by Frank Thomas
John,
“Good people are out there (edit: fighting the ordinary folks fight and exposing the financially destructive, narrow-minded Republican cut spending and taxes policy). They just aren’t getting the media exposure the other side is.”
Your words are right on, John, and reflect “the same old story” of right-wing ideological domination of the public political dialogue, mastering the indoctrination art of repeated, simplistic one-liners through media channels bought by powerful special-interests’money.
A huge inequality in income and wealth in a deregulated environment caused people to go into debt to consume or borrow against the inflated value of a house. The social-economic morass we are now in shows no light at the end of the tunnel. How do we come together finally to come out of the MESS we are in?
PART 1
What Is The Republican Agenda For America?
“DOWN with deficits, debt, government spending and UP with jobs by LOWER taxes mainly for the rich.”
This is the Boehner, McConnell, Cantor, Bachman Incorporated fiscal paradise shift for America … in reality, it’s an agenda to make government small by “starving the beast.” Welcome to the resurrection of Newt Gingrich’s “Contract for America” fiasco. Successor deciple Boehner has assumed the pledge of government’s demise with his recent words: “We need to end the job-killing binges by the federal government,…, and then we need to turn attention to killing the job-killing health care law.” The irony that passes over his head conveniently is that the Republicans did a marvelous job killing ALL jobs the last decade!
Only problem is this lean and mean paradigm will increasingly starve what’s left of middle-class Americans in an economy where job growth, aggregate demand and private investment remain stagnant with ±28 million people unemployed or underemployed … all reinforcing a vicious circle of ever lower demand, risk of spiraling deflation, and thus more unemployment.
Let’s bear in mind the last decade was the Lost Decade for working people with near ZERO job growth and annual GDP growth rates of 1.9%, close to 1.3% in the 30s Great Depression. We now have both private and public jobs being wiped out at all levels – a recipe for an ongoing financial relapse and continuing deficits (similar to Japan’s 1992-2004 economic stagnation).
As most informed Americans well know by now, tax cuts, mainly benefiting the rich, accelerate deficits and do little to create jobs (as Reagan found out much to his surprise). The right wing never stops lying about this much proven point.
However, as stated, the Republican priority is not lower deficits but smaller government and Obama’s defeat in 2012 – no matter the disproportionate economic sacrifices inflicted on ordinary Americans.
A creative, balanced, pragmatic BLEND of austerity measures and renewal policy solutions in the interests of everyone – middle-class as well as the upper class – clearly is not a driving Republican priority. Ignored is the persistent recession middle-class squeeze (building up over 30 years) with lost jobs and lost home equity and retirement savings.
How Will A Balanced Budget Amendment To The Constitution Help?
Republicans are now proposing a tough Balanced Budget Amendment (BBA) to come to grips with the soaring repetitive federal budget deficits – presumably formulated so as not to inflict greater pain on the working class, but of course this is the million dollar question.
In my opinion, the Republican initiative for a BBA could be a good idea providing it didn’t duplicate on a national level California’s catastrophic BBA experiment passed in Reagan’s time as Governor … and providing the language didn’t mirror an anti-government mission or incorporate strictures further harming the very vulnerable middle-class.
The Amendment as now formulated will:
- Require Congress to balance the Federal Budget each year
- Prevent Congress from spending more than 18% of GDP
- Require a 2/3 supermajority vote to raise taxes
The argument is that most states already have some form of BBA. This is true. BUT, the inevitable state and local budget shortfalls that frequently occur are by necessity greatly offset by recycled federal taxpayer funds. Without such support funds, most states would be in even more dire financial straits today (and would have been historically).
California, for example – despite federal funds support and emergency, panic implementation of other local taxes/fees – still has a ±$25 billion deficit – and climbing under its statute enforced BBA rules. Why is this? The answer is: insuffcient tax revenues caused by the state’s BBA over the years. (Ed. note: California has a 2/3 majority requirement in order to raise taxes put in under Prop. 13 which also is driving the deficit. Despite Democratic control of all three branches of government, California could not close it's budget gap because they were a few votes short in both Houses this year to raise taxes.) So what can be done in such a situation? Simple … fire teachers, firemen, policemen, government service providers; destroy Union collective bargaining rights; reduce social net benefits, etc. Result? State deficits and social instability are rising to inhuman proportions. This self-destructive practice on a national scale under a federal Balanced Budget Amendment would be disastrous.
The EU has a simple rule for controlling state budget deficits. The rule requires that a deficit not exceed 3% of GDP, with allowances for emergencies. When pro-actively enforced under effective warning signals – which wasn’t done for Greece, Ireland, Spain, and Portugal – it has worked reasonably well for the mature EU countries.
