history, does moral imperative to be charitable as Blessed John Paul II exhorted the faithful have the same meaning in developed nations as it does in a Third World nation where abject absolute material poverty abounds?  We need to clear the air, so to speak, and here is where hermeneutics could help greatly.

In a discussion session at the Fellowship Conference last September, I pointed out that the legislating of a family or living wage in the form of a minimum wage has very negative effects, especially for the marginalized workers at the low end of the wage scale.  If it is effective, i.e., above the equilibrium wage in that particular labor market, it will result in what is termed voluntary unemployment as the higher minimum above the equilibrium level will reduce the quantity demanded of labor and increase the quantity supplied.  Some will be better off but many will be worse off and not have a job.  A far better approach, I argued, is a tax credit for low income taxpayers called the earned income tax credit.

In a future article, I would like to examine the question of responsibility in conjunction with a right.  In the case of income redistribution, does Catholic Social Teaching require those relatively well off to support such redistribution policies to the same degree in well developed nations like the  U.S. as they would in poorer nations such as third World nations?  Are there also responsibilities that the beneficiaries of such policies have to the extent they have the ability to offer themselves as productive resources such as labor, in the production process?

In his magnificent book, History of Economic Analysis, Joseph A. Schumpeter examined the role of the Scholastic School in general and the Spanish Jesuits in particular concerning such moral issues as charging interest on loans.  It changed the interpretation of what is sinful and what is not in this area.  Especially in the area of finance, we need more such efforts in this rapidly changing world.  While some actions are intrinsically evil, most of life’s decisions are often made in the world of gray, not in the world of black or white.  The meanings of words do matter.

The monthly national employment numbers are posted by the U.S. Department of Labor’s Bureau of Labor Statistics [typically] on the first Friday of the month with the preceding month’s data. These days, a key statistic has been the Labor Force Participation Rate, which is a ratio of those people, 16 and older, who are either employed or unemployed as a percent of the Civilian Noninstitutional Population.

The labor force participation rate represents the proportion of the civilian noninstitutional population that is in the labor force. This measure of labor force activity grew from about 60 percent nationally in 1970 to about 67 percent in 2000, with much of the increase resulting from increased participation by women.

According to the December 2011 Commissioner’s Statement on the Employment Situation:

Nonfarm payroll employment rose by 200,000 in December, and the unemployment rate, at 8.5 percent, continued to trend down, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in transportation and warehousing, retail trade, manufacturing, health care, and mining.

Both the number of unemployed persons (13.1 million) and the unemployment rate (8.5 percent) continued to trend down in December. The unemployment rate has declined by 0.6 percentage point since August.

Nonfarm payroll employment rose by 200,000 in December, and the unemployment rate, at 8.5 percent, continued to trend down. In 2011, payroll employment growth averaged 137,000 per month. Private-sector job gains totaled 212,000 in December and 1.9 million over the year. Government employment changed little over the month but fell by 280,000 over the year.

The labor force participation rate, at 64.0 percent, was unchanged in December, but was slightly lower than a year earlier (64.3 percent).

Ahh, but not so fast. Let’s dig into the Labor Force Participation Rate…

In January 2009, the Civilian Labor Force stood at 154,185,000. By December 2011, the Civilian Labor Force had fallen by 298,000 to 153,887,000 people. In January 2009, the Civilian Noninstitutional Population stood at 234,739,000. By December 2011, the Civilian Noninstitutional Population had risen by 5,845,000 to 240,584,000 people.

The Labor Force Participation Rate in January 2009 was 65.68% and by December 2011 the Labor Force Participation Rate had fallen to 63.96%. Adjusting for a Labor Force Participation Rate of 67% (of the Civilian Noninstitutional Population of 240,584,000), the Civilian Labor Force should be 161,191,000 or 7,304,000 higher!

What does this mean?

