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The Inequality Gap

Robert Reich, former labor secretary, has some worthwhile advice for the President's State of the Union address:  he notes that the focus should be the "central issue you want the nation to help you take action on".  That's "not immigration, guns or the environment" (though "[a]ll are important") but rather "joblessness, falling real wages, economic insecurity, and widening inequality" . See Robert Reich, Memo to Obama: Focus on the inqueality gap, Salon.com (Feb. 11, 2013).

He's right.

"It's the economy, stupid", that old slogan from the Clinton campaign days, goes only so far.  It doesn't tell us, for example, what parts of the economy are most important--is it the stock market's well-being, and indirectly the fortunes of the very few at the top of the income distribution who own significant amounts of those items being sold on the market?  Or is it the unemployment data, with its distressing litany of continuing failure of our economy to provide decent jobs for ordinary people?  Is it the way that corporate owners and managers can use the powers of government to make unionization difficult and thereby make it much easier for corporate management and shareholders to retain all the productivity gains while workers wages stagnate (everything from Wal-Mart's tendency to tear down union fliers in worker areas (based on my personal observation) to the CEO's determination to beat unions down any way possible (see the New York Times story in the 2/12 edition, At Cablevision, Norma Rae's Been Escorted Outside, New York Times (Feb. 12, 2013), at A23, regarding Cablevision's firing of two  dozen employees for being off work, after claiming to have an "open" management that invited worker conversations yet allowing those same employees to cool their heels for 40 minutes waiting to talk to him and then walking out and firing them for not being on the job)?  Or is it the general optimism of the upper class, who can pass on untaxed estates to heirs who will get those stocks at stepped up basis and renew the cycle of monetization without taxation for their own account?

Stock market statistics mostly tell us about the upper class, along with the upper part of the middle class that has some share of that bounty:  they don't tell us about how well the economy is serving others, unless the general well-being of corporate America spills over to the general well-being of average Americans.  It doesn't do that in an era of push-down on unions to ensure that workers have no voice, push-back on taxes to ensure that the wealthy managers and owners not only get all the productivity gains but have to pay too little in taxes to support the system that made those gains possible.  Mostly, stock market statistics tell us about how the privileged are maintaining their privilege, as their ownership of most of the financial assets continues to mean their heightened influence over most laws and their garnering of most of the gains that do take place.

This is well noted in a post on Economist's View (Mark Thoma), embedding a post by Miles Corak on Free Exchange about research on inter-generational social mobility.

The real lesson from the historical research is not that there is anything inevitable about a low degree of inter-generational mobility, or that it signals more persistence than other research. The most privileged will do everything they can to perpetrate their status across generations, and in past eras the structure of labor markets and public policies permitted, and in some measure continue to permit, a non-level playing field.

I've long argued that the way to evaluate the economy is in terms of how well it is serving ordinary people who make up the middle class (roughly defined as the middle three quitiles of the income and wealth distribution)  and how adequate is the safety net it provides for those who make up the lower class (the bottom quintile of income and wealth).  What matters is economic sustainability, in terms of  adequacy of those many intangibles by which we measure quality of life--like accessible quality health care, accessible quality education, accessible quality jobs, decent wages for decent work.  That means that government's intervention in the economy will need to be on the side of the little guy, ensuring that resource allocation isn't so skewed to the already rich that we become an oligarchy where most of us live off crumbs and a few of us live like kings.  If we want a sustainable economy and sustainable democracy, democratic eqalitarianism demands that governments temper market forces with protections for underdogs, providing counterforces to the redistribution upwards tendency of brute force capitalism.

Today, the rise of the US oligarchy and the frightening power of wealth in determining how laws work have put us in a terrible situation:   "debtor prisons, once a relic of the 18th century, are making a frightening comeback in the U.S. justice system."  Alex Kane, Miss a traffic ticket, go to jail?, Salon.com (Feb. 11, 2013).

So an appropriate slogan for progressives today should be something along the lines of "It's the inequality, stupid."  And that certainly doesn't mean more of the same old failed GOP policies that favor the wealthy, mistakenly labeled "job creators" by the GOP in its constant effort to undo unions (witness Michigan's disastrous anti-union legislation or Cablevision's determination to aid anti-union forces and squelch union activists), favor capital over labor (from the problematic preferential rate for capital gains to the ridiculous "carried interest" taxation of the compensation payments to so-called profits partners (a category of "partner" for tax purposes not provided for in the tax code but essentially an invention of Wall Street) to the squandering waste of an estate tax and charitable contribution deduction that favor meritless accession to and use of untaxed wealth and pushes the burden for government revenues to laborers instead).  And it certainly doesn't mean more of the same "deficit hawks, austerity mavens, trickle-down charlatans, and government haters who have commanded center stage for too long."  Memo to Obama: Focus on the inqueality gap, As Reich says:

The President should make it clear that any Republican effort to hold the nation hostage to the GOP's ideological fixation on the budget deficit and a smaller government will slow the economy, likely pushing us into another recession.  And that those most imperiled are the middle class and the poor. 

