ADDRESSING THE DEFICIT

ABSTRACT: The federal government’s deficit does need to be addressed, but doing so precipitously and in the wrong ways will hurt the economic recovery. Spending cuts and tax increases that have the least negative impact on jobs and the economy should be used. Given these criteria, four items come to the top of the list: 1) A financial transaction tax, 2) Cuts in military spending, 3) Reversing tax cuts and loopholes for high income individuals, and 4) Closing tax loopholes for profitable corporations. These four policy changes would eliminate the roughly $1 trillion per year deficit.

I urge you to determine where candidates for election stand on these measures as alternatives to the “fiscal cliff”. After the election, I urge you to contact your elected representatives to let them know where you stand and to ask them their position on these issues.

FULL POST: The federal government’s deficit does need to be addressed, but doing so precipitously and in the wrong ways will hurt the economic recovery. Specifically, the austerity approach of across the board budget cuts and tax increases, as in the 12/31/12 US deficit reduction “fiscal cliff” (see 9/19/12 blog post) and as currently being implemented in Europe, would hurt job creation and likely push our economy back into a recession, as is happening in Europe.

Selected spending cuts and tax increases that have the least negative impact on jobs and the economy should be used, as opposed to the broad ones of the “fiscal cliff.” Spending cuts in areas that have seen significant recent increases and the reversing of recent tax cuts should be prioritized. Fairness should also be considered.

Given these criteria, four items come to the top of the list:

A financial transaction tax
Cuts in military spending
Reversing tax cuts and loopholes for high income individuals
Closing tax loopholes for profitable corporations

These four policy changes would eliminate the roughly $1 trillion per year deficit. Here’s some detail on each of them.

A financial transaction tax (FTT) could generate $500 billion of revenue per year with a very low tax rate of between 0.1% and 0.5% on financial transactions (i.e., between $1.00 and $5.00 on the purchase or sale of each $1,000 worth of stocks, bonds, currency, commodities, or other financial instruments, including “derivatives”). If such a tax were applied very broadly to all financial transactions (there are over $1 quadrillion of financial transactions each year in the US), a 0.1% tax would actually generate over $1 trillion and eliminate the full deficit by itself. [1] A bill to create a FTT tax has been introduced in Congress. It would generate an estimated $350 billion per year. Most of us pay a sales tax on many of our purchases, so why shouldn’t there be a sales tax on Wall St. transactions? (More on the FTT in my next post.)

Military spending could be reduced without jeopardizing national security because:

We are winding down the wars in Iraq and Afghanistan ($170 billion in 2011),
Military spending has more than doubled since 2001 (increasing almost $400 billion per year and more in percentage terms than any other component of the federal budget),
There is significant waste (easily tens of billions each year) in the military budget (some of it pork barrel spending to favor specific Congressional districts), and
The US alone spends over 40% of all global military expenditures and three times what our European allies spend relative to the size of their economies. (See blog post of 11/17/11.)

Furthermore, military spending produces fewer jobs than just about any other kind of public spending. Overall, phasing in cuts to military spending of $100 – $200 billion per year would be quite reasonable.

Personal income tax rates have been reduced significantly over the last 30 years and most recently in 2001 and 2003. Since 1981, tax rates on high incomes (the cut off has varied between incomes over $200,000 and over $400,000) have been cut in half (from 70% to 35% on regular income). The lowest rate has been cut from 14% or 15% to 10%. Note that if you have taxable income of $1 million, the reduction from 70% to 35% puts $350,000 in your pocket every year. (See blog post of 11/27/11 for more detail.)

Reversing the tax cuts of 2001 – 2003 for those with incomes over $250,000 would generate $200 billion per year. If The Buffet Rule were implemented, eliminating loopholes and special tax benefits so that those with the top 10% of incomes actually paid at least 30% in income tax, revenue of $450 billion would be generated.

The corporate income tax rate today is 35%, down from 46% in the late 1980s. The effective tax rate (what is actually paid) was 18.5% in a recent study of 280 large, profitable corporations; down from 26.5% in the late 1980s. (See blog post of 11/5/11 for more detail.) If corporations actually paid the 35% rate an additional $500 billion in revenue would be generated. If they paid an effective rate of 22.5%, which was the average between 1987 and 2008, revenue would increase by $250 billion.

In summary, four manageable steps that would return us to the status quo of the 1990s and add a financial transactions tax from the 1960s, both periods when the economy was doing very well, would eliminate the $1 trillion deficit:

A financial transaction tax: $350 – $500 billion
Cuts in military spending: $100 – $200 billion
Reversing tax cuts and loopholes for high income individuals: $200 – $450 billion
Closing tax loopholes for profitable corporations: $250 billion
TOTAL: $900 billion – $1.4 trillion

These steps, some phased in over time, would result in federal budget surpluses (as occurred in the 1990s). They would strengthen our economy and reduce inequality. None of them are radical; they simply reinstitute previous policies.

