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Deficits: Real Issue, Phony Debates

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December 03, 2010 – Comments (6)

 It is really not about "economics" or "sustainable". It is just decisions.

Enjoy.

http://www.dollarsandsense.org/archives/2010/1110wolff.html

What's at stake on either side of the class divide.

By Rick Wolff

Deficits have now risen, yet again, to headline status. Conservatives inside and to the right of the Republican Party frame the national debates by attacking deficits. They want to reduce them by cutting government spending. Liberals respond, as usual, by insisting that overcoming the crisis requires big government spending (“stimulus”) and hence big deficits. Most Americans watch the politicians' conflicts with mixtures of confusion, disinterest, and disdain. Yet deficits pose a real issue for everyone, one that the debates among politicians and their economist advisors miss, ignore, or hide.

When the federal government raises less in taxes and other revenues than it spends, it must borrow the difference. Such annual borrowing is each year's deficit. The U.S. Treasury borrows that money by selling bonds, federal IOUs, to the lenders. The accumulation of annual deficits comprises the national debt, the total of outstanding U.S. treasury bonds. So the first and simplest questions about deficits are (1) why does the federal government choose to borrow rather than to raise taxes? and (2) why does it borrow rather than cut its expenditures? The twin answers are profoundly political. Elected officials are afraid to raise taxes on business and the rich because their profits and great personal wealth can then finance the defeat of officials who do that. Cutting government spending that benefits business and the rich is avoided for the same reason. As the tax burden shifted increasingly onto middle- and lower-income people in recent decades, elected officials have faced rising tax revolts coupled with demands for more government services and supports.

In the United States—as in most capitalist countries—business and the rich, on one side, and the middle-income and the poor on the other, have placed the same demands on the government budget. Each side has wanted more government spending on what it needs and less taxes on its incomes. Both political parties thus fear raising taxes or cutting spending on the masses because that risks electoral defeats. This has been a very real, basic, and socially disruptive contradiction built into capitalist systems.

These days, business and the rich want both massive government supports to overcome the current crisis as well as their usual government benefits. The latter include government activities abroad—including wars—that secure export markets and access to crucial imports (e.g., the needed quantities and prices of business inputs and consumer goods not domestically available). They also demand the particular subsidies typically provided to agricultural enterprises, transport companies, defense producers, and so on, as well as tax reductions offered for various kinds of investments. Businesses press government to maintain or expand roads, harbors, airports, schools, mass transportation systems, and research institutes crucial for their enterprises' profits. Wealthy individuals want government spending on the police and judicial systems that protect their wealth.

Business and the rich likewise want the government not to raise their taxes. Businesses seek to keep in place their legal opportunities to evade taxes on profits (by means of offshore operations, internal transfer invoicing, etc.). Business and the rich in the United States want donations to their own foundations, to rich universities, art institutions, and their favorite charities to remain subsidized by generous federal tax reductions granted for such donations. They also currently demand the continuation of Bush-era tax exemptions and deductions on taxes on their incomes and on the estates they leave.

Middle-income and poorer Americans demand government spending for their unemployment insurance, as well as spending to prevent or soften the blow of home foreclosures, to provide low-interest mortgage money for their home purchases or refinancing, and to guarantee low-interest educational loans for their children. They want public schools well financed to function as means of advancement for their children. They support government regulation to guarantee safe and honestly labeled consumer goods and services and likewise health and safety on their jobs. They demand Social Security retirement benefits and Medicare. They share support for Medicaid, food stamps, and welfare, despite some demonization of those programs and their recipients. And they oppose both more taxes and higher government deductions from their incomes for these programs.

In all capitalist countries, more or less, the contradiction between these conflicting financial demands on the government's budget has shaped politics. Thus, elected officials have neither raised taxes nor cut spending enough to bring them into balance. Instead they have increasingly resorted to borrowing—running budget deficits. The officials like deficits because they reap immediate political benefits—“satisfying” business, the rich, and all the rest by holding down taxes and maintaining spending—while shifting the political costs of repaying rising national debt and its rising interest costs onto office-holders coming after them (today's equivalent of Louis XV's remark, “aprés moi le deluge”).

Government borrowing also benefits businesses and the rich by offering them an attractive investment. They lend money to the government that then repays those sums with interest. Instead of losing a portion of their wealth by paying taxes, those groups keep that portion (in the form of a purchased government bond) and earn more with it. Businesses and the rich are usually major lenders to their governments; workers rarely are. The same U.S. business leaders who advise governments to “live within their means” simultaneously fill their business and personal portfolios with government bonds.