He should emphasize that the real job creators are not the rich but the vast majority of ordinary Americans whose purchases give businesses reason to add jobs.  And that if most Americans still cannot afford to buy, the government must be the spender of last resort.  Id.

Reich goes on to make some specific policy suggestions for acting to reduce inequality.  These include

• reversing the impact of the reinstatement of the higher Social Security tax rate by exempting the first $20,000 of income from the tax and lifing the ceiling on income subject to it;
• reviving government-run work corps, like the WPA and CCC, "to put the long-term unemployed directly to work"
• raising the minimum wage
• imposing a 2% tax surcharge on wealth in excess of $7 billion to be dedicated to education
• Cutting corporate and military welfare
• not cutting public investments or safety nets
• giving tax credits for actual job creation
• supporting states that rehire teachers, firefighters police and social workers.  Id. (quoting and paraphrasing).

Sounds like a pretty good plan.   As Corak noted (in the Economist's View post cited above):

[D]ynamic labor markets offering new opportunities to the population as a whole, progressive public policies of relatively more benefit to the relatively disadvantaged, and strong families with growing incomes and human capital will lead to much more mobility than aristocrats of a pervious era could ever have imagined.

And the Reich plan is certainly better than what most of the GOP-led state experiments like Michigan are coming up with, which read like a plan for even more redistributing upwards to the top few, including:

• eliminating income taxes in favor of regressive sales taxes,
• eliminating business taxes in favor of regressive user fees (a GOP-led Michigan "upward" redistribution "innovation"),
• pushing hard against unions  (a GOP-led Michigan "innovation"),
• reducing safety net support like Medicaid (being considered in Michigan),
• taxing vulnerable seniors on pension income (another of Michigan's recent "innovations"),
• cutting support for state universities while reallocating the support that remains to those that serve the upper class rather than underprivileged who will generally need to borrow more and take longer to succeed (another of Michigan's redistributionist efforts).

Related articles

Red state tax "reform" and "economic growth"

Robert Reich: Coming Tuesday (Hopefully): The State of the Union's Economy

FOCUS | The State of the Union's Economy

Rising inequality in America is causing the economy to sputter

Romney's Tax Views Lead to Blooper Comments Denigrating America's Elderly and Poor

Most of us who follow tax issues in the news and in political campaigns are aware that GOP candidate Mitt Romney has been very secretive about various items.

First and foremost, he has been secretive about his own extraordinary wealth:  he has refused to follow his father's example in releasing more than a decade of tax returns and he has maintained numerous accounts offshore, including in jurisdictions that are known for banking secrecy.  This secrecy is problematic for many voters, because without those returns it is difficult to evaluate his aggressiveness in using shelters or taking controversial positions on returns to save himself tax dollars --a topic that is surely relevant to his qualification to hold the highest executive office in the land.

Second, he has been secretive about his plans for achieving across-the-board tax cuts of enormous benefit to the uber-rich and multinational corporations while claiming to maintain revenue neutrality.  Respected non-partisan tax analysts have concluded that his plans simply don't add up--the "arithmetic", as Democratic speeches noted, is against him.  When he refuses to specify just what programs he would cut while cutting taxes and increasing military expenditures, many voters are naturally suspicious that the cuts will all be taken out of the safety net--voucherization of Medicare, privatization of education funding, and even more of the deregulation that cost us so much in the 2007-8 financial crisis--while continuing the over-spending on military and various lucrative loopholes for the wealthy like the "carried interest" provision for private equity managers.

Third, he has been secretive about his lack of commitment to the disadvantaged in our society.  His failure to describe how he will create jobs (other than through his claim that managing vulture capital "leveraged buy-out" funds is good preparation for the presidency) suggests that he has no ideas other than the long disproven ones being pushed by the Chamber of Commerce and other business lobbying organizations--less regulation, more privatization, more reductions to earned benefits like Medicare and Social Security, and more tax provisions that favor the rich that the GOP labels--without empirical support-- as the "job creators".  But he has nonetheless tried to foster an image of caring about American people who weren't born to the life of wealth and luxury that he's enjoyed.

That third point of secrecy was shattered by the revelation of a taped video of Romney comments to major donors (delivered at a May 17 fundraiser at an investment banker's home in Boca Raton, Florida), in which Romney showed utter disdain for the large segment of the US population who ultimately do not pay any federal income taxes.  Romney called those who pay no federal income tax "dependent on government" and indicated that they see themselves as "victims".  He concluded he'd "never convince them they should take personal responsibility and care for their lives."  See David Corn, Secret Video: Romney Tells Millionaire Donors What He REALLY Thinks of Obama Voters, Mother Jones (Sept. 17, 2012).

 

See also Chris Miles, Obama vs Romney Polls: How Latest Romney Gaffe May Have Just Lost Him Ohio, Policymic (Sept. 17, 2012);  MicCheck.com email alert, 47% Video Worsens Romney's September Nightmare (Sept. 18, 2012); Chris Cillizza, The Fix: Mitt Romney's darkest hour, Washington Post.com (Sept. 17, 2012).