I urge you to determine where candidates for election stand on these measures as alternatives to the “fiscal cliff” that is in place for December 31, 2012. (See 9/19/12 blog post.) And after the election, I urge you to contact your elected representatives to let them know where you stand and to ask them their position on these issues.

[1] Buchheit, P., 8/27/12, “Add it up: Taxes avoided by the rich could pay off the deficit,” http://www.CommonDreams.org/view/2012/08/27

THE “FISCAL CLIFF” AND THE ECONOMY

ABSTRACT: The federal budget’s “fiscal cliff” is looming on December 31, 2012. If Congress and the President let us fall over its edge, it will significantly harm our fragile economy. It cuts annual spending by about $100 billion per year and increases taxes by about $350 billion per year. The result would be a significant reduction in the annual deficit, from about $1 trillion to about $600 billion. However it would also negatively affect the economy: a recession or projected growth of only 0.5% versus growth of between 1.7% and 4.4% if the fiscal cliff were completely eliminated. The negative impact on the economy would make it harder, over the longer-term, to reduce the deficit.

There are many ways to soften the cliff’s impact. One would be to eliminate the tax increase on income under $250,000. Another would be reducing the spending cuts. It’s clear that the US government’s stimulus package helped soften the US recession; it’s equally clear that austerity is not a route to economic recovery. Austerity in Europe has turned a slow recovery into a stalled economy with recession in some countries. We need to call on Congress and the President to soften the fiscal cliff. Right now, the primary focus needs to be on strengthening the economy and creating jobs, which, over the longer-term, will help reduce the deficit.

FULL POST: The federal budget’s “fiscal cliff” is looming on December 31, 2012. If Congress and the President let us fall over its edge, it will significantly harm our fragile economy. Under current law, annual spending cuts of about $100 billion per year would occur and the Bush tax cuts of 2001 through 2003 would expire, which would result in an annual tax increase of about $350 billion.

The result would be a significant reduction in the annual deficit, from about $1 trillion to about $600 billion. However, it would also negatively affect the economy; projections range from a recession (i.e., negative economic growth as economic output shrinks) to growth of only 0.5%. If the fiscal cliff is completely eliminated, in other words if all the tax cuts are extended and the spending cuts are eliminated, projected economic growth would be between 1.7% and 4.4%. [1][2] The negative impact on the economy would make it harder, over the longer-term, to reduce the deficit.

There are, of course, many ways to soften the impact on the economy and on specific groups or agencies. The fiscal cliff’s increased taxes would affect almost everyone and, therefore, hurt consumer spending. Some people are proposing eliminating the tax increase on income under $250,000. This would reduce the tax increase to about $200 billion per year (instead of $350 billion). In addition, it would significantly reduce the impact on our economy (which is 70% consumer spending) because those with incomes over $250,000, who would see their taxes increase, spend only a fraction of their income on goods and services in the local economy. The real job creators in our economy are the vast middle class; their consumer spending is businesses’ revenue and increased business revenue is what leads to job creation. [3]

Reducing the spending cuts would soften their impact. The fiscal cliff’s spending cuts would be split roughly evenly between the military and social programs. Some of the loudest voices arguing for reducing the spending cuts are opposing the $50 billion cut to military spending despite the facts that:

Military spending has more than doubled since 2001,
We’re winding down two wars, and
This represents less than 7% of the over $700 billion per year military budget, which is roughly half of discretionary spending.

One argument that is being put forth is that a cut to military spending would cost jobs. Ironically, this argument is being put forward by many of the same people who have said that government spending doesn’t create jobs and that the way to improve the economy and create jobs is to cut government spending. Yes, cutting military spending will cost jobs in the military-industrial complex. But because military spending creates fewer jobs per dollar than other types of spending, cutting it will cost fewer jobs than cuts in other areas, or, if these cuts will allow spending elsewhere, more jobs will be created than those lost, resulting in a net gain in jobs. [4] (See 11/17/11 post: Defense spending: Can we afford to cut it?)

