Taxes, Deficits and The Imperial Economy

First note of the day--the CBO priced the McColm Social Security Plan and it will take us fully funded into 2083 or roughly covering my own and my son's retirement. And that's without any cuts in benefits or raising the retirement age. So the phony debate really has to do with phasing the program out, not strenghtening it.

This past weekend we saw Republican congresscritters double down on extending the Bush tax cuts for the wealthiest. This in the face of a virtual avalanche of data showing they are the major reason for our massive deficits. The previous argument has been that these cuts would stimulate the economy and generate increased government revenues. The jury is in on not generating government revenues but in the last few days many people have written op-eds showing that after the tax cuts were enacted, job creation was roughly the same as before. However, the Republicans could pull a rabbit out of the hat if they argued that President Obama's ability to create by this December more jobs in his short-term of office than George W in eight years because of the existing tax structure. They already have written off the stimulus package as ineffective as John Boehner said he doesn't need to hear from economists about the stimulus to know it failed.

Reading David Stockman's op-ed yesterday about old-time Republican values, you begin to understand the term "conservative" as it shows up in Gallup polls. The 40% of the public that identifies as conservative related to values of fiscal prudence, etc. As a blogger noted yesterday, Republicans are not conservative, they are radical. And the present bunch are extremely radical.

The Financial Times (July 30) printed an article by Edward Luce "The Crisis of Middle Class America". Luce draws a picture of several middle-class Americans, who basically are fully employed but admit they exist two paychecks from the gutter. Before the Great Recession, there had been a personal recession ordinary Americans have been suffering for years. Dubbed "median wage stagnation", the annual incomes of the bottom 90% of American families have been essentially flat since 1973--having risen by only 10 percent in real terms over the last 37 years. This means that most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 percent have tripled. In 1973, chief executives were on the average paid 26 times the median income. Now the multiple is above 300.

Economists believe this is a structural problem and the trend is getting stronger. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000--the first time where Americans were worse off at the end of a cycle than at the start. Worse than the long era of stagnating incomes is declining income mobility. It should be no surprise that a majority of Americans tell pollsters that they expect their children to be worse off than they are.

Edward Luce interviewed Michael Spence, a Nobel Prize-winning economist, whom the World Bank has commissioned to lead a four-year study into the future of global growth. Spence believes the Great Stagnation is a profound crisis of identity for America. Spence says the problem was cushioned and partially hidden by the availability of cheap debt. Now that easy money has turned into heavy debt and the cushion is gone.

To be pessimistic about the future is so new for Americans, he says. He says that,"When people lose the sense of optimism, things tend to get more volatile. The future I most fear for America is Latin American: a grossly unequal society that is prone to wild swings from populism to orthodoxy, which makes sensible government increasingly hard to imagine."

Paul Krugman is fascinating to watch--especially the last few weeks--as he has pondered the gibberish coming out of Washington on the economy. This is a Nobel prize winner confronted with the world of political stupidity and even his reactions are getting volatile. Yesterday, he wrote an op-ed "Defining Prosperity Down", where he claims the governing elite just doesn't care--that a once-unthinkable level of economic distress is in the process of becoming the new normal. He is not talking about a stagnation of wages but an acceptance of high unemployment as structural. Governing elites, rather than take responsibility for job creation, are accepting high unemployment as a permanent part of the economic landscape. As he wrotes, they will condemn large numbers of Americans to long-term joblessness. He sees Congress sitting on its hands not only refusing to spend anything to create jobs but unwilling even to mitigate the suffering of the jobless.

As Krugman notes, structural unemployment becomes a self-fulfilling prophecy as long-term unemployed lose their skills and their connections with the work force, they become unemployable.

He shoots at the hyper concern about deficits and debt, noting that investors have been eagerly buying U.S. debt , driving interest rates to historic laws. He blasts those wanting to extend the tax cuts for the rich no matter what the amount of red ink they create. He then blasts the FED because it has a two-fold purpose--full employment and price stability. He says that the FED actually has a couple of tools left but they refuse to use them because they argue now that business is uncertain about future regulations. Krugman points out that this is completely at odds with all actual evidence. He foresees the FED actually tolerating deflation.

Robert Kuttner in "The Appeal of Austerity is Fading--Where is Obama?" points out that the deficit hawks, who look alike like the chicken hawks, have hogged all the microphones but that the consensus among them is breaking apart. He points to the defections of budget guru Robert Greenstein, who has had a longstanding concern about the unsustainably large deficits, and Yale economist Robert Shiller, who have taken to criticising Erskine Bowles, the chair of Obama's own commission on budget reform, that the federal budget should be balanced at about 21 percent of GDP, roughly the postwar average. The Center for Budget and Policy Priorities (CBPP) has just released a paper written by Paul Van de Water, which points out that with an aging population and heavy defense costs, government has to spend more than the 21% Bowles and the Heritage Foundation argue.

Fareed Zakaria in today Washington Post delivers a strong op-ed "To deal with the deficit, let the tax cuts expire". He argues that the "Bush tax cuts" passed in 2001 and 2003 remain the single largest cause of America's structural deficit. According to the CBO, nearly half the cost of all legislation enacted from 2001 to 2007 can be attributed to the tax cuts. The CBO estimates that creating tax credits for jobs--like in the small business loan bill Republicans are stopping--would create four to six times as many jobs as tax cuts. Zakaria argues that all of the Bush tax cuts are unaffordable. He points out that the United States has one of the smallest governments among all the world's rich countries, yet we refuse to pay for it.

Democrats fear the old Republican refrain about them tax and spending. As one colleague of mine at IRI used to say, "we just spend." The Republicans seem commited to building the shanty town on the Hill. With the exception of Arthur Laffer, every Republican economist has defected from their current political position of maintaining these tax cuts. Catastrophic is what libertarian Alan Greenspan says and Paul Volcker defected to Obama years ago. So it comes down to ideology alone and that's what I want to explore in further posts.

Over the last week, we saw the Washington Post explore in a three-part series Secret America, the $1.2 trillion-a-year military/ terrorist/ intelligence complex which has no accountability, no oversight and no known effectiveness. Over $500 billion of this complex goes to private corporations, who were aligned with George W. Bush and Dick Cheney. Then we have seen a series of analyses by economists that American corporations are no longer involved in job creation but are simply hoarders of cash. And I've argued that there are whole subcultures virtually immune to the economic downturn. What strikes me is that anyone seriously trying to come to grips with the economic crisis in America neglects to factor in the notion that maybe the requirements of our economic system are not what we assume. We need to review the economics of empire to get a greater grip on understanding the conundrum we face. Empires are notorious for only bringing home the bacon for an elite class. Remember Britain's imperial greatness came at the same time as Charles Dickens' novels.