Scene: Jordan and Sandy, a former business colleague, are having coffee.  The discussion begins Entry #121,.  This segment is a continuation of Jordan’s description to Sandy of a conversation with the Speaker of the House and the Senate Majority Leader, which begins Entry #123

Mackey:  “Alright, I agree that the Federal debt as a percent of GDP (Gross Domestic Product) was up less under Obama than Bush 43 but…”

Jordan:  “We’re making real progress.”

Mackey:  “Jordan, please, let me finish.  The debt percentage was less under Obama because Republicans forced him to cut back on his ridiculous expenditures.”

John Boy:  “That’s right.  And Republicans deserve all the credit for the economic recovery.”

Jordan:  “I must say, you guys have real chutzpah.”

Mackey:  “Jordan, just what is chutzpah?”

Jordan:  “For the average Joe, I would say, having a set of you know what…kahunas.  But ‘chutzpah’ is Yiddish and is best described with a story.”

John Boy:  “This should be interesting, but just don’t take too long.”

Jordan:  “The short version is this.  A hoodlum kills his mother and father, then begs for forgiveness from the court because he is an orphan.  That’s chutzpah.”

Mackey:  “The kid was disingenuous to say the least.”

Jordan:  “That’s why I said you guys had chutzpah.”

John Boy:  “You think we’re being disingenuous?”

Jordan:  “Look, Republicans tried to block nearly every program Obama proposed to stimulate the economy.  The Republicans mantra was ‘we need to save our way into prosperity.’  And, by the way, John Boy, how many times did the House vote to overturn the Affordable Care Act, aka Obamacare?”

Jordan:  “I quit counting after 50.”

Mackey:  “But Obama’s stimulus programs would have raised the debt?”

Jordan:  “True, but raised it only temporarily.  Mackey, if you’ve learned nothing else from this little session in the club house, I hope you’ve learned that one cannot save their way into prosperity.”

John Boy:  “Are you saying if I don’t spend money – or if someone doesn’t spend money – then demand will not increase?”

Jordan:  “Yes…and?”

John Boy:  “And without consumer demand there will be no additional jobs and no additional income…maybe no income for me, or most anyone.”

Jordan:  “And no income means no tax revenue from those unemployed.”

Mackey:  “But why doesn’t business spend more?”

Jordan:  “If you owned a business and demand for your product was flat to down, would you hire more people?

Mackey:  “No, of course not.”

Jordan:  “Which leaves government to get the economy started again.”

Mackey:  “If I hear you correctly, in a recession since business is not spending, government needs to spend more money.  If government cuts back also, it makes the economy worse.  Kinda creates a spiral downward.”

Jordan: “You’re on a roll, Mackey.”

Mackey:  “But what about paying back the debt?”

Jordan:  “Pay it down when the economy is stronger.  Then you can raise taxes.”

John Boy:  “You’re giving me apoplexy.  Raise taxes?  That’ll kill everything!”

Jordan:  “OK, Mr. No-Tax-Increase-Ever, what was the maximum marginal tax rate at the end of the Reagan Administration?”

John Boy:  “25%…and that was still too high.”

Jordan:  “Mackey, want to guess?”

Mackey:  “25% seems low but I’ll stick with it.”

Jordan:  “How ‘bout the maximum tax rate under Clinton?”

John Boy:  “Clinton got lucky.  Reagan and Bush created the environment and he benefitted.  Clinton probably raised it to 35%.  I really don’t remember.”

Mackey:  “Agreed.”

Jordan:  “Good guesses.  Reagan was 28% and Clinton was 35%.  But the 28% was short-lived.  The max rate was raised to 31% under Bush 41.”

John Boy:  “That’s why the economy went in the tank and he didn’t get reelected.  Taxes went up.  Proves my point.”

Jordan:  “Just what is your point?”

John Boy:  “Like I said earlier, Reagan deserves all the credit for the economic recovery.”

Jordan:  “And what about all the deficits under Reagan and the voodoo economics?  And, oh yes, when was the last time there was a budget surplus?  C’mon, John Boy, take a guess.”

John Boy:  “OK, you made your point.  There was a budget surplus under Clinton, not Reagan.  We went through that a few minutes ago.”