It’s clear that the US government’s stimulus package helped soften the US recession; it’s equally clear that austerity – cutting government spending and benefits often while raising taxes in an effort to reduce government deficits – is not a route to economic recovery. [5] While deficits do need to be addressed over the longer term, doing so while our economy is weak will only exacerbate the problem. Austerity in Europe has turned the slow recovery of 2009 into, at best, a stalled economy and recession or even depression in some countries. Demands for austerity in exchange for financial aid have occurred five times in Europe, with Greece, Portugal, Ireland, Spain, and Italy. Each time the austerity measures have deepened the economic crisis and weakened the country’s economy. Cutting public spending and benefits, while increasing taxes, decreases employment and incomes. This reduces consumer spending which hurts businesses and kills jobs. As a result, tax revenue falls, increasing (not reducing) government deficits. [6]

We need to call on Congress and the President to soften the fiscal cliff. Right now, the primary focus needs to be on strengthening the economy and creating jobs, which, over the longer-term, will help reduce the deficit. There is ample evidence that austerity will only make the economy and the deficit problem worse.

My next post will examine strategies for reducing the deficit in both the short and the long-term that would be less damaging to the economy than the fiscal cliff.

[1] Businessweek, 8/2/12, “A decade of tax cuts and deficits,” Bloomberg Businessweek

[2] Lipschutz, N., 8/22/12, “Even if ‘fiscal cliff’ gets resolved, outlook is anemic,” The Wall Street Journal

[3] Reich, R., 8/30/12, “Labor Day 2012 and the election of 2012: It’s inequality, stupid,” http://www.RobertReich.org

[4] Pemberton, M., 8/16/12, “Top 10 myths of the jobs argument against military cuts,” Institute for Policy Studies

[5] Loth, R., 9/1/12, “The value of public-sector jobs,” The Boston Globe

[6] Kuttner, R., 9/10/12, “Angela Merkel’s bad medicine,” The American Prospect

OUR SLOW ECONOMIC RECOVERY

ABSTRACT: Our economy is recovering slowly, as would be expected after such a deep recession and the near collapse of the financial system. Most economists agree that the federal government’s stimulus package aided the recovery by increasing employment by about 3 million jobs. Since the recovery began in 2009, the private sector has added 4.5 million jobs. The loss of public sector jobs, however, has been a drag on the recovery; over 600,000 jobs have been lost since 2009, including over 200,000 teachers. Without these job losses, the unemployment rate would be about 0.5% lower, or roughly 7.6%. Regardless of some people’s rhetoric, a public sector job puts money into a family and the economy the same way a private sector job does.

The current rate of economic growth is too slow to generate enough jobs to quickly and significantly reduce the unemployment rate. Federal Reserve Chairman Ben Bernanke recently made a forceful argument that additional steps are needed to stimulate the economy and attack high unemployment. The implied message is that stimulus through spending by the federal government would make sense and that cuts in government spending would not help economic growth or unemployment reduction.

FULL POST: Our economy was the subject of much rhetoric at the recent Republican and Democratic conventions. The reality is that the economy is recovering slowly, as would be expected after such a deep recession and the near collapse of the financial system. Most economists agree that the federal government’s stimulus package aided the recovery by increasing employment by about 3 million jobs and keeping the unemployment rate lower than it would have been (by about 2%).

The recovery began in mid-2009. The private sector has added 4.5 million jobs with net increases in each of the last 29 months. However, this is only half of the 9 million jobs lost in the recession and unemployment is still high at 8.1%. The worst month for job losses was January 2009 when over 800,000 jobs were lost just as President Obama was taking office.

The loss of public sector jobs has been a drag on the recovery; over 600,000 jobs have been lost since 2009, including over 200,000 teachers. The public sector continues to lose roughly 10,000 jobs per month, including teachers, firefighters, police, and other local, state, and federal government workers. Without these job losses, the unemployment rate would be about 0.5% lower, or roughly 7.6%. [1][2] Regardless of some people’s rhetoric, a public sector job is a job and puts money into a family and the economy the same way a private sector job does.

Harvard economist Kenneth Rogoff, who has studied recessions historically and globally, says the pace of the current recovery is consistent with what would be expected after this recession, which continues to reverberate around the globe. Economies damaged by financial crises recover more slowly and the brinkmanship in Congress over increasing the debt ceiling in the summer of 2011 created an additional drag on the recovery. The recovery after the 2001 recession (one of four in the last 30 years) actually experienced even slower job growth than the current recession.

Mark Zandi, chief economist at Moody’s Analytics and advisor to Republican Presidential nominee John McCain, notes that the economy’s problems were brought on by Wall Street’s recklessness and that “government saved our bacon. … the cost [to the economy] would have been measurably … greater had the government not interceded.” [3]

Nonetheless, the rate of economic growth has been too slow to generate enough jobs to quickly and significantly reduce the unemployment rate, let alone the numbers of underemployed workers and those who have given up looking for a job and therefore are not counted in the unemployment figures. Federal Reserve Chairman Ben Bernanke recently made a forceful argument that additional steps are needed to stimulate the economy and attack high unemployment. He noted that the likely benefits outweigh the potential costs. However, monetary policy from the Federal Reserve has limited ability to stimulate the economy at this point because interest rates, the main tool at its disposal, are already extremely low. Therefore, the Federal Reserve may take other, nontraditional steps. [4] The implied message is that stimulus through spending by the federal government would also make sense and that cuts in government spending would not help economic growth or unemployment reduction.

