PERILS TO AMERICA’S DEMOCRACY OF DESCENDING TO A NEO-LIBERAL CAPITALISTIC AUTOCRACY
by Frank Thomas
I agree with Umair Haque's excellent essay, Why America is the First Poor Rich Country, that our historical process of growing income/wealth concentration creates a vicious cycle that persists through generations, effectively corroding our democracy. We have an enhanced Free Market Capitalism democracy variant that's dangerously evolving into an Aristocracy in contrast to Europe's constantly refined 'mixed blending’ of socialist and capitalist elements in their multi-party, relatively inclusive Social Democracies. It comes down to a European 'noblesse oblige' culture. That generally means those with wealth, power, influence recognize that their advantageous positions come with some morally obligated social-economic responsibilities. Unlike the U.S., Europe has on average low income 'break-levels' where the highest progressive tax rate kicks in for ALL at the same income level.
But unlike Europe, we have large numbers in the top 1%, 5%, 10% income brackets earning increasingly prodigious incomes at much lower tax rates that kick in at very high income 'break-levels.' Besides very low inheritance tax rates, this tax advantage contributes significantly to our nation's huge income inequality and obscenely disproportionate shares of national income and wealth received by the top 10% vs. the bottom 90%. The top 1% has a vast majority of wealth in the economy and control of financial markets. So, we have the 'noblesse' without the 'oblige,' i.e., the most fortunate maximize their income and wealth, with scant attention to a moral obligation to support the lot of the less fortunate and stagnantly progressing middle class. In fact, such 'oblige' behavior is usually obstructed or given a token last thought by the conservative right.
As I've said before in prior writings, Europe's mature “social democracies” like the Scandinavian countries, Austria, Germany, the Netherlands, Belgium, Switzerland and others are NOT centers of “socialism” where individual freedom and enterprise are lost according to Republicans. This is the constant demonizing ad hominem rant of the American conservative right. With few exceptions, EU countries in the main are quintessentially vibrant capitalistic economies with sound, encompassing, well-managed social welfare and safety nets. An example of a thriving capitalistic economy with an outstanding multi-party structure and social welfare system is the Netherlands. A small country of 18 million people with an economy that has given rise to such world enterprising companies as Unilever, Phillips, Royal Dutch Shell, Heineken, KLM, DSM, ASML.
Europe's social democracies seek to ensure economic and job opportunity fairness, to incentivize opportunities, to provide protections, to restrain corruption and the excesses of capitalism including externalized costs. Europe's social democracies show us that free markets, lower consumption levels (52% of GDP vs. 70% of GDP in U.S.), high societal investments in infrastructure, education, quality social welfare and safety nets can co-exist rather well - even reinforce and complement each other.
In contrast, the U.S. economy and governing system based on a broad, strong working blue collar and middle class is being transformed into a feudal society by a small number of super wealthy elites, giant corporations, banks and bought politicians. A society where a fair share in income and asset ownership by the common working folk has disappeared into a 'daily bread', paycheck-to-paycheck, job survival struggle - now being made appallingly worse by current and rapidly forthcoming technical advances in digitalization, robotization and artificial intelligence. Over recent decades a rough, ultra-demanding, dominant capitalistic paradigm has been in play in America where the working folk are experiencing near zero upward mobility; where a majority of people are failing to progress in good times and are forced to share the brunt of the pain in bad times.
Current levels and trends in income and wealth inequality would certainly have terrified the Founding Fathers. They believed that broad-based property ownership and prosperity were essential to the sustenance of the republic. John Adams wrote that the goal of the democratic government was not to help the wealthy and powerful but to achieve "the greatest happiness for the greatest number." Adams feared that "monopolies of land" would destroy the nation, that an oligarchy arising out of inequality would manipulate voters, creating a system of subordination to all. Does this sound familiar to what's been happening in America?
Since the late 1970s, our nation has been overtaken by the conservative-right, doctrinaire harangue that a minimally regulated ‘market’ economy equates with democracy; i.e., the 'market' is the foundation of our social-economic-political system. Like Umair, I've examined and am haunted by how our free market capitalism politically influences and controls our economic system at the expense of the social welfare system. Simply said, the conservative right proponents of 'market liberalism' ignore how an unfettered 'market' and lobby-influenced politicians can come to function undemocratically. The moneyed elite and corporations inexorably use their leverage to marginalize the rights, wages, social welfare of average Americans, to exploit their tax advantages to the hilt using exotic tax avoidance structures.
The Founding Fathers clearly viewed government as the protector of the many, not the few. In general, they believed economics - not politics - concentrates wealth and power. Their conception of political democracy was that it extends to every citizen equally - one person, one vote. By contrast, the 'market' tends to recognize only money - one dollar, one vote. It cares less about the penniless, those hit by bad times, those unable to pay for decent healthcare coverage, those unable to pay for their children's trade school or college education. The Founders concluded that the rich and wealthy tend to monopolize society's resources and social welfare distribution. They knew that when income and wealth become highly concentrated, like in our country today, political power can never be democratically shared.