Jordan:  “At least one of the lessons stuck.  John Boy…and you, too Mackey…if someone offered you $1.00 but said that you had to pay $0.35 tax, you would turn down the $1.00 and have nothing or pay the tax and have $0.65 left?”

John Boy:  “No, I’d take the $1.00 and pay my $0.35 tax.”

Jordan:  “What if the deal was you could keep $0.61.  Would you still take it?”

Mackey:  “Of course, take the $1.00.”

John Boy:  “Mackey, be careful.  Jordan is setting up another one of those intellectual traps.”

Jordan:  “Look, I agree there is some point at which you would not take the $1.00.  You might reject it because of the risk involved, the amount of money you already make, the time involved…whatever.  But for most everyone except the very wealthy, would take the $1.00.  Taxes would need to be higher than 35% before they stopped seeking the extra $1.00.”

Mackey:  “Are you saying we should raise taxes?”

Jordan:  “I’m saying it is OK to raise taxes when the economy is strong, maybe even raise them a bit while the economy is starting to recover.  Then use the extra taxes to pay down the debt.  But people need to have income in order to generate tax revenue.”

John Boy:  “Jordan, why do you keep making such logical statements?”

Jordan:  “Comes with the territory.  I just wish we…collective we…would spend more time thinking through and talking through issues rather than throwing ideologue bombs at one another.”

Mackey:  “Listen, we need to get out of here.  But I want to make one final comment.  You know I can never admit to this publicly, but I very much appreciate the lessons in economics.”

John Boy:  “Hear, hear.  A toast to our host, Jordan Abel.”

Jordan:  “Thanks.  Glad I could be of help.”

Waiter:  “Mr. Abel, the check.”

(Back to the conversation with Sandy.)

Sandy:  “Wow, Jordan that was quite a story.  Have you got a few more minutes?  Have a couple of questions.”

Jordan:  “Yes, Sandy, but let’s take a break first.”

(To be continued.)   

Scene: Jordan and Sandy, a former business colleague, are having coffee.  The discussion begins Entry #121,.  This segment is a continuation of Jordan’s description to Sandy of a conversation with the Speaker of the House and the Senate Majority Leader, which begins Entry #123

John Boy:  “Let me repeat the questions.  ‘What was wrong with tax cuts under Bush 43?”

Mackey:  “Yes, Jordan, what was wrong with them?”

Jordan:  “Two fold.  First, Bush 43’s economic policy created huge deficits.  Remember CBO (Congressional Budget Office) had predicted budget surpluses for a number of years into the future.  Rather than reducing Federal debt…as many Republicans are wont to do…the tax cuts make the debt much worse.”

Mackey:  “And what was the second reason?”

Jordan:  “Let me add to the first.  Remember guys the US was at war with Iraq so military expenditures are starting to soar…and we’re cutting taxes.  Doesn’t seem very Republican-like to me.”

John Boy:  “OK, Jordan, what was the second reason?”

Jordan:  “You guys always interrupt someone when they are speaking?”

John Boy:  “Yes, just finish and quit evading the question.”

Jordan:  “The tax cuts were weighted heavily toward upper income.”

John Boy:  “Everyone…well most everyone…got a tax cut.  So the middle class benefitted.  Why are you always so worried about the middle class?  The wealthy pay way more than their fair share of taxes.”

Mackey:  “Right.  What’s your problem?”

Jordan:  “Just how short is your collective memory?  We just talked people needing money to buy things.  No money, no purchases, no demand and no new jobs. And, therefore less income for the wealthy. Remember?”

Mackey:  “You keep trying to convince us the Republicans economic theory…”

Jordan:  “…Trickle-Down theory.  And pardon me for interrupting.”

Mackey:  “Trying to convince us the Trickle Down theory doesn’t work.  You know, like a waterfall, those at the bottom benefit from the work done at the top.  You know, workers at the top of the income scale and moochers at the bottom.”

Jordan:  “I’ll ignore your last comment.  You guys are old enough to remember the 1980 presidential campaign.”

John Boy:  “Unfortunately, we are old enough.  And so are you.”