If a 67% Labor Force Participation Rate is more realistic than the current 63.96% Labor Force Participation Rate, then the ‘Unemployed’ are understated by 7,304,000 people, so rather than 13,097,000 unemployed the adjusted number would be 20,401,000!

Taking this a step further, the unemployment rates would also be adjusted upward.

The U-3, or official rate came in at 8.5% for December 2011. The U-3 unemployment rate adjusted for the 67% Labor Force Participation Rate would come in at 13.3%, the same rate as November 2011.

Finally, the U-6, or alternative unemployment rate that includes “total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force” came in at 15.2% for December 2011. The U-6 unemployment rate adjusted for the 67% Labor Force Participation Rate would come in at 19.9%.  

As has been previously noted:

The major cause of this decline in the participation rate has been the discouraged worker effect exacerbated by an unprecedented duration of unemployment. Spikes in the early retirement rate and the permanent disability rate have also added to this decline.

While the factors mentioned have certainly played a role in driving down the Labor Force Participation Rate, we suspect it has more to do with what we term the extremely discouraged worker – those people who have given up on any hope of seeking employment given the current and ongoing abysmal economic environment. 

Soak the rich if we can agree on who they are; 999 is the way to go; flat tax rate or bust; and on and on it goes.  This current crop of tax proposals is not new.  Huckabee, Forbes and others from previous elections, put forth similar ideas.  Unfortunately, public finance theory explains very clearly that those persons and non-person entities initially and legally mandated to pay the tax are not necessarily the ultimate bearers of the tax burden.  In public finance theory, the topic is referred to as the ‘shifting of’ and ‘incidence of’ taxes. “I did not know that,” you say.  Well sit back, have your aspirin or some such pain reliever at the ready, and fasten you intellectual seat belts.  We are about to embark on a flight into the now you see it, now you don’t land of the initial incidence, the shifting and final incidence, or where the burden finally rests, in the life of a tax. 

Our example of the analysis of the effects of a tax will focus on the profits tax.  Mass confusion exists over this tax as it does for most taxes.  If you think that the firm legally mandated to pay a corporate tax (at the state or federal level) is necessarily the ultimate bearer of the entire profits tax, think again.  If you think it is ultimately borne only by the rich fat cats, think again.   That is why you were asked to have a pain killer at the ready. 

One of the best minds of this past century in the area of public finance, the now deceased Richard A. Musgrave, a former professor of mine many years ago, would lament in his lectures and in his text book, The Theory of Public Finance (1959), that no matter what the law says, who actually is the ultimate bearer of all or part of the profits tax, can differ dramatically from one case to another.  After going through a kind of verbal games theory of analysis, he concluded that one guess is probably as good as another and perhaps the assumption as to who on average bears the corporate profits tax would be one-third of the final burden resting on the buyers (higher prices), one-third on the equity capitalists (stockholders in the form of lower dividends), and one third on the other productive resources such as labor (reduced wages/compensation).  Imagine that, labor ultimately bearing one-third of a corporate profits tax on the firm employing labor.  If the firm’s product is a consumer product, labor ends up ultimately another significant portion of the firm’s profits when the worker purchases the product in question.  But, but, but…you shout at me in a whining fashion...that your community organizer disagrees, to which I say join, your organizer in city centers and add to the cacophonous din in the chaotic demonstrations.

In The Incidence of Business Taxation, THE AMERICAN UNIVERSITY LAW REVIEW [Vol. 29:331 1980], Richard A. Musgrave provides us with a strong reminder:

"Although I wanted to present these statistics by way of introduction, the analysis of the tax structure in terms of what share is borne by business is inappropriate. Businesses do not pay taxes, businesses do not become poor. The business owners become poor, the business employees get lower wages, or the business customers pay higher prices. Businesses are merely intermediaries to tax burden distribution.  I am not saying that businesses are not powerful organizations with social and political influence. I am not saying that if there is a need for regulation, the shareholders should be regulated instead of the corporation. I am saying only that it is obvious that corporations and businesses, themselves, do not bear taxes to the same extent as owners, customers, and employees of the businesses. If one is interested in what happens to the distribution of the tax dollar, it is the distribution among people that should be examined, not the distribution between businesses and others. Thus, if one looks at the shifting pattern, the question clearly is whether, as part of this changing pattern, the tax burden distribution has become more progressive or less progressive."