In short, if a federal BBA is to be given serious consideration, it should Not be based on the three key provisions noted above. Such an Amendment should incorporate the following refinements, without riddling it with loopholes:
- Require that annual budget deficits not exceed 2% of GDP
- Prohibit by statute federal government borrowing from Social Security Trust Fund to cover other deficit spending. In past years, trust fund surpluses amounting to over $2 trillion have been siphoned off by the federal government borrowings in exchange for Treasury notes. This conceals the true nature of normal federal budget shortfalls and diverts taxpayer funds from a trust fund most Americans assume is for their minimum old-age pensions.
- Prevent Congress from spending more than 20% of GDP in any year which could be waived in times of recession, environmental disasters, war or military conflict. The 18% of GDP cap is far too low. It would have our country – with its no-holds barred, winner takes all political infighting culture – frequently meshed in enduring controversial budget storms. Result? The Supreme Court starts to run the country’s business.
Federal spending as a % of GDP in past decades was as follows: 17.8% in 1960; 19.5% in 1970 (Vietnam War); 21.7% in 1980; 22.8% in 1985 (Reagan’s increased Defense budget and lower taxes for rich); 21.9% in 1990 (Iraq War); 18.2% in 2000 (under Clinton); 19.9% in 2005 (under Bush Jr. with 2 wars); 25.4% in 2010 (under Obama with 2 wars, a nation still suffering from the Great Recession depressing GDP growth, tax revenues). - It is felt that a supermajority requirement for Congress and each state to raise federal taxes will hamstring flexibility of central and local government initiatives in running operations with a minimum of paralysis from extended infighting (as happens in California). Moreover, a 2/3 supermajority requirement would give an even greater advantage and incentive to the wealthy (e.g. Kochs) and corporate special interests to buy political and media influence to prevent the 2/3 majority from happening -- bringing our democracy that much closer to an oligarchy "of the rich and powerful, by the rich and powerful, for the rich and powerful."
How Much Has Our National Debt Grown In Past Decades?
The ultra-right especially and media pundit sensationalists tend to play on the public’s fear or preconceptions by manipulating and often misrepresenting government financial performance data. The lying machine is alive and speeds up in times of crisis. This has been occuring lately in discussions around raising the debt ceiling. It has occured when discussing the origins of our $13.8 trillion national debt, yearly deficits, and “Who is responsible.”
While the evidence shows both parties are responsible, it also shows that almost 70% of the $12.9 trillion increase in the national debt – after Pres. Carter’s last year office in office in 1980 – has happened on the watch of Republican Administrations (see TABLE 1). Below is a factual statement of origins of past debt growth … typical data so often used in a distorted blame game to misguide or dumb down the general public’s understanding.
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TABLE 1 National Debt Increase %+-
DOLLARS IN BILLIONS (Year Ending)
1980: Pres. Carter $909
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1984: Pres. Reagan $1,565 $656 72%
1988: Pres. Reagan $2,602 $1,037 66%
1980-1988: Pres. Reagan $2,602 $1,693 186%
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1989-1992: Pres. Bush. Sr. $4,065 $1,463 56%
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1996: Pres. Clinton $5,182 $1,117 27%
2000: Pres. Clinton $5,674 $492 9.5%
1993-2000: Pres. Clinton $5,674 $1,609 29.5%
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2004: Pres. Bush Jr. $7,355 $1,681 30%
2008: Pres. Bush Jr. $10,025 $2,670 36%
Plus: Tax revenues $1,250(a)
reduced by Bush
tax cuts: 2001-08(a)
2001-2008: Pres. Bush $11,275 $5,601 99%
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2009-2011: Pres. Obama $13,800 $2,525 22%
Less: Tax revenues -$450 (b)
Reduced by Bush
tax cuts: 2009-11
Net Debt Increase: Pres. Obama $2,075 18%
NOTE: The $2,075 net debt increase under
Obama was caused by recession, saving
financial institutions, stimulus package,etc.
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1980-2011 TOTAL $13,800 $12,891 (c)
DEBT GROWTH UNDER REPUBLICANS: $ 8,757 = 68%
DEBT GROWTH UNDER DEMOCRATS : $ 4,134 = 32% (d)
SOURCE: U.S. Federal Budget Reports, CBO 2011 Study: Bush Tax Cuts
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FOOTNOTES:
(a) CBO 2011 study result Bush tax cuts reduced fed. tax revenues $2.8 trillion between 2002-11; $1,250 figure is 50% of CBO study
(b) Fed. tax revenues reduced by Bush tax cuts per CBO study reduced 50%
(c) June ending debt of $13,800 minus 1980 $909 ending debt under Carter
(d) $4,134 excludes 2009-2011 $450 billion debt increase caused by Bush tax cuts
So much for the Republican double talk that those profligate liberals, with Obama in the vanguard now, are the BIG SPENDERs causing most of the expansion in national debt over the last 31 years. In fact, the really big Republican spenders and deficit producers were Reagan, Bush Sr., Bush Jr.