To repeat, the Founding Fathers believed wide disparities in wealth result when an elite manipulates politics to extract monies and benefits from the labor of hard-working citizens as well as marginalize their political power. For example, politics and our highest court aligned to form the legal reality of "corporate personhood" in the Citizens United Supreme Court decision. This decision makes corporations and labor unions free as 'citizens' to fund political candidates, to support or denounce an individual candidate (e.g.by political advertising). And there are no spending limits. Many reputable constitutional experts say the unconstrained corporate political spending is eroding our democracy. The Citizen’s United ruling contributes to making the one person, one vote principle fundamentally ever more compromised, if not a joke. We know that the primary goal of a corporate entity is to generate maximum profits for its shareholders. In contrast, most EU countries set and enforce very LOW limits on political spending by corporations and other associations.
After a long history of massively destructive wars and ruthless rulers/dictators/kingships, Europeans have come to accept a government role to hold income and wealth disparities equitably in balance – for the ‘market and democracy’ to operate democratically and harmoniously in any meaningful way. That’s why the maximum progressive individual tax rate in EU countries for ALL citizens averages 50% on an individual ordinary income of ≈$95,000 (≈euro 81,000) or more. This compares to LOW U.S. progressive tax rates of 22% on incomes of $39,500 to $84,000, with step-by-step tax rate rises to 35% on incomes of $200,000 to $500,000 to a maximum tax rate of 37% on incomes above $500,000 - vs. EU’s average maximum tax rate of 50% on incomes above $95,000. Extremely Low U.S. progressive tax rates on very high income levels of ordinary income and even lower rates of 0 to 20% on up to millions in capital gains – 10% of American households own 84% of all stock – ensure that the top 1%, 10% income/wealth classes become richer and richer … at the expense of the bottom 90%.
In Europe, a significant income and social benefit comes from EU redistribution policies that bring a variety of financial gains to every citizen. To name a few: average college costs are less than $15,000/year with zero tuition costs in many countries; quality, reasonable healthcare coverage at an affordable universal monthly premium in the Netherlands, for example of ≈$130 (euro 115) for an individual 18 or above, and the monthly premium is reduced up to 70% by a government subsidy for those with incomes below $35,000 (euro 30,000); government apartment monthly rental subsidy for low income people of up to ≈40%, 4-week vacation for everyone partly funded by withheld taxes; quality, up-to-date, well-maintained infrastructure, and educational systems.
I'm not suggesting our country should copy the European progressive tax system or economic model which generally works well for most EU countries. And it’s adjusted up or down when societal needs/wants warrant that. The European social-economic model has been achieved by, among other factors mentioned by Umair, e.g. better economic interactions and redistribution, better public goods, better worker representation, uniform-for-all progressive high tax rates with hardly any deductions. As noted, maximum progressive tax rates start on incomes of ≈ $95,000 (≈euro 80,000) and apply to EVERYONE. So income and wealth distribution is FAR more broadly dispersed in Europe for a good quality-of-life standard for nearly all citizens. Reasonable social welfare benefits and safety nets support those with annual income levels below ≈$35,000.
A good balance between capitalistic market and government social welfare policies have been achieved without the interaction of multiple factors that have caused the great divide in productivity and compensation in America since 1975. Again, I'm not advocating we should adopt a typical European social-economic model like the Netherlands or Sweden, Norway, Germany, Austria. But we could learn a LOT by examining carefully the social-economic workings of these excellent free Market & Government “hybrid” social democracies.
I agree with Umair radical changes are needed to our "economic-social miracle paradigm:" a hugely costly Military-Industrial complex; grossly unaffordable, poor coverage basic healthcare for all; trillions in investments required for a 3rd world obsolete infrastructure and very weak pre-college education system; absence of a united, aggressive, innovative, pragmatic transition to green energy sources and lifestyle supported by a president who claims the science of human-induced fundamental climate change is a hoax, pure rubbish!
These urgent investment requirements when implemented simultaneously with massive Defense spending at 5% of GDP (vs. 2% in Europe) and huge tax cuts going predominately to the Top 10% and corporations in GOOD economic times is the classic formula for exploding federal Debt and Interest from already record-high levels. And that’s exactly what’s happening now with our deficits trending into the $1 trillion range as TABLE 1 shows for FY 2016-2017 and FY 2017-2018. While Obama inherited an unemployment level of 9.9% in July 2009, recovering to 4.7% in Dec 2016, to 4% in 2018, following data suggest Trump’s huge tax cuts for the rich and corporations are not being recovered by economic growth.