THE REALITY  First of all, recall that the firm is simply the place where the transformation process of production occurs.  The firm is not the debt (bondholders) or equity capitalist (Stockholders… being the owner of the firm and as such is self-employed as the equity capitalist).  The firm is also not the entrepreneur who determines the output and input mix and negotiates the compensation to the other resources including labor.  Neither is the firm the labor or land it employs.  If this is understood, it would seem that the profits tax falls upon the owner or equity capitalist and not the firm employing the equity capital.  But while this is so, it is only the initial incidence and nearly always not the final incidence (or burden) of this profits tax.  The owners or equity capitalists do not bear the ultimate tax burden or at least not all of it.  Most people are of the mindset that the owners of the firm bear all of the profits tax, but that is incorrect, or at least partly incorrect,  depending upon how much of the burden can be passed forward to the buyer of the firm’s product or backward to the other resources such as labor.

Also remember that we are well into the age of Institutional Capitalism.  While there are a few privately owned firms with a narrow base of ownership, the capital stock of most of the large publicly traded firms are increasingly owned by financial institutions such as mutual funds, life insurance companies and pension funds.  To the extent the profits tax falls upon the owners of firms, they fall upon the beneficiaries of pension funds, the owners of mutual fund shares such as the Vanguard family of mutual funds or stockholders in Buffett’s Berkshire Hathaway, and policy holders of mutual life insurance companies and stockholders of the stock life insurance companies.  Most of these are not the rich and the famous.  They are very likely to be Jose the Plumber or Mary the financial analyst or Luke, the greeter at your local Wal-Mart or Costco outlet.

 

Depending upon the price elasticity of demand, some or all of the ultimate burden of the profits tax could be passed forward in the form of a higher prices to the buyers or backward to the other productive resources in the employ of the firm whose profits are being taxed.  The only general rule is that the more price inelastic is the demand for the firm’s product, the more likely is a portion of the burden of the tax that will be passed on the buyer. 
 The degree to which a good or service is price inelastic is heavily dependent of the substitution effect.  The substitution effect in turn depends upon the number of substitutes for the product of the firm whose profits are being taxed and the degree of substitutability of competing goods and services. Similarly, the more price inelastic is the supply of the productive resource (labor, debt and equity capital, entrepreneurship, and land), the more of the final burden is passed backward to the productive resources employed by the firm in the transformation process of production. 

Which of the productive resources and how much of the final burden will be borne by each of them differs in each case and may change over time.  How much will be passed forward to the buyers and how much backward to the productive resources depends upon the price inelasticity of the demand for the product and the supply of each of the productive resources.  This can change over time as the product and resource markets change.   

One thing is certain, the firm, qua [as] firm, will not ultimately bear the final burden of the profits tax regardless of the legislative mandate as to who initially will pay the tax or be burdened with the initial incidence.  Remember the firm is only the place where the transformation process of production occurs.  Households from whence the productive resources originate, at least in a free market capitalistic system, as either the supplier of the productive resources or as consumer of the goods and services produced, ultimately bears the entire tax burden.

 

Again, from Richard A. Musgrave:

"Businesses do not pay taxes, businesses do not become poor. The business owners become poor, the business employees get lower wages, or the business customers pay higher prices. Businesses are merely intermediaries to tax burden distribution.
"

For this reason the progressivity or regressivity of a profits tax cannot be determined despite the popular view that the rich bear the burden of the profits tax.