Reagan to his great credit saw that “tax decreases don’t pay for themselves” as debt and deficits rose steeply in his first term of office, not helped by sharply increased Defense spending. Reagan got caught up in the “Trickle Down” political-economic con game that lowering taxes for the rich reduces deficits and increase jobs. Reagan ended up Raising Taxes 11 times. Bush Sr. also saw the need to increase taxes.
Tragically, Bush Jr. (and Greenspan) didn’t respect the junk economics of “Trickle Down” calling for reducing taxes largely for the wealthy because this increases jobs – a line Boehner robotically repeats to the party faithful. The truth is that the modest 2001-07 economic expansion period produced lackluster tax revenue growth and an anemic 6.2 million jobs.(see study: U.S. Pattern of Structural & Long-Term Joblessness ).
The meager 6.2 million job increase over 7 years evaporated when ±8 million jobs were lost in the 2008-09 Great Recession. After 2009, the Great Recession was thought to be finis, but the job and growth crisis is still unfolding. No need to worry though, the deficits and debt will magically disappear by firing government workers at all levels and lowering taxes to expand jobs. If you believe this financial math wizardry, you're drinking too much wine.
PART II
How Is Our Economic Development Affected by the Global Economy?
There are critical structural challenges to our economic system in a technically fast-evolving, tightly integrated global economy. An economy where emerging nations with lots of cheap labor and sustainable +8% GDP growth rates are placing severe competitive pressures on existing scarce natural resources, on the income, wealth and job opportunities of advanced nations. Our national debt escalation is but a serious symptom of these underlying global changes affecting future growth dynamics.
Some of these structural factors are:
- U.S. Consumption at 70-72% of GDP (vs. 60% in Europe) is not sustainable with huge trade deficits. This dependence combined with stagnant wages inevitably exhausts savings, accelerates credit levels (i.e. living beyond one’s means) to buy cheap imports offsetting stagnant wages, drives up trade deficits to new astronomical levels, and reduces system liquidity for desperately needed societal improvements. With a national debt structure approaching 100% of GDP, this economic vicious circle will only lead to repeated social-economic crises. Lower consumption patterns will be an increasingly negative factor affecting future aggregate demand and our economic model. More on this later.
- New labor-saving technology, automation, robotization, outsourcing, job downgrading, also means relatively fewer decent jobs in coming years – particularly job opportunites for the less well-educated in a world favoring high-value-added jobs. The Wall Street Journal recently reported that the top U.S. firms cut 2.9 million jobs in the last decade – a Zero job growth decade – while hiring 2.4 million overseas.
- A structurally slower rate of job growth started in the 80s, slowed down substantially to less than 1% in 2001-07 and peaked to below zero in the 2007-09 crisis bubble. Recently, there has been a slowdown in the low-value-added service job sector – retail, hotel, restaurant, construction, health-care, government jobs – providing over 90% of all new jobs in the past two decades. This slowdown cannot be regained by the much smaller high-value-added job sector of the well-educated in computer science and design, finance, consulting services, engineering and production of products. Manufacturing activities have declined considerably the last 30 years. They now provide jobs to less than 8% of the workforce vs. 22% in 1980 and vs. +20% in Germany today – expanding Germany’s job opportunities, technical knowhow and breadth as well as trade surpluses. Meanwhile, U.S. jobs are growing less in both low-tier and high-tier job sectors adding other pressures on the nation’s ability to continue Consuming at 70-72% of GDP.
- Our economic model is structurally out-of-balance, relying far too much on consumption for GDP growth with stagnant wages driving cheap imports and massive trade deficits made worse by polluting fossil fuel imports. Under our economic model, high trade deficits reduce GDP so much we are forced into an abnormal dependence on consumption triggering irresponsible debt expansion and the next financial crisis.
We are in a losing battle with the GDP formula for growth: GDP = Consumption + Private Investment + Public Investment + Net Exports.