Each country's unique history, culture, and politics determine how much its government borrows. In the United States, as elsewhere, successive governments (usually of both left and right) have borrowed so much that further borrowing is becoming increasingly difficult. One obstacle looms, because the more a government pays in interest and debt repayment, the less funds it has to undertake the spending business and the public demand. Over the last five years, annual interest payments on the U.S. national debt have averaged over $400 billion. Political opposition to continuing those interest payments, and perhaps anger directed against lenders, may arise (as has already happened in Europe). Since lenders to governments are overwhelmingly businesses, rich individuals, and various government entities (foreign and domestic), such opposition may draw on deep resentments. Rising national indebtedness therefore builds its own opposition. Where and when that happens or even threatens to happen, major lenders stop risking further purchases of government bonds. Unable to borrow as before, governments return to face the original problem: which social groups are going to be taxed more and/or which will suffer government spending cuts.

Greece, Ireland, Hungary, and Spain are among countries whose people have already felt the impacts of their combinations of tax increases and spending cuts. In those countries, businesses and rich citizens have been able to impose their preferred response to the problem of deficits, what politicians call “austerity.” When government borrowing must be reduced or stopped, “austerity” means sharply cut government spending on public sector jobs and services for the mass of people. Across Europe, government after government is being pressed by its businesses and its richest citizens to impose austerity on its people. However, also across Europe, slowly but steadily—because they are less well organized and financed—labor unions, left parties, and left political formations are mobilizing against austerity and for alternative plans. These involve raising taxes on business and the rich and/or reducing the government spending benefiting them.

Because the United States is the world's richest country and can borrow more and more easily than other countries, the federal government has not yet reached the limits of its borrowing capacity. However, states and municipalities are forbidden to borrow for their operating budgets, so they have already imposed austerities across the United States (especially visible in the massive spending cuts on public services in California and New York). Yet in the United States, too, there are the beginnings of signs of an anti-austerity movement. For example, in January 2010, Oregon voters ratified their state's decision to respond to the economic crisis neither by borrowing nor by cutting state expenditures, but rather by raising over $700 million in taxes on businesses and on households earning over $250,000 per year.

Consider this example of this kind of alternative to austerity programs: Every year, two companies catering to rich investors survey their clients. Capgemini and Merrill Lynch Wealth Management's “World Wealth Report for 2010” counts as High Net Worth Individuals (HNWIs) everyone with at least $1 million of “investible assets” in addition to the values of their primary residence, art works, collectibles, etc. HNWIs in the United States numbered 2.9 million in 2009: well under 1% of the people in the United States. The HNWIs' investible assets totaled $12.09 trillion. For 2009, the total U.S. budgetary deficit was $1.7 trillion. Had the U.S. government levied an economic emergency tax of 15% on only the HNWIs' investible assets, no government borrowing would have been necessary in 2009. Obama's stimulus program would have required no deficit, no borrowing, and no additional taxes for 99% of U.S. citizens.

The real debates all along should have been—and now ought to be—about who pays how much in taxes and who benefits in what ways from government spending. Deficits are necessary neither in normal economic times nor when crises hit and government stimulus is required. That business and the rich prefer lending to finance government deficits over being taxed instead is just their understandable self-interest. The rest of us have not only the right to a very different preference, but also a clear basis in economic theory and available empirical studies not to abandon our preference for theirs. We only have deficits because of who pays and who does not pay how much in taxes and who gets how much in government spending.

We should be debating the social acceptability of a capitalist class division between employers and employees that places dangerously contradictory pressures on government budgets. Had we had such debates and a democratic process of deciding them in the United States, deficits and their consequences might have been avoided. But that never happened. Instead, the mainstream debates about deficits have simply assumed their necessity. Those debates then focus narrowly on the size of deficits—whether larger versus smaller is better—rather than on why they exist and who benefits from them. No wonder those debates have never solved the deficit problem; they functioned rather to obscure the underlying issue about who pays for and who benefits from government budgets in capitalist societies.

Rick Wolff teaches economics at the University of Massachusetts-Amherst and is author of Capitalism Hits the Fan: The Global Economic Meltdown and What to Do About It.

6 Comments – Post Your Own

#1) On December 04, 2010 at 9:03 AM, fmahnke (90.07) wrote:

Hi Devo,

Nice post. While most of it is factual, I do disagree with a couple of points:

First""when crises hit and government stimulus is required"  supports  an econmic theory that is far from universally accepted. I suspect there is some "liberal bias" in this article as the writer mentions Oregon while ignoring the failure of a similar ballot issue in the state of Washington,

Although I am a critic pf BHO and his economic policies, I generally support his view of tax policy. My views are summarized here http://msncaps.fool.com/Blogs/ViewBlog.aspx?t=02005823434695143917

However, I am surprised at how inept BHO's political leadership skills appear to be in face of this issue and the considerable campaign related excellence he exhibited,  Seems to me he could have found a way to pay for the extenstion of unemplyment insurance, come uo with a tax policy like mine and beat the repubs over the head with it.