Jordan:  “George Herbert Walker Bush, eventually #41, was running against Ronald Reagan to be the Republican presidential nominee.  And what label did Bush put on his fellow Republican’s economic policy?  The Trickle Down theory.”

Mackey:  “He called it ‘voodoo economics’ or something like that.”

Jordan:  “Voodoo economics…and truer words were never spoken.”

John Boy:  “The voodoo economics label was campaign talk.’

Jordan:  “Spoken during the campaign, yes.  But merely ‘campaign talk’ as you claim, no.  The label was spot on.”

Mackey:  “But the economy expanded under Reagan.  Proves he was right.”

Jordan:  “One more time, let’s look at the Federal debt as a percent of GDP.  Under Reagan what happened?”

John Boy:  “I know, I know.  Under Mr. Conservative, Ronald Reagan, the Federal debt nearly doubled as a percent of GDP.  That’s still hard for me to believe.”

Mackey:  “Seems as if someone is cooking the books.”

Jordan:  “Forget the conspiracy theories about distorting the data.  Remember the data were gathered when Reagan was president.”

Mackey: “But all those liberal bureaucrats in Washington hated Reagan and they fudged the data to make him look bad.”

Jordan:  Guys, whether you like it or not, economic growth under Reagan was a case of Keynesian economics at its best.  Reagan, the great communicator, roped you in to believing it was Trickle-Down economics.”

Mackey:  “Why doesn’t Trickle-Down work.  Seems as if it should.”

Jordan:  “Let’s go back to basics.  Add $1,000 to the income of someone making say $20,000-$30,000 per year.  What will they do with the money?”

John Boy:  “Spend it all.”

Jordan:  “What about $1,000 to people who make say $100,000 per year?”

Mackey:  “Might spend some of it.  Same with people making more than $100k.  But most over $100k won’t even notice.”

John Boy:  “Mackey, we keep falling into Jordan’s traps.”

Jordan:  “John Boy, these aren’t traps.  Just facts.”

John Boy:  “I know but your approach is frustrating.”

Jordan:  “Truth is sometimes frustrating.”

John Boy:  “You know it is, especially since we’ve been preaching the opposite for so long.”

Mackey: “Preaching what?”

John Boy: “That Keynesian economics does not work and the most effective way for economic growth in a recession is to cut back on Federal spending, not increase it.”

Jordan:  “Maybe it’s time to put away the ideologue rhetoric and start focusing on solutions.  The US had a Revenge Revolution and then threw out many sitting members of Congress.  The public said it was time to rethink policies like tax cut that benefit the wealthy and don’t create good jobs.”

John Boy:  “Alright, we can make some policy changes.  But…and I emphasize but…we don’t want another Obama Administration fiasco.”

Jordan:  “What was the alleged fiasco?”

Mackey:  “Alleged?  The fiasco was huge deficits.  Wild spending on health care.  The Administration was absolutely out of control.  Obama ruined the country.  He caused the Revenge Revolution.”

John Boy:  “Mackey, raise your right hand and repeat after me.  ‘Beginning now and henceforth I will think before making what are really outrageous political statements.”

Mackey:  “OK, no more statements without thinking first.  What’s the issue in telling the truth about Obama?  His fiscal deficits made Bush look like a piker.”

John Boy:  “Mackey, Mackey.  Look at Jordan’s charts.  Then get ready to eat some crow.”

(To be continued.  Included on the dinner menu, crow.)

Scene: Jordan and Sandy, a former business colleague, are having coffee.  The discussion begins Entry #121,.  This segment is a continuation of Jordan’s description to Sandy of a conversation with the Speaker of the House and the Senate Majority Leader, which begins Entry #123.

Jordan:  “A little surprised, Mackey?”

Mackey:  “Absolutely.  I had no idea.  John Boy, did you know about this?”

John Boy:  “I’ve heard Democrats talk about it but never really believed them.”

Mackey:  “Jordan, could you walk us through this chart?  I want to make sure I understand it.”

Jordan:  “Gladly.  Let’s start with what is displayed.”

John Boy:  “Federal debt as a percent of GDP, right?”