[1] Loth, R., 9/1/12, “The value of public-sector jobs,” The Boston Globe

[2] Woolhouse, M., 9/9/12, “Recovery slow, fits post-crisis pattern,” The Boston Globe

[3] Quoted in Woolhouse, 9/9/12, see above

[4] Appelbaum, B., 9/1/12, “Fed chief makes a detailed case for a stimulus,” The New York Times

CAMPAIGN FUNDRAISING: BIG VS. SMALL CONTRIBUTORS

ABSTRACT: Although every campaign likes to tout the importance and number of its small contributors, it’s large donors who give the bulk of the money. A few big contributors (0.1% of all contributors) give more than the millions of small contributors (90% of all contributors). As of June, 26% of the $469 million raised for the Obama campaign and affiliates (including Super PACs) was from contributions of $200 or less, while 7% of Romney’s $362 million was contributions of $200 or less. 112 so-called “mega-donors” (1 out of every 3 million Americans) have each contributed over $500,000. Super PACs have raised a total of $298 million for the 2012 election cycle; 70% of these contributions come from the 112 mega-donors.

Justice Posner, a Republican and not a judicial liberal, said recently that the Citizens United Supreme Court decision (which allows these huge campaign contributions) has created a political system that is “pervasively corrupt [where] wealthy people essentially bribe legislators.”

Despite all of this, I encourage you to send your small contributions to candidates. I do believe that candidates and office holders listen a bit more closely to contributors. However, it will be essential to stay engaged and active after the election to hold our elected officials accountable for their actions.

FULL POST:

Although every campaign likes to tout the importance and number of its small contributors (typically those contributing $200 or less to a federal office campaign), the truth is that it’s the large donors who give the bulk of the money. As of June, 2.5 million small contributors have given $148 million to the 2012 presidential candidates; this is not a small amount but it accounts for less than 18% of the total raised. On the other hand, 2,100 donors of $50,000 or more have given $200 million to the candidates’ campaigns and affiliated groups, including Super PACs. This means that these few big contributors (0.1% of all contributors) give more than the millions of small contributors (90% of all contributors).

Clearly, from a campaign fundraiser’s perspective, it is more cost effective to schmooze a few hundred rich people than to try to cultivate a few hundred thousand small contributors. Although the overall pattern is similar, there is a noticeable difference between the fundraising of Democrat Obama and Republican Romney: as of June, 26% of the $469 million raised for the Obama campaign and affiliates (including Super PACs) was from contributions of $200 or less, while 7% of Romney’s $362 million was contributions of $200 or less. [1]

Large campaign donors, the 1 out of every 400 Americans who give over $200 to Congressional campaigns, have a disproportionate impact on our elections, both on who gets to run (see 8/6/12 post) and who wins. But there’s an even smaller group that is having a truly outsized impact on the current elections: 112 so-called “mega-donors” (1 out of every 3 million Americans) have each contributed over $500,000. They are led by casino magnate Sheldon Adelson who through June has given $38 million to Super PACs. Super PACs had their biggest fundraising month so far in June when they raised $54 million. This brings the total amount they have raised for the 2012 election cycle to $298 million; 70% of these contributions come from the 112 mega-donors. [2] And this is just the part of the iceberg we know about. (See my 8/10/12 post on non-profit organizations that don’t have to disclose contributors and are outspending the Super PACs.)

Justice Posner of the US 7^th Court of Appeals, a Republican and not a judicial liberal, said recently that the Citizens United Supreme Court decision (which allows these huge campaign contributions) has created a political system that is “pervasively corrupt [where] wealthy people essentially bribe legislators.” [3]

Despite all of this, I encourage you to send your small contributions to candidates. They do make a difference and do identify you to the candidate (and hopefully office holder) as an engaged citizen. I do believe that candidates and office holders listen a bit more closely to contributors than non-contributors. However, given the reality of where the bulk of the campaign money comes from, it is essential to stay engaged and active after the election to hold our elected officials accountable for their actions.

[1] Vogel, K.P., 8/7/12, “Election 2012: The myth of the small donor,” Politico

[2] Blumenthal, P., 7/27/12, “Super PAC mega-donors surpass 100, June best Super PAC month ever,” Huffington Post

[3] Moyers, B., & Winship, M., 7/17/12, “Presto! The DISCLOSE Act disappears,” Moyers & Company