Romney's 47% comment fairly drips with disdain and scorn for ordinary Americans, casting them, as the Mother Jones article cited above notes, as "a mass of shiftless moochers who don't contribute much, if anything, to society." David Corn, Secret Video: Romney Tells Millionaire Donors What He REALLY Thinks of Obama Voters, Mother Jones (Sept. 17, 2012). It is of a par with comments by a woman that I met at a reception in Boston over the weekend, who spewed scorn as she claimed that anybody that is on welfare or getting unemployment is just a lazy bum that wants the rest of us to hand them a living on a silver platter.  Romney's and the woman's comments both show absolute insularity from the real world of povery and near-poverty in America in the aftermath of Bush's Great Recession, when able-bodied men despair of their situation in being unable to find a job, any job, and young folks grow hopeless as they fill in application after application.  Without government programs to fill in the gaps for these groups, their lives would be truly desperate.  Their non-taxpayer situation has nothing to do with lack of personal responsibility and everything to do with a society in which the economy for too long has favored the uberrich at the cost of ordinary Americans.

Remember that the federal income tax is specifically designed to protect taxpayers in the lower income distributions from paying federal income tax through the use of the standard deduction and personal exemptions.   That's because Congress has always assumed that there should be a minimum below which the federal income tax does not reach.  And Congress has enacted a number of other exclusions and credits designed to ensure that the federal income tax doesn't fall too heavily on the more vulnerable amongst us.  

About half of those [46% of households] did't pay [federal income taxes] because of standard deductions and personal exemptions designed to exclude subsistence levels of income from taxation.  The rest received tax breaks, including the earned income tax credit, the child tax credit and tax benefits for older Americans such as the exclusion of Social Security benefits from income."  Richard Rubin, Romney's 47% With Not Taxes Combines Elderly with Poor Workers, Bloomberg Businessweek (Sept. 18, 2012). 

Furthermore, most taxpayers who pay no federal income tax do pay other taxes:  state and local income, property and sales taxes eat up a substantial amount of income, as do federal payroll taxes, which often amount to the most significant tax bite for these lower-income taxpayers.  And as the Rubin article also notes, people who don't pay income tax one year--because of returning for education, job losses, extraordinary medical expenses and other causes--come back on the tax rolls in later years when they finish studies or find work.

Regrettably, Romney's remarks at the fundraiser mainly reveal an eager player in the class warfare game that the right has engaged in for the last few decades--it reflects a firm support for tax policies that redistribute upwards to the elite, at whatever cost to ordinary Americans who are disdained and even despised as irresponsible and lazy.  With CEOs making 200-400 times what their average workers make and the productivity gains contributed most especially by the workers being siphoned off for increasingly higher pay for the executives, ordinary Americans already are hurting.  Tax policies that continue the rip-off by continuing preferential rates for capital gains, providing even more preferential marginal rates for the uberrich, and eliminating worldwide taxation on multinationals will do even greater harm to ordinary Americans and the sustainability of our economy.

The Budget Crisis: OMB Watch's Analysis of Ryan's path to mediocrity proposal

OMB Watch provides another progressive perspective on the ideology driving the Ryan budget proposal.

Like all congressional budget resolutions, House Budget Committee Chair Paul Ryan's (R-WI) fiscal year (FY) 2012 Budget Resolution is not simply a chart of preferred spending and revenue levels, it's also a political statement guided by ideology. And Ryan's ideology demands that the federal government divert ever increasing sums from middle- and low-income families to big business and high-income families.

Importantly, they note that the call for cuts to programs that serve the more vulnerable amongst us is justified by an arbitrary decision to cap federal revenues at a level guaranteed to create deficits unless there are significant spending cuts.  This is the "starve the beast" idea at its culmination.

On the revenue side, Ryan's budget revolves around locking down federal revenues to below 19 percent of gross domestic product (GDP). While this number is the average for the past 30 years, it has consistently lagged federal spending, resulting in the steep deficits we see today. In order to maintain this deficit-inducing level, Ryan's plan calls for cutting income taxes for high-income earners from today's top marginal rate of 35 percent to 25 percent. (Interestingly, the last time we saw federal budget surpluses, between 1998 and 2001, the top marginal rate was 39.6 percent.) Ryan plans a similar giveaway to corporations, slashing the corporate tax rate from 35 percent to 25 percent.

Pay-fors for the big tax cuts to Big Business and the wealthy?  Well, those should come partly from those pesky large subsidies in the Code, right?  But Ryan avoids naming any of those.   My guess is that he knows the GOP isn't serious about eliminating large tax expenditures that primarily benefit the wealthy and Big Business, such as (i) active financing exception for overseas finance subs, (ii) deferral for multinational corporations' active business income, (iii) mortgage interest deduction that primarily gives huge tax cuts to elites with million-dollar homes, (iv) charitable contribution deduction that lets the wealthy donate stock and take a deduction for its value rather than for what they actually paid for it and have invested in it, etc..  And besides, even if he thought that the GOP might have to eliminate a very few of those nice juicy wealthy-friendly provisions, he isn't about to name them and then get a well-funded lobbying group working against him on this.  The GOP has benefitted much too much from having those well-heeled lobbying groups for Big Business and wealthy families (like the Walton heirs) on their side, along with the right-wing purported "think" tanks like Cato, American Enterprise, Tax Foundation, etc.....