To reduce the need for the pain reliever you have had at the ready, in a later article on the web site we will analyze the much bantered about spending tax, sales and excise taxes are examples.  Early in my graduate studies, I was in attendance at a lecture given by the British economist, Nicholas Kaldor. Guess what it was about?  A spending tax (e. g., VAT – Value Added Tax) and this was fifty some years ago.  At that time he was the leading authority on such a tax.

As Ecclesiastes (1:9) tells us, “What has been, that will be; what has been done, that will be done. Nothing is new under the sun.”  

Is there a contagion spreading across democratic nations? Rights without responsibilities is the new cry. Trillions for redistribution; not a penny for job growth.

Alexis de Tocqueville could see it coming way back in the early 1800s.

“The American Republic will endure until the day Congress discovers it can bribe the public with the public's money.”

Several years ago, I asked a man of the cloth of strong socialist bent (he was, in fact, a self-professed Christian Marxist; clearly an oxymoron if there ever was one), to discuss with me, the distinction between abject real poverty and relative poverty. Without hesitation and with a tone of finality, he said he would not do so.

...Too bad...Consider the differences between Relative; Abject (absolute); and Extreme Poverty.

Several years before this incident, a student from Africa, Nigeria as I recall, stormed into my office and menacingly demanded to know where the poor were in this country, the U.S. of A. The anger in his voice having scared the day lights out of me, I was making my peace with God fully expecting I would be in the headlines the following day as a professor terminated by an angry student, whom by the way I had never seen before...or since. He calmed down as he explained he had looked all over parts of this country and especially the Detroit metropolitan area, and saw no poverty. His standard of comparison was his native country in Africa, where real abject poverty abounds.

Over the last year, several fellow alumni and I from the University of Detroit, have written and offered for presentation at two conferences, papers arguing that capitalism, to the extent it is competitive, results in the accomplishment of justice in all its aspects; commutative, distributive, and social.

Justice is the perpetual and constant will to render to each one his right.

Commutative Justice regulates exchanges between persons and between institutions in accordance with a strict respect for their rights. ―Without commutative justice no other form of justice is possible.

Distributive Justice regulates what the community owes its citizens in proportion to their contributions and needs.

Social Justice is ensured when society provides the conditions that allow associations or individuals to obtain what is their due, according to their nature and their vocation.

For any economy to function efficiently, the income distribution must reflect some degree of inequality. Not everyone has the same quantity nor quality of productive resources to offer in the production of goods and services. But when markets are dominated with political power and/or monopoly power reflected in the ability of one or a few firms to control supply and therefore price, as in for example the oil markets, the additional income inequality resulting is NO LONGER JUSTified.

This excessive inequality, resulting from the lack of competition, typically results in government fiscal policies that attempt to redistribute income and wealth reducing the excessive inequality. Much of history is replete with government failure to achieve this goal and at times increasing the inequality through a flawed political discernment process.

Rarely is the question asked or is there a requirement that the beneficiary of the redistributive efforts has provided the service of his or her own productive resources such as labor and debt or equity capital. When for a while, and not too long ago, "workfare" was being attempted, many of the more liberal persuasion yelled and hollered at how cruel it was. Easy to forget isn‘t it? 

Little distinction is made between income earned by supplying productive resources to the economy‘s production process and income earned by the use of market power, usually in the form of restricting supply, to expropriate from buyers more expenditures than a more competitive economic environment would require.

This control of supply is not restricted to the supply of goods and services in the product market, but also occurs in the market for productive resources, including labor through the cartel effects of unionization.

Technically, in the presence of market power, suppliers such as the large oil firms expropriate and the labor of such firms organized by strong unions also expropriate the consumer surplus and convert much of it into producer surplus (for many years referred to as economic rent) along with a loss of consumer surplus that producers do not receive, a deadweight loss as it is called in economic theory.