Jordan:  “Yes, debt as a percent of gross domestic product.  Not the absolute level of debt, just the percent.”

Mackey:  “So the chart really is more like what we talked about re Bill Gates.  He can afford to take on a lot more debt than any one of us because he makes a lot more money than any one of us.”

Jordan:  “True.  But we also need to consider wealth in addition to income.  A lot of people make a lot of money every year but spend most of it…and therefore really haven’t accumulated a lot of wealth.”

Mackey:  “But Gates has income and wealth.  In fact, a whole lot more wealth than his annual income.”

John Boy:  “As simple as that sounds, talking about the combination of income and wealth really helps me understand.  The United States has a lot of assets, really accumulated wealth, which could be used to back-up the debt.  What do they call that back-up?”

Mackey:  “Collateral.  The back-up is like what they do for your mortgage.  The bank uses your house as security or back-up for the loan.”

John Boy:  “Jordan, you sure no one is recording this discussion?  I’d really be embarrassed if someone heard us asking these questions.”

Jordan:  “No one is recording the conversation.  And I think you hit on a good point.”

Mackey:  “You mean that a lot of people, including many of our legislative colleagues, do not understand the basics of finance.  And especially how the Federal government is financed.   From what you’ve said, financing the government is similar in some ways to your household finances, but there are some key differences.”

John Boy:  “Let’s get started with the chart, please.”

Jordan:  “What most people don’t realize, is the US has been in debt since the Revolutionary War.”

John Boy:  “What?  Debt since the Revolutionary War?  That seems hard to believe.”

Jordan:  “Think about it.  During the Revolution, the US was really like a start-up company…but really a country.  With the Revolution we gave the finger to our biggest trading partner – call it our biggest customer, mother England.”

Mackey:  “Now what do we do for money?  And where do we get some key supplies to fight the motherland?”

John Boy:  “We’ve got to import goods.”

Jordan:  “Goods cost money, which we don’t have.  But…”

Mackey:  “But like Bill Gates, we have lots of assets that other countries can use.”

John Boy:  “So now some countries, notably France, lend us money and also buy some of our products.”

Jordan:  “A new country going into debt is not unusual.  Really no different than a start-up company going into debt.”

Mackey:  “OK, the US has lots of debt but the economy starts to grow.”

John Boy:  “Yeah and according to the chart by 1835 or so we paid off the debt.  Who was president then?”

Jordan:  “Andrew Jackson.”

John Boy:  “What happened?  We were debt free and then we go back into debt again.  Seems stupid to me.”

Jordan:  “Try the Civil War for starters but let’s move beyond that.  Think of the US as a fast-growing company.  Give me some license in this comparison but I think you’ll get the point.”

John Boy:  “Many companies have no debt.  So why shouldn’t the US operate that way?”

Jordan:  “Here’s something I’ll bet you’ve never thought about.  Do you own stock in any companies?”

John Boy:  “Of course.”

Jordan:  “Mackey, how about you?  Own stock?”

Mackey:  “Absolutely.”

Jordan:  “Many of those larger companies replaced their debts…loans…by issuing stock.”

Mackey:  “What a minute.  Are you saying the people who bought the stock are really financing the company…just like the bank?  They’re really loaning it money?”

Jordan:  “Yes, but with one difference.  The company never needs to pay off the loan.”

John Boy:  “Aren’t stockholders protected?  The company has all the assets.”

Jordan:  “Stockholders can benefit by having the value of the stock increase and/or by receiving dividends…at least some companies pay dividends.  But there is no guarantee of anything.  If the company goes bankrupt, stockholders are at the back of the line and hold what is probably a worthless stock certificate.”

Mackey:  “If there’s no guarantee or no backing to the stock certificate, isn’t the company effectively printing money?  All they have to do to get more money is issue more stock, rather than going to the bank and getting a loan.”

John Boy:  “Mackey, we get all exorcised because the government issues money without backing it up with gold or silver.  When you stop and think about it, the companies that sell stock are, in essence, doing the same thing – printing money.

Jordan:  “A real eye opener, eh?  But let’s hold the conversation about printing money.  Back to the chart and more about when debt as a percent of GDP went up and then came down.”

(To be continued)