The proposal also indicates that "large" tax expenditures should be eliminated to pay for tax cuts for the rich. It states that "deductions, credits and special carve-outs" in the corporate tax code should be modified to pay for tax cuts for businesses. Notably left out from the discussion of removing these tax code "distortions" is any identification of which tax expenditures Congress should nix. Far from being bold, Ryan's proposal ducks these critical questions, shifting the heavy lifting and political daring to the tax writing committees, staving off attacks from powerful special interests that will no doubt flex their campaign contribution muscles to retain their federal largesse.

Not really cutting the rich doesn't mean that the GOP won't carry through with cutting the vulnerable.  Ryan is quite willing to list specifics here--after all, the poor and the young and the unemployed and the underemployed don't have much way to work together to have their voices heard (especially in those states where the GOP's anti-union drive is squelching unions).

In exchange for these tax cuts, spending for the old, the young, the poor, and the sick would be lopped off by two-thirds. Ryan laments the notion that the current social safety net is a "hammock, lulling able-bodied citizens into lives of complacency and dependency," while worrying about Medicaid health care providers "fleeing the system to escape endless red tape and underpayments." His solution is to apply the same failed "get-back-to-work-you-lazy-bum" policy that ended the old income assistance program and created Temporary Assistance for Needy Families (TANF).

In fact, the welfare reform of the 1990s that is approvingly cited in the budget plan did nothing to curtail poverty, and it only managed to reduce welfare rolls by forcing low-income parents to take low-wage jobs A similar approach to health care, nutrition, and housing assistance will likely result in only cutting families off from these vital programs when they need it the most.

Headlining the section of Ryan's proposals to "strengthen the social safety" are $771 billion in Medicaid cuts. Ryan's plan would convert this low-income health care program from a system in which states and the federal government share costs into a block grant program that would allow states to abandon the eligibility and benefit guidelines currently in place. Ryan argues that relieving states of this "one-size-fits-all" approach would result in significant cost savings, allowing states to pay for higher-quality care. But this is just window dressing beautifying almost $800 billion in health care cuts to low-income families that will ultimately result in poorer health outcomes for millions of people.

Nutrition and housing programs are also prominently featured on Ryan's chopping block. Ryan is clear that far too many people have access to the Supplemental Nutrition Assistance Program (SNAP, formerly "Food Stamps") and housing assistance. Applying a circular logic, Ryan insists that without kicking people out of these programs, the expenditures will be so great that people will have to be kicked out of these programs. Thus, he is just doing what will have to be done eventually. Yet cuts to health care, nutrition, and housing for low-income families is the bedrock on which Ryan builds his tax-cutting and corporate support programs.

OMB Watch points out that Ryan's plan is really a "two-fer"--it manages to take away from the vulnerable (the young, the poor, the elderly) even while giving to Big Business by letting corporations skim off the cream from the federal funding formerly dedicated to the vulnerable.  Here's where the Reagonomics mantra of privatization comes in--tax cuts with privatization is just another way of saying let's convert this funding for the poor into a subsidy for Big Business.

Ryan's plan was formulated with the goal of allowing private corporations greater access to federal funds. At the front of this effort is a form of privatizating Medicare. He calls for use of “premium supports,” which means Medicare would be changed from an entitlement with defined benefits to an insurance system in which the government provides a fixed sum of money to individuals to buy coverage. The phrase “premium supports” is used because “vouchers” doesn’t poll very well today. But a rose by any other name is still a rose. By giving vouchers to seniors to pay for their own health care, Ryan's plan would insert a middleman between patients and health care providers, giving health insurance companies the ability to skim untold billions in federal health care spending.

Ryan's plan would also voucherize federal jobs programs by doing away with them and creating a "career scholarship" program that would have the effect of giving for-profit colleges a bigger bite of the national education and training budget. And although having little, if any, impact on the budget, Ryan's proposal calls for gutting the recently passed Wall Street reform – a boon to big banks who loathe the legislation – and removing sensible oil drilling regulations despite last year's BP disaster in the Gulf of Mexico.

But if you think that this means an open look at the way we waste billions annually on militarization (one of the other four cornerstones of  privatization, deregulation, militarization and tax cuts  that make up the GOP's radical reagonomic agenda for continuing the devastation of the American economy that began when Reagan took office), think again.  Eisenhower's view that we had to maintain a military-industrial complex but should be very wary of its power has been translated with reaganomics into the view that we should constantly feed the military-industrial complex because it is the friend of the rich and Big Business, and we need never hold it accountable for anything. 