This producer surplus or economic rent, as it is also called, is the excess income (profits) earned above what the firm could earn if the market were highly competitive. For productive resources such as labor, excess compensation above what the resource such as labor could earn in a competitive, non-unionized labor market (its opportunity cost), is also contrary to commutative justice.

CONSUMER SURPLUS The consumer surplus is an estimate of how much more consumers would be willing to pay for the market quantity purchased if they had to, but do not have to if only one price is charged to all buyers. While a laptop computer might be worth several thousand dollars to a potential buyer, competitive forces have pushed the prices down to less than a thousand; thus, moving toward maximizing the consumer surplus.

OPPORTUNITY COST This is the compensation that a productive resource such as labor, could earn in its next best COMPETITIVE alternative employment. Remember that the productive resources include not only labor, but debt and equity capital, entrepreneurship and land (which encompasses natural resources). Included in opportunity cost is what is referred to as "normal‟ profits. Using labor as an example, if you are receiving less than your opportunity cost from your employer, in a competitive environment, you would simply find another job that covers your opportunity cost. Conversely, if you are receiving in excess of your opportunity cost as an employee, this violates the principle of equity and, if left unchanged in competitive product markets, will eventually have ramifications in terms of long-term viability for the firm, e.g., General Motors and Chrysler.

PRODUCER SURPLUS-ECONOMIC RENT Normal profits or opportunity cost level profits are a cost in economics just as is the cost of labor compensation. Equity capitalists are self-employed. Technically and simply, the firm they own employs them. The self-employed include stockholders. Income or compensation to productive resources in excess of this opportunity cost level is called a producer surplus (economic rent is the more traditional term), and is above what is needed to bring and keep the resource in the firm's employment.

CONNECTION BETWEEN CONSUMER AND PRODUCER SURPLUS Any producer surplus flowing to the productive resources such as labor or the owners (equity capitalists) came at the cost of a reduced consumer surplus and some degree of deadweight loss. This causes the consumer/buyer to pay more than they might otherwise have to pay in a more competitive environment. As competition increases, downward pressure of product prices will eventually reduce the producer surplus and increase the consumer surplus along with a restoration of the deadweight loss to the consumer surplus.

Excess management compensation, a form of producer surplus or economic rent, is a major cause of unjustified excessive inequality in the income distribution. These excessive compensations are often followed, sooner or later, by Chapter 11 and/or Chapter 7 bankruptcy hearings as seen recently at Chrysler and General Motors.

Unreal non-wage benefits to labor are one of the causes of excessive and unjustified inequality in the income distribution. The private sector firms agreeing to defined benefit pensions, usually due to strike threats by unions, are often impossible to adequately fund, and are just as guilty of contributing to excessive inequality in the income distribution as are various levels of government that are badgered by powerful labor unions into agreeing to not only current compensation packages that are now proving impossible to pay for through taxes but huge retirement benefits including health care for the retirees that are equally impossible to fund adequately through taxes.

In this regard, according to a March 2011 release from the Bureau of Labor Statistics, government employees on the average receive total compensation packages about 44% greater than the average of private sector employees.

Total employer compensation costs for State and local government workers averaged $40.54 per hour worked in March 2011 (versus $28.10 per hour for private industry), the U.S. Bureau of Labor Statistics reported. Wages and salaries amounting to $26.55 per hour accounted for 65.5 percent of compensation costs while benefits averaged $13.99 per hour worked and accounted for the remaining 34.5 percent.

Meanwhile, as we turn our eyes toward the U.S. economy, one might conclude that it’s beginning to look a lot like Europe, especially when the so-called entitlement programs are given a financial look-over...

SOCIAL SECURITY and MEDICARE According to the CBO, this year, for the first time since the Social Security reforms of the early 1980s, benefit payments from the trust funds will exceed the trust funds receipts from the public (which consist mostly of revenues from payroll taxes and exclude interest on Treasury securities held by the trust funds). Likewise, Medicare‟s Hospital Insurance (HI) Trust Fund is expected to pay out more in hospital benefits and other expenditures this year than it receives in taxes and other dedicated revenues. The difference will be made up by redeeming trust fund assets. Growing annual deficits are projected to exhaust HI reserves in 2017...