Our GDP growth rate is greatly depressed by huge trade deficits, which in turn depress private and public investments, which in turn drive our economy into a high consumption dependence with all the negative consequences. The current jobless GDP growth may comfort the few winners, but it’s a bankrupted development. The GDP components of growth are relatively much more in balance in mature EU countries with low net exports (trade deficits), higher private and public investments, much lower consumption (+-60% of GDP) and thus far higher savings (10-12% of GDP), adding more liquidity and stability to the entire social-economic system.
Until we learn how to get our economic model in better balance with the GDP components of growth, we are systemically destined to social-economic manic depression Ups and Downs, testing the barrier of an eventual complete breakdown!
- The economic model puzzle is how can the mature EU countries, where annual GDP growth averages about 10% less than ours, still have a decent living standard, no excessive trade deficits, lower unemployment levels (excepting the weaker countries under great stress now), stabilizing social-nets, active innovation and entrepreneurship … and do this with higher marginal tax rates?
Some answers are: higher household savings supporting private investment, VAT and ample tax funds for public investments, getting something concrete and valuable back for higher taxes, low college education costs, excellent health care coverage, constantly updated and state-of-art infrastructure, quality of life, e.g., vacations, a much, much flatter disparity between high-low income /wealth classes contributing to a spirit of equity and cohesion.
- Propagandists like to say that redistributing existing wealth by progressive taxation does not create wealth. Only low taxes spur economic growth and net tax revenue growth. Reagan found such claims to be completely FALSE; as did Bush Jr. but would never admit it; false also to the Germanies, Hollands, Swedens, Denmarks, Norways, etc., of this world; false also according to CBO study showing that tax cuts replace 22% of lost tax revenue the first 5 years, rising to replace 32% of lost tax revenue the second five years. In layman’s language: a $1 million tax cut would generate a $780,000 deficit in each of the first 5 years and a 680,000 deficit in each of the second 5 years!
TABLE 2 shows that the compositions of federal tax receipts from individuals, corporations, retirement receipts (Social Security), excise and other taxes have been getting Smaller or Stagnant in recent decades:
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TABLE 2 PERCENTAGE COMPOSITION OF FED. TAX RECEIPTS
1960s 1970s 1980s 1990s 2000s
Individual 44.1% 45.4% 45.8% 45.7% 44.7%
Taxes
Corporate 20.7% 14.6% 8.9% 10.6% 10.1%
Taxes
Retirement 19.9% 28.8% 35.2% 35.3% 37.6%
Taxes
Excise 10.8% 6.0% 4.8% 3.9% 3.2%
Taxes
Other 4.5% 5.2% 5.3% 4.5% 4.4%
Taxes
Individual taxes are extremely significant and stable contributing about 45% of all federal taxes. About 70% of all individual taxes are paid by the top 10% income bracket. This group earns +-48% of all reported income and owns 70% of all household wealth. Of course, conservative propagandists focus only on the 70% of individual taxes paid figure, ignoring the top 10% group's remarkably high absolute growth in income and wealth at the modest effective tax rate of +-20% -- of course,after exploiting all the tax loopholes, including 15% capital gains tax.
Hey, Mr. Boehner, do you hear me? The upper 1%-5%-10% income earners pay more taxes because of the huge increases in their income and wealth. Consider this FACT Mr. Boehner: Over the past three decades, 34.6% of all income growth went to the top 0.1% of all earners! In contrast, 90% of all earners have collectively seen only 15.9% of all income growth over the same period (Source: Economic Policy Institute, Feb. 2010). Republican propaganda that the rich are overtaxed is the party’s lie machine working overtime. Conclusion on individual taxes? Any dropping of the top income earners' taxes, besides increasing federal deficits and further exploding the income/wealth gap, will endanger the critically important, stable tax contribution of these taxes.
Same applies to corporate taxes which have declined 50% from 21% of all taxes in the 60s to 10% the last decade. Republicans and some Democrats, to please their election financiers, propose dropping the statutory corporate tax rate from 35% to 25%, knowing that the current corporate effective tax rate is at 25%. So, with all the loopholes and special deductions, this means the proposed 25% statutory rate will drop to a new low effective rate of +-18% range! This would have a disastrous effect on the already tiny, tiny percentage contribution of all taxes corporations already make to the nation's tax revenues. It would also raise pressure to increase individual taxes, add to deficits and intensify existing make-shift panic practices of many states to find other taxes in all directions to compensate for insufficient local revenues and federal funds.
Retirement receipts (Social Security) have been stagnating as a percentage of all taxes the past 30 years. In combination with the aging population and people living longer, this points to the need to improve the contribution of retirement receipts and/or reduce outflows by resetting retirement age to 67, doing away with benefits for millionaires, discontinuing the government practice of borrowing from the trust fund, and starting to refund the over $2 trillion accumulated government borrowings from trust fund (though legally done).