Security spending, however, would go untouched compared to President Obama's budget request, increasing compared to the Congressional Budget Office (CBO) baseline. This aspect of the budget proposal makes it a rarity among the many floating around Washington – the president's deficit commission plan is clear in its call for "equal percentage cuts from both [defense and non-defense]". The Pentagon awards hundreds of billions of contracts to private corporations every year. Cuts to the Pentagon's budget as deep as those to non-security programs would have significant impacts on the bottom lines of the nation's biggest businesses. The Ryan budget keeps the taps wide open and continues to pump billions of dollars of federal funds to these contractors.

So the Ryan budget is a disaster.

Despite claims to the contrary, Ryan's proposal would increase the debt in its first ten years. According to the CBO's analysis of Ryan's plan, in the first ten years after the enactment of his proposal, debt held by the public would actually increase compared to doing nothing. Under the hood of this clunker of a plan are draconian cuts to non-security spending that are less than the tax cuts that would be handed out to the rich and big businesses. The real cost savings in Ryan's plan come after the ten-year budget window that budget resolutions typically address. In 2022, the Medicare voucher system comes into effect, which essentially shifts health care costs from the government to senior citizens. In short, even with drastic spending reductions, the first ten years of Ryan's budget have no positive fiscal impact, while the out-years look improved because of radical Medicare cuts.

This is the budget of Big Business and the anti-government crowd. Ryan's budget doesn't dial back the laundry list of national priorities so much as it simply hacks away at the amount of resources devoted to accomplishing them. And in areas where he can, he opens them up to private corporations to skim funds as they flow from the Treasury to the provisioning of services. For what's left of programs operated by the federal government, Ryan's budget leaves a fraction of the funds necessary to implement an effective social safety net, protect the public, and invest in the economy as businesses and the wealthy contribute less.

Walker, the GOP Bully, and Michigan's crony "emergency financial manager" statute

Wisconsin Gov. Walker is still playing his "I won't budge" game of chicken with the lives and well-being of thousands of Wisconsin employees and all the others that depend on them, from family to local businesses, not to mention schools and other public services.  In the phone call a few days ago, he noted that they planned to lay off 5-6000 employees but might "ratchet that up" to blackmail Democratic senators into making the union-busting vote possible.  Today he is threatening to fire 12,000 state workers.  See Wisconsin Governor Threatens to Trigger Layoffs for Thousands of Public Workers, Washington Post, Feb. 26, 2011.

The argument is that unions get too sweet a deal, but that argument doesn't hold water, since it compares apples to oranges and disregards the fact that the state made a contract with the worker on pension and health care, through which workers gave up higher wages.  The GOP that proclaims its belief in personal responsibility, the importance of property and contract rights shows that it really means that it values those only for the wealthy when it intentionally tries to break contracts for public employees. 

Besides, the unions have already conceded that in tough financial times they should be willing to give up some of the benefits they have won in bargaining in the past.  Walker doesn't really want that--he wants to break the unions and be a national hero to the Ayn-Rand/John Birch Society branch of the Republican party (which seems to be most of it these days).   

This is not "equal sacrifice."  Walker has pushed through and signed a series of tax cuts for business.   That's robbing Peter --the ordinary wageearners who happen to work for the state as janitors and teachers and carpenters-- to pay Paul --mostly the big businesses that elects GOP politicians.  The Democratic Senators should stay away rather than assist Walker in his union-busting economic crisis-causing legislative gambit.

In Michigan, the GOP-led legislature passed an "emergency financial manager" bill that lets the GOP politicians in office appoint their cronies who weren't able to get elected and take over the jobs of elected officials.  It is privatization run amok, as schools are being closed and then leased (cheaply) to private for-profit schools.  Services for janitors and maintenance are being contracted out and those persons with 18 or 20 years of service are being fired and told that they cannot work for the new, privatized services else they will forfeit any pension rights that they have.  The claim is that this is for security reasons.

Don't these GOP politicians realize or care that they are creating a new class of poverty-striken people who were in the middle class just a few decades ago? 

 I know a family of five who are living on the (about to end) unemployment compensation of the wife, the odd jobs that the carpentar husband can get (about $500 a month at most), and the meager wages that the son gets working as the cook at a pizza bar, and some income from a daughter that is a part-time dental assistant with a young child.  The family gets just enough income that they've been turned down for money to assist with buying food.  They are afraid they will lose their home, on which they have a $102,000 mortgage.  What then?  What prospects for that young child?  For the father being able to work if he loses his garage workshop and his tools?  For the mother to find a new job if she is struggling to eat or buy a warm jacket?

This is what the GOP mentality is doing to this country.  Throwing decent people out of jobs, because they won't raise taxes on the wealthy and big businesses.  This has got to change. 

Economic Stimulus Plans (Part I)

As an economic stimulus package grows nearer, it's time to consider the various proposals and the party posturing in context.  Not unexpectedly, those groups that have long lobbied for tax reductions (especially for big business and the wealthy) are still lobbying for tax reductions.  Even companies that got TARP money from the taxpayers are busy lobbying the government for more tax reductions.  (That should have been one of the first strings attached to those funds, among many others.)  Even more unsurprisingly, the group that tends to be featured on the Wall Street Journal's editorial pages remains as convinced as ever (at least, in their public persona) that tax cuts are the way to go.  You know, that's the crowd that has argued for tax cuts for every imaginable reason, the cure-all for every governmental illness. 