Promise anything that will elect you and hope that you can retire from elected office before the proverbial ―crap hits the fan. Après moi, le deluge best describes local, state, and federal legislative assemblies in this nation. The only difference between Greece and the U.S. of A. is the persistence and size of the riots. Wisconsin, Indiana, etc. are beginning to look a lot like Athens, Greece.

The rise of default risk at local and state governments in the U.S. is reaching scary heights. At the federal level it is called sovereign risk and such risk is now heard daily on newscasts.

Après Moi, le Deluge

And so, I ask: why can‘t we raise taxes as the President and many U.S. Senators are arguing? Franklin Delano Roosevelt, FDR, tried it and it failed. He finally accepted deficits and then borrowed to finance the excess of spending. The Federal Debt at the time was relatively small and there was no threat of default and hence sovereign risk was not an issue then as it definitely is now.

...but the Great Depression continued and took a dreadful further collapse again in 1937.

Read what Henry Morgenthau, Jr. told House Ways and Means Committee on May 9, 1939:

“We have tried spending money. We are spending more than we have ever spent before and it does not work.”

“I say after eight years of this Administration we have just as much unemployment as when we started. ... And an enormous debt to boot!”

FDR‘s policies were failures, and Morgenthau was a close confidant who served as Treasury Secretary from 1934 to 1945. This is a far cry from the gigantic myths concerning the alleged successes of FDR.

More recent studies have concluded what Henry Morgenthau had concluded more than 70 years ago.

In returning to our conversation of equality and justice, it should be noted that a lack of significant competition causes the violation of equity and efficiency thus reducing the per capita material standard of living and results in an increasingly unequal income distribution far more unequal than needed for the achievement of equity. This latter violation has increased the fuel for those seeking massive redistribution of income. Rarely, however, do those agitating for such redistribution differentiate between the opportunity cost level of a productive resource‘s income and the surplus reward currently called a producer surplus.

Adam Smith‘s Invisible Hand of competition is the catalyst that assures efficient production and an equitable distribution of income. The high prices of crude oil and its refined products speak chapters on free market capitalism when markets are no longer competitive.

GM and Chrysler went under because of excessively bloated and overcompensated executives and excessively bloated and over compensated labor represented by powerful unions. Compared to them, the transplants are lean and mean and increasingly successful.

MARKET FAILURE AND THE ROLE OF GOVERNMENT – GOVERNMENT FAILURE VS MARKET FAILURE When the economic reality of increasing returns and economies of scale are dominant factors, natural monopolies and natural oligopolies result. Regulation of such natural monopolies as electric power, are NOT anti- capitalistic, but rather a surrogate for competition (granted that often such regulation is a less than perfect surrogate). Anti-trust agencies and the legislation that established them are not anti-capitalistic or socialist. They could certainly do a much better job than they have been doing. But absent the Invisible Hand of competition, they are needed.

Our friends on the far right that are more pragmatic than ideological can point to many such failures in the past and currently. Government failure is very real and significant. The following are some cases in point: the failure of the SEC and self-regulatory bodies to prevent the fiasco that started our ongoing financial and economic crisis, the failure of the anti-trust agencies (FTC and Anti-Trust division of the Justice Department) to prevent the re- cartelization of the U.S. segment of the oil industry, the war on poverty, etc.

Income redistribution of unjustified inequality after the fact is always less efficient than maximizing competition to the extent possible to prevent the occurrence of the excessive inequality before the fact. That is the role of anti-trust policies and public utility regulatory bodies. They failed us in the 1990s when these inept anti-trust agencies allowed a re-cartelization of the U.S. segment of the oil industry. The current administration selection of appointees to staff the anti-trust agencies has also been a failure despite their claims of not appointing lobbyists favoring cartelization of markets.