TABLE 1: U.S. FY 2018-2019 Budget Yields High Deficit Trend & Stagnant Growth in Tax Revenues
|
|
FY 2016-2017 |
FY2017-2018 |
% Growth |
|
TAX REVENUES (Data in $Billions) |
|
|
|
|
Individual Income Taxes |
$1,587.00 |
$1,684.00 |
6.10% |
|
Corporate Income Taxes |
$297.00 |
$205.00 |
-30.9% |
|
Payroll Taxes |
$1,162.00 |
$1,171.00 |
0.70% |
|
Excise Taxes/Other Taxes |
$269.00 |
$270.00 |
0.4% |
|
TOTAL REVENUES |
$3,315.00 |
$3,329.00 |
0.40% |
|
SPENDING |
|
|
|
|
Social Security |
$945.00 |
$987.00 |
4.50% |
|
Dept. of Defense |
$569.00 |
$601.00 |
5.60% |
|
Other Spending |
$2,205.00 |
$2,195.00 |
-0.40% |
|
Interest on Debt |
$262.00 |
$325.00 |
26.6% |
|
TOTAL SPENDING |
$3,981.00 |
$4,108.00 |
3.20% |
|
DEFICIT |
$666.00 |
$779.00 |
17.0% |
The Deficit soared to $779 billion in the FY 2017-2018 while corporate tax revenues fell 31% and Interest on Debt rose 27%! Obama inherited a 9.9% unemployment rate from Bush, which was brought to 4.7% in Dec. 2016, then under Trump to 4.1% in Dec. 2017 and to 4.0% today . Trump’s tax cuts went into effect January 2017. But the tax cuts didn’t generate sufficient additional GDP growth to make tax revenues higher than they would have been if the tax cuts had never been passed.
In fact, the CBO had forecast government tax revenues at $3.53 trillion for FY 2017-2018. They were actually $3.32 trillion or $200 billion short even though economic growth in GDP terms exceeded the CBO’s forecast. And the FY 2018-2019 is continuing this dynamic of an expanding deficit approaching over $900 billion at a 2.75% GDP growth rate and 4% unemployment rate. What’s the lesson here? The tax cuts for the rich and corporations in STRONG economic times are accelerating America’s growing budget deficits. The tax cuts are not paying for themselves. Yes, more workers have jobs but at bare survival wages. And then there are the financial pressures coming from critically needed massive investments in just our infrastructure and pre-college education systems.
Welcome to the next world of a potential financial crisis of all crises … despite all the hurrahs about our economy’s 3% GDP growth and 4% unemployment performance. The Joint Committee on Taxation, the Tax Policy Center, the CBO and Penn Wharton Budget Model are all warning that the new tax law is going to continue $1 trillion of annual deficits over next 3 or 4 years.
SUMMARY The Top 1%’s share of U.S. annual income peaked at around 23.9% in 1928 before the Great Depression, fell to 10% in 1980, soared back to 23.5% in 2007 before the Great Recession, then fell somewhat, and is now back on path to an extreme 25.0% income share of U.S. income - facilitated by the Trump Administration's 2017 tax cuts to the rich and corporations. The corporate EFFECTIVE tax rate of 27% BEFORE the tax cuts has been reduced to an EFFECTIVE tax rate of ≈17% today. This means corporations’ obscenely low federal tax revenue contribution share of 10% before the 2017 tax cuts will drop further to a TINY 7% or 8% share in 2019 and thereafter.
This and the highly disproportionate income growth of the Top 10% at low progressive tax rates has brought our nation to a mammoth income and wealth divide. In 1975, the average U.S. CEO salary was 50 times the average worker wage vs. 46 times in Europe. Today, the average U.S. CEO salary is 300 times the average worker wage vs. 55 times in Europe.
Umair Haque is right that the American public has little idea on what led to the extraordinary U.S. income and wealth gap compared to no such development in Europe. In his words:
"Why didn't Europe's "labor share of income" - that is, how much regular people receive - decline, like in the United States? The simple answer, of course, is "more social democracy, and less capitalism." But what does that mean? It means that European structures and institutions are radically different from American ones - so different, that many Americans have little idea such things ever exist.
Having lived and worked in Europe for nearly 40 years, I compliment Umair Haque for an incisive essay on our deep societal disintegration and polarization that's simply intensifying. About all I can say is what others like Umair are saying: we must open our eyes, minds and hearts to our country's severe disunity and structural problems and come to shared solutions. This calls for a reawakening of our civility towards each other, reclaiming cooperatively the social and economic balance and spaces in our society in favor of the small, the ignored, the local accountable community, the cooperative, the small existing and promising upstart enterprise.
Thinking creatively, constructively, cooperatively outside-the-box was what made our nation great before and after WWII through the 1970s. That more pragmatic, compromise, cooperative approach was working reasonably well and fairly post WWII for generations born in the 1920s, 1930s, 1940s, 1950s, and 1960s. But things have been going mostly downhill ever since for the average American.
All of the above brings me to some thoughtful words by Leroy Greason - former professor, dean, president of my alma mater Bowdoin College in Maine who died August 28, 2011:
"We are seldom absolutely right. Even when most alive and living beyond ourselves, we had best walk humbly with our gods." As one colleague of Mr. Greason remarked, "His greatest gift was his ability to find common ground among disparate people and to inspire them to work together."
We desperately need qualities like that in these times of overlapping, complex fundamental societal and environmental changes within and outside our traditional spaces and thinking processes.
Also see: Is America "The World's First Poor Rich Country
Frank Thomas, The Netherlands, March 16, 2019