So, who has got the right ideas about this stimulus plan, and what should Congress and the Obama Administration do to solve this mess that eight years of Bush and company left us with?  This posting is the first in a series over the next few days about the economic crisis and what measures make the most sense to address it. 

Let's start with the basics.  Just what is the problem we face, and how should our thinking about it be directed?

First, the credit crisis at which the TARP (troubled assets relief program) has been directed is real, but not the only piece of the problem.  The heart of the problem is the impact of the recession on ordinary Americans who are losing jobs, losing their homes, losing their savings and losing hope.  Whatever we do, we should spend our precious resources in ways that ultimately help people.

Second, any program that will be effective will be massive.  We are not in a "slight" downturn but a significant, deep and possibly long-lasting recession.  It will take massive doses of economic medicine to cure the patient.  Acting on too small a scale will likely have much too little impact to be noticed.

Third, there are both short-term and long-term needs.  We do need to "jump-start" the economy to try to spur us out of the worst depths, but we cannot think only short-term else the same problems, in slightly different forms, will come back to bite us again.  In addition to some programs designed to have a quick impact on the economy, especially in ways that help ordinary Americans who are hurting the most, we need to think about the kinds of programs that will create a long-term, viable, sustainable economy that will serve the American people well.  In other words, growth itself is not the object, but rather economic growth that is both broad-based and sustainable.   

Fourth, tax cuts--especially the business and capital and high-income favoring tax cuts of the Bush years--are generally not a viable solution for these problems.  Eight years of Bush and company was eight years of an economic philosophy based on cutting government revenues on a seemingly unending basis, with an explicit goal by some of "starving government" and "ending entitlements (read--aid to the poor) as we know it" and with the assistance of deceptive marketing touting unrealistic rosy scenarios about the impact of the tax cuts on the economy and intentionally misleading statements about those who would gain the most.  Remember Bush praising the 2001 tax cuts and saying that "average" American families of four would receive about $1800?  That number sounded good to lots of people who hadn't really though we needed tax cuts (there was no majority public interest pushing for tax cuts at the time of the (at least) $1.3 trillion dollar 2001 cut), but "average" is almost meaningless when you are putting multibillionaires like Bill Gates and Warren Buffet in with lots of low-paid janitors, housecleaners and the underemployed.  Lots of ordinary families got only $100 or so in tax cuts, not $1800 (while Bush and Cheney got tens of thousands of tax cuts out of that one bill).  Remember the American Jobs Creation Act of 2004 that really didn't do much at all to create jobs?  Remember that very low-tax-rate repatriation provision, that let companies bring earnings from abroad without tax on the ungrounded assumption (no requirement in the legislative language) that more money from lesser taxes means more jobs?  The result was that many of the companies that brought back the most money under the low tax provisions laid off employees.  Although the companies were not supposed to dividend the money out to shareholders, they did a bunch of stock buybacks, so that the low-taxed money went to their (frequently) high-wealth shareholders, who may well have then invested that low-taxed wealth overseas, causing ultimately even more job loss here.  We have, that is, seen a good bit of evidence over the last eight years of the lack of stimulative effect from tax cuts that go heavily to the wealthy and big business, as well as the lack of predictive power of the Laffer curve's so-called "hypothesis".  Tax cuts that reduce government revenues do not magically so stimulate growth that they replace the revenues they removed, nor do they stimulate the economy by spurring higher rates of growth than otherwise might be projected.  Tax cuts, in other words, generally don't create jobs.

Fifth, In an economic crisis, it is the people who cannot cope, or who are struggling mightily to cope, who need the most direct help. That means that tax cuts should be aimed exclusively at those people, since those cuts, delivered by a reduction in withholding from wages that puts more cash on a regular basis into their hands, will (i) help people who are faced with dire economic situations survive while at the same time (ii) pump that much more money directly into the economy at the local level across the country in the neighborhoods most in need of an economic lifeline, thus extending the economic jumpstart to the small businesses and communities most in need of the same.  And that means that some of the direct cash appropriated for projects must go to help that same group of people (with the same expected spreading effect within the local neighborhoods), through expansion of unemployment compensation and health care funding for low-income recipients, aid to states that permit the states to dispense assistance to low-income residents, and similar funding.

Sixth, in thinking about long-term impacts, we must ask polycentric questions and find the right solutions, looking to a sustainable future.  That is, we cannot be so focused on economic growth that we disregard the impact of our policies on economic inequality (since it is broad-based growth, not growth concentrated in the top 2% of the income distribution, that will mean a better standard of living for ordinary Americans) or on those areas in which significant changes in our policy approaches are necessary for a sustainable economy over the long term--i.e., environmental, labor, and health priorities. Thus, substantial increases in expenditures for  academic research in alternative energy and other high-value, low-impact technologies is essential, as are expenditures that expand use of existing, known high-value, low-impact technologies.  (Cf. Jeffrey Sachs, Common Wealth (both blog and book) for more on sustainable economic growth spurred by development of high-value, low-impact technological research, and note that sustainable development is not just a US-centric goal but essential to the Millennium Development Goals.  See, e.g., The Earth Institute at Columbia University for more on this.)