Case in point---–---from lobbyist, pushing and prodding the legislative process to form policy to benefit clients; to bureaucrat guarding the chicken coop; and then back into the ranks of the foxes as a partner at a top tier Wall Street Mergers and Acquisition law firm.

Christine A. Varney is an American lawyer lobbyist, and internet policy expert who served as personnel counsel for the Obama-Biden Transition Project. She now serves as Assistant Attorney General for Antitrust at the United States Department of Justice. Christine Varney, the assistant attorney general who spearheaded the Obama administration's drive to reinvigorate antitrust enforcement, plans to step down next month to join the law firm Cravath, Swaine & Moore LLP. As a Cravath partner, Ms. Varney will work on antitrust issues related to mergers and acquisitions.

Roosevelt‘s (FDR) early attempts at reducing the growing deficits due to the collapse of the tax base in the Great Depression are but one example of the failure of fiscal policies to prevent the occurrence of federal deficits and a rising national debt. When Clinton became President in 1993, he inherited an annual federal deficit of $290 billion (1992) and a U-3 unemployment rate of 7.5% (1992). In 1995, he appointed Robert Rubin as Secretary of the Treasury. He and President Clinton lobbied Congress to dedicate the higher taxes legislated in 1993 toward reducing the federal deficit and they agreed with him. In 1993, President Clinton ushered through Congress a large package of tax increases, which included the following:

- An increase in the individual income tax rate to 36 percent and a 10 percent surcharge for the highest earners, thereby effectively creating a top rate of 39.6 percent.

- Repeal of the income cap on Medicare taxes. This provision made the 2.9 percent Medicare payroll tax apply to all wage income. Like the Social Security payroll tax base today, the Medicare tax base was capped at a certain level of wage income prior to 1993.

- A 4.3 cent per gallon increase in transportation fuel taxes.

- An increase in the taxable portion of Social Security benefits.

- A permanent extension of the phase-out of personal exemptions and the phase-down of the deduction for itemized expenses.

- Raising the corporate income tax rate to 35 percent.

According to the original Treasury Department estimates, the Clinton tax hike was to raise federal revenues by 0.36 percent of gross domestic product (GDP) in its first year and by 0.83 percent of GDP in its fourth year, when all provisions were in effect and timing differences associated with near-term taxpayer behaviors had sorted themselves out. In 1997, the fourth-year effect would be roughly equivalent to an increase in the federal tax burden of about $114 billion.

For a while it seemed to worked but in 2000 the economy collapsed as the mounting federal budgetary deficits helped to collapse aggregate demand and with its collapse, GDP came crashing down and the federal budget surplus quickly became a deficit. 

There are two smoking guns, so to speak, that caused it.

The first was the steady rise in the effective tax rate from 1993 through 2000.

The second may be described as follows: “As the tax burden continued to rise, The FED (FOMC) began a policy of severe monetary constraint in 1999 continued it through 2000. Given this two pronged constraint of fiscal and monetary policy, the economy began a collapse in mid-2000 and then turned negative in the first quarter of 2001 and stayed negative through the third quarter.”

As George W Bush became president in 2001 he was faced with a collapsed economy and a national security environment totally unprepared and begging for a 9/11 disaster. And so it occurred.

Shortly after Bush became president, given the collapsed economy due in part to the high tax rate environment, he sought tax rate relief in order to stimulate the economy. Congress gave him the desired tax rate relief but tacked a sunset provision on the legislation now causing great uncertainty in business planning aggravated by the recent passage of a very costly heath care system.

It should be pointed out that in Bush’s second term, the federal budget deficit was decreasing through the end of the 2007 Fiscal Year (October 2007- September 2008) where is it was whittled down to $160.7 billion.

As for the future? "What is happening in the Cradle of Democracy" is on one hand quite predictable; on the other, an occasion for lament.