Instead, he will come to a deficit building compromise which like the Afghan war, his health care prposal, and terrorism trial for KSM, are at odds with popular opinion and in my mind, against our country's collective best interest.

I'm curious if you are still a BHO believer and hope you are well

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#2) On December 04, 2010 at 12:20 PM, devoish (98.36) wrote:

fmahnke,

from your link, 

Seems to me that there is a fairly simple solution to the argument  surrounding the extension of the Bush tax cuts for the wealthy.  If the republican argument is that this group creates jobs. then tie the tax benefits directly to those who employ american workers (could be some type of credit against employer paid FICA).  I also beleive the $250 K threshold should be raised by $100-150 or so.

 You want to collect the cost of freedom from corporate executives earning more than $250k and refund it to them in the form of a fica rebate windfall they might choose to spend on corporate executive salarys in the hopes the will hire more American workers?

I don't feel that gullible.

Regards,

Steven

 

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#3) On December 04, 2010 at 1:39 PM, fmahnke (90.07) wrote:

Well No Steven,

This proposal would tax earnings over $350-400K at the pre-Bush tax cut individual levels.  Corporate (or Sub-S) tax offsets would be offered to companies who hire American worlkers.

So a Corporate exec or small business owner making a $1 million, would have to hire approx six people at the top FICA limit (or a dozen at the avg salary) in order to get a dollar for dollar tax offset. Additionally, the Feds would collect more taxes for the dozen or half dozen new workers so  the deficit would not suffer.

I beleive deficets are the biggest threat, which is why under this plan, the top earners not hiring would go back to paying the higher rates,  It would only be fair if gpv't spending cuts were also implemented, (shared sacrafice) 

I'm surprised that this plan (ex the spending cuts) is not a liberal wet dream but if the idea is pay more unemployment insurance and put off the tax cut decision for two more years, well that just doesn't make sense to me, because the debt is the primary threat.

Are you happier with the BHO, I know what I said as a candidate but now I have decided to extend and pretend compromise proposal ??

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#4) On December 04, 2010 at 2:16 PM, devoish (98.36) wrote:

Lets not miss the point of the article.

We should be debating the social acceptability of a capitalist class division between employers and employees that places dangerously contradictory pressures on government budgets.

The real problem here is that Government borrowing has funded the financial industrys takeover of the Democracy known as the United States of America.

Let's not forget the wisdom of our Forefathers.

In chartering banks, the matter of paramount public concern is the protection of depositors and bill holders, and the act of 1829 contained a number of provisions designed to accomplish this object. No bank could do business until commissioners appointed by the governor should have ascertained that it had in its vaults gold and silver equal to one half its capital and should have received from the directors a sworn statement that there were no strings attached to this money. No shareholder could borrow from the bank until his subscription was paid in full, and no stock was transferrable until the entire capital was paid in.  Banks were forbidden to lend more than 50 per cent of their paid-in capital on the security of their own stock, to issue bills amounting to more than 125 per cent of the paid-in capital, or to incur debts amounting to more than twice their capital. Directors responsible for incurring such debts were to be held personally liable therefore. No bank was to engage in trade or to hold realty worth more than 12 per cent of its capital except as collateral or when taken on execution. Shareholders were to be liable up to the amount of their share holdings in case of loss of capital through the director’s mismanagement, and on the expiration of the charter were to be liable in proportion to their shares for the redemption of all outstanding bills. Inspection by a legislative committee was provided for, and there were to be elaborate annual reports to the secretary of the commonwealth.

A State enforced policy that was a far cry from to big to fail and bailouts.

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#5) On December 08, 2010 at 10:52 AM, mardukkorn (76.78) wrote:

Why not do what works elsewhere?

Singapore gets along exceptionally well  with low taxes and no taxes on dividends and cap gains. Their schools are excellent, healthcare is cheap,everyone has a home, there is almost no crime. They must be doing something right. So why not learn from them?

 

 

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#6) On December 08, 2010 at 7:22 PM, devoish (98.36) wrote:

mardukkorn,

I agree we should learn from those getting it right.

Singapore has a universal healthcare system where government ensures affordability, largely through compulsory savings and price controls, while the private sector provides most care.

 We are against that here. I wasn't, but it is a democracy and i lost.

Singapore has a vibrant manufacturing economy and a population of 5mil selling into an economy of 300mil, plus Europe. Their agriculture industry cannot feed themselves.

They are a tax haven for much larger economys, so they collect taxes from around the world, without the cost of road building for them.

I would love to have a small income from an economy 60 times larger than ours.

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