Seventh, in the deliberative process, the old rules permitting Big Oil, Big Pharm, and Big Finance privileged access to the decision-making process must not apply.  Lobbying by the old influential industries should be highly public and widely publicized--every instance of access should be catalogued on a public website, and every meeting of administrators or congresspersons with representatives of industry should be scrutinized for undue influence.  Just consider Big Finance and the disaster of its speculative run-up of profits and spectacular losses thrown on the public, or Big Oil and the way the neo-cons have supported military spending and war to feed the view that the US must exercise hegemony over the middle east oil fields. 

Introducing new blogs on my blogroll: Dani Rodrik and sustainablemiddleclass.com

As readers know, I believe that a sustainable democracy requires tax and fiscal policies that pay attention to the institutions of democracy andd the ability of the nation's citizens, to participate with equal respect and opportunity, in the economic, social and cultural life of the nation.  Poverty is an immediate barrier to that goal, and tax is a means of changing that barrier.  Accordingly, tax policy rests on a fundamental distributive justice principle that I have called "democratic egalitarianism."

In that vein, here's an interesting discussion of poverty in Haiti on a fellow progressive's blog, sustainablemiddleclass, back in early February, A Durable Indifference Toward Poverty.  just a few exerpts for a taste of the posting:

There is no good reason for Haitians to starve. The problem is extreme inequality of wealth and income on the island. The economy is controlled by a well-guarded elite. ......

The Gini Coefficient, which is an economic metric between zero and one used to describe income and wealth distribution, is 0.65 for Haiti - one of the highest in the Western Hemisphere. The higher the number, the greater the inequality. The Gini Coefficient is 0.54 in Mexico, 0.47 in the United States, 0.33 in Canada, and 0.25 in Sweden. ......

Anyone bothered by illegal immigration should be interested in ending poverty.
Any business trying to expand its market should be interested in ending poverty.
Anyone living in a precarious financial situation should be interested in ending poverty.

To which only can be said--how true.  So, do the politicians who are wise enough to realize the importance of egalitarian distribution of resources actually take steps to help that policy along in office?  Dani Rodrik, a Harvard economist, has some interesting things to say about that issue on his weblog (named, epynomously, Dani Rodrik's Weblog) today.  Here's an excerpt, describing data in Larry Bartel's new book Unequal Democracy: The Political Economy of the New Gilded Age (Princeton Univ. Press).

.......When a Republican president is in power, people at the top of the income distribution experience much larger real income gains than those at the bottom--a difference of 1.5 percent per year going from the bottom to the top quintile in the income distribution. The situation is reversed when a Democrat is in power: those who benefit the most are the lower income groups. If you are in the bottom quintile, the difference between having a Democratic or a Republican president in office is an income gain (or loss) of more than 2 percent per year! Strikingly, compared to Republicans, Democratic presidents generate higher income gains for all income groups (although the difference is statistically significant only for lower income groups).

Bartels shows in his book that this difference is not a statistical artifact or a fluke. ... These numbers ... are the outcome of partisan differences in policy. So if you are one of those who have bought the story that income distribution is the result of pure market forces and technological changes, with politics playing no role--think again.

United Nations Social Summit: Ten Years Later

In my last post, I wrote about the race for the presidency in Mexico that contrasts two different views of the economy--a traditional view that growth of any kind is good, with the possibility of benefits trickling down to the masses, and the populist view that privileges for the ultra-rich should be curtailed and growth should be directed to aid the poor.  Interestingly, the United Nations Department of Economic and Social Affairs has also concluded that countries should work towards broad-based growth that addresses poverty and unemployment and integrates the poor into society. 

The United Nations Department of Economic and Social Affairs issued a booklet in 2005 called "The Social Summit: Ten Years Later."  It revisits the Copenhagen Declaration and Programme of Action adopted in 1995 at the World Summit for Social Development, targeted towards developing a "society for all" in a world where globalization seemed to be creating growth benefits for unequal socieites where the gap between rich and poor was widening and the good life was bypassing millions who lived in extreme poverty.  Ten years later, the report notes a consensus that globalization has ignored vital links between poverty, unemployment and social dysfunction. 