Excise taxes have all but vanished as a % of all federal taxes, dropping from 11% of all taxes in the 60s to 3.2% the last decade. Besides contributing to the extraordinary wealth gap in America, this is just another factor squeezing our nation's overall tax revenue base to the primary benefit of the rich.
Conclusion: It's financial suicide to be recommending reducing marginal tax rates on the rich unless compensated for by serious tax reform that removes tax loopholes and special deductions. New taxes having no notable negative effects on deficits and aggregate consumer demand are still a critical (tax reform or not) dire need to reduce deficits/debt while also investing in our society’s renewal. It’s impossible to just cut our way out of deficits and debt!
What Blend of Balanced Solutions Deserve Consideration?
A balanced strategy mix around which to design a prudent tax and financing policy should embrace the following goals:
- Take needed austerity measures to remove wasteful spending
- Reform (not privatize) Social Security and Medicare
- Invest in human capital, technology, infrastructure
- Focus aggressively on renewables, eliminating fossil fuel imports
- Reduce debt and deficits under some form of balanced budget rules
- Fund programs by 50% self-financing (new taxes and cost cutting) and 50% debt financing
As opposed to a cut,cut,cut strategy with no tax increases, making things worse – a blend of financing actions to fund above goals might include:
(1) Implement a financial transaction tax on all stock, bond, large currency transactions – potential annual savings $100 billion
(2) Remove tax subsidies for large firms, e.g., the oil firms – potential annual savings $50 billion
(3) End tax havens and tax loopholes – potential annual savings $75 billion
(4) Reduce tax loopholes and simplify a tax structure so complex that even Warren Buffet stated recently he had a lower tax rate than his secretary
(5) Limit deductibility of interest on residential real estate (as the Netherlands is now planning to do) especially on second homes
(6) Reduce unaffordable Defense spending back to 3.5% to 4% of GDP over next 5 years – potential annual savings $200 billion (Obama Administration's recent $50 billion savings target is a joke. This out-of-control cost center contributes at least three times that amount to our annual deficits.
(7) Re-examine unfair trade practices as our current account deficits are no longer sustainable. Financing $40-65 billion a month trade deficits robs liquidity for investments in our society. Furthermore, it’s going to be increasingly difficult, if not impossible, to finance trade deficits even at a higher interest rate for Treasury notes. The sheer scale of trade deficit growth is nothing but ominous, rising from $132 billion in the 70s, to $940 billion in the 80s, to $1,457 billion in the 90s, to $5,636 billion in the 2000s (i.e., $5.6 trillion).
(8) Provide incentives for aggressive expansion of worker-manager owned Cooperatives that place profit and concern for people and communities on a more equal plain. Cooperatives bring money circulation closer to communities, reduce trade deficits, and expand jobs by more buying and producing of products at home.
SUMMARY
Let's not forget there's a minimum safety net in the U.S. The whole society has always been based on the assumption that new work is around the corner. We are in a dramatically changing world where such hopes are getting far more difficult to realize. Structural unemployment and underemployment sends too many people into a descending spiral: job degraded, health care coverage lost, auto lost, home lost, job lost, family lost … FOOD STAMPS!
The human challenge can't be better portrayed than in this painful job debacle picture (TABLE 3) that omits the ugly trend of a permanent drop in wages for those lucky enough to find work.
TABLE 3 UNEMPLOYED AND UNDEREMPLOYED IN MARCH 2011
A. Officially defined as unemployed (a) 13.5 million
B. Persons not in the labor force but wanting a job 6.5 million
C. Working part time but desiring full-time work 8.4 million
TOTAL 28.4 million
(a) Revised to 14.1 million June 2011
SOURCE: U.S. Dept. Of Labor, Bureau of Economic Research
When all is said and done, the U.S. challenge is to find a sound fiscal and human balance in our nation’s renewal process that benefits ALL Americans.
Purist ideology and orthodoxy must be set aside … if we are to recapture those unique American creative, pragmatic, dynamic skills. This requires courage to try new initiatives such as reducing the number of jobs exported that should stay at home … such as getting our house on a solid financial footing while investing in renewal … such as getting off the fossil fuel cocaine. These goals need not be mutually exclusive.
I want to be optimistic that our broken, polarized political climate will step up, come together to make the necessary changes … while at the same time recognizing this may only be possible by the common folk finally fighting back to get justice, the true facts, the development options, and a fair share of the pie in a more level playing field.
Frank Thomas
The Netherlands
July 2011