The tenth anniversary reaffirmed the objectives of the Copenhagen Declaration and recommitted the UN members to fostering safe, just, stable societies based on human rights and equality of opportunity.  The Declaration based that goal on promotion of a more equitable distribution of opportunities, income, assets, services and power to achieve greater equality in society.  The Summit concluded that the best policies are those that empower people.  A good society cannot be attained while large numbers of people live in poverty.  The Summit recognized that "striving to equalize the distribution of income and wealth and minimizing structural inequities was complicated by both inequality before the law (that is, the inability to exercise rights and participate fully as citizens) and inequality of opportunity and conditions (that is, the inaccessibility of means and resources considered necessary to overcome structural social, economic, political, cultural, ethnic, and racial barriers)."  Id. at 7-8.  To achieve equal access to employment, specific actions are needed to enhance opportunities for specific groups, including women.  To achieve social integration, policies need to focus on strengthening participation and involvement of civil society in decision-making processes, especially for underprivileged members of society. 

Perhaps of most interest here, the UN concluded that all three of these goals--eradication of poverty, equality of employment opportunity, and social integration--require an "enabling environment founded on a framework of equity and equality."  Id. at 7.  And at the bottom of this must be a legal framework and tax system that provide a fair set of rules.  The U.N Summit called for a progressive tax system with efficient and fair tax collections.

The United States should pay attention to the lessons from inequality in developing countries around the world and to these conclusions from the United Nations' review of the problems of poverty and unemployment.  One reason our country has done so well may have been the shocks of the Great Depression and World Wars I and II, which leveled the playing field by reducing the spread between the rich and poor and the power of oligarchic families.   With a more equitable distribution of resources, the US experienced a sustained spurt of growth after World War II, facilitated by the GI Bill's education of a full generation of returning soldiers and a steeply progressive tax system that remained in place after the war to fund societal programs.  The broad-based growth was able to "lift all boats", bringing many out of poverty and into the middle class.

Congress should think about our own history, and the conclusions the United Nations has reached about the developing world, before they junk our progressive income tax system in favor of replacement "reforms" like a consumption tax (on wages) or single-rate (flat) income tax. 

Mexico's Presidential Race

The Mexican presidential race may seem a borderline topic for this blog, which ordinarily deals with U.S. tax legislation and policy.  It is worth considering, however, in light of what we can learn about the impact on a country of governance by a wealthy elite, increasing evidence of tax evasion by professionals, and poverty for the majority of the country's citizens.

The New York Times ran a story today by James C. McKinley Jr, In Race for Mexico's Presidency, Populist Tilts at a Privileged Elite, about the populist campaign of Andres Manuel Lopez Obrador, a candidate who takes commercial flights, changes in dirty bathrooms before rallies, and knows where of he speaks when he addresses the fact that "politicians, business owners and their families have gotten rich and evaded taxes while the working class has remained mired in poverty."   

Mexico is a country in which half of its citizens live below the poverty line and a mere 10 percent of the elite hold at least 45% of the wealth.  (As the Times story notes, the wealthy do not readily respond to government surveys, so the figure may in fact be considerably higher.)  Tax evasion by the wealthy is "rampant", with 40% of businesses and 70% of professionals and small business owners cheating.  The poor, however, pay their taxes--a 15% sales tax on every durable good purchased. Mexico also has very high salaries for government bureaucrats who make more than their counterparts in the US while apparently running Abramoff-like sweetheart deals for government contracts (think of FEMA's arrangements for unused trailers and the Defense Department's sweetheart deals for Halliburton in Iraq, where even acknowledged charges for meals not provided are paid by the government).  The wealthy reaped enormous profits out of privatization--look at Carlos Slim Helu, the wealthiest man in Latin America (and the fourth wealthiest in the world) and head of a family oligarchy that controls communications and other companies throughout the region.  See Forbes, here, and another summary, here.   

Obrador's background is described in this entry in Wikipedia.  As mayor of Mexico City, Obrador balanced the budget--improving tax collection by 44% and cutting 500 government jobs from the swollen bureaucracy--and used government funding to help the poor.  New York Times, supra. Obrador wants to similarly change the way the Mexican federal government serves the wealthy few with privileges that "impoverish people and affect the country's development."  Obrador believes that the country's oil wealth can be used to industrialize and help defeat pervasive poverty.

Obrador's opponent, Felipe Calderon, a conservative from current President Fox's National Action Party who has a degree from the Kennedy School of Government, see this Wikipedia entry, proposes staying the course of free trade and cutting income taxes for the rich and businesses by enacting a flat rate.  New York Times, supra.  Calderon doesn't like Obrador's social agenda, implying that he is a radical revolutionary.  Calderon's chosen path--lowering taxes on the wealthy even in the midst of considerable tax evasion-- is not dissimilar from the regressive tax situation that many "reformers" are urging on the US--a policy that would permit wealthy families to owe no tax on their capital gain income or income from corporations but would require everybody to pay a steep sales tax on items purchased.

It is interesting that a person like Obrador is considered "dangerous" merely because he has an extraordinary ability to communicate with the poor and to understand that no country can function well with a small population of wealthy elites who siphon off funds from the government through tax evasion and corrupt deals while a majority of the population festers in poverty.  That is not the situation in the United States, thankfully, but tax policies that favor creation of wealth at the expense of social programs to improve the living of ordinary Americans could eventually lead us there.   Mexico's situation is a cautionary tale for those who believe that capital should go untaxed in order to spur investment.